U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-Q
 
(Mark one)
 
x
Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the Quarterly Period Ended June 30, 2010
Or
 
¨
Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934
 
Commission File Number 333-153829
 
GENSPERA, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
20-0438951
State or other jurisdiction of
incorporation or organization
 
(I.R.S. Employer
Identification No.)
     
2511 N Loop 1604 W, Suite 204
San Antonio, TX
 
78258
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code (210) 47 9 - 8112  
 
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.   x   Yes    ¨     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 ¨
 
Accelerated filer   ¨  
 
       
Non-accelerated filer   ¨   (Do not check if a small reporting company)
 
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  x   No
 
As of August 14, 2010, Registrant had 17,604,465 common shares, $0.0001 par value, issued and outstanding. 

 
 

 

GenSpera, Inc.
 
Table of Contents
       
Page
PART I -  
FINANCIAL INFORMATION
4
         
 
Item 1.
 
Financial Statements
4
         
     
Balance Sheets as of June 30, 2010 (Unaudited) and December 31, 2009
4
         
     
Statements of Operations (Unaudited)
 
     
Three and six months ended June 30, 2010 and 2009 and for the period from November 21, 2003 (inception) to June 30, 2010
5
         
     
Statements of Changes in Stockholders' Equity (Unaudited)
 
     
For the period from November 21, 2003 (inception) to June 30, 2010
6
         
     
Statements of Cash Flows (Unaudited)
 
     
Three and six months ended June 30, 2010 and 2009 and for the period from November 21, 2003 (inception) to June 30, 2010
8
         
     
Notes to Financial Statements (Unaudited)
9
         
 
Item 2.
 
Management's Discussion and Analysis of Financial Condition and Results of Operations
14
         
 
Item 3.
 
Quantitative and Qualitative Disclosures about Market Risk
21
         
 
Item 4.
 
Controls and Procedures
21
         
PART II -  
OTHER INFORMATION
22
         
 
Item 1.
 
Legal Proceedings
22
         
 
Item 1A.
 
Risk Factors
22
         
 
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
27
         
 
Item 3.
 
Defaults Upon Senior Securities
28
         
 
Item 4.
 
(Removed and Reserved)
28
         
 
Item 5.
 
Other Information
28
         
 
Item 6.
 
Exhibits
29

 
2

 

ADVISEMENT

We urge you to read this entire Quarterly Report, including the “Risk Factors” section, the financial statements, and related notes included herein.  As used in this Quarterly Report, unless the context otherwise requires, the words “we,” “us,”“our,” “the Company,” “GenSpera” and “Registrant” refer to GenSpera, Inc.  Also, any reference to “common shares,” or “common stock,” refers to our $.0001 par value common stock.   The information contained herein is current as of the date of this Quarterly Report (June 30, 2010), unless another date is specified.  

We prepare our interim financial statements in accordance with United States generally accepted accounting principles.  Our financials and results of operation for the three and six month periods ended June 30, 2010 are not necessarily indicative of our prospective financial condition and results of operations for the pending full fiscal year ending December 31, 2010. The interim financial statements presented in this Quarterly Report as well as other information relating to our company contained in this Quarterly Report should be read in conjunction and together with the reports, statements and information filed by us with the United States Securities and Exchange Commission (“SEC”).

NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Any statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. These forward-looking statements include, but are not limited to, statements about:

 
the development of our drug candidates, including when we expect to undertake, initiate and complete clinical trials of our product candidates;
     
 
the regulatory approval of our drug candidates;
     
 
our use of clinical research centers and other contractors;
     
 
our ability to sell, license or market any of our products;
     
 
our ability to compete against other companies;
     
 
our ability to secure adequate protection for our intellectual property;
     
 
our ability to attract and retain key personnel;
     
 
our ability to obtain adequate financing; and
 
 
the volatility of our stock price.
 
These statements are often, but not always, made through the use of words or phrases such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend” and similar words or phrases. Accordingly, these statements involve estimates, assumptions and uncertainties that could cause actual results to differ materially from those expressed in them. Discussions containing these forward-looking statements may be found throughout this quarterly report, including Part I, the section entitled “Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These forward-looking statements involve risks and uncertainties, including the risks discussed in Part II, Item 1A of this Report, under the caption “Risk Factors”, that could cause our actual results to differ materially from those in the forward-looking statements. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this report. The risks discussed in this report should be considered in evaluating our prospects and future financial performance.

 
3

 

PART I
FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS

GENSPERA INC.
(A Development Stage Company)
CONDENSED BALANCE SHEETS

   
June 30,
   
December 31,
 
   
2010
   
2009
 
   
(Unaudited)
       
Assets
           
             
Current assets:
           
Cash
  $ 4,498,942     $ 2,255,311  
                 
Total current assets
    4,498,942       2,255,311  
                 
Fixed assets, net of accumulated depreciation of $2,292 and $708
    13,541       15,125  
                 
Intangible assets, net of accumulated amortization of $34,532 and $26,858
    149,636       157,310  
                 
Total assets
  $ 4,662,119     $ 2,427,746  
                 
Liabilities and stockholders' equity (deficit)
               
                 
Current liabilities:
               
                 
Accounts payable and accrued expenses
  $ 149,807     $ 78,198  
Accrued interest - stockholder
    10,294       8,107  
Convertible note payable - stockholder, current portion
    75,000       35,000  
                 
Total current liabilities
    235,101       121,305  
                 
Convertible note payable, net of discount of $0 and $11,046
    -       -  
Convertible notes payable - stockholder, long term portion
    30,000       70,000  
Derivative liabilities
    2,817,991       2,290,686  
                 
Total liabilities
    3,083,092       2,481,991  
                 
Commitments and contingencies
               
                 
Stockholders' equity (deficit):
               
                 
Preferred stock, par value $.0001 per share; 10,000,000 shares authorized, none issued and outstanding
    -       -  
Common stock, par value $.0001 per share; 80,000,000 shares authorized, 17,584,465 and 15,466,446 shares issued and outstanding
    1,758       1,547  
Additional paid-in capital
    14,634,946       10,135,737  
Deficit accumulated during the development stage
    (13,057,677 )     (10,191,529 )
                 
Total stockholders' equity (deficit)
    1,579,027       (54,245 )
                 
Total liabilities and stockholders' equity (deficit)
  $ 4,662,119     $ 2,427,746  

See accompanying notes to unaudited condensed financial statements.

 
4

 

GENSPERA, INC.
(A Development Stage Company)
CONDENSED STATEMENTS OF LOSSES
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009
AND FOR THE PERIOD FROM INCEPTION (NOVEMBER 21, 2003) TO JUNE 30, 2010
(Unaudited)

                           
Cumulative Period
 
                           
from November 21, 2003
 
                           
(date of inception) to
 
   
Three Months ended June 30,
   
Six Months ended June 30,
   
June 30,
 
   
2010
   
2009
   
2010
   
2009
   
2010
 
                               
Operating expenses:
                             
General and administrative expenses
  $ 777,744     $ 231,255     $ 1,173,624     $ 430,972     $ 3,888,013  
Research and development
    737,106       624,989       1,091,171       934,491       6,602,712  
                                         
Total operating expenses
    1,514,850       856,244       2,264,795       1,365,463       10,490,725  
                                         
Loss from operations
    (1,514,850 )     (856,244 )     (2,264,795 )     (1,365,463 )     (10,490,725 )
                                         
Finance cost
    -       (5,155 )     -       (478,093 )     (518,675 )
Change in fair value of derivative liability
    809,880       (110,326 )     (613,612 )     (683,111 )     (2,044,162 )
Interest income (expense), net
    8,886       (2,867 )     12,259       (5,475 )     (4,115 )
                                         
Loss before provision for income taxes
    (696,084 )     (974,592 )     (2,866,148 )     (2,532,142 )     (13,057,677 )
                                         
Provision for income taxes
    -       -       -       -       -  
                                         
Net loss
  $ (696,084 )   $ (974,592 )   $ (2,866,148 )   $ (2,532,142 )   $ (13,057,677 )
                                         
Net loss per common share, basic and diluted
  $ (0.04 )   $ (0.07 )   $ (0.18 )   $ (0.20 )        
                                         
Weighted average shares outstanding
    16,752,200       13,026,971       16,203,123       12,864,048          

See accompanying notes to unaudited condensed financial statements.

 
5

 

GENSPERA, INC.
(A Development Stage Company)
CONDENSED STATEMENT OF STOCKHOLDERS' (DEFICIT) EQUITY
FROM DATE OF INCEPTION (NOVEMBER 21, 2003) TO JUNE 30, 2010
(Unaudited)

                     
Deficit
       
                     
Accumulated
       
               
Additional
   
During the
   
Stockholders'
 
   
Common Stock
   
Paid-in
   
Development
   
Equity
 
   
Shares
   
Amount
   
Capital
   
Stage
   
(Deficit)
 
                               
Balance, November 21, 2003
    -     $ -     $ -     $ -     $ -  
                                         
Sale of common stock to founders at $0.0001 per share in November, 2003
    6,100,000       610       (510 )     -       100  
                                         
Contributed services
    -       -       120,000       -       120,000  
                                         
Net loss
    -       -       -       (125,127 )     (125,127 )
                                         
Balance, December 31, 2003
    6,100,000       610       119,490       (125,127 )     (5,027 )
                                         
Contributed services
    -       -       192,000       -       192,000  
                                         
Stock based compensation
    -       -       24,102       -       24,102  
                                         
Net loss
    -       -       -       (253,621 )     (253,621 )
                                         
Balance, December 31, 2004
    6,100,000       610       335,592       (378,748 )     (42,546 )
                                         
Contributed services
    -       -       48,000       -       48,000  
                                         
Stock based compensation
    -       -       24,100       -       24,100  
                                         
Net loss
    -       -       -       (126,968 )     (126,968 )
                                         
Balance, December 31, 2005
    6,100,000       610       407,692       (505,716 )     (97,414 )
                                         
Contributed services
    -       -       144,000       -       144,000  
                                         
Stock based compensation
    -       -       42,162       -       42,162  
                                         
Net loss
    -       -       -       (245,070 )     (245,070 )
                                         
Balance, December 31, 2006
    6,100,000       610       593,854       (750,786 )     (156,322 )
                                         
Shares sold for cash at $0.50 per share in November, 2007
    1,300,000       130       649,870       -       650,000  
                                         
Shares issued for services
    735,000       74       367,426       -       367,500  
                                         
Contributed services
    -       -       220,000       -       220,000  
                                         
Stock based compensation
    -       -       24,082       -       24,082  
                                         
Exercise of options for cash at $0.003 per share in March and June, 2007
    900,000       90       2,610       -       2,700  
                                         
Net loss
    -       -       -       (691,199 )     (691,199 )
                                         
Balance, December 31, 2007
    9,035,000       904       1,857,842       (1,441,985 )     416,761  
                                         
Exercise of options for cash at $0.50 per share on March 7,2008
    1,000,000       100       499,900       -       500,000  
                                         
Sale of common stock and warrants at $1.00 per share - July and August 2008
    2,320,000       232       2,319,768       -       2,320,000  
                                         
Cost of sale of common stock and warrants
    -       -       (205,600 )     -       (205,600 )
                                         
Shares issued for accrued interest
    31,718       3       15,856       -       15,859  

See accompanying notes to unaudited condensed financial statements.

 
6

 

GENSPERA, INC.
(A Development Stage Company)
CONDENSED STATEMENT OF STOCKHOLDERS' (DEFICIT) EQUITY
FROM DATE OF INCEPTION (NOVEMBER 21, 2003) TO JUNE 30, 2010
(Unaudited)

Shares issued for services
    100,000       10       49,990       -       50,000  
                                         
Stock based compensation
    -       -       313,743       -       313,743  
                                         
Contributed services
    -       -       50,000       -       50,000  
                                         
Beneficial conversion feature of convertible debt
    -       -       20,675       -       20,675  
                                         
Net loss
    -       -       -       (3,326,261 )     (3,326,261 )
                                         
Balance, December 31, 2008
    12,486,718       1,249       4,922,174       (4,768,246 )     155,177  
                                         
Cumulative effect of change in accounting principle
    -       -       (444,161 )     (290,456 )     (734,617 )
                                         
Warrants issued for extension of debt maturities
    -       -       51,865       -       51,865  
                                         
Stock based compensation
    -       -       1,530,536       -       1,530,536  
                                         
Common stock issued for services
    86,875       10       104,109       -       104,119  
                                         
Sale of common stock and warrants at $1.50 per share - February 2009
    466,674       46       667,439       -       667,485  
                                         
Sale of common stock and warrants at $1.50 per share - April 2009
    33,334       3       49,997       -       50,000  
                                         
Sale of common stock and warrants at $1.50 per share - June 2009
    1,420,895       142       2,038,726       -       2,038,868  
                                         
Sale of common stock and warrants at $1.50 per share - July 2009
    604,449       60       838,024       -       838,084  
                                         
Sale of common stock and warrants at $1.50 per share - September 2009
    140,002       14       202,886       -       202,900  
                                         
Common stock and warrants issued as payment of placement fees
    53,334       5       (5 )     -       -  
                                         
Common stock and warrants issued upon conversion of note and accrued interest
    174,165       18       174,147       -       174,165  
                                         
Net loss
    -       -       -       (5,132,827 )     (5,132,827 )
                                         
Balance, December 31, 2009
    15,466,446       1,547       10,135,737       (10,191,529 )     (54,245 )
                                         
Stock based compensation
    -       -       726,402       -       726,402  
                                         
Sale of common stock and warrants at $1.65 per share - February and March 2010
    533,407       53       806,157       -       806,210  
                                         
Sale of common stock and warrants at $2.00 per share - May 2010
    1,347,500       135       2,655,365       -       2,655,500  
                                         
Common stock and warrants issued as payment of placement fees
    43,632       4       (4 )     -       -  
                                         
Salaries paid with common stock
    43,749       4       99,996       -       100,000  
                                         
Exercise of options and warrants
    150,001       15       124,986       -       125,001  
                                         
Reclassification of derivative liability upon exercise of warrants
    -       -       86,307       -       86,307  
                                         
Net loss
    -       -       -       (2,866,148 )     (2,866,148 )
                                         
Balance, June 30, 2010 (Unaudited)
    17,584,735     $ 1,758     $ 14,634,946     $ (13,057,677 )   $ 1,579,027  

See accompanying notes to unaudited condensed financial statements.

 
7

 

GENSPERA, INC.
(A Development Stage Company)
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
AND FOR THE PERIOD FROM INCEPTION (NOVEMBER 21, 2003) TO JUNE 30, 2010
(Unaudited)

               
Cumulative Period
 
               
from November 21, 2003
 
               
(date of inception) to
 
   
Six months ended June 30,
   
June 30,
 
   
2010
   
2009
   
2010
 
                   
Cash flows from operating activities:
                 
Net loss
  $ (2,866,148 )   $ (2,532,142 )   $ (13,057,677 )
Adjustments to reconcile net loss to net cash used in operating activities:
                       
Depreciation and amortization
    9,257       7,674       36,823  
Stock based compensation
    826,402       134,501       3,306,746  
Warrants issued for financing costs
    -       467,840       467,840  
Change in fair value of derivative liability
    613,612       683,111       2,044,162  
Contributed services
    -       -       774,000  
Amortization of debt discount
    -       10,253       20,675  
Changes in assets and liabilities:
                       
Increase (decrease) in accounts payable and accrued expenses
    73,797       55,833       186,526  
                         
Cash used in operating activities
    (1,343,080 )     (1,172,930 )     (6,220,905 )
                         
Cash flows from investing activities:
                       
Acquisition of property and equipment
    -       -       (15,833 )
Acquisition of intangibles
    -       -       (184,168 )
                         
Cash used in investing activities
    -       -       (200,001 )
                         
Cash flows from financing activities:
                       
Proceeds from sale of common stock and warrants
    3,461,710       2,738,852       10,689,847  
Proceeds from exercise of warrants
    125,001       -       125,001  
Proceeds from convertible notes - stockholder
    -       -       155,000  
Repayments of convertible notes - stockholder
    -       -       (50,000 )
                         
Cash provided by financing activities
    3,586,711       2,738,852       10,919,848  
                         
Net increase in cash
    2,243,631       1,565,922       4,498,942  
Cash, beginning of period
    2,255,311       534,290       -  
Cash, end of period
  $ 4,498,942     $ 2,100,212     $ 4,498,942  
                         
Supplemental cash flow information:
                       
Cash paid for interest
  $ -     $ 79          
Cash paid for income taxes
  $ -     $ -          
                         
Non-cash financial activities:
                       
Derivative liability reclassified to equity upon exercise of warrants
  $ 86,307     $ -          

See accompanying notes to unaudited condensed financial statements.

 
8

 

GENSPERA, INC.  
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2010 AND 2009
AND FOR THE PERIOD FROM NOVEMBER 21, 2003
(INCEPTION) TO JUNE 30, 2010
(Unaudited)

NOTE 1 - SUMMARY OF ACCOUNTING POLICIES

A summary of the significant accounting policies applied in the preparation of the accompanying financial statements follows.

Business and Basis of Presentation

GenSpera Inc. (“ we”, “us”, “our company” , “our”, “GenSpera” or the “Company” ) was formed under the laws of the State of Delaware in 2003. We are a development stage entity, as defined by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 915. GenSpera, Inc. is a pharmaceutical company focused on the development of targeted cancer therapeutics for the treatment of cancerous tumors, including breast, prostate, bladder and kidney cancer. Our operations are based in San Antonio, Texas.

To date, we have generated no sales revenues, have incurred significant expenses and have sustained losses. Consequently, our operations are subject to all the risks inherent in the establishment of a new business enterprise. For the period from inception on November 21, 2003 through June 30, 2010, we have accumulated losses of $13,057,677.

The accompanying unaudited condensed financial statements as of June 30, 2010 and for the three and six month periods ended June 30, 2010 and 2009 and from date of inception as a development stage enterprise (November 21, 2003) to June 30, 2010 have been prepared by GenSpera pursuant to the rules and regulations of the Securities and Exchange Commission, including Form 10-Q and Regulation S-X. The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations. The company believes that the disclosures provided are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the audited financial statements and explanatory notes for the year ended December 31, 2009 as disclosed in the company's 10-K for that year as filed with the SEC, as it may be amended.
 
The results of the six months ended June 30, 2010 are not necessarily indicative of the results to be expected for the pending full year ending December 31, 2010.

Liquidity
 
As of June 30, 2010, we had working capital of $4,263,841.  Our cash flow used in operations was $1,343,080 and $1,172,930 for the six months ended June 30, 2010 and 2009, respectively.  At June 30, 2010, we had cash on hand of approximately $4,499,000 and raised approximately $3,587,000 in the first two quarters of 2010.  Based upon current cash flow projections, management believes the Company will have sufficient capital resources to meet projected cash flow requirements through 2010.

 
9

 

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying disclosures. Although these estimates are based on management's best knowledge of current events and actions the Company may undertake in the future, actual results may differ from those estimates.

Research and Development

Research and development costs include expenses incurred by the Company for research and development of therapeutic agents for the treatment of cancer and are charged to operations as incurred. Our research and development expenses consist primarily of expenditures for toxicology and other studies, manufacturing, clinical trials and compensation and consulting costs.    

GenSpera incurred research and development expenses of $737,106 and $624,989 for the three months ended June 30, 2010 and 2009, respectively, and $1,091,171 and $934,491 for the six months ended June 30, 2010 and 2009, respectively, and $6,602,712 from November 21, 2003 (inception) through June 30, 2010.
 
Loss Per Share

We use ASC 260, “Earnings Per Share” for calculating the basic and diluted loss per share. We compute basic loss per share by dividing net loss and net loss attributable to common shareholders by the weighted average number of common shares outstanding. Basic and diluted loss per share are the same, in that any potential common stock equivalents would have the effect of being anti-dilutive in the computation of net loss per share. There were 8,894,425 common share equivalents at June 30, 2010 and 5,248,197 at June 30, 2009. For the three and six months ended June 30, 2010 and 2009, these potential shares were excluded from the shares used to calculate diluted earnings per share as their inclusion would reduce net loss per share.

Fair value of financial instruments
 
Our short-term financial instruments, including cash, accounts payable and other liabilities, consist primarily of instruments without extended maturities, the fair value of which, based on management’s estimates, reasonably approximate their book value. The fair value of long term convertible notes is based on management estimates and reasonably approximates their book value after comparison to obligations with similar interest rates and maturities. The fair value of the Company’s derivative instruments is determined using option pricing models.  

Fair value measurements
 
We follow the guidance established pursuant to ASC 820 which established a framework for measuring fair value and expands disclosure about fair value measurements. ASC 820 defines fair value as the amount that would be received for an asset or paid to transfer a liability (i.e., an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes the following three levels of inputs that may be used:
 
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets and liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
 
Level 2: Observable prices that are based on inputs not quoted on active markets but corroborated by market data.

 
10

 
 
Level 3: Unobservable inputs when there is little or no market data available, thereby requiring an entity to develop its own assumptions. The fair value hierarchy gives the lowest priority to Level 3 inputs.
 
The table below summarizes the fair values of our financial liabilities as of June 30, 2010:
 
   
Fair Value at
   
Fair Value Measurement Using
 
   
June 30,
2010
   
Level 1
   
Level 2
   
Level 3
 
                                 
Warrant derivative liability
 
2,817,991
     
     
    $
2,817,991
 
                                 
   
$
2,817,991
   
$
 —
   
$
 —
   
$
2,817,991
 
 
  The table below sets forth a summary of changes in the fair value of the Company’s Level 3 financial liabilities (warrant derivative liability) for the six months ended June 30, 2010 and 2009.

   
2010
   
 
2009
 
Balance at beginning of year
 
$
2,290,686
   
$
-
 
Additions to derivative instruments
   
-
     
1,150,593
 
Change in fair value of warrant liability
   
613,612
     
683,111
 
Reclassification to equity upon exercise of warrants
   
(86,307
)
   
-
 
                 
Balance at end of period
 
$
2,817,991
   
$
1,833,704
 

The following is a description of the valuation methodologies used for these items:
 
Warrant derivative liability — these instruments consist of certain of our warrants with anti-dilution provisions. These instruments were valued using pricing models which incorporate the Company’s stock price, volatility, U.S. risk free rate, dividend rate and estimated life.

Income Taxes

We utilize ASC 740 “Income Taxes” which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income.    

Stock-Based Compensation

We account for our stock based compensation under ASC 718 “Compensation – Stock Compensation” using the fair value based method. Under this method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period.  This guidance establishes standards for the accounting for transactions in which an entity exchanges it equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments.

 
11

 

We use the fair value method for equity instruments granted to non-employees and use the Black-Scholes model for measuring the fair value of options. The stock based fair value compensation is determined as of the date of the grant or the date at which the performance of the services is completed (measurement date) and is recognized over the vesting periods.

Recent Accounting Pronouncements

In June 2009, the FASB issued new accounting guidance which will require more information about the transfer of financial assets where companies have continuing exposure to the risks related to transferred financial assets. This guidance is effective at the start of a company’s first fiscal year beginning after November 15, 2009, or January 1, 2010 for companies reporting earnings on a calendar-year basis. The adoption of this guidance did not have a material impact on the Company’s financial position or results of operations.
 
In June 2009, the FASB issued new accounting guidance which will change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. Under this guidance, determining whether a company is required to consolidate an entity will be based on, among other things, an entity's purpose and design and a company's ability to direct the activities of the entity that most significantly impact the entity's economic performance. This guidance is effective at the start of a company’s first fiscal year beginning after November 15, 2009, or January 1, 2010 for companies reporting earnings on a calendar-year basis. The adoption of this guidance did not have a material impact on the Company’s financial position or results of operations.
 
In February 2010, the FASB issued FASB ASU 2010-09, “Subsequent Events, Amendments to Certain Recognition and Disclosure Requirements,” which clarifies certain existing evaluation and disclosure requirements in ASC 855 “Subsequent Events” related to subsequent events. FASB ASU 2010-09 requires SEC filers to evaluate subsequent events through the date in which the financial statements are issued and is effectively immediately. The new guidance does not have an effect on it’s the Company’s results of operations and financial condition.

In January 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-06, “Improving Disclosures about Fair Value Measurements, which clarifies certain existing disclosure requirements in ASC 820 “Fair Value Measurements and Disclosures,” and requires disclosures related to significant transfers between each level and additional information about Level 3 activity. FASB ASU 2010-06 begins phasing in the first fiscal period after December 15, 2009. The Company is currently assessing the impact on its consolidated results of operations and financial condition.
 
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC did not, or are not believed by management to, have a material impact on the Company's present or future financial statements.

NOTE 2 - CAPITAL STOCK AND STOCKHOLDER’S EQUITY

We are authorized to issue 80,000,000 shares of common stock with a par value of $.0001 per share and 10,000,000 shares of preferred stock with a par value of $.0001 per share.

During January and March 2010, we entered into securities purchase agreements with a number of accredited investors.  Pursuant to the terms of the agreements, we sold 533,407 units resulting in gross proceeds of approximately $880,000.  The price per unit was $1.65.  Each unit consists of: (i) one share of common stock; and (ii) one half common stock purchase warrant.  The warrants have a term of five years and allow the investors to purchase our common shares at a price per share of $3.10.  The warrants also contain anti-dilution protection in the event of stock splits, stock dividends and other similar transactions. We incurred placement agent fees of $73,910 in connection with the transaction. We also issued a total of 42,673 additional common stock purchase warrants as compensation.  The warrants have the same terms as the investor warrants except that 12,160 warrants have an exercise price of $2.20 and 30,513 warrants have an exercise price of $2.94.   

During May 2010, we entered into securities purchase agreements with a number of accredited investors.  Pursuant to the terms of the agreements, we sold 1,347,500 units resulting in gross proceeds of  $2,695,000.  The price per unit was $2.00.  Each unit consists of: (i) one share of common stock; and (ii) one half common stock purchase warrant.  The warrants have a term of five years and allow the investors to purchase our common shares at a price per share of $3.50.  The warrants also contain anti-dilution protection in the event of stock splits, stock dividends and other similar transactions. We incurred placement agent and escrow fees of $39,500 in connection with the transaction. We issued an additional 43,632 units as payment of $87,264 of consulting fees. We also issued a total of 18,000 additional common stock purchase warrants as compensation.  The warrants have the same terms as the investor warrants.   

 
12

 

During the six months ended June 30, 2010, we issued 150,001 shares of common stock upon exercise of an equivalent number of options and warrants and received cash proceeds of $125,001.

As a result of the exercise of 50,001 of the warrants, we have reclassified $86,307 of our warrant derivative liability to paid in capital.

On February 24, 2010, we granted a total of 77,000 common stock options to two directors. The options have a weighted average exercise price of $2.30 per share. The options will vest quarterly over one year. The options lapse if unexercised after five years.  The options have an aggregate grant date fair value of $54,079, determined using the Black-Scholes method based on the following weighted average assumptions:  (1) risk free interest rate of 0.245%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 99%; and (4) an expected life of the options of 0.625 years. During the three and six months ended June 30, 2010 we have recorded an expense of $13,520 and $18,027, respectively, related to the fair value of the options that are expected to vest.

During the three and six months ended June 30, 2010 we have recorded an expense of $98,849 and $234,049, respectively, related to the fair value of the options granted to our chief executive officer and chief operating officer that vested or are expected to vest.

During the three and six months ended June 30, 2010, we have recorded an expense of $38,016 and $85,051, respectively, related to the fair value of options granted to members of our Scientific Advisory Board that vested during that period.

During May and June 2010, we granted a total of 291,425 common stock warrants to consultants. The warrants have a weighted average exercise price of $1.99 per share. The warrants vested upon grant. The warrants lapse if unexercised after five years.  We have recorded an expense of $389,275, determined using the Black-Scholes method based on the following weighted average assumptions:  (1) risk free interest rate of 0.625%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 100%; and (4) an expected life of the warrants of 2 years.

During May 2010 we issued an aggregate of 43,479 shares of common stock to our chief executive officer and chief operating officer as payment of discretionary bonuses aggregating $100,000. For purposes of calculating the number of shares to be issued as payment of the discretionary bonuses, the grant date is May 14, 2010.

NOTE 3 – DERIVATIVE LIABILITY

During the three months ended March 31, 2010, 33,334 of our warrants subject to derivative accounting were exercised into common stock. We have recorded an expense of $21,119 at the date of exercise related to the change in fair value from January 1, 2010 to the date of exercise. As a result of the exercise of the warrants, we have reclassified $58,791 of our warrant derivative liability to paid in capital.  

During the three months ended June 30, 2010, 16,667 of our warrants subject to derivative accounting were exercised into common stock. We have recorded a credit of $3,044 at the date of exercise related to the change in fair value from April 1, 2010 to the date of exercise. As a result of the exercise of the warrants, we have reclassified $27,516 of our warrant derivative liability to paid in capital.  

At June 30, 2010, we recalculated the fair value of our remaining warrants subject to derivative accounting and have determined that their fair value at June 30, 2010 is $2,817,991. The value of the warrants was determined using the Black-Scholes method based on the following assumptions:  (1) risk free interest rate of 0.625%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 98%; and (4) an expected life of the warrants of 2 years. We have recorded a credit of $806,836 during the three months ended June 30, 2010 and an expense of $595,537 during the six months ended June30, 2010 related to the change in fair value during those periods.  

 
13

 
 
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is provided in addition to the accompanying consolidated financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. MD&A is organized as follows:

 
Overview  Discussion of our business and plan of operations, overall analysis of financial and other highlights affecting the company in order to provide context for the remainder of MD&A.

 
Significant Accounting Policies Accounting policies that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results and forecasts.

 
Results of Operations  Analysis of our financial results comparing: (i) the second quarter of 2010 to the comparable period in 2009, and (ii) the six month period ended June 30, 2010 to the comparable period in 2009.

 
Liquidity and Capital Resources  An analysis of changes in our balance sheets and cash flows, and discussion of our financial condition and potential sources of liquidity.

The various sections of this MD&A contain a number of forward-looking statements. Words such as “expects,” “goals,” “plans,” “believes,” “continues,” “may,” and variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. Such statements are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this filing and particularly in the “Overview” section (see also “Risk Factors” in Part II, Item 1A of this Form 10-Q). Our actual results may differ materially.

Management's Plan of Operation

We are pursuing a business plan related to the development of targeted cancer therapeutics for the treatment of cancerous tumors, including breast, prostate, bladder, and kidney cancer.  We are considered to be in the development stage as defined by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 915 “Development Stage Entities”.
 
Business Strategy

Our business strategy is to develop a series of therapeutics based on our target-activated pro-drug technology platform and bring them through Phase I/II clinical trials. At that point, we plan to license the rights to further development of the drug candidates to major pharmaceutical companies. We believe that major pharmaceutical companies see significant value in drug candidates that have passed one or more phases of clinical trials, and these organizations have the resources and expertise to finalize drug development and market the drugs.

Plan of Operation
 
On June 23, 2009, we submitted our first Investigational New Drug application (“IND”) for G-202 to the United States Food and Drug Administration (“FDA”).  On September 4, 2009, we received approval from the FDA for our IND in order to commence clinical trials.  Although we have received approval from the FDA to commence trials, the outcome of the trials is uncertain and, if we are unable to satisfactorily complete such trials, or if such trials yield unsatisfactory results, we will be unable to commercialize our proposed products. Over the next twelve months we plan to focus on our clinical trials of G-202 in cancer patients.

 
14

 

Additionally, we will continue to protect our intellectual property position particularly with regard to the outstanding claims contained within the core PSMA-pro-drug patent application in the United States.  We will also continue to prosecute the claims contained in our other patent applications in the United States.

We anticipate that during 2010 we will be engaged in conducting the Phase I clinical trial of G-202. The purpose of a Phase I study of G-202 is to evaluate safety, understand the pharmacokinetics (the process by which a compound is absorbed, distributed, metabolized, and eliminated by the body) of the drug candidate in humans, and to determine an appropriate dosing regimen for the subsequent clinical studies. We are currently conducting the Phase I study in refractory cancer patients (those who have relapsed after former treatments) with any type of solid tumors. This strategy is intended to facilitate enrollment and perhaps give us a glimpse of safety across a wider variety of patients. We expect to enroll up to 30 patients in this Phase I study at: (i) Sidney Kimmel Comprehensive Cancer Center at Johns Hopkins (Michael Carducci, MD as Principal Investigator); and (ii) University of Wisconsin Carbone Cancer Center (George Wilding, MD as Principal Investigator).

Assuming successful completion of the Phase I clinical trial, we expect to conduct a Phase II clinical trial to determine the therapeutic efficacy of G-202 in cancer patients. Although we believe that G-202 will be useful across a wide variety of cancer types, it is usually most efficient and medically prudent to evaluate a drug candidate in a single tumor type within a single trial. It is currently too early in the clinical development process to determine which tumor types will be evaluated, but our current expectation is to conduct up to four separate concurrent Phase II studies in different tumor types over a time span of 18 months.

In anticipation of the upcoming G-202 Phase II clinical trials, we will manufacture one or more batches of Good Manufacturing Practice ( GMP ) grade G-202 over the coming nine months.

We have identified 4 pro-drug candidates: G-202, G-114, G-115 and Ac-GKAFRR-L12ADT. At this time, we are engaged solely in the development of G-202. We plan to begin development of G-115 in the fourth quarter of 2010 with an anticipated filing of an IND in the third quarter of 2011. It is anticipated that the development of the remaining candidates will not commence until we have sufficient resources to devote to their development.

From inception through June 30, 2010 the vast majority of costs incurred have been devoted to G-202. We estimate that we have incurred costs of approximately $235,000 related to G-114, G-115 and Ac-GKAFRR-L12ADT. All of these costs were incurred prior to December 2007, at which time we began focusing solely on G-202. The balance of our costs, aggregating approximately $6,368,000, was incurred in the development of G-202. For the years ended December 31, 2009 and 2008, approximately $2,087,000 and $2,433,000, respectively, was incurred in the development of G-202.  For the six months ended June 30, 2010 and 2009, we incurred costs of approximately $1,091,000 and $934,000, respectively, in the development of G-202.

It is estimated that the development of G-202 will occur as follows:

It is estimated that the ongoing Phase I clinical trial will cost an additional approximately $1,200,000 and will be completed in the second quarter of 2011.

Phase II clinical studies will cost an additional $7,000,000 and will be completed in the fourth quarter of 2012.  The increase in estimated Phase II costs from previous disclosures is due to the addition of extra Phase II studies into the G-202 clinical development plan.

We anticipate that we will license G-202 to a third party during or after Phase II clinical studies.  In the event we are not able to license G-202, we will proceed with Phase III Clinical trials.  We estimate that Phase III Clinical trials will cost approximately $25,000,000 and will be completed in the fourth quarter of 2015. If all goes as planned, we may expect marketing approval in the second half of 2016 with an additional $3,000,000 spent to get the NDA approved. We do not expect material net cash inflows from our own marketing efforts before late 2016.  The Phase III estimated costs are subject to major revision simply because we have not yet obtained any efficacy data for our drug in patients and therefore cannot accurately predict what may be the optimal Phase III patient population. The estimates will become more refined as we obtain more clinical data.

We currently have budgeted $3,531,000 in cash expenditures for the twelve month period following the date of this report, including (1) $1,348,000 to cover our projected general and administrative expense during this period; and (2) $2,183,000 for research and development activities. Our cash on hand as of June 30, 2010 is sufficient to fund our operations for the next 16 months through October, 2011 after which time we will need to undertake additional financings.
 
The amounts and timing of our actual expenditures may vary significantly from our expectations depending upon numerous factors, including our results of operation, financial condition and capital requirements. Accordingly, we will retain the discretion to allocate the available funds among the identified uses described above, and we reserve the right to change the allocation of available funds among the uses described above.

 
15

 

Significant Accounting Policies
 
Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Note 1 of the Notes to Financial Statements describes the significant accounting policies used in the preparation of the financial statements. Certain of these significant accounting policies are considered to be critical accounting policies, as defined below. We do not believe that there have been significant changes to our accounting policies during the year ended December 31, 2009, as compared to those policies disclosed in the December 31, 2008 financial statements except as disclosed in the notes to financial statements or through the six month period ended June 30, 2010.

A critical accounting policy is defined as one that is both material to the presentation of our financial statements and requires management to make difficult, subjective or complex judgments that could have a material effect on our financial condition and results of operations. Specifically, critical accounting estimates have the following attributes: 1) we are required to make assumptions about matters that are highly uncertain at the time of the estimate; and 2) different estimates we could reasonably have used, or changes in the estimate that are reasonably likely to occur, would have a material effect on our financial condition or results of operations.
 
Estimates and assumptions about future events and their effects cannot be determined with certainty. We base our estimates on historical experience and on various other assumptions believed to be applicable and reasonable under the circumstances. These estimates may change as new events occur, as additional information is obtained and as our operating environment changes. These changes have historically been minor and have been included in the financial statements as soon as they became known. Based on a critical assessment of our accounting policies and the underlying judgments and uncertainties affecting the application of those policies, management believes that our financial statements are fairly stated in accordance with accounting principles generally accepted in the United States, and present a meaningful presentation of our financial condition and results of operations. We believe the following critical accounting policies reflect our more significant estimates and assumptions used in the preparation of our financial statements:

Use of Estimates — These financial statements have been prepared in accordance with accounting principles generally accepted in the United States and, accordingly, require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Specifically, our management has estimated the expected economic life and value of our licensed technology, our net operating loss for tax purposes and our stock, option and warrant expenses related to compensation to employees and directors and consultants. Actual results could differ from those estimates.

Cash and Equivalents — Cash equivalents are comprised of certain highly liquid investments with maturity of three months or less when purchased. We maintain our cash in bank deposit accounts, which at times, may exceed federally insured limits. We have not experienced any losses in such accounts.
 
Intangible and Long-Lived Assets — We follow Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 360, " Property, Plant and Equipment ", which established a "primary asset" approach to determine the cash flow estimation period for a group of assets and liabilities that represents the unit of accounting for a long lived asset to be held and used. Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell. We have not recognized any impairment losses.

Research and Development Costs — Research and development costs include expenses incurred by the Company for research and development of therapeutic agents for the treatment of cancer and are charged to operations as incurred.

Stock Based Compensation — We account for our share-based compensation under the provisions of ASC Topic 718 “Compensation – Stock Compensation”.

Fair Value of Financial Instruments   Our short-term financial instruments, including cash, accounts payable and other liabilities, consist primarily of instruments without extended maturities, the fair value of which, based on management’s estimates, reasonably approximate their book value. The fair value of long term convertible notes is based on management estimates and reasonably approximates their book value after comparison to obligations with similar interest rates and maturities. The fair value of the Company’s derivative instruments is determined using option pricing models.

Recent Accounting Pronouncements

For a discussion of new accounting pronouncements affecting the Company, refer to Note 1 of Notes to Financial Statements.

 
16

 

Result of Operations for the Second   Quarter of 2010 Compared to the Second Quarter of 2010
 
Our results of operations have varied significantly from year to year and quarter to quarter and may vary significantly in the future.

Revenue
 
We did not have revenue for the three months ended June, 2010 and 2009, respectively. We do not anticipate any revenues during 2010.

Operating Expenses
 
Operating expense totaled $1,514,850 and $856,244 for the three months ended June 30, 2010 and 2009, respectively.  The increase in operating expenses is primarily the result of increased general and administrative expenses.
 
   
Three   Months   Ended   June   30,
 
   
2010
   
2009
 
Operating expenses
           
General and administrative expenses
  $ 777,744     $ 231,255  
Research and development
    737,106       624,989  
Total expense
  $ 1,514,850     $ 856,244  
 
General and Administrative Expenses
 
G&A expenses totaled $777,744 and $231,255 for the three months ended June 30, 2010 and 2009, respectively.  The increase of $546,489 or 236% for the three months ended June 30, 2010 compared to the same period in 2009 was primarily attributable to a number of factors, including the allocation of 100% of Dr. Dionne’s compensation to G&A in 2010 as opposed to the 50% allocation to G&A for the first three quarters of 2009 (an increase in G& A allocation of $30,000), plus an increase in Dr. Dionne’s compensation of $7,500 in 2010. Stock based compensation increased by approximately $67,000, related primarily to options granted during the third quarter of 2009. Stock based consultant expense increased by approximately $383,000 during the 2010 period, related to common stock purchase warrants granted during the 2010 period. Professional and other fees increased by approximately $30,000 and insurance expense increased by approximately $23,000.
 
Research and Development Expenses
 
Research and development expenses totaled $737,106 and $624,989 for the three months ended June 30, 2010 and 2009, respectively.  The increase of $112,117 or 18% for the three months ended June 30, 2010 compared to the same period in 2009 was primarily attributable to increases in third party development costs of approximately $57,000, license fees of approximately $29,000 and compensation of approximately $35,000. The increase in compensation was a result of an increase in stock based compensation of approximately $60,000 and an increase in other compensation of approximately $5,000, partially offset by a decrease attributable to the allocation of 100% of Dr. Dionne’s compensation to G&A as opposed to the 50% allocation to R & D in 2009 (a decrease in R & D allocation of $30,000).

Our research and development expenses consist primarily of expenditures for toxicology and other studies, manufacturing, clinical trials and compensation and consulting costs.  Under the planning and direction of key personnel, we expect to outsource all of our GLP preclinical development activities (e.g., toxicology) and GMP manufacturing and clinical development activities to contract research organizations ( CROs ) and contract manufacturing organizations ( CMOs ).  Manufacturing will be outsourced to organizations with approved facilities and manufacturing practices. 

Other Income (Expenses)
 
Other income (expenses) totaled $818,766 of income for the three months ended June 30, 2010 and $118,348 of expense for the three months ended June 30, 2009.

   
Three   Months   Ended   June   30,
 
   
2010
   
2009
 
Other expense:
           
Finance Cost
  $ -     $ (5,155 )
Change in fair value of derivative liability
    809,880       (110,326 )
Interest income (expense) net
    8,886       (2,867 )
Total other income (expenses)
  $ 818,766     $ (118,348 )

 
17

 

Finance Cost
 
Finance Cost totaled $0 and $5,155 for the three months ended June 30, 2010 and 2009, respectively. This cost consists of the amortization of debt discount of $5,155 during the 2009 period.

Change in fair value of derivative liability

Change in fair value of derivative liability totaled $809,880 of income for the three months ended June 30, 2010 and $110,326 of expense for the three months ended June 30, 2009.

The change in the fair value of our warrant derivative liability resulted primarily from the changes in our stock price and the volatility of our common stock during the reported periods. Refer to Note 3 to the financial statements for further discussion on our warrant liabilities.

During the three months ended June 30, 2010, 16,667 of our warrants subject to derivative accounting were exercised into common stock. We have recorded income of $3,044 at the date of exercise related to the change in fair value from April 1, 2010 to the date of exercise. As a result of the exercise of the warrants, we have reclassified $27,516 of our warrant derivative liability to paid in capital.

At June 30, 2010, we recalculated the fair value of our remaining warrants subject to derivative accounting and have determined that their fair value at June 30, 2010 is $2,817,991. The value of the warrants was determined using the Black-Scholes method based on the following assumptions:  (1) risk free interest rate of 0.625%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 98%; and (4) an expected life of the warrants of 2 years. We have recorded income of $806,836 during the three months ended June 30, 2010 related to the change in fair value during that period.  

At June 30, 2009 we recalculated the fair value of our warrants subject to derivative accounting and have determined that their fair value at June 30, 2009 is $1,833,703. The fair value of the warrants was determined using the Black-Scholes method based on the following assumptions:  (1) risk free interest rate of 0.875%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 175%; and (4) an expected life of the warrants of 2 years. We have recorded an expense of $110,326 during the three months ended June 30, 2009 related to the change in fair value during that period.

Interest expense

We had net interest income of $8,886 for the three months ended June 30, 2010 and net interest expense of $2,867 for the three months ended June 30, 2009. The increase in net interest income of $11,753 for the three months ended June 30, 2010 compared to the same period in 2009 was attributable to a decrease in debt outstanding in 2010 and an increase in interest earned on deposits.

Result of Operations for the First Half of 2010 Compared to the First Half of 2010
 
Our results of operations have varied significantly from year to year and quarter to quarter and may vary significantly in the future.

Revenue
 
We did not have revenue for the six months ended June, 2010 and 2009, respectively. We do not anticipate any revenues during 2010.
 
Operating Expenses
 
Operating expense totaled $2,264,795 and $1,365,463 for the six months ended June 30, 2010 and 2009, respectively.  The increase in operating expenses is primarily the result of increased general and administrative expenses.
 
   
Six   Months   Ended   June   30,
 
   
2010
   
2009
 
Operating expenses
           
General and administrative expenses
  $ 1,173,624     $ 430,972  
Research and development
    1,091,171       934,491  
Total expense
  $ 2,264,795     $ 1,365,463  

 
18

 

General and Administrative Expenses
 
G&A expenses totaled $1,173,624 and $430,972 for the six months ended June 30, 2010 and 2009, respectively.  The increase of $742,652 or 172% for the six months ended June 30, 2010 compared to the same period in 2009 was primarily attributable to a number of factors, including the allocation of 100% of Dr. Dionne’s compensation to G&A in 2010 as opposed to the 50% allocation to G&A for the first three quarters of 2009 (an increase in G& A allocation of $65,000), plus an increase in Dr. Dionne’s compensation of $75,500 in 2010. Stock based compensation increased by approximately $145,000, related primarily to options granted during the third quarter of 2009. Stock based consultant expense increased by approximately $376,000 during the 2010 period, related to stock warrants granted during the 2010 period. Professional and other fees increased by approximately $67,000 and insurance expense increased by approximately $27,000.

Research and Development Expenses
 
Research and development expenses totaled $1,091,171 and $934,491 for the six months ended June 30, 2010 and 2009, respectively.  The increase of $156,680 or 17% for the six months ended June 30, 2010 compared to the same period in 2009 was primarily attributable to increases in license fees of approximately $29,000 and compensation of approximately $131,000. The increase in compensation was a result of an increase in stock based compensation of approximately $145,000 and an increase in other compensation of approximately $46,000, partially offset by a decrease attributable to the allocation of 100% of Dr. Dionne’s compensation to G&A as opposed to the 50% allocation to R & D in 2009 (a decrease in R & D allocation of $60,000).

Other Expenses
 
Other expenses totaled $601,353 and $1,166,679 for the six months ended June 30, 2010 and 2009, respectively.

   
Three   Months   Ended   June   30,
 
   
2010
   
2009
 
Other expense:
           
Finance Cost
  $ -     $ (478,093 )
Change in fair value of derivative liability
    (613,612 )     (683,111 )
Interest income (expense) net
    12,259       (5,475 )
Total other expenses
  $ (601,353 )   $ (1,166,679 )

Finance Cost
 
Finance Cost totaled $0 and $478,093 for the six months ended June 30, 2010 and 2009, respectively. During the six months ended June 30, 2009 we incurred a $415,976 charge for the fair value of additional warrants issued when the anti-dilution provisions in our warrants issued during the July and August 2008 financing were triggered plus a $51,864 charge for the fair value of additional warrants issued as consideration for the extension of the maturity dates of notes payable. The balance of the cost consisted of the amortization of debt discount. We had no comparable expense during the 2010 period.

Change in fair value of derivative liability

Change in fair value of derivative liability totaled $613,612 and $683,111 for the six months ended June 30, 2010 and 2009, respectively.

The change in the fair value of our warrant derivative liability resulted primarily from the changes in our stock price and the volatility of our common stock during the reported periods. Refer to Note 3 to the financial statements for further discussion on our warrant liabilities.

During the six months ended June 30, 2010, 50,001 of our warrants subject to derivative accounting were exercised into common stock. We have recorded a net aggregate expense of $18,075 at the dates of exercise related to the change in fair value from January 1, 2010 (for those warrants exercised during the first quarter) or April 1, 2010 (for those warrants exercised during the second quarter) to the dates of exercise. As a result of the exercise of the warrants, we have reclassified $86,307of our warrant derivative liability to paid in capital.

 
19

 

At June 30, 2010, we recalculated the fair value of our remaining warrants subject to derivative accounting and have determined that their fair value at June 30, 2010 is $2,817,991. The value of the warrants was determined using the Black-Scholes method based on the following assumptions:  (1) risk free interest rate of 0.625%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 98%; and (4) an expected life of the warrants of 2 years. We have recorded an expense of $613,612 during the six months ended June 30, 2010 related to the change in fair value during that period.  

At June 30, 2009 we recalculated the fair value of our warrants subject to derivative accounting and have determined that their fair value at June 30, 2009 is $1,833,703. The fair value of the warrants was determined using the Black-Scholes method based on the following assumptions:  (1) risk free interest rate of 0.875%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 175%; and (4) an expected life of the warrants of 2 years. We have recorded an expense of $683,111 during the six months ended June 30, 2009 related to the change in fair value during that period.

Interest expense

We had net interest income of $12,259 for the six months ended June 30, 2010 and net interest expense of $5,475 for the six months ended June 30, 2009. The increase in net interest income of $17,734 for the six months ended June 30, 2010 compared to the same period in 2009 was attributable to a decrease in debt outstanding in 2010 and an increase in interest earned on deposits.

Liquidity and Capital Resources
 
Since our inception, we have financed our operations primarily through the private placement of our securities. Our currently monthly cash burn rate is $298,000. This will increase to $391,000 in the fourth quarter of 2010 primarily due to G-202 manufacturing costs but it will then decrease to $244,000 per month for the first half of 2011. We anticipate that our available cash and expected income will be sufficient to finance most of our current activities for at least the next 16 months from June 30, 2010.
 
   
Six   Months   Ended   June   30,
 
   
2010
   
2009
 
Cash & Cash Equivalents
  $ 4,498,942     $ 2,100,212  
                 
Net cash used in operating activities
  $ (1,343,080 )   $ (1,172,930 )
Net cash provided by financing activities
    3,586,711       2,738,852  
  
Total cash was $4,498,942 and $2,100,212 at June 30, 2010 and 2009, respectively.  The increase of $2,398,730 at June 30, 2010 compared to 2009 was attributable to capital raised through equity sales in the first half of 2010.

Net Cash Used in Operating Activities
 
In our operating activities we used cash of $1,343,080 and $1,172,930 for the six months ended June 30, 2010 and 2009, respectively. The increase of $170,150 in cash used for the six months ended June 30, 2010 compared to the same period in 2009 was primarily attributable to an increase in loss of $188,114 (after adjusting for non cash items) offset by an increase in accounts payable of $17,964.
 
Net Cash Provided by Financing Activities
 
Cash provided by financing activities was $3,586,711 and $2,738,852 for the six months ended June 30, 2010 and 2009, respectively.

Listed below are key financing transactions we have entered into during 2009 and year to date 2010. 

 
·
In February and April of 2009, we sold 500,000 units resulting in gross proceeds of approximately $750,000.

 
·
In June and July of 2009, we sold 2,025,344 units resulting in gross proceeds of approximately $3,038,000.

 
·
In September of 2009, we sold 140,002 units resulting in gross proceeds of approximately $210,000.

 
·
In January and March of 2010, we sold 553,407 units resulting in gross proceeds of approximately $880,000.

 
·
In May of 2010, we sold 1,347,500 units resulting in gross proceeds of approximately $2,695,000.

 
20

 

We have incurred significant operating losses and negative cash flows since inception. We have not achieved profitability and may not be able to realize sufficient revenue to achieve or sustain profitability in the future. We do not expect to be profitable in the next several years, but rather expect to incur additional operating losses. We have limited liquidity and capital resources and must obtain significant additional capital resources in order to sustain our product development efforts, for acquisition of technologies and intellectual property rights, for preclinical and clinical testing of our anticipated products, pursuit of regulatory approvals, acquisition of capital equipment, laboratory and office facilities, establishment of production capabilities, for general and administrative expenses and other working capital requirements. We rely on cash balances and the proceeds from the offering of our securities, exercise of outstanding warrants and grants to fund our operations.

The source, timing and availability of any future financing will depend principally upon market conditions, interest rates and, more specifically, on our progress in our exploratory, preclinical and future clinical development programs. Funding may not be available when needed — at all, or on terms acceptable to us. Lack of necessary funds may require us, among other things, to delay, scale back or eliminate some or all of our research and product development programs, planned clinical trials, and/or our capital expenditures or to license our potential products or technologies to third parties.
 
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We are not required to provide the information required by this items as we are considered a smaller reporting company, as defined by Rule 229.10(f)(1).

ITEM 4.
CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures
 
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to be effective in providing reasonable assurance that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the “ SEC”), and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure.

The Company’s management, under the supervision and with the participation of the Company's Chief Executive Officer and Chief Financial (and principal accounting) Officer, carried out an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act) as of June 30, 2010.  Based upon that evaluation and the identification of the material weakness in the Company’s internal control over financial reporting as described below, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were ineffective as of the end of the period covered by this report.

The Company has limited resources and a limited number of employees. As a result, management concluded that our internal control over financial reporting is not effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. To mitigate the current limited resources and limited employees, we rely heavily on direct management oversight of transactions, along with the use of legal and accounting professionals. As we grow, we expect to increase our number of employees, which will enable us to implement adequate segregation of duties within the internal control framework.
 
Changes in Internal Control over Financial Reporting
 
There were no changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 
21

 

PART II
OTHER INFORMATION

ITEM 1.
LEGAL PROCEEDINGS

As of the date of this Report, there are no material pending legal or governmental proceedings relating to our company or properties to which we are a party, and to our knowledge there are no material proceedings to which any of our directors, executive officers or affiliates are a party adverse to us or which have a material interest adverse to us.

ITEM 1A.
RISK FACTORS

We have described below a number of uncertainties and risks which, in addition to uncertainties and risks presented elsewhere in this Report, may adversely affect our business, operating results and financial condition.  The uncertainties and risks enumerated below as well as those presented elsewhere in this Report should be considered carefully in evaluating us and our business and the value of our securities. The following important factors, among others, could cause our actual business, financial condition and future results to differ materially from those contained in forward-looking statements made in this Report or presented elsewhere by management from time to time.

General Risks Relating to Our Business and Business Model

As a result of our limited operating history, you cannot rely upon our historical performance to make an investment decision.

Since inception in 2003 and through June 30, 2010, we have raised approximately $10,815,000 in capital.  During this same period, we have recorded accumulated losses totaling $13,057,677.  As of June 30, 2010, we had working capital of $4,263,841 and stockholders’ equity of $1,579,027. Our net losses for the two most recent fiscal years ended December 31, 2008 and 2009 have been $3,326,261 and $5,132,827, respectively. Since inception, we have generated no revenue.

Our limited operating history means that there is a high degree of uncertainty in our ability to: (i) develop and commercialize our technologies and proposed products; (ii) obtain approval from the FDA; (iii) achieve market acceptance of our proposed product, if developed; (iv) respond to competition; or (v) operate the business, as management has not previously undertaken such actions as a company. No assurances can be given as to exactly when, if at all, we will be able to fully develop, license, commercialize, market, sell and derive material revenues from our proposed products in development.

We will need to raise additional capital to continue operations.

We currently generate no cash. We have relied entirely on external financing to fund operations. Such financing has come primarily from the sale of equity securities to third parties and the exercise of warrants/options.  We have expended and will continue to expend substantial amounts of cash in the development, pre-clinical and clinical testing of our proposed products. We will require additional cash to conduct drug development, establish and conduct pre-clinical and clinical trials and for general working capital needs. We anticipate that we will require an additional $7 million in addition to $2.25 million in operating costs to take our lead drug through Phase II clinical evaluations, which is currently anticipated to occur in the fourth quarter of 2012.

  As of June 30, 2010, we had cash on hand of approximately $4,499,000 which we anticipate will fund our operations through October of 2011.  Presently, the Company has an average monthly cash burn rate of $298,000. This will increase to $391,000 in the fourth quarter of 2010 primarily due to G-202 manufacturing costs but it will then decrease to $244,000 per month for the first half of 2011 assuming we do not engage in an extraordinary transaction or otherwise face unexpected events or contingencies.  Accordingly, we will need to raise additional capital to fund anticipated operating expenses after October of 2011. In the event we are not able to secure financing, we may have to delay, reduce the scope of or eliminate one or more of our research, development or commercialization programs or product launches or marketing efforts.  Any such change may materially harm our business, financial condition and operations.

We cannot assure you that financing whether from external sources or related parties, will be available if needed. If additional financing is not available when required or is not available on acceptable terms, we may be unable to fund operations and planned growth, develop or enhance our technologies, take advantage of business opportunities or respond to competitive market pressures.

Raising needed capital may be difficult as a result of our limited operating history.

When making investment decisions, investors typically look at a company’s historical performance in evaluating the risks and operations of the business and the business’s future prospects. Our limited operating history makes such evaluation and an estimation of our future performance substantially more difficult. As a result, investors may be unwilling to invest in us or such investment may be on terms or conditions which are not acceptable. If we are unable to secure such additional finance, we may need to cease operations.

 
22

 

We may not be able to commercially develop our technologies.

We have concentrated our research and development on our pro-drug technologies.  Our ability to generate revenue and operate profitably will depend on our being able to develop these technologies for human applications. Our technologies are primarily directed toward the development of cancer therapeutic agents. We cannot guarantee that the results obtained in the pre-clinical and clinical evaluation of our therapeutic agents will be sufficient to warrant approval by the FDA. Even if our therapeutic agents are approved for use by the FDA, there is no guarantee that they will exhibit an enhanced efficacy relative to competing therapeutic modalities such that they will be adopted by the medical community. Without significant adoption by the medical community, our agents will have limited commercial potential which could harm our ability to generate revenues, operate profitably or remain a viable business.

Inability to complete pre-clinical and clinical testing and trials will impair our viability.

In the first quarter of 2010, we commenced our first clinical trials of G-202 at the University of Wisconsin, Carbone Cancer Center in Madison Wisconsin and at the Sydney Kimmel Comprehensive Cancer Center at Johns Hopkins University.   Although we have commenced our clinical trials, the outcome of the trials is uncertain and, if we are unable to satisfactorily complete such trials, or if such trials yield unsatisfactory results, we will be unable to commercialize our proposed products. No assurances can be given that our clinical trials will be successful. The failure of such trials could delay or prevent regulatory approval and could harm our ability to generate revenues, operate profitably or remain a viable business.

Future financing will result in dilution to existing stockholders.

We will require additional financing in the future. We are authorized to issue 80 million shares of common stock and 10 million shares of preferred stock. Such securities may be issued without the approval or consent of our stockholders. The issuance of our equity securities in connection with a future financing will result in a decrease of our current stockholders’ percentage ownership.

We depend on Craig A. Dionne, PhD, our Chief Executive Officer, and Russell Richerson, PhD, our Chief Operating Officer, for our continued operations.

We only have 2 full time employees.  The loss of either Craig A. Dionne, PhD, our Chief Executive Officer, or Russell Richerson, PhD, our Chief Operating Officer, would be detrimental to us. Although we have entered into employment agreements with Messrs Dionne and Richerson, there can be no assurance that these individuals will continue to provide services to us. A voluntary or involuntary termination of employment by Messrs. Dionne or Richerson could have a materially adverse effect on our business.  Further, as part of their employment agreements, Messrs Dionne and Richerson agreed to not compete with us for a certain amount of time following the termination of their employment.  Once the applicable time of these provisions expires, Messrs Dionne and Richerson may be employed by a competitor of ours in the future.

We may be required to make significant payments to members of our management in the event their employment with us is terminated or if we experience a change of control.

We are a party to employment agreements with each of Craig Dionne, our President and Chief Executive Officer and Russell Richerson, our Chief Operating Officer.  In the event we terminate the employment of any of these executives, we experience a change in control, or in certain cases, if such executives terminate their employment with us, such executives will be entitled to receive certain severance and related payments.  Additionally, in such instance, certain securities held by Messrs. Dionne and Richerson will become immediately vested and exercisable.  Upon the occurrence of any such event, our obligation to make such payments could significantly impact our working capital and accordingly, our ability to execute our business plan which could have a materially adverse effect to our business.  Also, these provisions may discourage potential takeover attempts.

We will require additional personnel to execute our business plan.

Our anticipated growth and expansion into areas and activities requiring additional expertise, such as clinical testing, regulatory compliance, manufacturing and marketing, may require the addition of new management personnel and the development of additional expertise by existing management. There is intense competition for qualified personnel in such areas.  There can be no assurance that we will be able to continue to attract and retain the qualified personnel necessary for the development of our business.

Our competitors have significantly greater experience and financial resources.

We compete against numerous companies, many of which have substantially greater financial and other resources than us. Several such enterprises have research programs and/or efforts to treat the same diseases we target. Companies such as Merck, Ipsen and Diatos, as well as others, have substantially greater resources and experience than we do and are situated to compete with us effectively.  As a result, our competitors may bring competing products to market that would result in a decrease in demand for our product, if developed, which could have a materially adverse effect on the viability of the company.

 
23

 

We are dependent upon third-parties to develop our product candidates, and such parties are, to some extent, outside of our control.

We depend upon independent investigators and collaborators, such as universities and medical institutions, to conduct our pre-clinical and clinical trials under agreements with us. These collaborators are not our employees and we cannot control the amount or timing of resources that they devote to our programs. These investigators may not assign as great a priority to our programs or pursue them as diligently as we would if we were undertaking such programs ourselves. If outside collaborators fail to devote sufficient time and resources to our drug-development programs, or if their performance is substandard, the approval of our FDA applications, if any, and our introduction of new drugs, if any, will be delayed. These collaborators may also have relationships with other commercial entities, some of whom may compete with us. If our collaborators assist our competitors at our expense, our competitive position would be harmed.

We intend to rely exclusively upon the third-party FDA-approved manufacturers and suppliers for our products.

We currently have no internal manufacturing capability, and will rely exclusively on FDA-approved licensees, strategic partners or third party contract manufacturers or suppliers. Should we be forced to manufacture our products, we cannot give you any assurance that we will be able to develop internal manufacturing capabilities or procure third party suppliers. In the event we seek third party suppliers, they may require us to purchase a minimum amount of materials or could require other unfavorable terms. Any such event would materially impact our prospects and could delay the development and sale of our products. Moreover, we cannot give you any assurance that any contract manufacturers or suppliers that we select will be able to supply our products in a timely or cost effective manner or in accordance with applicable regulatory requirements or our specifications.

Our business is dependent upon securing sufficient quantities of a natural product that currently grows in very specific locations outside of the United States.

The therapeutic component of our products, including our lead compound G-202, is referred to as 12ADT. 12ADT functions by dramatically raising the levels of calcium inside cells, which leads to cell death. 12ADT is derived from a material called thapsigargin. Thapsigargin is derived from the seeds of a plant referred to as Thapsia garganica which grows along the coastal regions of the Mediterranean Sea. We currently secure the seeds from Thapsibiza, SL, a third party supplier. There can be no assurances that the countries from which we can secure Thapsia garganica will continue to allow Thapsibiza, SL to collect such seeds and/or to do so and export the seeds derived from Thapsia garganica    to the United States. In the event we are no longer able to import these seeds, we will not be able to produce our proposed drug and our business will be adversely affected.

The current manufacturing process of G-202 requires acetonitrile.

The current manufacturing process for G-202 requires the common solvent acetonitrile. Beginning in late 2008, there was a temporary worldwide shortage of acetonitrile for a variety of reasons. We observed that during that period of time the available supply of acetonitrile was of variable quality, some of which is not suitable for our purposes.  If we are unable to successfully change our manufacturing methods to avoid the reliance upon acetonitrile, we may incur prolonged production timelines and increased production costs if an acetonitrile shortage was to reoccur. In an extreme case this situation could adversely affect our ability to manufacture G-202 altogether, thus significantly impacting our future operations.

In order to secure market share and generate revenues, our proposed products must be accepted by the health care community.

Our proposed products, if approved for marketing, may not achieve market acceptance since hospitals, physicians, patients or the medical community in general may decide not to accept and utilize them. We are attempting to develop products that will likely be first approved for marketing in late stage cancer where there is no truly effective standard of care. If approved for use in late stage, the drugs will then be evaluated in earlier stage where they would represent substantial departures from established treatment methods and will compete with a number of more conventional drugs and therapies manufactured and marketed by major pharmaceutical companies. It is too early in the development cycle of the drugs for us to accurately predict our major competitors.  Nonetheless, the degree of market acceptance of any of our developed products will depend on a number of factors, including:

 
·
our demonstration to the medical community of the clinical efficacy and safety of our proposed products;

 
·
our ability to create products that are superior to alternatives currently on the market;

 
·
our ability to establish in the medical community the potential advantage of our treatments over alternative treatment methods; and

 
·
the reimbursement policies of government and third-party payors.

If the health care community does not accept our products for any of the foregoing reasons, or for any other reason, our business will be materially harmed.

 
24

 
 
We may be required to secure land for cultivation and harvesting of Thapsia garganica.

We believe that we can satisfy our needs for clinical development of G-202 through completion of Phase III clinical studies from Thapsia garganica that grows naturally in the wild.  In the event G-202 is approved for commercial marketing, our current supply of Thapsia garganica may not be sufficient for the anticipated demand.  We estimate that in order to secure sufficient quantities of Thapsia garganica for the commercialization of a product comprising G-202, we will need to secure approximately 100 acres of land to cultivate and grow Thapsia garganica .   We anticipate the cost to lease such land would be $40,000 per year but have not yet fully assessed what other costs would be associated with a full-scale farming operation. There can be no assurances that we can secure such acreage, or that even if we are able to do so, that we could adequately grow sufficient quantities of Thapsia garganica to satisfy any commercial objectives that involve G-202. Our inability to secure adequate seeds will result in us not being able to develop and manufacture our proposed drug and will adversely impact our business.

Thapsia garganica and Thapsigargin can cause severe skin irritation.

It has been known for centuries that the plant Thapsia garganica can cause severe skin irritation when contact is made between the plant and the skin.  In 1978, thapsigargin was determined to be the skin-irritating component of the plant Thapsia garganica . The therapeutic component of our products, including our lead product G-202, is derived from thapsigargin. We obtain thapsigargin from the above-ground seeds of Thapsia garganica . These seeds are harvested by hand and those conducting the harvesting must wear protective clothing and gloves to avoid skin contact. Although we obtain the seeds from a third-party contractor located in Spain, and although the contractor has contractually waived any and all liability associated with collecting the seeds, it is possible that the contractor or those employed by the contractor may suffer medical issues related to the harvesting and subsequently seek compensation from us via, for example, litigation.  No assurances can be given, despite our contractual relationship with the third party contractor, that we will not be the subject of litigation related to the harvesting.

The synthesis of 12ADT must be conducted in special facilities.

There are a limited number of manufacturing facilities qualified to handle and manufacture therapeutic toxic agents and compounds. This limits the potential number of possible manufacturing sites for our therapeutic compounds derived from Thapsia garganica .   No assurances can be provided that these facilities will be available for the manufacture of our therapeutic compounds under our time schedules or within the parameters of our manufacturing budget. In the event facilities are not available for manufacturing our therapeutic compounds, our business and future prospects will be adversely affected.

Our lead therapeutic compound, G-202, has not been subjected to large scale manufacturing procedures.

To date, G-202 has only been manufactured at a scale adequate to supply early stage clinical trials. There can be no assurances that the current procedure for manufacturing G-202 will work at a larger scale adequate for commercial needs.  In the event G-202 cannot be manufactured in sufficient quantities, our future prospects could be significantly impacted.

We may not have adequate insurance coverage.

The testing, manufacturing, marketing and sale of human therapeutic products entail an inherent risk of product liability claims.  We cannot assure you that substantial claims will not be asserted against us.  In the event we are forced to expend significant funds on defending such claims beyond our current coverage, and in the event those funds come from operating capital, we will be required to reduce our business activities, which could lead to significant losses.

Risks Relating to Intellectual Property and Government Regulation

We may not be able to withstand challenges to our intellectual property rights.

We rely on our intellectual property, including our issued and applied for patents, as the foundation of our business. Our intellectual property rights may come under challenge.  No assurances can be given that, even if issued, our patents will survive claims alleging invalidity or infringement on other patents. The viability of our business will suffer if such patent protection becomes limited or is eliminated.

We may not be able to adequately protect our intellectual property.

Considerable research with regard to our technologies has been performed in countries outside of the United States. The laws protecting intellectual property in some of those countries may not provide protection for our trade secrets and intellectual property.  If our trade secrets or intellectual property are misappropriated in those countries, we may be without adequate remedies to address the issue. At present, we are not aware of any infringement of our intellectual property. In addition to our patents, we rely on confidentiality and assignment of invention agreements to protect our intellectual property. These agreements provide for contractual remedies in the event of misappropriation.  We do not know to what extent, if any, these agreements and any remedies for their breach will be enforced by a court. In the event our intellectual property is misappropriated or infringed upon and an adequate remedy is not available, our future prospects will greatly diminish.

 
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Our proposed products may not receive FDA approval.

The FDA and comparable government agencies in foreign countries impose substantial regulations on the manufacture and marketing of pharmaceutical products through lengthy and detailed laboratory, pre-clinical and clinical testing procedures, sampling activities and other costly and time-consuming procedures. Satisfaction of these regulations typically takes several years or more and varies substantially based upon the type, complexity and novelty of the proposed product.  On September 4, 2009, we received approval from the FDA for our first IND in order to commence clinical trials with our lead drug candidate, G-202.   Although we began the G-202 Phase I clinical trial on January 19, 2010, we cannot assure you that we will successfully complete the trial.  Further, we cannot yet accurately predict when we might first submit any product license application for FDA approval or whether any such product license application would be granted on a timely basis, if at all.   Any delay in obtaining, or failure to obtain, such approvals could have a materially adverse effect on the commercialization of our products and the viability of the company.

Risks Relating To Our Common Stock

There is no well established public market for our securities.

On September 18, 2009, our common shares began quotation on the Over-the-Counter Bulletin Board (“OTCBB”) and Pinksheets.  The shares were initially sporadic traded and as a result, we did not consider that a public market for our securities existed.  Commencing in the first quarter of 2010, our common shares began trading regularly but with limited volume.   Accordingly, although technically a limited public market for our securities now exists, it is still relatively illiquid.  Any prospective investor in our common stock should consider the limited market when making an investment decision as our securities are still relatively illiquid.    No assurances can be given that the trading volume of our common shares will increase or that a liquid public market will ever materialize.   Additionally, due to the limited trading volume, it may be difficult for an investor to sell shares.
 
We face risks related to compliance with corporate governance laws and financial reporting standards.

The Sarbanes-Oxley Act of 2002, as well as related new rules and regulations implemented by the SEC and the Public Company Accounting Oversight Board, require changes in the corporate governance practices and financial reporting standards for public companies.  These new laws, rules and regulations, including compliance with Section 404 of the Sarbanes-Oxley Act of 2002 relating to internal control over financial reporting (“Section 404”), will materially increase the Company's legal and financial compliance costs and make some activities more time-consuming and more burdensome. As a result, management will be required to devote more time to compliance which could result in a reduced focus on the development thereby adversely affecting the Company’s development activities. Also, the increased costs will require the Company to seek financing sooner that it may otherwise have had to.

Starting in 2007, Section 404 of the Sarbanes-Oxley Act of 2002 requires a company’s management to assess the company’s internal control over financial reporting annually and include a report on such assessment in our annual report filed with the SEC.  Section 404(b) is not applicable to smaller reporting companies.  Presently we qualify as a smaller reporting company under Section 404(b) and, accordingly, our independent registered public accounting firm is not required to audit the design and operating effectiveness of our internal controls and management's assessment of the design and the operating effectiveness of such internal controls.  In the event we cease to qualify as a smaller reporting company, we will be required to expand substantial capital in connection with compliance.

Because of our limited resources, management has concluded that our internal control over financial reporting may not be effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.  To mitigate the current limited resources and limited employees, we rely heavily on direct management oversight of transactions, along with the use of legal and accounting professionals. As we grow, we expect to increase our number of employees, which will enable us to implement adequate segregation of duties within the Committee of Sponsoring Organizations of the Treadway Commission internal control framework.

We do not intend to pay cash dividends.

We do not anticipate paying cash dividends in the foreseeable future. Accordingly, any gains on your investment will need to come through an increase in the price of our common stock.  The lack of a market for our common stock makes such gains highly unlikely.   

Our board of directors has broad discretion to issue additional securities.

We are entitled under our certificate of incorporation to issue up to 80,000,000 common and 10,000,000 “blank check” preferred shares. Blank check preferred shares provide the board of directors broad authority to determine voting, dividend, conversion, and other rights. As of June 30, 2010, we have issued and outstanding 17,584,465 common shares and we have 8,894,425 common shares reserved for future grants under our equity compensation plans and issuances upon the exercise of current outstanding options, warrants and convertible securities. Accordingly, we will be entitled to issue up to 53,521,110 additional common shares and 10,000,000 additional preferred shares. Our board may generally issue those common and preferred shares, or options or warrants to purchase those shares, without further approval by our shareholders.  Any preferred shares we may issue will have such rights, preferences, privileges and restrictions as may be designated from time-to-time by our board, including preferential dividend rights, voting rights, conversion rights, redemption rights and liquidation provisions. It is likely that we will be required to issue a large amount of additional securities to raise capital to further our development and marketing plans. It is also likely that we will be required to issue a large amount of additional securities to directors, officers, employees and consultants as compensatory grants in connection with their services, both in the form of stand-alone grants or under our various stock plans. The issuance of additional securities may cause substantial dilution to our shareholders.

 
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Our Officers and Scientific Advisors beneficially own approximately 37% of our outstanding common shares.

Our Officers and Scientific Advisors own approximately 37% of our issued and outstanding common shares. As a consequence of their level of stock ownership, the group will substantially retain the ability to elect or remove members of our board of directors, and thereby control our management. This group of shareholders has the ability to significantly control the outcome of corporate actions requiring shareholder approval, including mergers and other changes of corporate control, going private transactions, and other extraordinary transactions any of which may be in opposition to the best interest of the other shareholders and may negatively impact the value of your investment.  
  
Provisions in Delaware law and executive employment agreements may prevent or delay a change of control

We are subject to the Delaware anti-takeover laws regulating corporate takeovers.  These anti-takeover laws prevent Delaware corporations from engaging in a merger or sale of more than 10% of its assets with any stockholder, including all affiliates and associates of the stockholder, who owns 15% or more of the corporation’s outstanding voting stock, for three years following the date that the stockholder acquired 15% or more of the corporation’s assets unless:
 
 
·
the Board of Directors approved the transaction in which the stockholder acquired 15% or more of the corporation’s assets;

 
·
after the transaction in which the stockholder acquired 15% or more of the corporation’s assets, the stockholder owned at least 85% of the corporation’s outstanding voting stock, excluding shares owned by directors, officers and employee stock plans in which employee participants do not have the right to determine confidentially whether shares held under the plan will be tendered in a tender or exchange offer; or

 
·
on or after this date, the merger or sale is approved by the Board of Directors and the holders of at least two-thirds of the outstanding voting stock that is not owned by the stockholder.

A Delaware corporation may opt out of the Delaware anti-takeover laws if its certificate of incorporation or bylaws so provide. We have not opted out of the provisions of the anti-takeover laws. As such, these laws could prohibit or delay mergers or other takeover or change of control of GenSpera and may discourage attempts by other companies to acquire us.

In addition, employment agreements with certain executive officers provide for the payment of severance and acceleration of the vesting of options and restricted stock in the event of termination of the executive officer following a change of control of GenSpera.  These provisions could have the effect of discouraging potential takeover attempts.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following information is given with regard to unregistered securities sold since January 1, 2010.  The following securities were issued in private offerings pursuant to the exemption from registration contained in the Securities Act and the rules promulgated thereunder in reliance on Section 4(2) thereof, relating to offers of securities by an issuer not involving any public offering.

 
·
During January and March of 2010, we entered into securities purchase agreements with a number of accredited investors.  Pursuant to the terms of the agreements, we sold 533,407 units resulting in gross proceeds of approximately $880,000.  The price per unit was $1.65.  Each unit consists of: (i) one common share; and (ii) one half common stock purchase warrant.  The warrants have a term of five years and allow the investors to purchase our common stock at a price per share of $3.10.  The warrants also contain anti-dilution protection in the event of stock splits, stock dividends and other similar transactions. The warrants are callable by us assuming the following: (i) our common stock trades above $5.00 for twenty (20) consecutive days; (ii) the daily average minimum volume over such 20 days is 75,000 or greater; and (iii) there is an effective registration statement covering the underlying shares.   We incurred placement agent fees of $70,410 in connection with the transaction. We also issued a total of 42,673 additional common stock purchase warrants to our placement agent as compensation.  The warrants have the same terms as the investor warrants except that 12,160 warrants have an exercise price of $2.20 and 30,513 warrants have an exercise price of $2.94.

 
·
In February of 2010, we granted John M. Farah, Jr., Ph.D, one of our outside directors, options to purchase 39,000 common shares.  The options were granted pursuant to our director compensation plan as compensation for Dr. Farah’s service on our Board and related committees.  The options have an exercise price of $2.14 per share, a term of 5 years and vest quarterly over the grant year.
 
 
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·
In March of 2010, we granted Scott Ogilvie, one of our outside directors, options to purchase 38,000 common shares.  The options were granted pursuant to our director compensation plan as compensation for Mr. Ogilvie’s service on our Board and related committees.  The options have an exercise price of $2.47 per share, a term of 5 years and vest quarterly over the grant year.

 
·
In May of 2010, we issued warrants to purchase 235,000 common shares as compensation for business advisory services.  The warrant has an exercise price of $1.65 per share, a term of 5 years and provides for cashless exercise after 6 months in the event the shares underlying the warrant are not registered at the time of exercise.

 
·
In May of 2010, we issued 5,800 common stock purchase warrants as compensation to a consultant.  The warrants have an exercise price of $2.40 and a term of 5 years and provides for cashless exercise after 6 months in the event the shares underlying the warrant are not registered at the time of exercise.

 
·
In May of 2010, we issued Craig Dionne, our CEO, and Russell Richerson, our COO, an aggregate of 43,479 common shares as payment for their 2009 discretionary bonuses.  The shares were valued at $2.30 which represents their fair market value on the grant date of May 14, 2010.

 
·
On May 18, 2010, we sold 1,347,500 units resulting in gross proceeds of approximately $2,695,000.  The price per unit was $2.00.  Each unit consists of the following: (i) one common share, and (ii) one half common stock purchase warrant.  The warrants have a term of five years and an exercise price of $3.50.  The warrants also contain provisions providing for an adjustment in the underlying number of shares and exercise price in the event of stock splits or dividends and fundamental transactions.  The securities purchase agreement, pursuant to which the offering was completed, also contains a 180 days most favored nation provision whereby if we enters into a subsequent financing with another individual or entity on terms that are more favorable to the third party, then at the discretion of the holder, the agreements between us and the investors shall be amended to include such better terms.  The warrants are callable by us assuming the following: (i) our common stock trades above $6.50 for twenty (20) consecutive days; (ii) the daily average minimum volume over such 20 days is 50,000 or greater; and (iii) there is an effective registration statement covering the underlying shares.   We also granted the investors certain piggy-back registration rights.
 
In connection with the transaction, we incurred a total of $39,500 in fees and expenses.  We also issued warrants to purchase a total of 18,000 shares to our placement agent.  The placement agent warrant has the same terms and conditions as the investor warrant.
 
As part of the offering, we also agreed to exchange 43,632 units for $87,264 in payables owed to a consultant.  The exchange was on the same terms and conditions as the offering.
 
As a result of the offering and the exchange, we issued a total of 1,391,132 shares and issued 713,566 warrants.

 
·
In June of 2010, we issued 100,000 common shares upon the exercise of an outstanding common stock purchase option.  The exercise price of the option was $0.50 per share and we received gross proceeds of $50,000.

 
·
In June of 2010, we issued warrants to purchase an aggregate of 50,625 common shares.  The warrants were issued as compensation to consultants.  The warrants have an exercise price of $3.50, a term of 5 years, are callable in the event certain conditions are met, and generally have the same terms and conditions as the warrants issued to our investors in the May 18, 2010 offering.

ITEM 3.             DEFAULT UPON SENIOR SECURITIES

None 

ITEM 4.             (REMOVED AND RESERVED)

None

ITEM 5.             OTHER INFORMATION

None

ITEM 5.             OTHER INFORMATION

None

 
28

 

ITEM 6.             EXHIBITS

The exhibits listed in the accompanying index to exhibits are filed or incorporated by reference as part of this Form 10-Q.

SIGNATURES
 
In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed by the undersigned hereunto duly authorized.
 
 
GENSPERA, INC.
     
Date: August 13, 2010
  
/s/ Craig Dionne
   
Chief Executive Officer
     
   
/s/ Craig Dionne
   
Chief Financial Officer
   
(Principal Accounting Officer)
 
 
29

 

INDEX TO EXHIBITS

           
Incorporated by Reference
Exhibit
No.
 
 
Description
 
Filed
Herewith
 
Form
 
Exhibit
No.
 
File No.
 
Filing Date
3.01
 
Amended and Restated Certificate of Incorporation
     
 S-1
 
3.01
 
 333-153829
 
10/03/08
                         
3.02
 
Amended and Restated Bylaws
     
 8-K
 
3.02
 
333-153829 
 
1/11/10
                         
4.01
 
Specimen of Common Stock certificate
     
 S-1
 
4.01
 
333-153829 
 
10/03/08
                         
 4.02**
 
Amended and Restated GenSpera 2007 Equity Compensation Plan adopted on January , 2010
     
8-K
 
4.01
 
333-153829 
 
1/11/10
                         
4.03**
 
GenSpera Form of 2007 Equity Compensation Plan Grant and 2009 Executive Compensation Plan Grant