UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.20549

 

 

FORM 10-K

(Mark One)

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  For the fiscal year ended December 31, 2012  

 

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  For the transition period from                      to                      .  

   

Commission File Number 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: 210-479-8112

 

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes   x No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes   x No

 

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    o 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). x Yes   o No

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ¨

 

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   o   Accelerated filer  o
     
Non-accelerated filer  o (Do not check if a smaller 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 Act).   o Yes   x No 

 

 The aggregate market value of the voting and non-voting common equity held by non-affiliates computed using the price at which the common equity was last sold as of the last business day of the registrants’ most recently completed second fiscal quarter was $39,267,000. As of March 27, 2013, there were 23,713,040 shares of the registrant’s common stock outstanding.  

 

DOCUMENTS INCORPORATED BY REFERENCE

 

None

 

1
 

 

GENSPERA, INC.

FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 2012

 

INDEX 

 

        Page
PART I
Item 1.   Business   3
Item 1A.   Risk Factors   10
Item 1B.   Unresolved Staff Comments   23
Item 2.   Properties   24
Item 3.   Legal Proceedings   24
Item 4.   Mine Safety Disclosure   24
 
PART II
Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   24
Item 6.   Selected Financial Data   26
Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   27
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk   32
Item 8.   Financial Statements and Supplementary Data   32
Item 9.   Changes in and Disagreements With Accountants on Accounting and Financial Disclosure   32
Item 9A.   Controls and Procedures   32
Item 9B.    Other Information    33
 
PART III
Item 10.   Directors, Executive Officers and Corporate Governance   33
Item 11.   Executive Compensation   35
Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   40
Item 13.   Certain Relationships and Related Transactions, and Director Independence   41
Item 14.   Principal Accounting Fees and Services   43
 
PART IV
Item 15.   Exhibits, Financial Statement Schedules   43

 

2
 

 

PART I

 

We urge you to read this entire Annual Report on Form 10-K, including the “Risk Factors” section and the financial statements and related notes included herein. As used in this Annual Report, unless 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.

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Annual 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 that are not historical in nature 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; and

 

  ·

our ability to obtain adequate financing.

 

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 Annual Report, including the section entitled Management’s Discussion and Analysis of Financial Condition and Results of Operations. These forward-looking statements involve risks and uncertainties, including the risks discussed 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 Annual Report. The risks discussed in this report should be considered in evaluating our prospects and future financial performance.

 

ITEM 1. BUSINESS

 

Overview

 

We are a development stage pharmaceutical company focused on the development of prodrug cancer therapeutics for the treatment of solid tumors including prostate, liver, brain and other cancers. A prodrug is an inactive precursor of a drug that is converted into its active form only at the site of the tumor. Our technology platform combines a powerful, plant-derived cytotoxin with a prodrug delivery system that targets release of the drug within the tumor. We believe that, if successfully developed, our cancer prodrug therapies have the potential to provide a targeted therapeutic approach to a broad range of solid tumors with fewer side effects than those related to current chemotherapy treatments. We plan to develop a series of therapies based on our prodrug technology platform and test them through Phase I/II clinical trials, at which time we intend to license or sell the intellectual property underlying the compounds.

 

Our primary focus at the present time is the clinical development of our lead compound, G-202, a novel therapeutic agent with a unique mechanism of action. We have completed enrollment in a Phase Ia/Ib dose-escalation safety, tolerability and dose refinement study in which two patients remain on study with stable disease as of March 27, 2013. We are also conducting a Phase II clinical trial to test the utility of G-202 in patients with hepatocellular carcinoma (liver cancer). As of March 27, we treated one patient in this Phase II trial.

 

We were incorporated in the State of Delaware in November 2003 and our principal office is located in San Antonio, Texas. Since our inception, we have invested a substantial portion of our efforts and financial resources in the development of G-202. G-202 is the only product candidate for which we have conducted clinical trials, and to date we have not marketed, distributed or sold any products. We have generated no revenues from the sale of our product candidates and have experienced substantial net operating losses.

 

3
 

 

Recent Developments

 

From December 2012 through March 2013, we offered and sold an aggregate of 1,054,160 units in a private placement, in multiple closings, resulting in gross proceeds of $1.9 million.

 

On March 14, 2013, the Company announced that the U.S. Food and Drug Administration’s Office of Orphan Products Development granted Orphan Drug Designation to our lead candidate, G-202, for the treatment of hepatocellular carcinoma, the most common form of primary liver cancer.

 

Strategy

 

Our Business Strategy

 

We plan to develop a series of therapies based on our target-activated prodrug technology platform and test them through Phase I/II clinical trials, at which time we intend to license or sell the intellectual property underlying the compounds. We are currently focused on the clinical development of G-202 and have recently initiated a Phase II study in hepatocellular carcinoma. Our capacity to execute our plans as described in this Annual Report is dependent on a number of factors, including the outcome of our ongoing clinical trials as well as our ability to raise sufficient capital. We may also seek to enter collaborative or partnering arrangements to fund or conduct portions of our development plan.

 

Our current strategy contemplates the following major initiatives:

 

· Conducting our hepatocellular carcinoma clinical study entitled, “A Phase II, Multi-Center, Single-Arm Study of G-202 as Second-Line Therapy for Adult Patients with Progressive Advanced Hepatocellular Carcinoma.” As of March 27, 2013, one patent has been treated in the study.

 

· Conducting a clinical study of G-202 in patients with glioblastoma multiforme (a form of brain cancer). We are currently evaluating protocol design and may enter into a collaborative arrangement to conduct this trial.

 

· Conducting our prostate cancer clinical study entitled, “An Open-Label, Single-Arm, Phase 2 Study of G-202 in Patients with Chemotherapy Naïve Metastatic Castrate-Resistant Prostate Cancer.” We have deferred commencement of this study until additional capital is raised or we enter into a collaborative arrangement to conduct this study.

 

· Developing an injectable form of G-202. We are currently crafting a development plan and intend to execute such plan if and when sufficient capital is raised to fund development.

 

Our Clinical Development Strategy

 

We intend to conduct several Phase II clinical trials to determine the therapeutic efficacy of G-202 in cancer patients. We anticipate that G-202 will be therapeutically effective in a wide range of solid tumor types and have chosen to first evaluate the drug in hepatocellular carcinoma and glioblastoma, both of which have high unmet medical need and we believe a relatively rapid pathway to approval. We also plan to evaluate G-202 in prostate cancer in which we believe there is a very strong scientific rationale for its utility in this disease.

 

G-202 CLINICAL DEVELOPMENT PIPELINE
Indication Status
Solid Tumors Ongoing Phase 1a/b safety, tolerability and dosing refinement study. Closed to further enrollment; 2 patients remain on study.  
Hepatocellular Carcinoma (liver cancer)

Ongoing Phase II with one patient treated to date.

Received FDA Orphan Drug designation.

Glioblastoma (brain cancer) Evaluating protocol design and development plan.
Prostate Cancer Phase II cleared by United States Food and Drug Administration (FDA) and Medicines and Healthcare products Regulatory Agency (MHRA).

 

Hepatocellular Carcinoma (Liver Cancer)

 

Primary hepatocellular carcinoma is cancer that forms in the tissues of the liver. Estimates for liver and intrahepatic bile duct cancer in the U.S. for 2013 are about 30,640 new cases and 21,670 deaths. Incidence of hepatocellular carcinoma in the U.S. is rising, principally in relation to the spread of hepatitis C infection. It is the most common cancer in some parts of the world, with more than 1 million new cases diagnosed each year. Hepatocellular carcinoma is potentially curable by surgical resection, but surgery is the treatment of choice for only the small fraction of patients with localized disease. Prognosis depends on the degree of local tumor replacement and the extent of liver function impairment. Treatment options for people with liver cancer are surgery (including liver transplant), ablation, embolization, targeted therapy, radiation therapy, and chemotherapy, for which there is only one approved drug (sorafenib), or a combination of these options. There is no standard therapy for patients with advanced metastatic liver cancer.

 

4
 

 

Glioblastoma multiforme (a form of brain cancer)

 

There are approximately 10,000 new cases of malignant glioblastoma diagnosed each year in the United States and despite optimal treatment, the median survival for these patients is only 12 – 15 months. Treatment commonly consists of surgery followed by treatment with radiation and the drug temozolomide. There are a few drugs that have been approved in patients that have recurrent tumors but none have been shown to promote long-term tumor stabilization or survival.

 

Prostate Cancer

 

Prostate cancer forms in tissues of the prostate (a gland in the male reproductive system found below the bladder and in front of the rectum).  Other than skin cancer, prostate cancer is the most common cancer in American men and is the second leading cause of cancer death in American men, behind only lung cancer. Estimates for prostate cancer in the U.S. for 2013 are about 238,590 new cases and about 29,720 deaths. About 1 man in 6 will be diagnosed with prostate cancer during his lifetime and occurs mainly in men aged 65 or older, and it is rare before age 40. Depending on the situation, the treatment options for men with prostate cancer may include:  expectant management (watchful waiting) or active surveillance; surgery; radiation therapy; cryosurgery; hormone therapy; chemotherapy; and vaccine treatment.  These treatments are generally used one at a time, although in some cases they may be combined.

 

Phase I Clinical Development of G-202 – Solid Tumors

 

During 2011 and 2012, we were engaged in conducting our Phase Ia/b clinical trial of G-202. The purpose of the trial was to evaluate safety, understand the pharmacokinetics (the process by which a compound is absorbed, distributed, metabolized, and eliminated by the body) of G-202 in humans, and to determine an appropriate dosing regimen for subsequent clinical studies.

 

In the Phase Ia portion, 28 patients were treated in eight individual cohorts with each subsequent cohort receiving a higher dose of drug until a Maximum Tolerated Dose (MTD) was identified. The Phase Ia portion was conducted in refractory cancer patients (those who have relapsed after former treatments) with any type of solid tumors. This strategy was intended to facilitate enrollment and provide a preliminary indication of safety across a wider variety of patients with different prior treatment regimens. We treated 28 patients in the Phase Ia portion of the trial at doses ranging from 1.2 mg/m2/dose (approximately 2 mg/dose) up to 88 mg/m2/dose (approximately 150 mg/dose). The drug exposure in patients receiving the higher doses of G-202 falls within the range associated with anti-tumor efficacy in animal models. The MTD of G-202 was identified in this dose escalation portion of the Phase I study.

 

We further evaluated G-202 in sixteen additional patients in a Phase Ib continuation of the clinical trial. The Phase Ib portion of the trial was designed to further refine a dosing regimen, obtain more safety data and determine a recommended dose for our anticipated Phase II clinical studies. Of these sixteen patients, five were hepatocellular carcinoma (HCC) patients who had tumor progression after previous treatment with sorafenib, which is the only drug approved for this indication. Median progression-free survival in this patient population is eight weeks. As of March 27, 2013 two of these HCC patients, who were enrolled with metastatic disease, remain on study with stable disease at 32 and 43 weeks after initiation of treatment with G-202. Although our Phase I study was not designed to determine the anti-tumor effects of G-202, we view these data as encouraging; however, we have not completed the trial, we have not evaluated the results of the data from the trial, and therefore, the final outcome of the trial is still uncertain and there can be no assurance that these or any early observations are ultimately valid.

 

Phase II Clinical Development of G-202 – Hepatocellular Carcinoma (Liver Cancer)

 

In 2012, we obtained clearance from the FDA to initiate our Phase II clinical trial entitled, “A Phase II, Multicenter, Single-Arm Study of G-202 as Second-Line Therapy Following Sorafenib for Adult Patients with Progressive Advanced Hepatocellular Carcinoma.” This trial is being conducted at multiple sites in the U.S. and is expected to enroll up to 29 patients. As of March 27, 2013, one patient was treated in the study.

 

Development Strategy

 

Under the planning and direction of key personnel, we expect to continue to outsource all of our preclinical development (e.g., toxicology), manufacturing, and clinical development activities to contract research organizations (CROs) and contract manufacturing organizations (CMOs). Our contract CROs and CMOs are required to comply with federal, state and FDA regulations including Good Manufacturing Practices (cGMP), Good Clinical Practices (GCP), and Good Lab Practices (GLP).

 

The current form of G-202 is delivered to patients by intravenous infusion, a typical form of delivery for most chemotherapeutic treatments. We have completed preliminary development on an injectable form of G-202 that we believe could add significant value and benefits for: patients (shorter time for drug administration); oncologists (ease of delivery to patient); strengthening our patent portfolio; and enhancing market competitiveness.

 

Commercialization Strategy

 

We intend to license or sell the underlying technology of our drug compounds to third parties during or after Phase I/II clinical trials. It is expected that such third parties would then continue to develop, market, sell, and distribute any resulting products. As part of our overall strategic plan, we are exploring our options and actively seeking to engage in a collaborative, strategic and/or licensing arrangement with another pharmaceutical company. If we enter into any such transaction, we may be required to give up certain rights to our technology and control over its future development.

 

5
 

 

Our Technology

 

Our approach is to identify specific enzymes that are found at high levels in tumors relative to other tissues in the body. Upon identifying these enzymes, we attempt to create a peptide that is recognized predominantly by those enzymes in the tumor and not by enzymes in normal tissues. We then use the peptide as the masking/targeting agent and attach it to our “cytotoxin” to create a prodrug. We believe that this double layer of recognition adds to the tumor-targeting found in our prodrugs.

 

Cytotoxin—Thapsigargin

 

Thapsigargin is a cytotoxin found within the seeds of Thapsia garganica , a plant that grows wild in the Mediterranean region. This cytotoxin has been found to kill cancer cells independent of growth rate (fast-, slow- and non-dividing cells) and is the active toxic ingredient contained in our prodrugs. Thapsigargin is a potent inhibitor of the intracellular sarcoplasmic/endoplasmic reticulum calcium adenosine triphosphastase (SERCA) pump protein, consequently causing calcium levels to rise significantly and trigger apoptosis (cell death). We chemically modify thapsigargin to create the molecule, 12ADT, that retains all the potent cell-killing attributes of thapsigargin and, unlike thapsigargin, contains a new structure that can be coupled to a masking/targeting agent. Our prodrugs are manufactured by attaching a specific peptide to 12ADT.

 

Masking/Targeting Agent

 

We use peptides to mask the cytotoxin and target the tumor (masking/targeting agents). Peptides are short strings of amino-acids, the building blocks of many components found in cells. When attached to 12ADT, they have the potential to make the cytotoxin inactive and once the peptide is removed from 12ADT, the cytotoxin is active again. Our technology attempts to take advantage of the fact that the masking peptides can be removed by chemical reactors in the body called enzymes, and that the recognition of particular peptides by particular enzymes can be very specific. The peptides also make 12ADT soluble in blood. When the masking peptide is removed, 12ADT returns to its natural insoluble state and precipitates directly into nearby tumor cells.

 

Our Prodrug Therapies

 

Cancer chemotherapy involves treating patients with cytotoxic drugs (compounds or agents that are toxic to cells). Chemotherapy is often combined with surgery or radiation in the treatment of early-stage disease and it is the preferred, or only, treatment option for many forms of cancer in later stages of the disease. However, major drawbacks of chemotherapy include, but are not limited to:

 

  Side effects — non-cancer cells in the body are also affected, often leading to serious side effects, which may include the destruction of bone marrow, damage to digestive tract cells, and hair loss.

 

  Incomplete tumor kill — many of the leading chemotherapeutic agents act during the process of cell division and may be effective on tumors comprised of rapidly-dividing cells, but are much less effective on tumors that contain slowly dividing cells.

 

  Resistance — tumors will often develop resistance to current drugs after repeated exposure, thereby limiting the effectiveness of such therapies over multiple dosing.

 

Prodrug chemotherapy is a relatively new approach to cancer treatment that is being explored as a means of delivering higher concentrations of cytotoxic agents at the tumor location while avoiding or decreasing toxicity in the rest of the body. An inactive form of a cytotoxin is administered to the patient. The prodrug is converted into the active cytotoxin preferentially at the tumor site. Based on our testing of animal cancer models, as well as our ongoing Phase I clinical trial, we believe that our lead compound, G-202, may overcome a number of drawbacks associated with current cancer drugs, including:

 

Reduced side effects — our lead compound, G-202, appears to be well-tolerated in cancer patients with reduced side effects compared to traditional chemotherapeutic agents, particularly exhibiting significantly less or no effect on the patient’s bone marrow.

 

Cell-killing activity — our prodrugs have been shown in animal cancer models to kill slowly-dividing, non-dividing, as well as rapidly-dividing cancer cells.

 

Lack of acquired drug resistance — testing in animal models of cancer indicated no development of resistance to G-202 after multiple cycles of treatment with G-202

 

As a result of our Phase I clinical trials, as well as observations in animal cancer models, we have advanced G-202 into Phase II clinical trials.

 

6
 

 

Our Prodrug Development Candidates

 

We currently have identified four prodrug candidates based on our technology, as summarized in the table below. At this time we are focused exclusively on the clinical development of G-202 and have deferred further development of the other prodrug candidates.  

 

Prodrug
Candidate
 

Activating

Enzyme

  Target Location of
Active Enzyme
 

 

Status

G-202  

Prostate Specific Membrane Antigen (PSMA)

  The blood vessels of most solid tumors   •  Phase II
             
G-115   Prostate Specific Antigen (PSA)   Prostate cancers   •  Pilot toxicology completed
•  Limited pre-clinical development
             
G-114   Prostate Specific Antigen (PSA)   Prostate cancers   •  Validated efficacy in pre-clinical animal models (Johns Hopkins University)
             
G-301   Human glandular kallikrein 2 (hK2)   Prostate cancers   •  Validated efficacy in pre-clinical animal models (Johns Hopkins University)

 

The enzymes that we target with our prodrugs are found in very specific places within the body and within the tumors. Our lead drug candidate, G-202, is activated by the enzyme Prostate Specific Membrane Antigen, or PSMA, which is found in prostate epithelial cells in the normal prostate, in prostate cancer cells, and in vascular endothelial cells (blood vessels) found in almost all solid tumors. Thus, we expect that G-202 may be used in the treatment of almost all solid tumors. Importantly, we anticipate that G-202 may work by destroying the tumor vasculature, thus starving the tumor to death.

 

G-115 is activated by the enzyme Prostate Specific Antigen, or PSA, which is secreted by prostate epithelial cells in the normal prostate and by prostate cancer cells. PSA is found in the bloodstream and is a known tumor marker for prostate cancer, but it is inactive in the bloodstream due to potent binding by a protein inhibitor. However, PSA is enzymatically active on the surface of prostate cancer cells as it is being secreted and this activity forms the basis for tumor targeting with G-115. G-301 is activated by the enzyme Human Glandular Kallikrein 2, or hK2, which is secreted by prostate epithelial cells in the normal prostate and by prostate cancer cells. The enzyme hK2 is found in the bloodstream and is known as a tumor marker for prostate cancer but it is inactive in the bloodstream due to potent binding by a protein inhibitor. However, hK2 is enzymatically active on the surface of prostate cancer cells as it is being secreted and this activity forms the basis for tumor targeting with G-301. Both G-115 and G-301 are believed to be useful in the treatment of prostate cancers only and not to be useful for the treatment of other cancers.

 

Market and Competitive Considerations

 

The table below summarizes a number of the potential U.S. target markets for our proposed drug candidates:

 

    2013 Estimated Number of  
Cancer Type   New Cases     Deaths  
Prostate     238,590       29,720  
Breast     232,340       39,620  
Liver & intrahepatic bile duct     30,640       21,670  
Brain & other nervous system     23,130       14,080  
Source: CA Cancer J. Clin 2013; 63: 11-30                

 

The Therapeutic Opportunity for Our Drug Candidates

 

We believe that current anti-angiogenesis drugs (drugs that disrupt the blood supply to tumors) validate the clinical approach and market potential of our drug candidate, G-202. Angiogenesis is the physiological process involving the growth of new blood vessels from pre-existing vessels and is a normal process in growth and development, as well as in wound healing. Angiogenesis is also a fundamental step in the development of tumors from a clinically insignificant size to a malignant state because no tumor can grow beyond a few millimeters in size without the nutrition and oxygenation that comes from an associated blood supply. Interrupting this process has been targeted as a point of intervention for slowing or reversing tumor growth. An example of an anti-angiogenic approach is the FDA approved drug, Avastin™, a monoclonal antibody that inhibits the activity of Vascular Endothelial Growth Factor, which is important for the growth and survival of endothelial cells.

 

Avastin and other anti-angiogenic drugs have only a limited therapeutic effect with increased median patient survival times of only a few months. Our approach is designed to destroy both the existing and newly growing tumor vasculature, rather than just block new blood vessel formation. We anticipate that this approach will lead to a more immediate collapse of the tumor’s nutrient supply and consequently an enhanced rate and degree of tumor destruction. 

 

7
 

 

Competition

 

The pharmaceutical and biotechnology industries are very competitive, fast moving and intense, and expected to be increasingly so in the future. Although we are not aware of any competitor who is developing a drug that is designed to destroy both the existing and newly growing tumor vasculature in a manner similar to our drug candidates, there are several marketed drugs and drugs in development that attack tumor-associated blood vessels to some degree. For example, Avastin™ is a marketed product that acts predominantly as an anti-angiogenic agent. Zybrestat™ is another drug in development that is described as a vascular-disrupting agent that inhibits blood flow to tumors. Nexavar TM and Sutent TM are two other approved drugs that appear to work in part through anti-angiogenic mechanisms. It is impossible to accurately ascertain how well our drugs will compete against these or other products that may be in the marketplace until we have more complete human patient data for comparison.

 

Intellectual Property

 

We regard the protection of patents and other intellectual property rights that we own or license as critical to our business and competitive position. To protect our intellectual property, we rely on patent, trade secret and copyright law, as well as confidentiality, nondisclosure, assignment of invention and other contractual arrangements with our officers, directors, employees, consultants, investigators, clinical trial sites, contractors, collaborators and other third parties to whom we disclose confidential information. Our policy is to pursue patent applications on inventions and discoveries that we believe are commercially important to the development and growth of our business. We solely own or have exclusive licenses to all of our patents and patent applications.

 

Our pipeline currently includes four prodrug product candidates: G-202 (solid tumors); and G-114, G-115 and G-301 (prostate cancer). Our patent portfolio is currently composed of: 9 issued U.S. patents; 6 pending U.S. non-provisional patent applications; 3 pending U.S. provisional patent applications; 1 pending Patent Cooperation Treaty, or PCT, application; and 1 pending European patent application (also registered in Hong Kong), which relates to the PCT application.

 

The 9 issued U.S. patents, which expire between 2018 and 2026, contain claims directed to: peptide specific prodrugs (targeting hK2, PSA, PSMA); thapsigargin derivatives; methods of making the same; and, methods of treatment using the same. The U.S. provisional and non-provisional patent applications cover: additional peptide specific prodrugs (targeting fibroblast activation protein-alpha, “FAP”); injectable formulations of peptide prodrugs (PSMA, PSA, hK2, and FAP); methods for producing the same; and methods of treatment using the same. If allowed, these applications would expire between 2027 and 2034. The pending PCT, and its European Union and U.S. counterparts, contain claims directed to compositions and methods for detecting and imaging cancer, and if issued, expire in 2030.

 

When appropriate, we plan to continue to seek patent protection for inventions in our core technologies and in ancillary technologies that support our core technologies or which we otherwise believe would provide us with a competitive advantage. We expect to be able to accomplish this by filing and maintaining patent applications for discoveries we make, either alone or in collaboration with scientific collaborators and strategic partners. Typically, we plan to file patent applications in the United States as well as foreign countries, where applicable. In addition, we may obtain licenses or options to acquire licenses to patent filings from other individuals and organizations that we anticipate could be useful in advancing our research, development and commercialization initiatives and our strategic business interest.

 

In addition to and separate from patent protection, G-202 for the treatment of hepatocellular carcinoma has been granted orphan drug designation under the Orphan Drug Act of 1983, as amended, which was enacted to provide incentives to pharmaceutical companies who create treatments for rare diseases. It does so by granting seven years of exclusivity after approval of a drug in the rare disease, or "orphan" indication. During the seven year period, the FDA may not grant marketing authorization (e.g. to a generic manufacturer) for the same drug for the orphan indication.

 

We are currently involved in legal proceedings related to certain of our licensed patents. See “Legal Proceedings” below.

 

Manufacturing and Supply

 

We do not plan to develop company-owned or company-operated manufacturing facilities. We outsource all drug manufacturing to contract manufacturers that are required to operate in compliance with cGMP. We may also seek to refine the current manufacturing process in order to achieve improvements in efficiency, costs, purity and the like as well as address different drug formulations to achieve improvements in stability and/or drug delivery.

 

Supply of Raw Materials — Thapsibiza SL

 

To our knowledge, there is only one commercial supplier of Thapsia garganica seeds. In April 2007, we obtained the proper permits from the U.S. Department of Agriculture (the USDA) for the importation of Thapsia garganica seeds. In April 2012, we entered into a five year sole source agreement with Thapsibiza, SL. Either party can extend the agreement for an additional five years by providing 30 days written notice prior to the expiration date. Pursuant to the terms of the agreement, Thapsibiza, SL has agreed to exclusively provide us Thapsia garganica seeds while we retain the right to seek additional suppliers. The agreement requires us to purchase minimum quantities of seeds per harvest period.

 

8
 

 

Long-term Supply of Raw Materials

 

We believe that we presently have sufficient supply of Thapsia garganica seeds in storage that we anticipate needing to complete our clinical trials as currently planned. However, in order to secure a long-term, stable supply of thapsigargin starting material, we are engaged in two ongoing research projects, including traditional cultivation and metabolic engineering of moss cells.

 

We are funding an ongoing Thapsia garganica cultivation project with Thapsibiza, SL. It is known that thapsigargin is produced in the various parts of the plant and we are evaluating the most cost-effective way to produce thapsigargin, whether it is extracted from seedlings, early roots, stems and/or shoots or from seeds of the mature plant. Reliable germination methods are established and transfer of plantings from greenhouse to fields appears straightforward. At the current time, we believe traditional cultivation, farming and harvesting of Thapsia garganica is the most reliable and straightforward source of thapsigargin starting material.

 

We are also co-funding a moss project at the University of Copenhagen. A major goal of the project entitled SPOTLight (Sustainable Production of Thapsigargin using Light) is to produce thapsigargin in high yields in genetically modified moss cells thus enabling an inexpensive year-round supply of thapsigargin for drug manufacturing. The SPOTLight project is primarily funded by a DKK 18.3M (approximately $3.5M USD) grant from The Danish Council for Strategic Research and is directed by Dr. Soren Brogger Christensen, Professor at the University of Copenhagen, member of our Scientific Advisory Board and the scientist responsible for the initial isolation and characterization of thapsigargin. We have agreed to co-fund the project to a total sum of $100,000 paid in four annual installments of $25,000, the last of which is due in 2013. Under the terms of the agreement, we have obtained an exclusive, milestone- and royalty-free, fully paid license to the resulting moss cell lines necessary to generate thapsigargin or its chemical precursors. We recognize that this is an ambitious project and that the goal of having a thapsigargin-producing cell line may not be reached. However, even if the project can only generate cell lines that produce chemical precursors of thapsigargin, this might form the basis of a semi-synthetic route to thapsigargin on a commercially viable scale.

 

Governmental Regulations

 

FDA Approval Process

 

Prior to commencement of clinical studies involving humans, preclinical testing of new pharmaceutical products is generally conducted on animals in the laboratory to evaluate the potential efficacy and safety of the product candidate. The results of these studies are submitted to the FDA as part of an IND application, which must become effective before clinical testing in humans can begin. Typically, human clinical evaluation involves a time-consuming and costly three-phase process. In Phase I, clinical trials are conducted with a small number of people to assess safety, tolerability and to evaluate the pattern of drug distribution within the body. In Phase II, clinical trials are conducted with groups of patients afflicted with a specific disease in order to determine preliminary efficacy, optimal dosages and expanded evidence of safety. (In some cases, an initial trial is conducted in diseased patients to assess both preliminary efficacy and preliminary safety, in which case it is referred to as a Phase I/II trial.) In Phase III, large-scale, multi-center, comparative trials are conducted with patients afflicted with a target disease in order to provide enough data to demonstrate the efficacy and safety required by the FDA. The FDA closely monitors the progress of each of the three phases of clinical testing and may, at its discretion, re-evaluate, alter, suspend, or terminate the testing based upon the data which have been accumulated to that point and its assessment of the risk/benefit ratio to the patient. All adverse events must be reported to the FDA. Monitoring of all aspects of the study to minimize risks is a continuing process.

 

The results of the preclinical and clinical testing on non-biologic drugs and certain diagnostic drugs are submitted to the FDA in the form of a New Drug Application (NDA) for approval prior to commencement of commercial sales. In responding to an NDA submission, the FDA may grant marketing approval, may request additional information, may deny the application if it determines that the application does not provide an adequate basis for approval, and may also refuse to review an application that has been submitted if it determines that the application does not provide an adequate basis for filing and review. There can be no assurance that approvals would be granted on a timely basis, if at all, for any of our proposed products.

 

European and Other Regulatory Approval

 

Whether or not FDA approval has been obtained, approval of a product by comparable regulatory authorities in Europe and other countries is necessary prior to commencement of marketing the product in such countries. The regulatory authorities in each country may impose their own requirements and may refuse to grant an approval, or may require additional data before granting it, even though the relevant product has been approved by the FDA or another authority. As with the FDA, the regulatory authorities in the European Union (EU), and other developed countries have lengthy approval processes for pharmaceutical products. The process for gaining approval in particular countries varies, but generally follows a similar sequence to that described for FDA approval. In Europe, the European Committee for Proprietary Medicinal Products provides a mechanism for EU-member states to exchange information on all aspects of product licensing. The EU has established a European agency for the evaluation of medical products, with both a centralized community procedure and a decentralized procedure, the latter being based on the principle of licensing within one member country followed by mutual recognition by the other member countries.

 

Orphan Drug Designation

 

We have been granted orphan drug designation by the FDA for G-202 in hepatocellular carcinoma. The Orphan Drug Act provides incentives to encourage pharmaceutical companies to development drugs for rare diseases and conditions affecting fewer than 200,000 persons in the U.S. at the time of application for orphan drug designation, or more than 200,000 individuals in the U.S. and for which there is no reasonable expectation that the cost of developing and making a drug product available in the U.S. for this type of disease or condition will be recovered from sales of the product. Orphan drug designation does not convey any advantage in or shorten the duration of the regulatory review and approval process. The first developer to receive FDA marketing approval for an orphan drug is entitled to a seven year exclusive marketing period in the U.S. for that drug product in a certain disease as well potential tax credits and waiver of certain user fees.

 

9
 

 

Other Regulations

 

We are also subject to various U.S. federal, state, local and international laws, regulations and recommendations relating to safe working conditions, laboratory and manufacturing practices and the use and disposal of hazardous or potentially hazardous substances, including radioactive compounds and infectious disease agents, used in connection with our business. Additionally, we are subject to regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, and Securities and Exchange Commission regulations. We cannot accurately predict the extent of government regulation which might result from future legislation or administrative action.

 

Scientific Advisory Board

 

We have access to a number of academic and industry advisors with expertise in clinical and pharmaceutical development. Members of our Scientific Advisory Board, or SAB, meet with our management and key scientific employees on an ad hoc basis to provide advice in their respective areas of expertise and further assist us by periodically reviewing with management our preclinical and clinical activities. The members of our SAB are Søren Brøgger Christensen, PhD, Samuel R. Denmeade, MD, and John T. Isaacs, PhD. Our SAB members possess deep insight into our technologies and our drug candidate’s mechanism of action which is instrumental in advancing our clinical and development programs. Our SAB members have already made significant contributions to our current clinical development programs, providing input on trial protocols and endpoint design. In connection with a member’s retention on our SAB, we have entered into confidentiality agreements as well as assignment of invention agreements, subject to the member respective obligations and responsibilities to any institution or institutions at which they are employed.

 

Employees

 

As of December 31, 2012 we employed 2 full-time and 1 part-time individuals who are also our executive officers, all of whom hold advanced degrees. In addition, from time to time on an as needed basis, we contract with approximately 12 consultants to assist in activities related to our operations and research and development plan.

 

Where to Find More Information

   

We make our public filings with the SEC, including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all exhibits and amendments to these reports. These materials are available on the Company’s website at www.genspera.com or on the SEC’s web site, http://www.sec.gov . You may also read or copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Alternatively, you may obtain copies of these filings, including exhibits, by writing or telephoning us at:

 

GENSPERA

2511 N Loop 1604 W, Suite 204

San Antonio, TX 78258

Attn: Chief Executive Officer

Tel: 210-479-8112

 

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 Annual 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 Annual Report should be considered carefully in evaluating us, 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 Annual Report or presented elsewhere by management from time to time.

 

Risks Related to our Financial Position and Need to Raise Additional Capital

 

We may not be able to continue as a going concern if we do not obtain additional financing by September 2013.

 

10
 

 

Our cash and cash equivalents balance at December 31, 2012 was $2.3 million. Based on our current expected level of operating expenditures, we expect to be able to fund our operations through September, 2013. Our ability to continue as a going concern is wholly dependent upon obtaining sufficient financing to fund our operations. We have no committed sources of additional capital and our access to capital funding is always uncertain. Accordingly, despite our ability to secure capital in the past, there is no assurance that additional equity or debt financing would be available to us when needed, on acceptable terms or even at all. In the event that we are not able to secure financing, we may be forced to curtail operations, delay or stop ongoing clinical trials, or cease operations altogether or file for bankruptcy. Any such change may materially harm our business, financial condition, and operations.  

 

Our auditors have expressed substantial doubt about our ability to continue as a going concern.

 

Our auditors’ report on our December 31, 2012 financial statements expressed an opinion that our Company’s capital resources as of the date of their Audit Report are not sufficient to sustain operations or complete our planned activities for the upcoming year unless we raise additional funds. These conditions raise substantial doubt about our ability to continue as a going concern. If we do not obtain additional funds there is the distinct possibility that we will no longer be a going concern and will cease operation which means any persons purchasing shares will lose their entire investment in our Company.

 

We are an early development stage company, have no product revenues, are not profitable and may never be profitable.

 

Since inception in 2003 and through December 31, 2012, we have raised approximately $17.7 million through the sale of our securities. During this same period, we have recorded accumulated deficit totaling approximately $27.1 million. Our net losses for the two most recent fiscal years ended December 31, 2012 and 2011 were $6.9 million and $5.7 million, respectively. None of our products in development have received approval from the FDA or other regulatory authorities; we have no sales and have never generated product revenues nor expect to for years, if at all. Currently, our only product candidate in development is G-202 which is being tested in Phases I and II clinical trials. We expect to incur significant operating losses for the foreseeable future as we continue research and clinical development of our product candidates. Accordingly, we need additional capital to fund our continuing operations. Since we do not generate any revenue, the most likely sources of such additional capital include the sale of our securities or funds from a potential strategic licensing or collaboration transaction involving the rights to one or more of our product candidates, or from grants. To the extent that we raise additional capital by issuing equity securities, our stockholders are likely to experience dilution, which may be significant. If we raise additional funds through collaborations and licensing arrangements, it may be necessary to relinquish some rights to our technologies, product candidates or products, or grant licenses on terms that are not favorable to us. If we raise additional funds by incurring debt, we could incur significant interest expense and become subject to covenants in the related transaction documentation that could affect the manner in which we conduct our business.

 

We intend to develop our drug candidates through Phase I/II clinical trials, and then seek to license or sell the underlying technology of our drug candidates to third parties. It is expected that such third parties would then continue to develop, market, sell, and distribute the resulting products. Even if we succeed in developing one or more product candidates, we expect to incur substantial losses for the foreseeable future and may never become profitable. We cannot predict the extent of these future net losses, or when we may attain profitability, if at all. 

 

All of our product candidates are in an early stage of development and we may never succeed in developing and/or commercializing them. If we are unable to commercialize G-202 or any of our other product candidates, or if we experience significant delays in doing so, our business may fail.

 

Our products are in various stages of early development and significant financial resources are required to develop commercially viable products and obtain regulatory approval. We have invested a significant portion of our efforts and financial resources in the development of G-202, together with limited pre-clinical development of G-115. We depend heavily on the success of G-202. We will need to devote significant additional research and development efforts, financial resources and personnel to develop commercially viable products, obtain regulatory approvals and establish a sales and marketing infrastructure. We may encounter hurdles and unexpected issues as we proceed in the development of G-202 and our other product candidates. There are many reasons that we may not succeed in our efforts to develop our product candidates, including the possibility that:

 

  · we may be unable to enroll sufficient subjects to complete our clinical studies in a timely manner;

 

  · unexpected safety issues may occur and additional studies or analyses may be required to characterize and understand those issues, or our studies may be terminated by the institutional review boards or the FDA;

 

  · our product candidates may be deemed ineffective, unsafe or will not receive regulatory approvals;

 

  · our product candidates may be too expensive to manufacture or market or will not achieve broad market acceptance;

 

  · others may claim proprietary rights that may prevent us from marketing our product candidates; or

 

  · our competitors may market products that are perceived as equivalent or superior.

 

11
 

 

If we fail to develop and commercialize our product candidates, our business would be materially harmed and could fail.

 

We have only three employees and a limited operating history and may not be able to effectively operate our business.

 

Our limited staff and operating history means that there is a high degree of uncertainty in our ability to:

 

  · develop and commercialize our technologies and proposed products;

 

  · obtain regulatory approval to commence marketing our products;

 

  · identify, hire and retain any needed additional management or scientific personnel to develop and implement our product development plans and conduct pre-clinical and clinical testing;

 

  · manage potential rapid growth with our current limited managerial, operational and financial resources;

 

  · achieve market acceptance or insurance reimbursement for any of our proposed products, if successfully developed;

 

  · respond to competition; or

 

  · 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 would be able to fully develop, and take the necessary steps to derive any revenues from our proposed products candidates.

 

Raising 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, as well as any estimation of our future performance, substantially more difficult. As a result, investors may be unwilling to invest in us or on terms or conditions which are acceptable. If we are unable to secure additional financing, we may need to materially scale back our business plan and/or operations or cease operations altogether.  

 

Risks Related to Commercialization

 

The market for our proposed products is rapidly changing and competitive, and new drugs and new treatments, which may be developed by others, could impair our ability to maintain and grow our business and remain competitive.

 

The pharmaceutical and biotechnology industries are subject to rapid and substantial technological change. Developments by others may render our proposed products noncompetitive or obsolete, or we may be unable to keep pace with technological developments and other market factors. Technological competition from pharmaceutical and biotechnology companies, universities, governmental entities and others diversifying into the field is intense and is expected to increase.

 

As a pre-revenue company engaged in the early development of prodrug cancer therapeutics, our resources are limited and we may experience technical challenges inherent in the early development of novel therapeutics. Competitors have developed or are in the process of developing technologies that are, or in the future may be, the basis for competition. Some of these technologies may have an entirely different approach or means of accomplishing similar therapeutic efforts compared to our proposed products. Our competitors may develop drugs that are safer, more effective and less costly than our proposed products and, therefore, present a serious competitive threat to us.

 

The potential widespread acceptance of therapies that are alternatives to ours may limit market acceptance of our proposed products, even if commercialized. Many of our targeted diseases and conditions can also be treated by other medications and treatments. These treatments may be widely accepted in medical communities and have a longer history of use. The established use of other competing drugs may limit the potential for our proposed products, even if commercialized.

 

Our proposed products may not 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 utilize them. We are attempting to develop products that are likely to be first approved for marketing as a treatment for late stage cancer where there is no truly effective standard of care. If approved for use in late stage cancer, our proposed products might then be evaluated in earlier stages where they could represent a substantial departure from established treatment methods and would most likely 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 our proposed products for us to accurately predict our major competitors. The degree of market acceptance of any of our developed products depends on a number of factors, including but not limited to:

 

12
 

 

  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. 

 

There can be no assurance that such reimbursement would be available at all or without substantial delay, or if such reimbursement is provided, that the approved reimbursement amounts would be sufficient to support demand for our services at a level that would be profitable. If the health care community does not accept our products, our business could be materially harmed.

 

Our competitors in the biotechnology and pharmaceutical industries have significantly greater operating histories and financial resources than we have.

 

We compete against numerous companies, many of which have substantially greater financial and other resources than we have. Several such competitors have research programs and/or efforts to treat the same diseases we target. Companies such as Merck & Co., Inc., Ipsen, Johnson & Johnson, and Sanofi S.A., as well as others, have substantially greater financial and other resources, larger research and development staffs and more effective marketing and manufacturing organizations than we have and are better situated to compete with us. 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.

 

Risks Related to Manufacturing Our Product Candidates

 

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

 

We currently have no internal manufacturing capability, and intend to rely exclusively on FDA-approved licensees, strategic partners or third party contract manufacturers or suppliers for the foreseeable future. Because manufacturing facilities are subject to regulatory oversight and inspection, failure to comply with regulatory requirements could result in material manufacturing delays and product shortages, which could delay or otherwise negatively impact our clinical trials and product development. Should we be forced to manufacture our products, we cannot give any assurance that we would be able to develop internal manufacturing capabilities or procure third party suppliers for raw materials. In the event we seek third party suppliers or alternative manufacturers, they may require us to purchase a minimum amount of materials or could require other unfavorable terms. Any such event would materially impact our business prospects and could delay the development of our products. Moreover, we cannot give any assurance that any contract manufacturers or suppliers that we select would be able to supply our products in a timely or cost effective manner or in accordance with applicable regulatory requirements or our specifications.

 

We may not be able to establish or maintain the third-party relationships that are necessary to develop or potentially commercialize some or all of our product candidates.

 

Our business plan relies heavily on third party collaborators, partners, licensees, clinical research organizations or other third parties to support our discovery efforts, and to conduct clinical trials for all or some of our product candidates. We cannot guarantee that we are able to successfully negotiate agreements for or maintain relationships with collaborators, partners, licensees, clinical investigators, vendors or other third parties on a commercially reasonable basis, if at all. Additionally, to commercialize our products, we intend to rely on third party licensees or the outright sale of our proposed products to a major pharmaceutical partner. Our ability to successfully negotiate such agreements depends on, among other things, potential partners’ evaluation of our technology over competing technologies and the quality of the pre-clinical and clinical data that we have generated, and the perceived risks specific to generating our product candidates. If we fail to establish such third-party relationships as anticipated, we could experience delays in the commercialization of our products.

 

Our business is dependent upon securing and importing sufficient quantities of seeds from the plant, Thapsia garganica, 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 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 Thapsia garganica would continue to grow in sufficient quantities to produce an adequate supply of seeds for the production of sufficient quantities of thapsigargin, or that the countries from which we can secure Thapsia garganica continue to allow Thapsibiza, SL, to collect such seeds and/or export the seeds derived from Thapsia garganica to the United States. The process of importing Thapsia garganica seeds is subject to U.S. import and export laws and controls. Our supply agreement with Thapsibiza, SL (our sole supplier) expires on April 6, 2017.

 

13
 

 

The agreement also provides that either party may extend the agreement for an additional 5 years by providing the other party 30 days’ written notice prior to its expiration. In the event we are no longer able to obtain these seeds in the future, we may not be able to produce our proposed drug and our business could be adversely affected.

 

We may be required to locate, secure and finance land for cultivation and harvesting of Thapsia garganica to satisfy our needs for clinical development of our therapies.

 

We believe that we can satisfy our needs for the 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. In in order to secure sufficient quantities of Thapsia garganica for the commercialization of a product comprising G-202, we would need to secure adequate acreage of land to cultivate and grow Thapsia garganica . We have not yet fully assessed the amount of land or other costs that would be associated with a full-scale farming operation. There can be no assurances that we would be able to secure adequate acres of land, or that even if we are able to do so, that we could 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 candidates and could adversely impact our business. Additionally, due to the toxic nature of the plant, our harvesting of Thapsia garganica could be subject to various environmental and/or zoning laws, the violation of which could materially impact our product development.

 

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

 

We are required to manufacture the 12ADT that is to be used in our clinical trials in FDA approved facilities. There are a limited number of manufacturing facilities qualified to handle and manufacture toxic therapeutic 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 would 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 the manufacturing of our therapeutic compounds, we may not be able to complete our clinical trials and our business and future prospects would be adversely affected.

 

Our current manufacturing process requires acetonitrile, which in the past has been in short supply.

 

The current manufacturing process for our compounds requires the common solvent acetonitrile. From late 2008 through 2009 there was a worldwide shortage of acetonitrile for a variety of reasons. We observed during that time that the available supply of acetonitrile was of variable quality, some of which was not suitable for our purposes. If we are unable to successfully change our manufacturing methods to avoid the reliance upon acetonitrile, we may incur longer production timelines and increased production costs in the future if such shortage reoccurs, which would harm our financial results. In an extreme case this situation could adversely affect our ability to manufacture our compounds altogether, thus adversely impacting our future operations.

  

Our therapeutic compounds have not been subjected to large scale manufacturing procedures and may not be able to be manufactured profitably on a large enough scale to support late stage clinical trials or commercialization.

 

To date, our proposed products have only been manufactured at a scale which is adequate to supply our research activities and early stage clinical trials. There can be no assurance that the current procedures used to manufacture our proposed products would work at a scale which is adequate for commercial needs. In the event our therapeutic compounds cannot be manufactured in sufficient commercial quantities, our future prospects could be significantly impacted and our financial prospects would be materially harmed.

 

Risks Relating to our Intellectual Property

 

Our competitive position is contingent upon the production of our intellectual property and 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 U.S. and foreign patents as well as our licenses, as the foundation of our business. If our intellectual property rights are challenged, no assurances can be given that our patents or licenses would survive claims alleging invalidity or infringement on other patents and/or licenses. In addition, disputes may arise regarding inventorship of our intellectual property. It is possible that our products may be infringing upon existing patents that we are currently unaware of. As the number of participants in the market place grows, the possibility of patent infringement claims against us increases. It is difficult, if not impossible, to determine how such disputes would be resolved. Furthermore, because of the substantial amount of discovery required in connection with patent litigation, there is a risk that some of our confidential information could be required to be publicly disclosed. In addition, during the course of patent litigation, there could be public announcements of the results of hearings, motions or other interim proceedings or developments in the litigation. Any litigation claims against us may cause us to incur substantial costs and could place a significant strain upon our financial resources, divert the attention of management or restrict our core business or result in the public disclosure of confidential information. The occurrence of any of the foregoing could materially impact our business.

 

14
 

 

We are the subject of litigation related to our intellectual property.

 

We instituted a declaratory judgment action in the United States District Court of Maryland on March 12, 2012. We, as the licensee, are seeking a declaratory judgment that the current named inventors on U.S. Patent Nos. 7,468,354 and 7,767,648 are the only inventors of the underlying inventions. On November 1, 2012, the defendant in the case filed a complaint in the State Circuit Court for Baltimore County, Maryland, naming GenSpera as a defendant along with Dr. Samuel Denmeade and Dr. John Isaacs (the named inventors on the ‘354 patent and the ‘648 patent). The complaint, alleges certain common-law torts by conspiring to exclude her wrongly from inventorship on a valid patent. The outcome of the above mentioned litigation could materially and adversely affect our business. However, because this litigation is in its early stages, and due to the inherent uncertainty surrounding the litigation process, we are unable to reasonably estimate the ultimate outcome or the impact of such outcome at this time. See “Legal Proceedings” in this Annual Report.

 

We may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights and we may be unable to protect our rights to, or use of, our technology.

 

Some or all of our patent applications may not issue as patents, or the claims of any issued patents may not afford meaningful protection for our technologies or products. In addition, patents issued to us or our licensors, if any, may be challenged and subsequently narrowed, invalidated or circumvented. Patent litigation is widespread in the biotechnology industry and could harm our business. Litigation might be necessary to protect our patent position or to determine the scope and validity of third-party proprietary rights. If we choose to go to court to stop someone else from using the inventions claimed in our patents, that individual or company would have the right to ask the court to rule that such patents are invalid and/or should not be enforced against that third party. These lawsuits are expensive and we may not have the required resources to pursue such litigation or to protect our patent rights. In addition, there is a risk that the court might decide that these patents are not valid and that we do not have the right to stop the other party from using the inventions. There is also the risk that, even if the validity of these patents is upheld, the court refuses to stop the other party on the ground that such other party’s activities do not infringe our rights in these patents.

 

Furthermore, a third party may claim that we are using inventions covered by the third party’s patent rights and may go to court to stop us from engaging in our normal operations and activities, including making or selling our product candidates. These lawsuits are costly and could affect our results of operations and divert the attention of managerial and technical personnel. There is a risk that a court would decide that we are infringing the third party’s patents and would order us to stop the activities covered by the patents. In addition, there is a risk that a court would order us to pay the other party treble damages for having violated the other party’s patents. The biotechnology industry has produced a proliferation of patents, and it is not always clear to industry participants, including us, which patents cover various types of products or methods of use. The coverage of patents is subject to interpretation by the courts, and the interpretation is not always uniform.

 

If we are sued for patent infringement, we would need to demonstrate that our products or methods of use either do not infringe the claims of the relevant patent and/or that the patent claims are invalid, and we may not be able to do this. Proving invalidity in the United Sates, in particular, is difficult since it requires a showing of clear and convincing evidence to overcome the presumption of validity enjoyed by issued patents.

 

Because some patent applications in the United States may be maintained in secrecy until the patents are issued, patent applications in the United States and many foreign jurisdictions are typically not published until eighteen months after filing, and publications in the scientific literature often lag behind actual discoveries, we cannot be certain that others have not filed patent applications for technology covered by our issued patents or our pending applications or that we were the first to invent the technology. Our competitors may have filed, and may in the future file, patent applications covering technology similar to ours. Any such patent application may have priority over our patent applications and could further require us to obtain rights to issued patents covering such technologies.

 

If another party has filed a United States patent application on inventions similar to ours, we may have to participate in an interference or other proceeding in the U.S. Patent and Trademark Office, or the PTO, or a court to determine priority of invention in the United States. The costs of these proceedings could be substantial, and it is possible that such efforts would be unsuccessful, resulting in a loss of our United States patent position with respect to such inventions.

 

Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. In addition, any uncertainties resulting from the initiation and continuation of any litigation could have a material adverse effect on our ability to raise the funds necessary to continue our operations.

 

Obtaining and maintaining our patent protection depends upon compliance with various procedural, documentary, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.

 

The PTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other provisions during the patent process. There are situations in which noncompliance can result in abandonment or lapse of a patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, competitors might be able to enter the market earlier than would otherwise have been the case.

 

Our failure to secure trademark registration could adversely affect our ability to market our product candidates and our business.

 

Our trademark applications in the United States, when filed, and any other jurisdictions where we may file, may not be allowed for registration, and our registered trademarks may not be maintained or enforced. During trademark registration proceedings, we may receive rejections. Although we are given an opportunity to respond to those rejections, we may be unable to overcome such rejections. In addition, in the PTO and in comparable agencies in many foreign jurisdictions, third parties are given an opportunity to oppose pending trademark applications and to seek to cancel registered trademarks. Opposition or cancellation proceedings may be filed against our applications and/or registrations, and our applications and/or registrations may not survive such proceedings. Failure to secure such trademark registrations in the United States and in foreign jurisdictions could adversely affect our ability to market our product candidates and our business.

 

15
 

 

Confidentiality agreements with employees and others may not adequately prevent disclosure of our trade secrets and other proprietary information and may not adequately protect our intellectual property, which could impede our ability to compete.

 

Because we operate in the highly technical field of biotechnology and pharmaceutical development, we rely in part on trade secret protection in order to protect our proprietary trade secrets and unpatented know-how. However, trade secrets are difficult to protect, and we cannot be certain that others do not develop the same or similar technologies on their own. We have taken steps, including entering into confidentiality agreements with our employees, consultant and service providers to protect our trade secrets and unpatented know-how. These agreements generally require that the other party keep confidential and not disclose to third parties all confidential information developed by the party or made known to the party by us during the course of the party’s relationship with us. We also typically obtain agreements from these parties which provide that inventions conceived by the party in the course of rendering services to us are our property. However, these agreements may not be honored and may not effectively assign intellectual property rights to us. Enforcing a claim that a party illegally obtained and is using our trade secrets or know-how is difficult, expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States may be less willing to protect trade secrets or know-how. The failure to obtain or maintain trade secret protection could adversely affect our competitive position.

 

We may be subject to claims that our employees have wrongfully used or disclosed alleged trade secrets of their former employers.

 

As is common in the biotechnology and pharmaceutical industry, we employ and hire as consultants individuals who were previously employed at other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although no claims against us are currently pending, we may be subject to claims that these employees or we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management.

 

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 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. Additionally, we also 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 would be enforced by a foreign or domestic court. In the event our intellectual property is misappropriated or infringed upon and an adequate remedy is not available, our future prospects would greatly diminish.

 

Additionally, prosecuting and maintaining intellectual property (particularly patent) rights are very costly endeavors. We do not know whether legal and government fees would increase substantially and therefore are unable to predict whether cost may factor into our intellectual property strategy.

 

Risks Relating to Marketing Approval and Government Regulations

 

Thapsia garganica and thapsigargin are highly toxic and we may be liable for any contamination or injury we may cause or any environmental and safety law we may violate.

 

The therapeutic component of our products, including our lead product G-202, is derived from the natural product, thapsigargin, which is isolated from the seeds of the plant Thapsia garganica . Both thapsigargin, as well as seeds of Thapsia garganica , are highly toxic. As a consequence, we are subject to numerous environmental and safety laws and regulations, including those governing laboratory procedures and the handling of toxic materials. We may be required to incur significant costs to comply with current or future environmental laws and regulations and may be adversely affected by the cost of compliance with these laws and regulations. Although we believe that our safety procedures for using, handling, storing and disposing of hazardous materials comply with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials cannot be eliminated. In the event of such an accident, state or federal authorities could curtail our use of these materials and we could be liable for any civil damages that result, the cost of which could be substantial. Further, any failure by us to control the use, disposal, removal or storage, or to adequately restrict the discharge, or assist in the clean-up of toxic substances could subject us to significant liabilities, including joint and several liabilities under certain statutes. Although we feel this risk may be minimized through our use of third parties, it is possible that the employees of such contractors could suffer medical issues related to the handling of these toxic agents and subsequently seek compensation from us via, for example, litigation. Any such liability could exceed our resources and could have a material adverse effect on our business, financial condition and results of operations. No assurances can be given, despite our contractual relationship with the third-party contractor, that we would not be the subject of litigation related to the handling of Thapsia garganica and the natural product thapsigargin. Additional federal, state and local laws and regulations affecting us may be adopted in the future. We may incur substantial costs to comply with these laws and regulations and substantial fines or penalties if we violate any of these laws or regulations, which would adversely affect our business.

 

16
 

 

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 contract research organizations, investigators and collaborators, such as universities and medical institutions, to conduct our pre-clinical and clinical trials under agreements with us. These individuals and/or entities are not our employees and we cannot control the amount or timing of resources that they devote to our programs. These third parties 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 these third parties fail to devote sufficient time and resources to our programs, or if their performance is substandard, the development of our drug candidates and corresponding FDA approval could be delayed or fail entirely.

 

Data obtained from clinical trials are susceptible to varying interpretations and may not be sufficient to support approval by the FDA, which could delay, limit or prevent regulatory clearances.

 

The design of our clinical trials is based on many assumptions about the expected effect of our product candidate and if those assumptions are incorrect, the clinical trials may not produce statistically significant results. Preliminary results may not be confirmed on full analysis of the detailed results of early clinical trials. Data already obtained, or in the future obtained, from pre-clinical studies and clinical trials do not necessarily predict the results that may be obtained from later pre-clinical studies and clinical trials. Moreover, pre-clinical and clinical data are susceptible to varying interpretations, which could delay, limit or prevent regulatory approval. A number of companies in the pharmaceutical industry have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials. The failure to adequately demonstrate the safety and effectiveness of a proposed formulation or product under development could delay or prevent regulatory clearance of the potential drug. Our products may not prove to be safe and effective in clinical trials and may not meet all regulatory requirements needed to receive regulatory approval. The resulting delays to commercialization could materially harm our business. Our clinical trials may not demonstrate sufficient levels of safety and efficacy necessary to obtain the requisite regulatory approvals for our drugs, and thus our proposed drugs may not be approved for marketing.

 

Changes in regulatory requirements and guidance or unanticipated events during our clinical trials may occur, which may result in necessary changes to clinical trial protocols, informed consents and study budgets, which could result in increased costs to us, delay our development timeline or reduce the likelihood of successful completion of the clinical trial or product development.

 

Changes in regulatory requirements and guidance or unanticipated events during our clinical trials may occur, as a result of which, we may need to amend clinical trial protocols, informed consents and study budgets. If we experience delays in initiation, conduct or completion of, or if we terminate, any clinical trials due to changes in regulatory requirements/guidance or other unanticipated events, we may incur additional costs, have difficulty enrolling subjects or achieving medical investigator or institutional review board acceptance of the changes and the successful completion of the trial and, ultimately, the commercial prospects for our products may be harmed and our ability to generate product revenue could be delayed, possibly materially.

 

The process to obtain FDA approval for a new drug is very costly and time consuming and if we cannot complete our clinical trials in a timely or cost-effective manner, our results of operations may be adversely affected.

 

The costs of clinical trials may vary significantly over the life of a project owing, but not limited to the following:

 

  the duration of the clinical trials;
     
  the number of sites included in the trials;
     
  the countries in which the trials are conducted;
     
  the length of time required to enroll eligible patients;
     
  the number of patients that participate in the trials;
     
  the number of doses that patients receive;
     
  the drop-out or discontinuation rates of patients;
     
  potential additional safety monitoring or other studies requested by regulatory agencies;
     
  the duration of patient follow-up;
     
  the efficacy and safety profile of the product candidate; and
     
  the costs and timing of obtaining regulatory approvals.

 

17
 

 

If we are unable to control the costs of our clinical trials and conduct our trials in a cost-effective manner, our results of operations may be adversely affected.

 

Our proposed products may not receive FDA or other regulatory approvals.

 

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. Our products are subject to extensive regulation and/or acceptance by numerous governmental authorities in the United States, including the FDA, and authorities in other countries. Most of our products require governmental approval before they can be commercialized. If we are unable to obtain regulatory approvals for our products at all or in a timely manner, we may not be able to grow as quickly as expected, or at all, and the loss of anticipated revenues could reduce our ability to fully fund our operations and to otherwise execute our business plan. Our failure to receive the regulatory approvals in the United States would likely cause us to cease operations and go out of business.

 

As we develop additional new products, we are required to determine what regulatory requirements, if any, we must comply with in order to market and sell our products in the United States and worldwide. The process of obtaining regulatory approval could take years and be very costly, if approval can be obtained at all. If we fail to comply with these requirements, we could be subjected to enforcement actions such as an injunction to stop us from marketing the product at issue or a possible seizure of our assets. We intend to work diligently to assure compliance with all applicable regulations that impact our business. We can give no assurance, however, that we will be able to obtain regulatory approval for our products. We also cannot assure that additional regulations will not be enacted in the future that would be costly or difficult to satisfy. Our failure to receive regulatory approvals in the United States in a timely manner or comply with newly enacted additional regulation could cause us to cease operations and go out of business. Because our products are in various stages of development, we expect that significant research and development, financial resources, and personnel would be required to develop commercially-viable products that can obtain regulatory approval.

 

The regulatory process, which includes clinical validation of many of our products to establish their safety and effectiveness, can take many years and require the expenditure of substantial financial and other resources. Data obtained from clinical validation activities are susceptible to varying interpretations that could delay, limit or prevent regulatory approval. In addition, delays or rejection may be encountered based upon changes in, or additions to, regulatory policies for device marketing authorization during the period of product development and regulatory review. Delays in obtaining such approvals could adversely affect our marketing of products developed and our ability to generate commercial product revenues.

 

In addition, if we desire to commercialize our products worldwide, we are required to meet regulatory requirements in countries outside the United States, which can change rapidly with relatively short notice, resulting in our products being banned in certain countries and an associated loss of revenues and income. Foreign regulatory agencies can also introduce test format changes which, if we do not quickly address, can result in restrictions on sales of our products. Such changes are not uncommon due to advances in basic research.

  

We may be unable to complete our Phase II clinical trials of G-202 if we do not have adequate enrollment or capital to finance the studies.

 

In February 2013, we initiated a Phase II clinical trial in hepatocellular carcinoma. The continuation and completion of this trial is dependent on a number of factors, including adequate capital to fund the clinical trials and patient enrollment at the trial sites. At present, we have limited capital resources and require significant additional capital to complete any ongoing or future clinical trials that we may initiate. Additionally, we are initially targeting liver cancer in these trials which has historically had a lower occurrence in the United States, which is where our trial is being conducted. Our failure to gain required regulatory approval or to be able to initiate our clinical trials could materially harm our business.

 

Even if we complete clinical development, successfully submit applications for marketing and obtain regulatory approvals, our marketed drugs are subject to ongoing regulatory review and oversight. If we fail to comply with ongoing regulatory requirements, we could be subject to potential enforcement actions such as fines, seizures, operating restrictions, suspension or lose our approvals to market drugs and our business would be materially and adversely affected.

 

Following regulatory approval of any drugs or therapies we may develop, we remain subject to continuing regulatory review, including the review of adverse drug experiences and clinical results that are reported after our drug products are made available to patients. This would include results from any post marketing tests or vigilance required as a condition of approval. The manufacturer or manufacturing facilities we use to make any of our drug products are also be subject to periodic review and inspection by the FDA. The discovery of any new or previously unknown problems with the product, manufacturer or facility may result in restrictions on the drug or manufacturer facility, including withdrawal of the drug from the market. We would continue to be subject to the FDA requirements governing the labeling, packaging, storage, advertising, promotion, recordkeeping, and submission of safety and other post-market information for all of our product candidates, even those that the FDA has approved. If we fail to comply with the applicable continuing regulatory requirements, we may be subject to fines, suspension or withdrawal of regulatory approval, product recalls and seizures, operating restrictions and other adverse consequences.

 

18
 

 

Even if we receive regulatory approval to market our proposed product candidates, they may not be accepted commercially, or be eligible for reimbursement under governmental or third-party payor insurance programs, which would prevent us from becoming profitable.

 

We have concentrated our research and development on our prodrug technologies. Our ability to generate revenue and operate profitably depends on us 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 would 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 exhibit an enhanced efficacy relative to competing therapeutic modalities such that they would 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.

 

Additional factors that we believe could materially affect market acceptance of our therapeutic agents are:

 

  timing of our receipt of any marketing approvals, the terms of any approvals and the countries in which approvals are obtained;
     
  safety, efficacy and ease of administration of our therapeutic agents;
     
  advantages of our therapeutic agents over those of our competitors;
     
  willingness of patients to accept new therapies;
     
  success of our physician education programs;
     
  availability of government and third-party payor reimbursement;
     
  pricing of our products, particularly as compared to alternative treatments; and
     
  availability of effective alternative treatments and the relative risks and/or benefits of the treatments.

 

If users of our proposed products are unable to obtain adequate reimbursement from third-party payors, market acceptance of our proposed products may be limited and we may not achieve revenues or profits.

 

The continuing efforts of governments, insurance companies, health maintenance organizations and other payers of healthcare costs to contain or reduce costs of health care may affect our future revenues and profitability as well as the future revenues and profitability of our potential customers, suppliers and collaborative partners in addition to the availability of capital. In other words, our ability to commercialize our proposed products depends in large part on the extent to which appropriate reimbursement levels for the cost of our proposed formulations, products and related treatments are obtained by the health care providers of these products and treatments. At this time we cannot predict the precise impact of the Patient Protection and Affordable Care Act of 2010, as amended by the Health Care and Education Affordability Act of 2010, the comprehensive health care reform legislation passed by Congress in March 2010.

 

We need to obtain FDA approval of any proposed product brand names, and any failure or delay associated with such approval may adversely impact our business.

 

A pharmaceutical product cannot be marketed in the United States or other countries until it has completed rigorous and extensive regulatory review processes, including approval of a brand name. Any brand names we intend to use for our product candidates requires approval from the FDA regardless of whether we have secured a formal trademark registration from the PTO. The FDA typically conducts a review of proposed product brand names, including an evaluation of potential for confusion with other product names. The FDA may also object to a product brand name if it believes the name inappropriately implies medical claims. If the FDA objects to any of our proposed product brand names, we may be required to adopt an alternative brand name for our product.

 

If we are unable to successfully complete clinical trials, we will be unable to seek regulatory approval to commercialize our proposed products which could significantly impair our viability.

 

The Phase II trial of G-202 in hepatocellular carcinoma patients is ongoing and we plan to initiate additional Phase II trials with G-202 when financial resources permit. Although one Phase II clinical trial is underway, the outcome of this and future clinical trials is uncertain and, if we are unable to satisfactorily complete such trials, or if such trials yield unsatisfactory results, we would not be able to commercialize our proposed products. The failure of our trials could delay or prevent regulatory approval and could harm our ability to generate revenues, operate profitably or remain a viable business.

 

We may be unable to comply with our reporting and other requirements under federal securities laws.

 

The Sarbanes-Oxley Act of 2002, as well as related new rules and regulations implemented by the United States Securities and Exchange Commission, or SEC, and the Public Company Accounting Oversight Board, require changes in the corporate governance practices and financial reporting standards for public companies. These laws, rules and regulations, including compliance with Section 404 of the Sarbanes-Oxley Act of 2002 relating to internal control over financial reporting, would be expected to materially increase the Company’s legal and financial compliance costs and make some activities more time-consuming and more burdensome. Presently we qualify as a non-accelerated filer and, accordingly, are exempt from the requirements of Section 404(b) and 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 become an accelerated filer, we would be required to expend substantial capital in connection with compliance.

 

19
 

 

We do not have effective internal controls over our financial reporting, and if we cannot provide reliable financial and other information, investors may lose confidence in us and in our SEC reports.

 

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 number of 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 would enable us to implement adequate segregation of duties within the Committee of Sponsoring Organizations of the Treadway Commission internal control framework.

 

Effective internal controls over financial reporting and disclosure controls and procedures are necessary for us to provide reliable financial and other reports and effectively prevent fraud. If we cannot provide reliable financial or SEC reports or prevent fraud, investors may lose confidence in our SEC reports, our operating results and the trading price of our common stock could suffer materially and we may become subject to litigation.

 

Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses and will divert time and attention away from revenue generating activities.

 

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and related SEC regulations, have created uncertainty for public companies and significantly increased the costs and risks associated with accessing the public markets and public reporting. For example, on January 30, 2009, the SEC adopted rules requiring companies to provide their financial statements in interactive data format using the eXtensible Business Reporting Language which increased our annual compliance costs. Our management team invests significant time and financial resources to comply with both existing and evolving standards for public companies, which will lead to increased general and administrative expenses and a diversion of management time and attention from developing our business to compliance activities which could have an adverse effect on our business.

 

Risks Relating to our Securities

 

Our common stock price may be particularly volatile because we are a drug development company and may be adversely affected by several factors.

 

The market prices for securities of biotechnology and pharmaceutical companies in general, and early-stage drug development companies in particular, have been highly volatile and may continue to be highly volatile in the future. The following may have a significant impact on the market price of our common stock:

 

  the development status of our drug candidates, particularly the results of our clinical trials of G-202;
     
  market conditions or trends related to the biotechnology and pharmaceutical industries, or the market in general;

 

  announcements of technological innovations, new commercial products, or other material events by our competitors or us;
     
  disputes or other developments concerning our proprietary rights;
     
  changes in, or failure to meet, securities analysts’ or investors’ expectations of our financial and developmental performance;
     
  additions or departures of key personnel;
     
  loss of any strategic relationship;
     
  discussions of our business, products, financial performance, prospects, or stock price by the financial and scientific press and online investor communities such as chat rooms;
     
  industry developments, including, without limitation, changes in healthcare policies or practices or third-party reimbursement policies;
     
  public concern as to, and legislative action with respect to, testing or other research areas of biopharmaceutical and pharmaceutical companies, the pricing and availability of prescription drugs, or the safety of drugs;
     
  regulatory developments in the United States or foreign countries; and
     
  economic, political and other external factors.

 

20
 

 

In addition, the market price for securities of pharmaceutical and biotechnology companies historically has been volatile, and the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These broad market fluctuations may cause the market price of our common stock to decline substantially. In the past, following periods of volatility in the market price of a particular company’s securities, securities class action litigation has often been brought against that company. We may become subject to this type of litigation, which is often extremely expensive and diverts management’s attention. Additionally, fluctuations in the trading price or liquidity of our common stock may materially and adversely affect, among other things, the interest of investors to purchase our common stock on the open market and, generally, our ability to raise capital.

 

We may issue additional common stock, which might dilute the net tangible book value per share of our common stock for existing stockholders.

 

We are authorized to issue 80,000,000 shares of common stock and 10,000,000 shares of “blank check” preferred stock. Any additional stock issuances could be made at a price that reflects a discount to, or a premium from, the then-current market price of our common stock. In addition, in order to raise capital, we may need to issue securities that are convertible into or exchangeable for a significant amount of our common stock. These issuances would dilute the percentage ownership interest, which would have the effect of reducing your influence on matters on which our stockholders vote, and might dilute the net tangible book value per share of our common stock.

 

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 shares of common stock and 10,000,000 “blank check” shares of preferred stock. Shares of our blank check preferred stock provide the board of directors broad authority to determine voting, dividend, conversion, and other rights. As of December 31, 2012 we have issued and outstanding 22,298,424 shares of common stock and we have 13,441,310 shares of common stock reserved for future grants under our equity compensation plans and for issuances upon the exercise or conversion of currently outstanding options, warrants and convertible securities. As of December 31, 2012, we had no shares of preferred stock issued and outstanding.

 

Accordingly, we are entitled to issue up to 57,701,576 additional shares of common stock and 10,000,000 additional shares of “blank check” preferred stock. Our board may generally issue those common and preferred shares, or convertible securities to purchase those shares, without further approval by our shareholders. Any preferred shares we may issue could 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 would issue a large amount of additional securities to raise capital in order to further our development and marketing plans. It is also likely that would 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.

 

Future sales of our common stock could cause our stock price to fall.

 

Finance transactions resulting in a large amount of newly issued shares that become readily tradable, or other events that cause current stockholders to sell shares, could place downward pressure on the trading price of our common stock. In addition, the lack of a robust resale market may require a stockholder who desires to sell a large number of shares of common stock to sell the shares in increments over time to mitigate any adverse impact of the sales on the market price of our stock. If our stockholders sell, or the market perceives that our stockholders intend to sell for various reasons, substantial amounts of our common stock in the public market, including shares issued upon the exercise of outstanding options or warrants, the market price of our common stock could fall. Sales of a substantial number of shares of our common stock may make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate. We may become involved in securities class action litigation that could divert management’s attention and harm our business.

 

As of December 31, 2012, we had 22,298,424 shares of common stock issued and outstanding. Substantially all of these shares are available for public sale, subject in some cases to volume and other limitations or delivery of a prospectus. As of December 31, 2012, we had reserved for issuance (i) 252,698 shares of our common stock issuable upon the conversion of outstanding convertible notes; (ii) 8,513,984 shares of our common stock issuable upon exercise of outstanding warrants at a weighted average exercise price of $2.47 per share; and (iii) 4,674,628 shares of our common stock issuable upon exercise of outstanding stock options under our equity compensation plans at a weighted average exercise price of $1.79 per share. Subject to applicable vesting requirements, upon conversion or exercise of the outstanding convertible notes, warrants and options, the underlying shares may be resold into the public market. In the case of outstanding convertible notes, warrants and options that have conversion or exercise prices, as the case may be, that are below the market price of our common stock from time to time, investors would experience dilution. We cannot predict if future issuances or sales of our common stock, or the availability of our common stock for issuance or sale, would harm the market price of our common stock or our ability to raise capital.

 

21
 

 

The market for our common stock has been illiquid.

 

Our common stock trades with limited volume on the OTCBB and Pinksheets. Accordingly, although a limited public market for our common stock exists, it is still relatively illiquid compared to that of a seasoned issuer. Any prospective investor in our securities should consider the limited market of our common stock when making an investment decision. No assurances can be given that the trading volume of our common stock increases or that a liquid public market would ever materialize.

 

We have not paid cash dividends in the past and do not expect to pay cash dividends in the foreseeable future. Any return on your investment may be limited to increases in the market price of our common stock.

 

We have never paid cash dividends on our common stock and do not anticipate paying cash dividends on our common stock in the foreseeable future. The payment of dividends on our common stock will depends on our earnings, financial condition and other business and economic factors affecting us at such time as the board of directors may consider relevant. If we do not pay dividends, our common stock may be less valuable because a return on your investment might only occur if the market price of our common stock price appreciates.

 

Our officers and scientific advisors, by virtue of ownership of our securities, may be able to control the Company.

 

As of December 31, 2012 our officers and scientific advisors owned approximately 26% of our issued and outstanding common stock. As a consequence of their level of stock ownership, the group retains substantial ability to influence the election or removal of 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 of Delaware law and executive employment agreements may prevent or delay a change of control, which could depress the trading price of our common stock.

 

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 provides. 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 even if it would be beneficial to shareholders.

 

Our certificate of incorporation and bylaws contain provisions that could discourage a third-party from acquiring us.

 

Our certificate of incorporation and bylaws, as applicable, among other things, i) provide our board with the ability to alter the bylaws without stockholder approval, and ii) provide that vacancies on our board of directors may be filled by a majority of directors in office. These provisions, while designed to reduce vulnerability to an unsolicited acquisition proposal, and to discourage certain tactics used in proxy fights, may negatively impact a third-party’s decision to acquire us even if it would be beneficial to shareholders.

 

If securities or industry analysts do not publish research or reports or publish unfavorable research about our business, the price and trading volume of our common stock could decline.

 

The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our business. We currently have limited research coverage by securities and industry analysts. We are a small company which is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and even if we come to the attention of such persons, they tend to be risk averse and would be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned and viable. As a consequence, there may be periods of several days, weeks or months when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that generally supports continuous sales without an adverse effect on share price. We cannot give you any assurance that a broader or more active public trading market for our common stock could develop or be sustained, or that current trading levels could be sustained or not diminish. In addition, in the event any of the analysts who cover us downgrade our securities, the price of our securities would likely decline. If one or more of these analysts ceases to cover us or fails to publish regular reports on us, interest in the purchase of our securities could decrease, which could cause the price of our common stock and other securities and their trading volume, if any, to decline.

 

22
 

 

Our common stock may be considered a “penny stock,” and is subject to additional sale and trading regulations that may make it more difficult to sell.

 

Our common stock may be considered a “penny stock.” The principal result or effect of being designated a penny stock is that securities broker-dealers participating in sales of our common stock may be subject to the penny stock regulations set forth in Rules 15g-2 through 15g-9 promulgated under the Exchange Act. For example, Rule 15g-2 requires broker-dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the document at least two business days before effecting any transaction in a penny stock for the investor’s account. Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve the account of any investor for transactions in such stocks before selling any penny stock to that investor. This procedure requires the broker-dealer to (i) obtain from the investor information concerning his or her financial situation, investment experience and investment objectives; (ii) reasonably determine, based on that information, that transactions in penny stocks are suitable for the investor and that the investor has sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions; (iii) provide the investor with a written statement setting forth the basis on which the broker-dealer made the determination in (ii) above; and (iv) receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investor’s financial situation, investment experience and investment objectives. Compliance with these requirements may make it more difficult and time consuming for holders of our common stock to resell their shares to third parties or to otherwise dispose of them in the market or otherwise.

 

Other Risks

 

We depend on Craig A. Dionne, PhD, our Chief Executive Officer, to manage and drive the execution of our business plans, develop our products and core technologies and pursue collaborative relationships; the loss of Dr. Dionne would materially and adversely affect our business.

 

Although we have entered into an employment agreement with Dr. Dionne, there can be no assurance that he will continue to provide services to us. A voluntary or involuntary termination of employment by Dr. Dionne could have a materially adverse effect on our business.

 

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 Dr. Dionne and other members of management. In the event we terminate the employment of any of these executives, we experience a change in control or, in certain cases, if such executive terminates his employment with us, such executive is entitled to receive certain severance and related payments. Additionally, in such instance, certain securities held by Dr. Dionne and other members of management shall 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 that could be beneficial to our stockholders.

 

If our management team is not effective or if we fail to attract, hire or retain qualified personnel, we may not be able to design, develop or commercialize our products successfully or manage our business.

 

Our anticipated growth and expansion may require the addition of new personnel and the development of additional expertise by existing management. There is intense competition for qualified personnel in such areas. Accordingly, there can be no assurances that we would be able to attract and retain the qualified personnel necessary for the successful development of our business.

 

We are exposed to product liability risks, which could place a financial burden upon us, should we be sued.

 

We have obtained limited product liability insurance coverage for our clinical trials. However, we may not be able to secure or maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against all losses we may incur. If a successful product liability claim or series of claims is brought against us for uninsured liabilities or in excess of insured liabilities, our assets may not be sufficient to cover such claims and our business, financial condition and results of operations could be materially adversely affected.

 

ITEM 1B.

UNRESOLVED STAFF COMMENTS

 

None.

 

23
 

 

ITEM 2. PROPERTIES

 

Our executive offices are located at 2511 N Loop 1604 W, Suite 204, San Antonio, TX 78258. We lease this facility, consisting of approximately 2,376 square feet, for $4,554 per month. Our lease expires on October 14, 2015. There is no affiliation between us or any of our principals or agents and our landlords or any of their principals or agents.

  

ITEM 3. LEGAL PROCEEDINGS

 

Except as described below, 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.

 

On March 12, 2012, GenSpera instituted a declaratory judgment action against Annastasiah Mhaka in the United States District Court for the District of Maryland: GenSpera, Inc. v. Mhaka, Civil Action No. MJG-12-772 (D. Md.). In the complaint, GenSpera, as the licensee of the inventions described and claimed in the U.S. Patent No. 7,468,354 (“the ‘354 patent”) and U.S. Patent No. 7,767,648 (“the ‘648 patent”), sought a declaratory judgment that Annastasiah Mhaka (a former doctoral student at Johns Hopkins University) should not be added to either the ‘354 patent or the ‘648 patent as an inventor. On April 2, 2012, the defendant filed and served her answer and counterclaim, in which she sought to be added as an inventor to the ‘354 patent and the ‘648 patent. On October 1, 2012, discovery was completed. On October 18, 2012, the Court held a telephonic hearing concerning GenSpera’s request to move for summary judgment. After hearing argument, the Court indicated that it would be willing to entertain the motion. All briefing concerning the motion was completed by December 10, 2012. On January 24, 2013, the Court heard the motion and communicated its intent to grant summary judgment in GenSpera’s favor on all inventorship claims and counterclaims. GenSpera has indicated that, on entry of summary judgment, it will seek its fees and costs associated with this action.

 

On November 1, 2012, Mhaka filed a complaint in the State Circuit Court for Baltimore County, Maryland, naming GenSpera as a defendant along with Dr. Samuel Denmeade and Dr. John Isaacs (the named inventors on the ‘354 patent and the ‘648 patent). In the complaint, Mhaka alleges that the defendants engaged in certain common-law torts by conspiring to exclude her wrongly from inventorship on a valid patent. On November 8, 2012, the Defendants removed the complaint to the United States District Court for the District of Maryland, where it was assigned to the judge presiding over the original action. On November 16, 2012, the Defendants moved to dismiss all claims in the complaint. On January 24, 2013, the Court heard that motion also. At the hearing, the Court requested supplemental briefing on certain procedural issues raised by the motion to dismiss. That supplemental briefing was completed on March 1, 2013, and the parties currently await ruling on Defendants’ motion to dismiss. The Court has indicated that no case deadlines will be set until the Defendants have an opportunity to file an answer and counterclaims (which will only occur if the pending motion to dismiss is denied). Due to the inherent uncertainty surrounding the litigation process, we are unable to reasonably estimate the ultimate outcome or the impact of such outcome at this time.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

 

Not Applicable

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information

 

Our common shares are quoted on the OTCBB and Pinksheets under the symbol GNSZ. Although a market for our common stock exists, it is relatively illiquid.  The following quotations are taken from the OTC Bulletin Board. The prices reflect high and low inter-dealer bid prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions.

 

Quarter Ended   High     Low  
2012:                
Fourth Quarter     $2.93       $2.15  
Third Quarter     $2.95       $2.25  
Second Quarter     $3.15       $2.47  
First Quarter     $3.28       $1.95  
2011:                
Fourth Quarter     $1.92       $1.35  
Third Quarter     $1.91       $1.20  
Second Quarter     $2.00       $0.00  
First Quarter     $2.00       $1.10  

 

24
 

 

Holders

 

As of March 15, 2013, the approximate number of holders of record of our common stock was 1,863.

 

Dividend Policy

 

We have never paid or declared cash dividends on our common stock, and we do not intend to pay or declare cash dividends on our common stock in the foreseeable future.

 

Equity Compensation Plan Information

 

The following table sets forth information as of December 31, 2012 with respect to our compensation plans under which equity securities may be issued.

 

    (a)     (b)     (c)  
    Number of Securities
to be Issued
upon Exercise of
Outstanding
Options, Warrants
and Rights
    Weighted-Average
   Exercise Price of    
Outstanding
Options,
Warrants and
Rights
    Number of Securities
Remaining Available for
Future Issuance under
Equity Compensation Plans
(Excluding Securities
Reflected in Column (a))
 
Equity compensation plans approved by security holders                        
2007 Stock Plan, as amended  (1)     2,899,628     $ 1.92       2,873,209  
Equity compensation plans not approved by security holders                        
2009 Executive Compensation Plan     1,775,000       1.58       -  
Total     4,674,628     $ 1.79       2,873,209  

 

(1) Our 2007 Stock Plan, as amended, provides for the issuance of up to 1,500,000 common shares during any calendar year. The plan provides for the issuance of up to 6,000,000 common shares in the aggregate.

 

GenSpera 2009 Executive Compensation Plan

 

Our 2009 Executive Compensation Plan (“2009 Plan”) is administered by our Board or any of its committees. The purpose of our 2009 Plan is to advance the interests of GenSpera and our stockholders by attracting, retaining and rewarding persons performing services for us and to motivate such persons to contribute to our growth and profitability. The issuance of awards under our 2009 Plan is at the discretion of the administrator, which has the authority to determine the persons to whom any awards shall be granted and the terms, conditions and restrictions applicable to any award. Under our 2009 Plan, we may grant stock options, restricted stock, stock appreciation rights, restricted stock units, performance units, performance shares and other stock-based awards. As of December 31, 2012, our 2009 Plan authorizes the issuance of up to 1,775,000 shares of our common stock for the foregoing awards. As of December 31, 2012, we have granted awards under the plan equal to 1,775,000 common shares. On March 25, 2013, we amended the terms of the 2009 Plan to allow for the issuance of up to 6,000,000 shares of our common stock. Accordingly, after giving effect to recent stock option grants issued to executives in 2013, we have granted total awards under the 2009 plan of 2,996,972, and have 3,003,028 available for future awards.

 

Deferred Compensation Plan

 

In July of 2011, we adopted Executive Deferred Compensation Plan (the “Deferred Plan”). The Deferred Plan is intended to comply with the requirements of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”). The Deferred Plan is intended to be an unfunded “top hat” plan which is maintained primarily to provide deferred compensation benefits for a select group of our “management or highly compensated employees” within the meaning of Sections 201, 301, and 401 of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and to therefore be exempt from the provisions of Parts 2, 3, and 4 of Title I of ERISA. The Deferred Plan is intended to help build a supplemental source of savings and retirement income through pre-tax deferrals of eligible compensation, which may include cash, option and stock bonus awards, discretionary cash, option and stock awards and/or any other payments which may be designated by the Deferred Plan administrator, as eligible, for deferral under the Deferred Plan from time to time. As administered, the Deferred Plan is used to defer compensation of stock awards granted under our other equity compensation plans and does not by its terms approve any grants or awards.

 

25
 

 

Recent Sales of Unregistered Securities

 

The following information is given with regard to unregistered securities sold since January 1, 2011.  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.

 

· On August 16, 2011, we entered into an agreement whereby we agreed to issue to LifeTech Capital, a division of Aurora Capital, LLC, a warrant to purchase 25,000 shares of common stock as partial compensation for business advisory services. The warrant vests in amounts equal to 6,250 on: (i) October 16, 2011; (ii) January 16, 2012; (iii) April 16, 2012; and (iv) July 16, 2012, so long as consultant continues to provide us services. Additionally, the warrant has a term of five years, is exercisable for cash and has an exercise price of $1.94 per share which is subject to adjustment upon stock splits and dividends. We issued the warrant on January 12, 2012.

 

· On June 1, 2012, we issued Cameron Associates, Inc., a warrant to purchase 18,000 shares of common stock as partial compensation for investor relations services. The warrant vests, in an amount equal to 1,500, on the last day of each calendar month commencing on the issuance date, provided the consultant is providing us services on each such vesting date. The warrant has a term of five years, is exercisable for cash and has an exercise price of $2.55 which is subject to adjustment in the event of a stock dividend or split.

 

· From December of 2012 through January of 2013, we offered and sold an aggregate of 400,461 units in a private placement, in multiple closings, resulting in gross proceeds of $881,000 (“December Offering”). The price per unit was $2.20. On March 22, 2013, we issued 96,443 additional units in order to adjust the price per unit from $2.20 to $1.773 to be consistent with the price per unit of our March 22, 2013 closing. Each unit consists of: (i) one (1) share of the common stock, par value $0.0001, and (ii) one common stock purchase warrant. The warrants have a term of five years and entitle the holders to purchase common stock at a price per share of $3.00. In the event the shares underlying the warrants are not subject to a registration statement, the warrants may be exercised on a cashless basis after 12 months from the issuance date. 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 warrants do not contain any price protection provisions. Additionally, the warrants contain limitations on the holder’s ability to exercise the warrants in the event such exercise causes the holder to beneficially own in excess of 4.99% of the Company’s issued and outstanding common stock, subject to a discretionary increase in such limitation by the holder to 9.99% upon 61 days’ notice.

 

In connection with the offering, we entered into a registration rights agreement with our investors. Pursuant to the registration rights agreements, we agreed to file a “resale” registration statement with the SEC covering all shares of the common stock and the shares underlying the warrants within 45 days of the final closing date of the sale of units and to maintain the effectiveness of the registration statement until all securities have been sold or are otherwise able to be sold pursuant to Rule 144. We have agreed to use our best efforts to have the registration statement declared effective within 90 days of the final closing. We are also obligated to pay to investors, as partial liquidated damages, a fee of 0.50% per month in cash up to a maximum of 6%, upon the occurrence of certain events, including but not limited to failure to file and/or have the registration statement declared effective within the time provided. As of March 27, the final closing has not occurred.

 

Between March 22, 2013 and March 27, 2013 we offered and sold 557,256 units in in connection with another closing of our December Offering. This closing resulted in gross proceeds of $1.0 million. The price per unit was $1.773. All other terms and conditions are the same as the December Offering.

 

In connection with this closing, we paid placement agent fees and expenses to Galt Financial Group, Inc. in the amount of $37,000 in cash and issued warrants to purchase 18,410 shares at an exercise price per share of $3.00.

 

As of March 27, 2013, we have issued 1,054,160 units, 18,410 placement agent warrants and received gross proceeds of approximately $1.9 million in connection with the December Offering.

 

ITEM 6.

SELECTED FINANCIAL DATA

 

We are not required to provide the information as to selected financial data as we are considered a smaller reporting company.

 

26
 

 

ITEM 7. 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 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 plan and strategy, overall analysis of financial and other highlights affecting our business in order to provide context for the remainder of MD&A.

 

  Critical 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 year ended December 31, 2012 to 2011.

 

  Liquidity and Capital Resources — Analysis of changes in our 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. 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 Risk Factors section of this Annual Report. Our actual results may differ materially.

 

Company Overview

 

Business

 

We are a development stage pharmaceutical company focused on the development of prodrug cancer therapeutics for the treatment of solid tumors including prostate, liver, brain and other cancers. A prodrug is an inactive precursor of a drug that is converted into its active form only at the site of the tumor. Our technology platform combines a powerful, plant-derived cytotoxin with a prodrug delivery system that targets release of the drug within the tumor. We believe that, if successfully developed, our cancer prodrug therapies have the potential to provide a targeted therapeutic approach to a broad range of solid tumors with fewer side effects than those related to current chemotherapy treatments. We plan to develop a series of therapies based on our target-activated prodrug technology platform and test them through Phase I/II clinical trials.

 

We are currently focused on the clinical development of G-202 as an intravenously administered infusion drug candidate and have completed preliminary development of an injectable form of G-202 that we believe would be more convenient for both doctors and patients and strengthen the value of our patent portfolio. To date, we have completed enrollment in a Phase Ia/Ib dose-escalation safety, tolerability and dose refinement study in which two patients remain on study with stable disease as of March 27, 2013. We are also conducting a Phase II clinical trial to test the utility of G-202 in patients with hepatocellular carcinoma (liver cancer).

  

We intend to license or sell the underlying technology of our drug candidates to major pharmaceutical companies during or after Phase I/II clinical trials. We believe that major pharmaceutical companies associate significant value in drug candidates that have completed one or more phases of clinical trials, and these organizations have the resources and expertise to finalize drug development and market the drugs. However, if we are not able to license or sell our drug candidate(s) on acceptable terms, or at all, we intend to proceed into Phase III clinical trials and prepare for future sales and marketing operations, or possibly delay or cease further development. In an effort to advance our product development strategy and potentially raise funds, we are exploring our options and actively seeking to engage in a collaborative, strategic and/or licensing arrangement with another pharmaceutical company. If we enter into any such transaction, we may be required to give up certain rights to our technology and control over its future development.

 

We were incorporated in the State of Delaware in November 2003 and our principal office is located in San Antonio, Texas.

 

Recent Developments

 

From December 2012 through March 2013, we offered and sold an aggregate of 1,054,160 units in a private placement, in multiple closings, resulting in gross proceeds of $1.9 million.

 

On March 14, 2013, the Company announced that the U.S. Food and Drug Administration’s Office of Orphan Products Development granted Orphan Drug Designation to our lead candidate, G-202, for the treatment of hepatocellular carcinoma, the most common form of primary liver cancer.

 

Financial

 

During 2011 and 2012, we conducted a phase Ia dose-escalation, safety and tolerability study of G-202 that continued into a phase 1b dose refinement study. This study is closed to new enrollment, although two patients remain on treatment as of March 27, 2013. Furthermore during 2011 and 2012, we developed our phase II clinical program, completed manufacturing batches of clinical drug supply, submitted two protocols to regulatory authorities, and initiated our Phase II clinical study testing G-202 in patients with hepatocellular carcinoma. As of March 27, 2013, one patient has been treated in this trial.

 

27
 

 

To date, we have devoted a substantial portion of our efforts and financial resources to the development of G-202. G-202 is the only product candidate for which we have conducted clinical trials, and we have not marketed, distributed or sold any products. As a result, since our inception in 2003, we have generated no revenue from product sales and have funded our operations principally through private sales of our equity securities. We have never been profitable and, as of December 31, 2012, we had an accumulated deficit of $27.1 million. We expect to continue to incur significant operating losses for the foreseeable future as we continue the development of our product candidates and advance them through clinical trials.

 

Our cash and cash equivalents balance at December 31, 2012 was $2.3 million, representing 91% of total assets. Based on our current expected level of operating expenditures, we expect to be able to fund our operation through September, 2013. This period could be shortened if there are any significant increases in spending that were not anticipated or other unforeseen events. We need to raise additional cash through the private or public sales of equity or debt securities, collaborative arrangements, or a combination thereof, to continue to fund operations and the development of our product candidates. There is no assurance that such financing will be available to us when needed to allow us to continue our operations or if available, on terms acceptable to us. If we do not raise sufficient funds in a timely manner, we may be forced to curtail operations, delay or stop our ongoing clinical trials, or cease operations altogether, or file for bankruptcy. We currently do not have commitments for future funding of cash from any source.

 

To preserve cash, we have delayed the start of our planned Phase II prostate cancer clinical trial and certain other product development activities. In the event financing is not obtained, we could pursue further cost cutting measures as well as explore the sale of selected assets to generate additional funds. If we are required to significantly reduce operating expenses and delay, reduce the scope of, or eliminate additional development programs, these events could have a material adverse effect on our business, results of operations and financial condition.

 

These factors raise significant doubt about our ability to continue as a going concern. The financial statements do not include any adjustments relating to recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue in existence.

 

Product Development of G-202

 

Our ability to execute our product development plan is wholly dependent on the amount and timing of cash, if any, that we are able to raise in 2013 and 2014. Should we not raise sufficient funds to do all that we contemplate, our priority is the continuation and completion of our Phase II clinical study in hepatocellular carcinoma. We currently do not have sufficient working capital to fund this one clinical study through completion.

 

Our current product development plan of G-202 contemplates the following major initiatives:

 

· Conducting a Phase II clinical study in patients with hepatocellular carcinoma.
     
· Conducting a clinical study in patients with glioblastoma multiforme (a form of brain cancer). We are currently evaluating protocol design and may enter into a collaborative arrangement to conduct this trial.
     
· Conducting a Phase II clinical study in patients with prostate cancer. We have deferred commencement of this study until additional capital is raised or we enter into a collaborative arrangement to conduct this study.
     
· Developing an injectable form of G-202. We are currently crafting a development plan and intend to execute such plan if and when sufficient capital is raised to fund development.

 

Phase I Clinical Development of G-202

 

During 2011 and 2012 we were engaged in conducting the Phase Ia/b clinical trial of G-202. The purpose of our Phase Ia/b trial of G-202 was to evaluate safety, understand the pharmacokinetics (the process by which a compound is absorbed, distributed, metabolized, and eliminated by the body) of G-202 in humans, and to determine an appropriate dosing regimen for subsequent clinical studies. This clinical trial is closed to new patient enrollment. We have treated a total of 44 patients (includes Phase Ia and Ib) and two patients with hepatocellular carcinoma remain on study with stable disease at 32 and 43 weeks after initiation of treatment with G-202. Although our Phase I study was not designed to determine the anti-tumor effects of G-202, encouraging signs were observed, including prolonged disease stabilization in a few hepatocellular carcinoma patients; however, we have not completed the trial, we have not evaluated the results of the data from the trial, and therefore, the final outcome of the trial is still uncertain and there can be no assurance that these or any early observations are ultimately valid. The primary endpoints of the study which are to determine the safety, tolerability and pharmacokinetics of the drug have been met and we have determined a dose recommended for the proposed Phase II studies.

 

Phase II Clinical Development of G-202

 

In 2012, we obtained clearance from the FDA to initiate our Phase II clinical trial entitled, “A Phase II, Multicenter, Single-Arm Study of G-202 as Second-Line Therapy Following Sorafenib for Adult Patients with Progressive Advanced Hepatocellular Carcinoma.” This trial is being conducted at multiple sites in the U.S. and is expected to enroll up to 29 patients. As of March 27, 2013, 1 patient was treated in the study.

 

28
 

 

We are evaluating clinical trial designs in glioblastoma multiforme, and expect to initiate this study over the next twelve months, assuming we raise sufficient capital or enter into a collaborative arrangement to conduct the study.

 

In 2012, we obtained clearance from the FDA and the MHRA to initiate our Phase II clinical trial entitled, “An Open-Label, Single-Arm, Phase 2 Study of G-202 in Patients with Chemotherapy-Naïve Metastatic Castrate-Resistant Prostate Cancer.” The trial is expected to enroll up to forty patients and conducted at up to six sites in the U.S. and UK. We have obtained IRB and MREC clearance from certain clinical sites in the U.S. and UK, respectively, but have not begun the study. This study is deferred until we obtain sufficient capital to conduct the study.

 

Manufacturing and Development Strategy

 

Under the planning and direction of key personnel, we expect to continue to outsource all of our preclinical development (e.g., toxicology), manufacturing, and clinical development activities to contract research organizations (CROs) and contract manufacturing organizations (CMOs). Our contracted CROs and CMOs are required to comply with federal, state and FDA regulations including Good Manufacturing Practices, (cGMP), Good Clinical Practices (GCP), and Good Lab Practices (GLP).

 

The current form of G-202 is delivered to patients by intravenous infusion, a typical form of delivery for most chemotherapeutic treatments. We have completed preliminary development on an injectable form of G-202 that we believe could add significant value and benefits for: patients (shorter time of drug administration); oncologists (ease of delivery to patient); strengthening our patent portfolio; and enhancing market competitiveness. 

 

Significant Accounting Policies

 

We have prepared our financial statements in conformity with accounting principles generally accepted in the United States, which requires management to make significant judgments and estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. We base these significant judgments and estimates on historical experience and other applicable assumptions we believe to be reasonable based upon information presently available. 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. Actual results could materially differ from our estimates under different assumptions, judgments or conditions.

 

All of our significant accounting policies are discussed in Note 2, Summary of Critical Accounting Policies, to our financial statements, included elsewhere in this Annual Report on Form 10-K. We have identified the following as our critical accounting policies and estimates, which are defined as those that are reflective of significant judgments and uncertainties, are the most pervasive and important to the presentation of our financial condition and results of operations and could potentially result in materially different results under different assumptions, judgments or conditions.

 

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 — 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. Actual results may 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.

 

Research and Development Costs — Research and development costs are charged to expense as incurred. Our research and development expenses consist primarily of expenditures for toxicology and other studies, manufacturing, clinical trials, compensation and consulting costs.

 

Stock-based Compensation — The Company measures the cost of employee services received in exchange for an equity award based on the grant-date fair value of the award. All grants under our stock-based compensation programs are accounted for at fair value and that cost is recognized over the period during which an employee is required to provide service in exchange for the award (the vesting period).

 

Compensation expense for options granted to non-employees is determined in accordance with the standard as the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measured. Compensation expense for awards granted to non-employees is re-measured each period.

 

Determining the appropriate fair value of the stock-based compensation requires the input of subjective assumptions, including the expected life of the stock-based payment and stock price volatility. The Company uses the Black-Scholes option-pricing option model to value its stock option awards which incorporate the Company’s stock price, volatility, U.S. risk-free rate, dividend rate, and estimated life.

 

29
 

 

Fair Value of Financial Instruments — Our short-term financial instruments, including cash, accounts payable and other liabilities, consist primarily of instruments without extended maturities. We believe that the fair values of our current assets and current liabilities approximate their reported carrying amounts.

 

Warrant derivative liability consists of certain of our warrants with anti-dilution provisions, and valued using option pricing models which incorporate the Company’s stock price, volatility, U.S. risk-free rate, dividend rate, and estimated life.

 

Recent Accounting Pronouncements

 

For a discussion of new accounting pronouncements affecting the Company, refer to Note 3 of Notes to Financial Statements.

 

Result of Operations

 

Year Ended December 31, 2012 Compared to the Year Ended December 31, 2011

 

Our results of operations have varied significantly from year to year and quarter to quarter and may vary significantly in the future. We did not have revenue during the years ending December 31, 2012 and 2011. We do not anticipate generating any revenues during 2013. Net loss for 2012 and 2011 were $6.9 million and $5.7 million, respectively, resulting from the operational activities described below. 

 

Operating Expenses

 

Operating expense totaled $6.9 million and $6.3 million during 2012 and 2011, respectively.  The increase in operating expenses is the result of the following factors.

 

    Year Ended     Change in 2012  
    December 31,     Versus 2011  
    2012     2011     $     %  
Operating Expenses   (amount in thousands)              
General and administrative   $ 3,953     $ 3,262     $ 691       21 %
Research and development     2,922       3,302       (380 )     (12 )%
Research and development grant received           (244 )     244       (100 )%
Total operating expense   $ 6,875     $ 6,320     $ 555       9 %

 

General and Administrative  

 

General and administrative expenses totaled $4.0 million and $3.3 million during 2012 and 2011, respectively. The increase of $691,000 or 21% for 2012 compared to 2011 was primarily attributable to increases in professional and consulting expenses related to patents, patent litigation and financing of approximately $1,458,000, that was partially offset by decreases of approximately $767,000 due primarily to stock-based compensation expense incurred in 2011 as a result of stock option grants to consultants as payment for services, and grants to employees for both 2011 and 2010.

 

Our general and administrative expenses consist primarily of expenditures related to compensation, legal, accounting and tax and other professional, and general operating.

 

Research and Development  

 

Research and development expenses totaled $2.9 million and $3.3 million during 2012 and 2011, respectively. The decrease of $380,000 or 12% for 2012 compared to 2011 was attributable to decreases in stock-based compensation expense of approximately $170,000 and manufacturing of approximately $620,000, that was partially offset by increases in clinical trial related expenses of approximately $409,000 due to our ongoing Phase Ia/b and activity related to our Phase II clinical development program.

 

Our research and development expenses consist primarily of expenditures related to toxicology and other studies, manufacturing, clinical trials, compensation and consulting costs.

 

Research and Development Grant

 

During 2010 we were awarded two Federal grants, totaling approximately $0.5 million, through the Patient Protection and Affordable Care Act, which supports investments in qualifying therapeutic discovery projects.  Of this amount, we received approximately $0.2 million during the fourth quarter of 2010 and the balance of approximately $0.2 million during the first quarter of 2011.  We will not receive any additional funding under these grants.

 

30
 

 

Other Income (Expense)

 

Other income (expense) totaled approximately ($45,000) and $606,000 for 2012 and 2011, respectively.

 

    Year Ended     Change in 2012  
    December 31,     Versus 2011  
    2012     2011     $     %  
  (amount in thousands)              
(Loss) gain on change in fair value of warrant derivative liability   $ (50 )   $ 580     $ (630 )     (109 )%
Interest income     5       26       (21 )     (81 )%
Total other income (expense)   $ (45 )   $ 606     $ (651 )     (107 )%

 

(Loss) gain on change in fair value of warrant derivative liability

 

The (loss) gain on change in fair value of warrant derivative liability totaled approximately $50,000 loss and $580,000 gain during 2012 and 2011, respectively. The change in the fair value of 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 11 of Notes to Financial Statements for further discussion on our warrant liability.

 

Interest income (expense)

 

We had net interest income of approximately $5,000 and $26,000 for the year ended December 31, 2012 and 2011, respectively. The decrease in net interest income of $21,000 for 2012 compared to 2011 was attributable to a decrease in interest earned on diminishing cash balances.

 

Liquidity and Capital Resources

 

We have incurred losses since our inception in 2003 as a result of significant expenditures for operations and research and development and the lack of any approved products to generate revenue. We have a deficit accumulated of $27.1 million as of December 31, 2012 and anticipate that we will continue to incur additional losses for the foreseeable future. To date, we have funded our operations through the private sale of our equity securities and exercise of warrants, resulting in total proceeds of $18.4 million. Cash and cash equivalents at December 31, 2012 was $2.3 million.

 

Based on our current level of expected operating expenditures, we expect to be able to fund our operations through September 2013. This assumes that we spend minimally on general operations and only continue conducting our ongoing Phase I and II clinical trials, and that we do not encounter any unexpected events or other circumstances that could shorten this time period. We do not have sufficient funds to complete our Phase II trial in hepatocellular carcinoma or fund operations beyond September 2013.

 

We are actively seeking sources of financing to fund our continued operations and research and development programs. To raise additional capital, we may sell shares of equity or debt securities, or enter into collaborative, strategic and/or licensing transactions. There can be no assurance that we will be able to complete any financing transaction in a timely manner or on acceptable terms or otherwise. If we are not able to raise additional cash, we may be forced to further delay, curtail, or cease development of our product candidates, or cease operations altogether.

 

From December 2012 through March 2013, we offered and sold an aggregate of 1,054,160 units in a private placement, in multiple closings, resulting in gross proceeds of $1.9 million. Of the gross proceeds, $0.7 million and $1.2 million was received in 2012 and 2013, respectively.

 

    Year Ended  
    Ended December 31,  
    2012     2011  
    (amounts in thousands)  
Cash at beginning of period   $ 5,530     $ 3,671  
Net cash used in operating activities     (4,521 )     (3,744 )
Net cash used in investing activities     (7 )      
Net cash provided by financing activities     1,343       5,603  
Cash at end of period   $ 2,345     $ 5,530  

 

Net Cash Used in Operating Activities

 

Net cash used in operating activities was $4.5 million and $3.7 million during 2012 and 2011, respectively. The increase of $0.8 million in cash used during 2012 compared to 2011 was primarily attributable to increases in patent, patent litigation and costs of financing.

 

31
 

 

Net Cash Used in Investing Activities

 

Cash used in investing activities was $7,000 and $0 for 2012 and 2011, respectively. The increase was due to purchases of office equipment in 2012.  

 

Net Cash Provided by Financing Activities

 

During 2012, we raised approximately $0.7 through the sale of our securities compared to $5.7 million during 2011.

 

Listed below are key financing transactions we have entered into since January 1, 2011 through March 27, 2013:

 

· In January and February 2011, we sold 2,303,100 units resulting in gross proceeds of $4.1 million.
· In April 2011, we sold 1,363,622 units resulting in gross proceeds of $2.2 million.
· In December 2012, we sold 367,740 units resulting in gross proceeds of $0.7 million.
· During 2012, we received gross proceeds of approximately $0.7 million from the exercise of outstanding common stock options and warrants.
· In January 2013, we sold 129,164 units resulting in gross proceeds of $0.2 million.
· In March 2013, we sold 557,256 units resulting in gross proceeds of $1.0 million.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

We are not required to provide the information as to selected financial data as we are considered a smaller reporting company.

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

This information required by this Item is included in our Financial Statements and Supplementary Data listed in Item 15 (a) (1) of Part IV of this Annual Report on Form 10K.

 

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

ITEM 9A. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer and Principal Accounting Officer, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2012. Based on that evaluation, our Chief Executive Officer and Principal Accounting Officer concluded that our disclosure controls and procedures as of December 31, 2012 were ineffective in ensuring that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

 

Inherent Limitations Over Internal Controls

 

The Company’s internal control over financial reporting is designed to provide 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 (“GAAP”). The Company’s internal control over financial reporting includes those policies and procedures that:

 

(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets;

 

(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that the Company’s receipts and expenditures are being made only in accordance with authorizations of the Company’s management and directors; and

 

(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

 

Management, including the Company’s Chief Executive Officer and Principal Accounting Officer, does not expect that the Company’s internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods are subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

32
 

 

Management’s Annual Report on Internal Control Over Financial Reporting

 

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting based on the criteria set forth in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the Company’s assessment, management has concluded, that due to limited resources and limited number of employees, its internal control over financial reporting was ineffective as of December 31, 2012 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP. To mitigate the current limited resources and 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 the number of employees, which would enable us to implement adequate segregation of duties within the internal control framework.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting during the fourth quarter of 2012, which were identified in connection with management’s evaluation required by paragraph (d) of rules 13a-15 and 15d-15 under the Exchange Act that has materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to the rules of the SEC that permit smaller reporting companies to provide only the management’s report in this annual report.

  

ITEM 9B. OTHER INFORMATION

 

Amendment to GenSpera 2009 Executive Compensation Plan

 

On March 25, 2013, based on the recommendation of our Leadership Development and Compensation Committee the Board approved an amendment to our 2009 Executive Compensation Plan (as amended, the "2009 Plan"). The 2009 Plan provides for awards of stock options, restricted stock, stock appreciation rights, restricted stock units, performance units, performance shares and other stock-based awards. The sole purpose of the amendment was to increase the number of shares of common stock which can be issued under the 2009 Plan by 4,225,000 so that the aggregate number of shares that can now be awarded under the 2009 Plan is 6,000,000. No other changes to the 2009 Plan were made.

 

PART III

   

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Directors, Executive Officers and Significant Employees

 

The following sets forth the current members of our board of directors, as well as information with regard to our executive officers, and information concerning their ages and background. All directors hold office until the next annual meeting of stockholders or until their respective successors are elected, except in the case of death, resignation or removal: 

 

Name   Position   Age   Director
Since
Executive Officers            
Craig A. Dionne, PhD   Chief Executive Officer, Chief Financial Officer, President and Chairman of the Board of Directors   55   11/2003
Nancy Jean Barnabei   Vice President Finance, Treasurer and Principal Accounting Officer   50  
Russell Richerson, PhD   Chief Operating Officer and Secretary   61  

 

Non-employee Directors

           
Peter E. Grebow, PhD   Director   66   05/2012
Bo Jesper Hansen, MD, PhD   Director   54   08/2010
Scott V. Ogilvie   Director   58   03/2008

 

Craig A. Dionne, PhD, age 55, serves as our Chief Executive Officer, Chief Financial Officer, President and Chairman of the Board of Directors. Dr. Dionne is one of our founders and has served on our board since November 2003. He has over 23 years of experience in the pharmaceutical industry, including direct experience identifying promising oncology treatments and bringing them through clinical trials. For example, he served for five years as Vice President Discovery Research at Cephalon, Inc. where he was responsible for its oncology and neurobiology drug discovery and development programs. Dr. Dionne has also recently served as Executive Vice President at the Prostate Cancer Research Foundation. In addition to extensive executive experience, Dr. Dionne’s productive scientific career has led to 6 issued patents and co-authorship of many scientific papers. In evaluating Dr. Dionne’s specific experience, qualifications, attributes and skills in connection with his appointment to our board, we took into account his 23 year career in pharmaceutical drug discovery and development, prior work for our company in addition to being one of our founders, familiarity with our technologies, and academic background. Dr. Dionne earned his BS in biochemistry in 1979 from Louisiana State University, Baton Rouge, Louisiana and his PhD in biochemistry in 1984 from the University of Texas at Austin.

 

33
 

 

Nancy Jean Barnabei, age 50, serves as our Vice President Finance, Treasurer and Principal Accounting Officer. Ms. Barnabei has more than 20 years’ experience with both public and private companies in the biotechnology industry. From 2010 – 2011, Ms. Barnabei served as Chief Financial Officer of Corridor Pharmaceuticals, Inc., a drug development company, which acquired Immune Control Inc., where she served as Chief Financial Officer from 2008 – 2010. In 2005, Ms. Barnabei founded Talkeetna Advisors, a consulting and advisory firm specializing in biotechnology companies. From 2000 – 2004, she was Vice President Finance, Treasurer and Chief Financial Officer at Locus Pharmaceuticals, Inc. Her previous experience includes eight years at Cephalon, Inc., concluding as Corporate Controller. Ms. Barnabei earned a BS in business administration in 1986 from Northeastern University, Boston, and is a certified public accountant.

 

Russell Richerson, PhD , age 61, serves as our Chief Operations Officer and Secretary. Dr. Richerson has over 25 years of experience in the biotechnology/diagnostics industry, including 11 years at Abbott Laboratories in numerous management roles. Most recently, he has served as Vice President of Diagnostic Research and Development at Prometheus Laboratories (2001 – 2004) and then as Chief Operating Officer of the Molecular Profiling Institute (2005 – 2008). Dr. Richerson also served as Vice President of Operations of International Genomics Consortium or IGC from 2005 to 2008. Commencing in August of 2011, Dr. Richerson joined the IGC board of directors. Dr. Richerson received his BS in 1974 from Louisiana State University, Baton Rouge, Louisiana and his PhD in 1983 from the University of Texas at Austin.

 

Peter E. Grebow, PhD , age 66, joined our board in May of 2012. Dr. Grebow is President and founder of P.E. Grebow Consulting, Inc. which he formed in 2011. From 1991 to 2011, Dr. Grebow held several key positions with Cephalon, Inc. (now Teva Pharmaceuticals), a biopharmaceutical company, including Executive Vice President, Cephalon Ventures, Senior Vice President, Worldwide Business Development and Senior Vice President, Drug Development. Prior to joining Cephalon, Dr. Grebow served as the Vice President, Drug Development for Rorer Central Research, a division of Rhone-Poulenc Rorer Pharmaceuticals Inc., a pharmaceutical company, from 1986 to 1990. Dr. Grebow has served as a director of Optimer Pharmaceuticals since February 2009. Dr. Grebow has also served as a director of Q Holdings, Inc. since December 2011. Dr. Grebow received his undergraduate degree from Cornell University, an MS in chemistry from Rutgers University and a PhD in physical biochemistry from the University of California, Santa Barbara. Dr. Grebow’s demonstrated leadership in his field, his knowledge of scientific matters affecting our business and his understanding of our industry contribute to our conclusion that he should serve as a director.

 

Bo Jesper Hansen, MD, PhD , age 54, has served as a director on our board since August 2010. Dr. Hansen is currently the Executive Chairman of the Board of Swedish Orphan Biovitrum AB (STO: SOBI), an international growth company specializing in the development, registration, marketing and distribution of pharmaceutical drugs for rare and life-threatening diseases. Dr. Hansen has held the position since January 2010 as a result of the merger of Swedish Orphan International AB Group and Biovitrum. Prior to the merger, Dr. Hansen served in numerous positions with Swedish Orphan International AB Group, including, from 1998 to 2010, CEO, President and Director of the Board. Dr. Hanson’s responsibilities at the company include establishment, development and expansion of the company’s operations in Europe, Japan, the Americas and Australia. Dr. Hansen holds a Doctor of Medicine degree from the University of Copenhagen with a specialty in urology. Dr. Hansen also serves on the boards of CMC AB, MipSalus ApS, Incentive AB (Gambro), Orphazyme ApS, Novagali SAS and TopoTarget A/S (NASDAQ OMX: TOPO), Hyperion Therapeutics Inc. and Zymenex A/S. In evaluating Dr. Hansen’s specific experience, qualifications, attributes and skills in connection with his appointment to our board, we took into account his prior work with both public and private organizations, including his experience in building biopharmaceutical organizations, his strong business development background and experience with mergers and acquisitions and his past experience and relationships in the biopharma and biotech fields.

 

Scott V. Ogilvie , age 58, has served as a director on our board since February 2008. Mr. Ogilvie is currently the President of AFIN International, Inc., a private equity/business advisory firm, which he founded in 2006. Additionally, Mr. Ogilvie has served as a partner of Wirthlin Worldwide International, a private strategic advisory and M&A firm, since September 2011. Prior to December 31, 2009, he was CEO of Gulf Enterprises International, Ltd, a company that brings strategic partners, expertise and investment capital to the Middle East and North Africa. He held this position since August 2006. Mr. Ogilvie previously served as Chief Operating Officer of CIC Group, Inc., an investment manager, a position he held from 2001 to 2007. He began his career as a corporate and securities lawyer with Hill, Farrer & Burrill, and has extensive public and private corporate management and board experience in finance, real estate, and technology companies. Mr. Ogilvie currently serves on the board of directors of Neuralstem, Inc. (NYSE AMEX:CUR), Preferred Voice Inc. (OTCBB: PRFV) and Derycz Scientific, Inc. (OTCBB: DYSC). In evaluating Mr. Ogilvie’s specific experience, qualifications, attributes and skills in connection with his appointment to our board, we took into account his prior work in both public and private organizations regarding corporate finance, securities and compliance and international business development.

 

Family Relationships

 

There are no family relationships between any director, executive officer, or person nominated or chosen by the registrant to become a director or executive officer.

 

34
 

 

Code of Ethics

 

We have adopted a "Code of Ethics” that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. A copy of our code can be viewed on our website at www.genspera.com.

 

Committees

The board of directors has established three standing committees: (1) an Audit Committee, (2) a Nominating and Corporate Governance Committee, and (3) a Leadership Development and Compensation Committee. Each of the committees operates under a written charter adopted by the board of directors. All of the committee charters are available on our web site at www.genspera.com . The committee membership and the function of each of the committees are described below.  

 

Director   Audit Committee   Nominating
and Corporate
Governance
Committee
  Leadership
Development
and Compensation
Committee
Peter E. Grebow, PhD   Member   Chair   Member
Bo Jesper Hansen, MD, PhD   Member   Member   Chair
Scott V.Ogilvie   Chair   Member   Member

 

Executive compensation is determined by the Leadership Development and Compensation Committee.

 

Independent Directors

 

For purposes of determining independence, the Company has adopted the definition of independence as contained in NASDAQ Market Place Rules 4200. Pursuant to the definition, the Company has determined that Messrs. Ogilvie, Grebow and Hansen qualify as independent.

 

Audit Committee Financial Experts

 

Our Audit Committee is currently comprised of Scott V. Ogilvie, Peter Grebow, PhD and Bo Jesper Hansen, MD, PhD, each of whom is a non-employee member of our board of directors. The board of directors has determined that Scott V. Ogilvie and Bo Jesper Hansen, MD, PhD are each an audit committee financial expert as defined under the rules of the SEC.

 

ITEM 11. EXECUTIVE COMPENSATION

 

Executive Compensation

 

Summary Compensation

 

The following table sets forth information for our most recently completed fiscal year concerning the compensation of Craig Dionne, our Chief Executive Officer (“CEO”), and all other executive officers of GenSpera, Inc. who earned over $100,000 in salary and bonus during the last most recently completed fiscal years ended December 31, 2012 and 2011 (together the “Named Executive Officers”).

 

Name & Principal Position   Year     Salary ($)     Bonus ($)     Stock
Awards ($)
    Option
Awards ($)
    Non-Equity
Incentive Plan
Compensation ($)
    Nonqualified
Deferred
Compensation
Earnings ($)
    All Other
Compensation ($)
    Total ($)  
Craig Dionne, PhD
  2012       330,000       112,200  (5)     -       330,000  (5)     -       -       30,324       802,524  
Chief Executive Officer                                                                      
    2011       300,000       122,400       -       300,000  (1)     -       -       23,135       745,535  
                                                                       
Nancy Jean Barnabei   2012       54,000  (2)     31,500  (6)     -       346,670  (3)(6)     -       -       1,813       433,983  
Vice President Finance and Treasurer (Principal Accounting Officer)                                                                        
                                                                         

Russell Richerson, PhD
  2012       289,000       145,858  (7)     -       289,000  (7)     -       -       18,780       742,638  
Chief Operating Officer                                                                      
    2011       270,000       85,860       -       270,000  (4)     -       -       9,503       635,363  

 

(1) Mr. Dionne was awarded a 2011 long term incentive grant on December 28, 2011 in the amount of $300,000. As payment of the grant, 344,813 options were issued on January 2, 2012. The number of options issued pursuant to the long term incentive grant was calculated based on the value determined using the Black Sholes option pricing model with the following assumptions: (i) exercise price of $2.21 per share; (ii) fair value of a share of common stock of $2.01; (iii) volatility of 77%; (iv) dividend rate of 0%; (v) risk free interest rate of 0.1875%; and (vi) estimated life of 2.5 years. The options are fully vested and lapse if unexercised on January 2, 2019.

 

35
 

 

(2) Ms. Barnabei was hired on August 16, 2012 as the Company’s Vice President Finance, Treasurer and Principal Accounting Officer. She is to receive a base salary of $144,000 per year.

 

(3) Ms. Barnabei was awarded 200,000 common stock options on August 16, 2012. The options have an exercise price of $2.80 per share. The options vest as follows: 60,000 vested upon grant, 60,000 on the first anniversary, and 80,000 options shall vest upon her becoming a full time employee, if ever, provided such event occurs before August 16, 2014. In the event our vice president finance does not become a full time employee by such time, the 80,000 options shall automatically terminate. The options lapse if unexercised after seven years.  The options have a grant date fair value of $256,670, determined using the Black-Scholes method based on the following assumptions:  (1) risk free interest rate of 0.63%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 60%; and (4) an expected life of the options of 4 years.

 

(4) Mr. Richerson was awarded a 2011 long term incentive grant on December 28, 2011 in the amount of $270,000. As payment of the grant, 292,927 options were issued on January 2, 2012. The number of options issued pursuant to the long term incentive grant was calculated based on the value determined using the Black Sholes option pricing model with the following assumptions: (i) exercise price of $2.01 per share; (ii) fair value of a share of common stock of $2.01; (iii) volatility of 77%; (iv) dividend rate of 0%; (v) risk free interest rate of 0.1875%; and (vi) estimated life of 2.5 years. The options are fully vested and lapse if unexercised on January 2, 2019.

 

(5) On March 25, 2013, Mr. Dionne was awarded a 2012 long term incentive grant and a bonus award in the amount of $330,000 and $112,200, respectively. As payment of the grant and bonus award, 561,394 options were issued on March 25, 2013. The number of options issued pursuant to the long term incentive grant and bonus award was calculated based on the value determined using the Black Sholes option pricing model with the following assumptions: (i) exercise price of $2.18 per share; (ii) fair value of a share of common stock of $1.98; (iii) volatility of 59.23%; (iv) dividend rate of 0%; (v) risk free interest rate of 0.485%; and (vi) estimated life of 3.5 years. The options are fully vested and lapse if unexercised on March 25, 2020.

 

(6) On March 25, 2013, Ms. Barnabei was awarded a 2012 long term incentive grant and a bonus award in the amount of $90,000 and $31,500, respectively. As payment of the grant and bonus award, 144,260 options were issued on March 25, 2013. The number of options issued pursuant to the long term incentive grant and bonus award was calculated based on the value determined using the Black Sholes option pricing model with the following assumptions: (i) exercise price of $1.98 per share; (ii) fair value of a share of common stock of $1.98; (iii) volatility of 59.23%; (iv) dividend rate of 0%; (v) risk free interest rate of 0.485%; and (vi) estimated life of 3.5 years. The options are fully vested and lapse if unexercised on March 25, 2020.

 

(7) On March 25, 2013, Mr. Richerson was awarded a 2012 long term incentive grant and a bonus award in the amount of $289,000 and $145,858, respectively. As payment of the grant and bonus award, 516,318 options were issued on March 25, 2013. The number of options issued pursuant to the long term incentive grant and bonus award was calculated based on the value determined using the Black Sholes option pricing model with the following assumptions: (i) exercise price of $1.98 per share; (ii) fair value of a share of common stock of $1.98; (iii) volatility of 59.23%; (iv) dividend rate of 0%; (v) risk free interest rate of 0.485% and (vi) estimated life of 3.5 years. The options are fully vested and lapse if unexercised on March 25,, 2020.

  

Outstanding Executive Equity Awards at Fiscal Year-End 2012

 

The following table sets forth information concerning stock options held on December 31, 2012, the last day of our 2012 fiscal year, for each named executive officer. 

 

    Number of Securities Underlying     Option     Option  
    Unexercised Options (#)     Exercise     Expiration  
Name and Principal Position   Exercisable     Unexercisable     Price ($)     Date  
                         
Craig Dionne, PhD     1,000,000             1.65       9/2/2016  
Chief Executive Officer     302,580             2.01       7/1/2018  
      344,813             2.21        1/2/2019  
      70,342             2.21       1/2/2019  
                                 
Nancy Jean Barnabei     60,000       140,000       2.80       8/16/2019  
Vice President Finance and Treasurer (Chief Accounting Officer)                          

 

Russell Richerson, PhD     775,000             1.50       9/2/2016  
Chief Operating Officer     256,790             1.83       7/1/2018  
      292,927             2.01        1/2/2019  
      46,576             2.01       1/2/2019  

 

36
 

 

Employment Agreements and Change in Control

 

Craig Dionne

 

In connection with Dr. Dionne’s employment, we have entered into: (i) an employment agreement; (ii) a severance agreement; (iii) a proprietary information, inventions and competition agreement; and (iv) an indemnification agreement.

 

Employment Agreement

 

We employ Craig Dionne as our Chief Executive Officer pursuant to a 5 year written contract which commenced on September 2, 2009. As compensation for his services during 2012, Dr. Dionne received a base salary of $330,000 per year. Effective January 1, 2013, Dr. Dionne’s base salary was increased to $363,000 per year. Such base salary is reviewed yearly with regard to possible increase. In addition, Dr. Dionne is eligible to receive annual discretionary and long term incentive bonuses as determined by the board. For 2012 and 2013, Dr. Dionne’s target bonus levels for annual discretionary bonus and long term incentive bonuses are: (i) 50%, and (ii) 100%, of base salary, respectively. Notwithstanding, the Board has broad discretion to make awards in excess of executives established targets. The bonuses are payable in cash or non-cash compensation, or a combination thereof, at the discretion of the board. Dr. Dionne is also entitled to receive certain payments and acceleration of outstanding equity awards in the event his employment is terminated. In the event that Dr. Dionne is terminated (not in connection with a change of control) without cause or if he resigns for good reason, he will be entitled to thirty-six (36) months of salary continuation (payable in monthly installments), thirty-six (36) months of continued medical insurance coverage for Dr. Dionne and his family at a cost no less favorable than the premium co-pay charged to active employees, the acceleration of outstanding equity awards and any accrued obligations. In the event that Dr. Dionne is terminated as a result of his disability, he will be entitled to twelve (12) months of salary continuation plus any accrued obligations. Any termination payments that may become due to Dr. Dionne are contingent upon his execution of a timely separation agreement in a form acceptable to us, which shall include a release of claims against us and his resignation from the board. As part of his employment agreement, Dr. Dionne was also granted options to purchase 1,000,000 shares of Common Stock with an exercise price of $1.65 per share and a term of seven years. The options were issued pursuant to our 2009 Plan and vested upon Dr. Dionne achieving certain milestones. As of August 1, 2012, all milestones had been reached and accordingly, all the options are vested.

 

Severance Agreement

 

We have entered into a severance agreement with Dr. Dionne. The severance agreement provides for certain payments, as described below, in the event Dr. Dionne’s employment is terminated in connection with a change in control. In the event that Dr. Dionne is terminated without cause or resigns for good reason within a period of two (2) months before or two (2) years following the consummation of a change of control, the Company would be required to pay him (i) 100% of his then annual target bonus, pro-rated by the number of calendar days in which he was employed during that particular year, and (ii) a lump sum payment in an amount equal to three (3) times his then annual salary. These payments are subject to Dr. Dionne’s execution of a release of claims against us and shall be made on the tenth business day following the effective date of the release. If any payment under the severance agreement, when combined with any other payment, would constitute a “parachute payment” within the meaning of Code Section 280G then such payment shall be either the full amount or such lesser amount that would not result in an excise tax under Code Section 280G, based upon which interpretation yields the greater after-tax amount for Dr. Dionne.

 

Proprietary Information, Inventions and Competition Agreement

 

The proprietary information, inventions and competition agreement requires Dr. Dionne to maintain the confidentiality of the Company’s intellectual property as well as the assignment of any inventions made by Dr. Dionne during his employment. The agreement also limits Dr. Dionne’s ability to compete within certain fields of interest, as defined in the agreement, for a period of 18 months following the end of his employment. 

 

Indemnification Agreement

 

The indemnification agreement provides for the indemnification and defense of Dr. Dionne, in the event of litigation, to the fullest extent permitted by law. The Company has also adopted the form of indemnification agreement for use with its other executive officers, employees and directors.

 

The foregoing summaries of Dr. Dionne’s: (i) employment agreement; (ii) severance agreement; (iii) proprietary information, inventions and competition agreement; and (iv) indemnification agreement are qualified in their entirety by reference to the full text of the agreements which have been filed with the SEC as exhibits to our public filings.

 

Nancy Jean Barnabei

 

In connection with Ms. Barnabei’s employment, we entered into: (i) an employment agreement; (ii) a proprietary information, inventions and competition agreement; and (iii) an indemnification agreement.

 

37
 

 

Employment Agreement

 

We employ Nancy Jean Barnabei as our Vice President Finance, Treasurer and Principal Accounting Officer pursuant to a 2 year written contract, which commenced on August 16, 2012. As compensation for her services, Ms. Barnabei receives a base salary of $144,000 per year and is required to devote no less than 24 hours per week to the business and affairs of the Company. Such base salary is reviewed yearly with regard to possible increase. In addition, Ms. Barnabei is eligible to receive annual discretionary and long term incentive bonuses as determined by the board. For 2012 and 2013, Ms. Barnabei’s target discretionary and long term incentive bonuses are: (i) 35% and (ii) 100% of base salary, respectively. Notwithstanding, the Board has broad discretion to make awards in excess of executives established targets. The bonuses are payable in cash or non-cash compensation, or a combination thereof, at the sole discretion of the board. Ms. Barnabei is also entitled to receive certain payments and acceleration of outstanding equity awards in the event her employment is terminated. In the event Ms. Barnabei is terminated without cause or if she resigns for good reason, she will be entitled to eighteen (18) months of salary continuation (payable in monthly installments), eighteen (18) months of continued medical insurance coverage for Ms. Barnabei and her family at a cost no less favorable than the premium co-pay charged to active employees, the acceleration of outstanding equity awards and any accrued obligations. In the event that Ms. Barnabei is terminated as a result of her disability, she will be entitled to twelve (12) months of salary continuation plus any accrued obligations. Any termination payments that may become due to Ms. Barnabei are contingent upon her execution of a timely separation agreement in a form acceptable to us. As part of the agreement, Ms. Barnabei was also granted options to purchase 200,000 shares of the Company’s common stock. The options have an exercise price of $2.80 per share and a term of seven (7) years. The options were issued pursuant to the Company’s 2007 Equity Compensation Plan and vest as follows: (i) 60,000 upon the effective date of her employment agreement, and (ii) 60,000 on the one year anniversary of such effective date, provided she is still employed by the Company at such time. In addition, 80,000 options shall vest upon Ms. Barnabei becoming a full time employee of the Company, if ever, provided such event occurs before the two year anniversary of the effective date of the employment agreement. In the event Ms. Barnabei does not become a full time employee by such time, the 80,000 options shall automatically terminate. The options are also subject to accelerated vesting upon the occurrence of certain conditions including a change of control or termination of employment by the Company without cause.

 

Proprietary Information, Inventions and Competition Agreement

 

The proprietary information, inventions and competition agreement requires Ms. Barnabei to maintain the confidentiality of the Company’s intellectual property as well as the assignment of any inventions made by Ms. Barnabei during her employment. The agreement also limits Ms. Barnabei’s ability to compete within certain fields of interest, as defined in the agreement, for a period of 18 months following end of her employment.

 

Indemnification Agreement

 

The indemnification agreement provides for the indemnification and defense of Ms. Barnabei, in the event of litigation.

 

The foregoing summaries of Ms. Barnabei’s: (i) employment agreement; (ii) proprietary information, inventions and competition agreement; and (iv) indemnification agreement are qualified in their entirety by reference to the full text of the agreements which have been filed with the SEC as exhibits to our public filings.

 

Russell Richerson

 

In connection with Dr. Richerson’s employment, we have entered into: (i) an employment agreement; (ii) a proprietary information, inventions and competition agreement; and (iii) an indemnification agreement.

 

Employment Agreement

 

We employ Russell Richerson as our Chief Operating Officer pursuant to a 3 year written contract, which commenced on September 2, 2009 and expired on September 2, 2012. On September 2, 2012, the agreement was automatically extended for an additional year pursuant to its terms. As compensation for his services during 2012, Dr. Richerson received a base salary of $289,000 per year. Effective January 1, 2013, Dr. Richerson’s base salary was increased to $309,000 per year. Such base salary is reviewed yearly with regard to possible increase. In addition, Dr. Richerson is eligible to receive annual discretionary and long term incentive bonuses as determined by the board. For 2012 and 2013, Dr. Richerson’s target bonus levels for annual discretionary bonus and long term incentive bonuses are: (i) 35%, and (ii) 100%, of base salary, respectively. The bonuses are paid in cash or non-cash compensation, or a combination of both, at the discretion of the board. Dr. Richerson is also entitled to receive certain payments and acceleration of outstanding equity awards in the event his employment is terminated. In the event that Dr. Richerson is terminated without cause or if he resigns for good reason, he will be entitled to eighteen (18) months of salary continuation (payable in monthly installments), eighteen (18) months of continued medical insurance coverage for Dr. Richerson and his family at a cost no less favorable than the premium co-pay charged to active employees, the acceleration of outstanding equity awards and any accrued obligations. In the event that Dr. Richerson is terminated as a result of his disability, he will be entitled to twelve (12) months of salary continuation plus any accrued obligations. Any termination payments that may become due to Dr. Richerson are contingent upon his execution of a timely separation agreement in a form acceptable to us, which shall include a release of claims against us and his resignation from the board, if applicable. As part of his employment, Dr. Richerson was also granted options to purchase 775,000 shares of Common Stock with an exercise price of $1.50 per share and have a term of 7 years. The options were issued pursuant to the 2009 Plan and vested upon Dr. Richerson achieving certain milestones. As of August 1, 2012, all milestones had been reached and accordingly, all the options are vested.

 

Proprietary Information, Inventions and Competition Agreement

 

The proprietary information, inventions and competition agreement requires Dr. Richerson to maintain the confidentiality of the Company’s intellectual property as well as the assignment of any inventions made by Dr. Richerson during his employment. The agreement also limits Dr. Richerson’s ability to compete within certain fields of interest, as defined in the agreement, for a period of 18 months following end of his employment.

 

38
 

 

Indemnification Agreement

 

The indemnification agreement provides for the indemnification and defense of Dr. Richerson, in the event of litigation, to the fullest extent permitted by law.

 

The foregoing summaries of Mr. Richerson’s: (i) employment agreement; (ii) proprietary information, inventions and competition agreement; and (iv) indemnification agreement are qualified in their entirety by reference to the full text of the agreements which have been filed with the SEC as exhibits to our public filings.

 

Potential Payments Upon Termination or Change- in-Control

 

The following table sets forth the payments that would be made to our named executive officers if his or her employment in accordance with his or her employment agreement had been terminated by us without cause, termination as a result of disability on December 31, 2012 or in the event a change in control of our Company occurred on December 31, 2012, as applicable.

 

Name   Terminated without
cause
    Terminated, change of control     Termination as a result of Disability  
Craig Dionne, PhD                        
Salary   $ 990,000     $ 990,000     $ 330,000  
Bonus (1)     495,000       495,000        
Health     72,000       72,000        
Total:   $ 1,557,000     $ 1,557,000     $ 330,000  
                         
Nancy Jean Barnabei                        
Salary     216,000     $     $ 144,000  
Bonus (1)     73,900              
Health     3,600              
Acceleration of Stock Options (2)                  
Total:   $ 293,500     $     $ 144,000  
                         
Russell Richerson, PhD                        
Salary     433,500     $     $ 289,000  
Bonus (1)     390,150              
Health     27,000              
Total:   $ 850,650     $     $ 289,000  

 

(1) Assumes all annual bonus milestones have been attained prior to termination.
(2) Calculated based upon a price per share of our common stock of $2.20, which was the closing price per share of our common stock on December 31, 2012. Ms. Barnabei’s options do not have any intrinsic value.

 

Director Compensation

 

Name   Fees Earned 
or Paid in
Cash ($)
    Stock
Awards ($)
    Option
Awards ($)
    Non-Equity Incentive 
Plan Compensation ($)
    Non-Qualified
Deferred
Compensation 
Earnings ($)
    All Other
Compensation ($)
    Total ($)  
Peter E. Grebow, PhD     17,501             66,183 (1)                       83,684  
                                                         
Bo Jesper Hansen     35,002             42,679 (2)                       77,681  
                                                         
Scott Ogilvie     35,002             46,745 (3)                       81,747  

 

(1) Options were granted at fair market value on May 24, 2012 at $1.05 per share.  Of these options 25,000 vested upon grant and 38,000 will vest quarterly over a one-year period.

 

(2) Options were granted at fair market value on August 13, 2012 at $1.12 per share.  Options vest quarterly over a one-year period.

 

(3) Options were granted at fair market value on March 1, 2012 at $1.20 per share.  Options vest quarterly over a one-year period.

 

Director Compensation Plan

 

Pursuant to the terms of our non-executive director compensation policy, non-employee directors are entitled to the following compensation for service on our Board:

 

39
 

  

Inducement/First Year Grant.   Upon joining the Board, individual will receive options to purchase 50,000 shares of our common stock.  The options vest as follows:  (i) 25,000 immediately upon appointment to the Board; and (ii) 25,000 vesting quarterly over the following 12 months.

 

Annual Grant.   Subject to shareholder rights to elect any individual director, starting on the first year anniversary of service, and each subsequent anniversary thereafter, each eligible director will be granted options to purchase 25,000 shares of common stock.  The annual grants vest quarterly during the grant year.

 

Committee and Committee Chairperson Grant.   Each director will receive options to purchase an additional 4,000 shares of common stock for each committee on which he or she serves. Chairpersons of each committee will receive options to purchase an additional 1,000 share common stock.  The committee grants vest quarterly during the grant year.

 

Special Committee Grants.    From time to time, individual directors may be requested by the Board to provide extraordinary services.  These services may include such items as the negotiation of key contracts, assistance with scientific issues, or such other items as the Board deems necessary and in the best interest of the Company and our shareholders.  In such instances, the Board shall have the flexibility to issue special committee grants.   The amount of such grants and terms will vary commensurate with the function and tasks of the special committee.

 

Exercise Price and Term.   All options issued pursuant to the non-executive board compensation policy will have an exercise price equal to the fair market value of the Company’s common stock at close of market on the grant date.  The term of the options shall be for a period of 5 years from the grant date.

 

Cash Compensation.   Our eligible directors also receive cash compensation equal to: (i) an annual cash retainer of $25,000, and (ii) a per committee cash award of $3,334.  

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

Securities authorized for issuance under equity compensation plans

 

Information regarding shares authorized for issuance under equity compensation plans approved and not approved by stockholders required by this Item are incorporated by reference from Item 5 of this Annual Report from the section entitled “ Equity Compensation Plan Information .”

 

Security Ownership of Certain Beneficial Owners and Management

 

The following table sets forth, as of March 27, 2013, information regarding beneficial ownership of our capital stock by:

 

  · each person, or group of affiliated persons, known by us to be the beneficial owner of 5% or more of any class of our voting securities;

 

  · each of our current directors and nominees;

 

  · each of our current named executive officers; and

 

  · all current directors and named executive officers as a group.

 

Beneficial ownership is determined according to the rules of the SEC. Beneficial ownership means that a person has or shares voting or investment power of a security and includes any securities that person or group has the right to acquire within 60 days after the measurement date. This table is based on information supplied by officers, directors and principal stockholders. Except as otherwise indicated, we believe that each of the beneficial owners of the common stock listed below, based on the information such beneficial owner has given to us, has sole investment and voting power with respect to such beneficial owner’s shares, except where community property laws may apply.

 

40
 

 

          Common Stock              
Name and Address of Beneficial Owner(1)   Shares     Shares
Underlying
Convertible
Securities (2)
    Total     Percent of
Class (2)
 
Directors and named Executive Officers                                
Craig Dionne, PhD     2,464,749 (7)     2,533,905       4,998,654       19.0 %
Russell B. Richerson, PhD(3)     942,392       1,887,611       2,830,003       11.1 %
Nancy Jean Barnabei           204,260       204,260       *  
Bo Jesper Hansen, MD, PhD           129,500       129,500       *  
Scott Ogilvie           231,000       231,000       *  
Peter E. Grebow, PhD           63,000       63,000       *  
                                 
All directors and executive officers as a group (6 persons)     3,407,141       5,049,276       8,456,417       29.4 %
                                 
Beneficial Owners of 5% or more                                
John T. Isaacs, PhD(4)     1,271,528       105,000       1,376,528       5.8 %
Samuel R. Denmeade, MD(5)     1,271,528       105,000       1,376,528       5.8 %
Kihong Kwon, MD(6)     3,407,025             3,407,025       14.4 %

 

* Less than one percent.

 

(1) Except as otherwise indicated, the persons named in this table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them, subject to community property laws where applicable and to the information contained in the footnotes to this table. Unless otherwise indicated, the address of the beneficial owner is GenSpera, Inc., 2511 N Loop 1604 W, Suite 204, San Antonio, TX 78258.

 

(2) Pursuant to Rules 13d-3 and 13d-5 of the Exchange Act, beneficial ownership includes any shares as to which a shareholder has sole or shared voting power or investment power, and also any shares which the shareholder has the right to acquire within 60 days, including upon exercise of common shares purchase options or warrants. There are 23,713,040 shares of common stock issued and outstanding as of March 27, 2013.

 

(3) 5050 East Gleneagles Drive, Tucson, AZ 85718

 

(4) 13638 Poplar Hill Road, Phoenix, MD 21131

 

(5) 5112 Little Creek Drive, Ellicott City, MD 21043

  

(6)

1015 E. Chapman, Suite 201, Fullerton, CA 92831. Does not include 1,747,509 warrants or convertible securities subject to exercise conditions based on percentage ownership.

 

(7)

884,663 owned by Craig A. Dionne & Bonnie Camille Dionne TTEES The Dionne Annuity Trust of 2011 and 115,337 owned by Craig A. Dionne & Bonnie Camille Dionne TTEES The Dionne Annuity Trust of 2012. 

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

Information regarding disclosure of an employment relationship or transaction involving an executive officer and any related compensation solely resulting from that employment relationship or transaction is incorporated by reference from the section of this annual report entitled “ Executive Compensation .”

 

41
 

 

Information regarding disclosure of compensation to a director is incorporated by reference from the section of this annual report entitled “ Independent Directors .”

 

Related Party Transactions

 

· We have entered into an indemnification agreement with each of our directors and executive officers. The indemnification agreements and our certificate of incorporation and bylaws require us to indemnify our directors and executive officers to the fullest extent permitted by Delaware law.

 

· During our January and February of 2011 offerings, Kihong Kwon, MD (including related and/or affiliated entities), purchased 1,773,804 units on the same terms and conditions as the other investors in the offering. Prior to the transaction, Dr. Kwon was not a related person. The price per unit was $1.80. Each unit consists of: (i) one (1) share of the common stock, and (ii) one half (½) common stock purchase warrant. The warrants have a term of five years and entitle the holders to purchase common stock at a price per share of $3.30. In the event the shares underlying the warrants are not subject to a registration statement, the warrants may be exercised on a cashless basis after 12 months from the issuance date. 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 warrants do not contain any price protection provisions. The warrants are callable assuming the following: (i) our common stock trades above $5.50 for ten (10) consecutive days; (ii) the daily average minimum volume over such ten (10) days is 15,000 or greater; and (iii) there is an effective registration statement covering the underlying shares. We also grant the investors in the units certain piggy-back registration rights.

 

· During our April 2011 offerings, Kihong Kwon, MD (including related and/or affiliated entities), purchased 1,212,122 units on the same terms and conditions as the other investors in the offering. The price per unit was $1.65. Each unit consists of: (i) one (1) share of the common stock and (ii) one half (½) common stock purchase warrant. The warrants have a term of five years and entitle the holders to purchase common stock at a price per share of $3.15. In the event the shares underlying the warrants are not subject to a registration statement, the warrants may be exercised on a cashless basis after 12 months from the issuance date. 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 warrants do not contain any price protection provisions. The warrants are callable assuming the following: (i) our common stock trades above $6.50 for ten (10) consecutive days; (ii) the daily average minimum volume over such ten (10) days is 15,000 or greater; and (iii) there is an effective registration statement covering the underlying shares. We also granted the investors certain piggy-back registration rights.

 

· On May 18, 2011, we granted each of Drs. Isaacs and Denmeade, our Scientific Advisors, common stock purchase options to purchase 20,000 shares, as compensation for serving on the Company’s scientific advisory board. The options have an exercise price of $1.85 per share. The options vest on the following schedule: 5,000 shares vested immediately and the rest vest in equal quarterly installments during the year beginning June 30, 2011, and lapse if unexercised on May 18, 2016.

 

· On December 28, 2011, we granted each of Drs. Isaacs and Denmeade, our Scientific Advisors, common stock purchase options to purchase 20,000 shares, as compensation for serving on the Company’s scientific advisory board. The options have an exercise price of $2.03. The options vest on the following schedule: 5,000 shares vested immediately and the rest vest in equal installments quarterly beginning on March 31, 2012, and lapse if unexercised on January 1, 2017.

 

· On July 1, 2011, we amended our outside director compensation policy to provide our outside directors with a $25,000 per year cash retainer as partial compensation for their service on our board.

 

· As of December 31, 2012, we have 3 promissory notes payable to Dr. Dionne. Each note accrues interest at 4.2% per annum. The loans were originally made in order to provide us with working capital. The aggregate balance of the notes is $105,000 in principal and $21,000 in accrued interest. The notes and accrued interest are convertible into shares of common stock at a price per share of $0.50.

 

· During our December Offering, Kihong Kwon, MD (including related and/or affiliated entities), purchased 70,914 units on the same terms and conditions as the other investors in the offering. The price per unit was $2.20. On March 22, 2013, we issued Dr. Kwon (or his related and affiliated entities) 17,076 additional units in connection with the adjustment to the per unit price. Each unit consists of: (i) one (1) share of the common stock, par value $0.0001, and (ii) one common stock purchase warrant. The warrants have a term of five years and entitle the holders to purchase common stock at a price per share of $3.00. In the event the shares underlying the warrants are not subject to a registration statement, the warrants may be exercised on a cashless basis after 12 months from the issuance date. 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 warrants do not contain any price protection provisions. Additionally, the warrants contain limitations on the holder’s ability to exercise the warrants in the event such exercise causes the holder to beneficially own in excess of 4.99% of the Company’s issued and outstanding common stock, subject to a discretionary increase in such limitation by the holder to 9.99% upon 61 days’ notice.

 

42
 

 

In connection with the offering, we entered into a registration rights agreement with Kihong Kwon, MD (including related and/or affiliated entities) on the same terms as that of the other investors in the offering. Pursuant to the registration rights agreements, we agreed to file a “resale” registration statement with the SEC covering all shares of the common stock and the shares underlying the warrants within 45 days of the final closing date of the sale of units and to maintain the effectiveness of the registration statement until all securities have been sold or are otherwise able to be sold pursuant to Rule 144. We have agreed to use our best efforts to have the registration statement declared effective within 90 days of the final closing. We are also obligated to pay to investors, as partial liquidated damages, a fee of 0.50% per month in cash up to a maximum of 6%, upon the occurrence of certain events, including but not limited to failure to file and/or have the registration statement declared effective within the time provided.

 

· On February 12, 2013, we granted each of Drs. Isaacs and Denmeade, our Scientific Advisors, common stock purchase options to purchase 20,000 shares, as compensation for serving on the Company’s scientific advisory board. The options have an exercise price of $1.95 per share. The options vest quarterly beginning on March 31, 2013 and lapse if unexercised on February 12, 2018.

 

· On March 1, 2013 we granted Scott V. Ogilvie., one of our outside directors, options to purchase 38,000 shares of common stock. 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 $1.90 per share. The options vest quarterly beginning June 1, 2013, and lapse if unexercised on March 1, 2018.

 

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

 

The following table summarizes the approximate aggregate fees billed to us or expected to be billed to us by our independent auditors for our 2012 and 2011 fiscal years:

             
Type of Fees   2012     2011  
                 
Audit Fees                
Liggett, Vogt & Webb, P.A.   $ 32,500     $ -  
RBSM, LLP     57,246       69,143  
Audit Related Fees                
Liggett, Vogt & Webb, P.A.     -       -  
RBSM, LLP     51,100       8,100  
Tax Fees     4,500       -  
All Other Fees     -       -  
Total Fees   $ 145,346     $ 77,243  

 

Pre-Approval of Independent Auditor Services and Fees

 

Our board of directors reviewed and pre-approved all audit and non-audit fees for services provided by independent registered accounting firm and has determined that the provision of such services to us during fiscal 2012 is compatible with and did not impair independence. It is the practice of the audit committee to consider and approve in advance all auditing and non-auditing services provided to us by our independent auditors in accordance with the applicable requirements of the SEC. Neither of the firms which we engaged during 2012 provided any services, other than those listed above.

 

PART IV

 

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

  1. Financial Statements: See “Index to Financial Statements” in Part II, Item 8 of this Form 10-K.

  

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

  

Certain of the agreements filed as exhibits to this Form 10-K contain representations and warranties by the parties to the agreements that have been made solely for the benefit of the parties to the agreement. These representations and warranties:

 

  · may have been qualified by disclosures that were made to the other parties in connection with the negotiation of the agreements, which disclosures are not necessarily reflected in the agreements;

  

  · may apply standards of materiality that differ from those of a reasonable investor; and

 

  · were made only as of specified dates contained in the agreements and are subject to later developments.

 

Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time, and investors should not rely on them as statements of fact.

 

43
 

 

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: March 29, 2013   /s/ Craig Dionne
    Chief Executive Officer
     
    /s/ Nancy Jean Barnabei
    Vice President Finance and Treasurer
     (Principal Accounting Officer)

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the following capacities and on the dates indicated.

 

Name   Title   Date
         
/s/ Craig Dionne   Chief Executive Officer, Chief Financial Officer and   March 29, 2013
     Craig Dionne   Director (Principal Executive Officer)    
         
/s/ Nancy Jean Barnabei   Vice President and Treasurer   March 29, 2013
     Nancy Jean Barnabei   (Principal Accounting Officer)    
         
/s/ Peter E. Grebow, PhD     Director   March 29, 2013
     Peter E. Grebow, PhD        
         
/s/ Bo Jesper Hansen MD PhD   Director   March 29, 2013
     Bo Jesper Hansen MD PhD        
         
/s/ Scott Ogilvie   Director   March 29, 2013
     Scott Ogilvie        

 

Supplemental Information to be Furnished With Reports Filed Pursuant to Section 15(d) of the Act by Registrants which have Not Registered Securities Pursuant to Section 12 of the Act.

 

Information with regard to proxy materials sent to the Registrant’s security holders has been supplementally provided to the SEC.

 

44
 

 

GENSPERA, INC.

 

INDEX TO FINANCIAL STATEMENTS

     
    Page
     
Report of Liggett, Vogt & Webb P.A, Independent Registered Public Accounting Firm    F-1
     
Report of RBSM, LLP, Independent Registered Public Accounting Firm    F-2
     
Balance Sheets   F-3
     
Statements of Losses   F-4
     
Statements of Stockholders’ (Deficit) Equity   F-5
     
Statements of Cash Flows    F-6
     
Notes to Financial Statements   F-7

 

 
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors

GenSpera Inc.

San Antonio, TX

 

We have audited the accompanying balance sheets of GenSpera Inc., a development stage company, as of December 31, 2012, and the related statements of losses, statement of stockholders' equity, and cash flows for the year ended December 31, 2012 and the period November 21, 2003 (date of inception) through December 31, 2012. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on the financial statements based upon our audits. The cumulative statements of losses, changes in stockholders’ equity, and cash flows for the period November 21, 2003 (date of inception) to December 31, 2012 include amounts for the period from November 21, 2003 (date of inception) to December 31, 2011, which were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for the period November 21, 2003 through December 31, 2011 is based solely on the report of other auditors.

 

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of GenSpera Inc., a development stage company, at December 31, 2012 and the results of its operations and its cash flows for each of year ended December 31, 2012 and the period November 21, 2003 (date of inception) through December 31, 2012 in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company had an accumulated deficit of $728,000 as of December 31, 2012, and will require additional cash to fund and continue operations, which raises substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

 

/s/ Liggett, Vogt & Webb, P.A.

Liggett, Vogt & Webb, P.A .

 

March 29, 2013

New York, New York

 

F- 1
 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors

GenSpera Inc.

San Antonio, TX

 

We have audited the accompanying balance sheet of GenSpera Inc., a development stage company, as of December 31, 2011, and the related statements of losses, statement of stockholders' equity, and cash flows for the year ended December 31, 2011 and the period November 21, 2003 (date of inception) through December 31, 2011. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on the financial statements based upon our audits.

 

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of GenSpera Inc., a development stage company, at December 31, 2011 and the results of its operations and its cash flows for the year ended December 31, 2011 and the period November 21, 2003 (date of inception) through December 31, 2011 in conformity with accounting principles generally accepted in the United States of America.

 

  /s/   RBSM LLP
  RBSM LLP
New York, New York  
March 6, 2012  

 

F- 2
 

 

GENSPERA, INC.

(A Development Stage Company)

BALANCE SHEETS

(in thousands, except share and per share data)

 

    December 31,     December 31,  
    2012     2011  
ASSETS                
                 
Current assets:                
Cash and cash equivalents   $ 2,345     $ 5,530  
Prepaid expenses     77       -  
Total current assets     2,422       5,530  
Office equipment, net of accumulated depreciation of $10 and $7     12       9  
Intangible assets, net of accumulated amortization of $77 and $60     136       152  
Other assets     3       -  
Total assets   $ 2,573     $ 5,691  
                 
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY                
                 
Current liabilities:                
Accounts payable   $ 728     $ 70  
Accrued expenses     1,292       728  
Warrant derivative – short-term     1,176       -  
Convertible notes - stockholder     105       105  
Total current liabilities     3,301       903  
Warrant derivative – long-term     -       1,734  
Total liabilities     3,301       2,637  
                 
Commitments and contingencies (Note 8)                
                 
Stockholders' (deficit) equity:                
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, 22,298,424 and 21,457,419 shares issued and outstanding, respectively     2       2  
Additional paid-in capital     26,353       23,215  
Deficit accumulated during the development-stage     (27,083 )     (20,163 )
                 
Total stockholders' (deficit) equity     (728 )     3,054  
                 
Total liabilities and stockholders' equity   $ 2,573     $ 5,691  

 

See accompanying notes to audited financial statements.

 

F- 3
 

 

GENSPERA, INC.

(A Development Stage Company)

STATEMENTS OF LOSSES

FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

AND FOR THE PERIOD FROM INCEPTION (NOVEMBER 21, 2003) TO DECEMBER 31, 2012

(in thousands, except share and per share data)

 

                Cumulative Period  
                from November 21, 2003  
                (date of inception) to  
    Years ended December 31,     December 31,  
    2012     2011     2012  
                   
Operating expenses:                        
General and administrative   $ 3,953     $ 3,262     $ 12,103  
Research and development     2,922       3,302       13,979  
Research and development grant received     -       (244 )     (489 )
                         
Total operating expenses     6,875       6,320       25,593  
                         
Loss from operations     (6,875 )     (6,320 )     (25,593 )
                         
Financing cost     -       -       (519 )
(Loss) gain on change in fair value of warrant derivative liability     (50 )     580       (1,010 )
Interest income, net     5       26       39  
                         
Loss before provision for income taxes     (6,920 )     (5,714 )     (27,083 )
                         
Provision for income taxes     -       -       -  
                         
Net loss   $ (6,920 )   $ (5,714 )   $ (27,083 )
                         
Net loss per common share, basic and diluted   $ (0.32 )   $ (0.27 )        
                         
Weighted average shares outstanding     21,805,211       20,821,555          

 

See accompanying notes to audited financial statements.

 

F- 4
 

 

GENSPERA, INC.

(A Development Stage Company)

STATEMENT OF STOCKHOLDERS' (DEFICIT) EQUITY

FROM DATE OF INCEPTION (NOVEMBER 21, 2003) TO DECEMBER 31, 2012

(in thousands, except share and per share data) 

 

                            Deficit        
                            Accumulated        
                Additional     Common     During the     Stockholders'  
    Common Stock     Paid-in     Stock     Development     Equity  
    Shares     Amount     Capital     Subscribed     Stage     (Deficit)  
                                     
Balance, November 21, 2003     -     $ -     $ -     $ -     $ -     $ -  
                                                 
Sale of common stock to founders at $0.0001 per share in November, 2003     6,100,000       1       (1 )     -       -       -  
                                                 
Contributed services     -       -       120       -       -       120  
                                                 
Net loss     -       -       -       -       (125 )     (125 )
                                                 
Balance, December 31, 2003     6,100,000       1       119       -       (125 )     (5 )
                                                 
Contributed services     -       -       193       -       -       193  
                                                 
Stock-based compensation     -       -       24       -       -       24  
                                                 
Net loss     -       -       -       -       (254 )     (254 )
                                                 
Balance, December 31, 2004     6,100,000       1       336       -       (379 )     (42 )
                                                 
Contributed services     -       -       48       -       -       48  
                                                 
Stock-based compensation     -       -       24       -       -       24  
                                                 
Net loss     -       -       -       -       (127 )     (127 )
                                                 
Balance, December 31, 2005     6,100,000       1       408       -       (506 )     (97 )
                                                 
Contributed services     -       -       144       -       -       144  
                                                 
Stock-based compensation     -       -       42       -       -       42  
                                                 
Net loss     -       -       -       -       (245 )     (245 )
                                                 
Balance, December 31, 2006     6,100,000       1       594       -       (751 )     (156 )
                                                 
Sale of common stock at $0.50 per share     1,300,000       -       650       -       -       650  
                                                 
Shares issued for services     735,000       -       367       -       -       367  
                                                 
Contributed services     -       -       220       -       -       220  
                                                 
Stock-based compensation     -       -       24       -       -       24  
                                                 
Exercise of options     900,000       -       3       -       -       3  
                                                 
Net loss     -       -       -       -       (691 )     (691 )
                                                 
Balance, December 31, 2007     9,035,000       1       1,858       -       (1,442 )     417  
                                                 
Exercise of options     1,000,000       -       500       -       -       500  
                                                 
Sale of common stock and warrants at $1.00 per share     2,320,000       -       2,320       -       -       2,320  
                                                 
Cost of sale of common stock and warrants     -       -       (206 )     -       -       (206 )
                                                 
Shares issued for accrued interest     31,718       -       16       -       -       16  
                                                 
Shares issued for services     100,000       -       50       -       -       50  
                                                 
Stock-based compensation     -       -       314       -       -       314  
                                                 
Contributed services     -       -       50       -       -       50  
                                                 
Beneficial conversion feature of convertible debt     -       -       20       -       -       20  
                                                 
Net loss     -       -       -       -       (3,326 )     (3,326 )
                                                 
Balance, December 31, 2008     12,486,718       1       4,922       -       (4,768 )     155  
                                                 
Cumulative effect of change in accounting principle     -       -       (444 )     -       (290 )     (734 )
                                                 
Warrants issued for extension of debt maturities     -       -       52       -       -       52  
                                                 
Stock-based compensation     -       -       1,531       -       -       1,531  
                                                 
Common stock issued for services     86,875       -       104       -       -       104  
                                                 
Sale of common stock and warrants at $1.50 per share     2,665,354       1       3,797       -       -       3,798  
                                                 
Common stock and warrants issued as payment of placement fees     53,334       -       -       -       -       -  
                                                 
Common stock and warrants issued upon conversion of note and accrued interest     174,165       -       174       -       -       174  
                                                 
Net loss     -       -       -       -       (5,134 )     (5,134 )
                                                 
Balance, December 31, 2009     15,466,446       2       10,136       -       (10,192 )     (54 )
                                                 
Stock-based compensation     -       -       1,165       -       -       1,165  
                                                 
Sale of common stock and warrants at $1.65 per share     533,407       -       806       -       -       806  
                                                 
Sale of common stock and warrants at $2.00 per share     1,347,500       -       2,656       -       -       2,656  
                                                 
Common stock and warrants issued as payment of placement fees     43,632       -       -       -       -       -  
                                                 
Common stock issued as payment for patents and license     20,000       -       47       -       -       47