PART I
Company Overview
We were organized as a blank check company formed for the purpose of effecting a business combination with an operating business. On June 30, 2006, pursuant to a Share Exchange Agreement dated as of June 8, 2006 among us, Dr. John S. Kovach and Lixte Biotechnology, Inc., we issued 19,021,786 shares of our common stock to Dr. Kovach in exchange for all of the issued and outstanding shares of Lixte Biotechnology, Inc. As a result of this transaction, Lixte Biotechnology, Inc. is now our wholly-owned subsidiary, though from an historical perspective it was deemed to have been the acquirer in the reverse merger and the survivor of the reorganization. On December 7, 2006, we changed our name from SRKP 7, Inc. to Lixte Biotechnology Holdings, Inc.
Lixte was created to capitalize on opportunities for the Company to develop low cost, specific and sensitive tests for the early detection of cancers to better estimate prognosis, to monitor treatment response, and to reveal targets for development of more effective treatments. Over the past several years, however, the Company has evolved into what is now primarily a cancer drug discovery company, using biomarker technology to develop new potentially more effective anti-cancer drugs for life-threatening diseases.
DESCRIPTION OF BUSINESS
The Company’s primary focus is developing new treatments for human cancers for which better therapies are urgently needed. However, the scope of potential applications of the Company’s products has expanded to other common non-malignant diseases, including vascular diseases (heart attacks and stroke, diabetes, and genetic diseases, such as Gaucher’s disease) in which errors in normal cellular processing lead to loss of functions important to normal cell function. This has occurred because the targets selected by the Company have multiple functions in the cell, which when altered result in different disorders that may benefit by treatment from the Company’s products.
The Company’s drug discovery process is based on discerning clues to potential new targets for disease treatments reported in the increasingly large body of literature identifying the molecular variants which characterize human cancers and other non-cancer disorders. In the past decade, there has been an unprecedented expansion in knowledge of biochemical defects in the cancer cell. The Company designs drugs for which there are existing data suggesting that they may affect the altered pathways of the cancer cell and may be given safely to humans. The Company seeks to rapidly arrive at patentable structures through analysis of the literature rather than screening of thousands of structures for activity against a particular biochemical pathway. This approach has led to the development of two classes of drugs for the treatment of cancer, protein phosphatase inhibitors (PTase-i), designated by the Company as the LB-100 series of compounds, and histone deacetylase inhibitors (HDACi), designated by the Company as the LB-200 series of compounds. Compounds of both types also have potential use in the prevention and treatment of neurodegenerative diseases.
The LB-100 series consists of novel structures, which have the potential to be first in their class, and may be useful in the treatment of not only several types of cancer but also vascular and metabolic diseases. The LB-200 series contains compounds which have the potential to be the most effective in its class and may be useful for the treatment of chronic hereditary diseases, such as Gaucher’s disease, in addition to cancer and neurodegenerative diseases.
On August 16, 2011, the United States Patent and Trademark Office (the “PTO”) awarded a patent to the Company for its lead compound, LB-100, as well as for a number of structurally related compounds. On November 10, 2011, the PTO issued an Official Notice of Allowance in conjunction with the Company’s patent application for the structure and synthesis of its compounds of the LB-200 series. On November 15, 2011, the PTO awarded a patent to the Company for its lead compound in the LB-200 series and a compound in the LB-100 series as neuroprotective agents for the prevention and treatment of neurodegenerative diseases. Patent applications on these compounds are pending world-wide. The Company’s issued patents are summarized below at “Intellectual Property”.
The Company has demonstrated that lead compounds of both series of drugs are active against a broad spectrum of human cancers in cell culture and against several types of human cancers in animal models. The research on new drug treatment was initiated in 2006 with the National Institute of Neurologic Disorders and Stroke (“NINDS”), National Institutes of Health (“NIH”) under a continuing Cooperative Research and Development Agreement (“CRADA”) effective March 22, 2006. The research at NINDS was led by Dr. Zhengping Zhuang, an internationally recognized investigator in the molecular pathology of cancer. The initial focus of the CRADA was on the most common and uniformly fatal brain tumor of adults, glioblastoma multiforme (GBM). The work at NIH was then extended to the most common brain tumor of children, medulloblastoma, and to the most common extracranial solid tumor of children, neuroblastoma. The CRADA was extended through a series of amendments and remained in effect until April 1, 2013, when it terminated as scheduled.
Effective treatment of brain tumors depends upon the ability of compounds to penetrate a physiological barrier known as the “blood-brain barrier”, which protects the brain from exposure to potentially toxic substances in the blood. Because there is no certainty that the Company’s compounds will be active against tumors confined to the brain, the LB-100 compounds have been studied against a variety of common and rare cancer types and have been shown to potentiate the activity of standard anti-cancer drugs in animal models of breast and pancreatic cancer, melanoma, pheochromcytomas and sarcomas. Because the LB-100 compounds appear to exert their ability to improve the effectiveness of different forms of chemotherapy and radiation therapy by inhibiting a process upon which most, if not all, cancer cell types depend on to survive treatment, the Company believes the LB-100 series of compounds may be useful against most, if not all, cancer types.
The second class of drugs under development by the Company, the LB-200 series, is the histone deacetylase inhibitors. Many pharmaceutical companies are also developing drugs of this type, and at least two companies have HDACi approved for clinical use, in both cases for the treatment of a type of lymphoma. Despite this significant competition, the Company has demonstrated that its HDACi have broad activity against many cancer types, have neuroprotective activity, and have anti-fungal activity. In addition, these compounds have low toxicity, making them attractive candidates for development. It appears that one type of molecule has diverse effects, affecting biochemical processes that are fundamental to the life of the cell, whether they are cancer cells, nerve cells, or even fungal cells. The neuroprotective activity of the Company’s HDACi has been demonstrated in the test tube in model systems that mimic injury to brain cells such as occurs in stroke and Alzheimer’s disease. Potentially, this type of protective activity may have application to a broad spectrum of other chronic neurodegenerative diseases, including Parkinson’s Disease and Amytrophic Lateral Sclerosis (ALS, or Lou Gehrig’s Disease).
The Company’s primary objective has been to bring one lead compound of the LB-100 series to clinical trial. In 2012, the Company completed the pre-clinical studies needed to prepare an Investigation New Drug (“IND”) application to the United States Food and Drug Administration (“FDA”) to conduct a Phase I clinical trial of LB-100, and engaged the CRO responsible for the clinical development of the Company’s lead compound, LB-100, to prepare an IND application for filing with the FDA. This task included preparing the detailed clinical protocol, the "Investigator's Brochure", a document containing a detailed summary of all that is known about LB-100, and development of the formal IND application for submission to the FDA. The CRO also established the procedures for assuring appropriate collection and reporting of data generated during the clinical trial of LB-100 to the FDA.
The Company filed an IND application with the FDA on April 30, 2012, and on July 24, 2012, the FDA notified the Company that it would allow initiation of a Phase 1 clinical trial of LB-100. The purpose of the clinical trial is to demonstrate that LB-100 can be administered safely to human beings at a dose and at a frequency that achieves the desired pharmacologic effect; in this case, inhibition of a specific enzyme, without being associated with toxicities considered unacceptable.
The Phase 1 clinical trial of LB-100 began in April 2013 with the entry of patients into the clinical trial (see NCTO 1837667 at www.clinicaltrials.gov) and was initiated at the City of Hope National Medical Center in Duarte, California, and was extended in December 2013 to include the Mayo Clinic in Rochester, Minnesota, both of which are Comprehensive Cancer Centers designated by the National Cancer Institute. The Company estimates that the Phase 1 clinical trial will be completed within the next 12 to 21 months (sometime between March and December 2015)and will cost a total of approximately $2,000,000, which will be paid to or through Theradex Systems, Inc. (“Theradex”), the contract research organization (“CRO”) responsible for the clinical development of LB-100. The final cost of the clinical trial is variable, depending upon the number of patients needed to be medically screened to determine if they meet the criteria for entry into the study and ultimately upon the total number of patients entered into the study to establish the proper doses of the drug for Phase 2 clinical trials.
The Phase 1 clinical trial of LB-100 is designed to determine the maximum tolerable dose of LB-100 given alone and then in combination with a standard widely use anti-cancer drug. As a prelude to determining the therapeutic effectiveness of LB-100 in a subsequent Phase 2 clinical trial of common cancers, a key goal of the initial portion of the Phase 1 clinical trial is to demonstrate that the target enzyme of LB-100, protein phosphatase 2A (PP2A), can be inhibited in humans with readily tolerable toxicity. As an anti-cancer drug, LB-100 is likely to be used at maximum tolerable doses, but for the potential treatment of non-malignant diseases, such as acute vascular diseases and metabolic diseases, lower doses may achieve therapeutic benefit by inhibition of the target enzyme, PP2A, thus opening up the possibility of a host of therapeutic applications for LB-100 and related proprietary compounds.
The next step in the clinical development of LB-100 after the completion of a Phase 1 clinical trial is to obtain IND approval from the FDA to administer the drug to patients. In order to do this, the Company must demonstrate that LB-100 can be administered safely to human beings at a dose and at a frequency that achieves the desired pharmacologic effect, in this case inhibition of a specific enzyme, without being associated with toxicities considered unacceptable. A compound that has a mechanism of action similar to that of LB-100 has been given with safety and benefit to cancer patients outside the United States in the past. This similar compound has a chemical feature which appears to be responsible for most of its toxicity. This feature has been removed from LB-100, making it likely that the Company’s compound will be less toxic and, therefore, safer for human use.
National Cancer Institute Experimental Therapeutics Program
On September 17, 2010, the National Cancer Institute (NCI) Experimental Therapeutics (NExT) Program Senior Advisory Committee (SAC) approved a collaboration by the NCI with the Company for clinical evaluation of LB-100. This collaboration is a milestone-based approach in which NCI will first confirm studies of the LB-100 compound in an animal model of glioblastoma multiforme, the most common form of brain tumor of adults, and conduct an initial exploratory toxicology study in an animal model. At milestone intervals, the SAC will re-evaluate project progress before considering assignment of additional support and resources to this project. As noted below, the NExT group advised the Company on several aspects of the process of pre-clinical characterization of LB-100 needed for submission of an IND and carried out an initial toxicological study of LB-100 in rats. This study was used to guide the subsequent formal toxicology studies based on good laboratory practice (GLP) completed in rats and dogs by the Company with a contract research organization. The Company subsequently conducted its own GLP toxicity studies and submitted an IND for a clinical trial of LB-100, which acknowledged the early assistance of the NExT program in planning the design of animal studies.
The NExT program of the NCI is a unique partnership with the NCI to facilitate oncology drug discovery and development. The program is not a grant or a contract, but provides access to the NCI’s drug discovery and preclinical development resources, including expert advice concerning the various requirements for bringing a new compound to initial clinical trial. Participation in the NExT program is via a competitive application. The Company was admitted to the program in September 2010. The Company received advice as to how to proceed with pre-clinical development of its lead compound LB-100 and the NCI performed one rodent toxicology study with LB-100. The Company was not responsible for any costs or payments, and neither party obtained or incurred any material rights or obligations. As is standard for the NExT program, there was no specific agreement, other than to limit support to pre-clinical development pending validation of anti-tumor activity in a specific tumor model. Activity deemed less than sufficient to warrant extension of NExT support toward clinical development led to termination of the Company’s participation in the program on July 21, 2011. As noted above, the Company subsequently carried out the pre-clinical studies for and obtained an IND from the FDA to study LB-100 in a Phase 1 clinical trial.
The Company believes that it has sufficient funds to continue with the Phase 1 clinical trial of LB-100 and to fund its operating plans through April 30, 2014. Accordingly, in order to continue to fund the Company’s operations in 2014 and thereafter, the Company will need to raise additional capital, likely in the form of equity, aggregating at least $2,000,000 to fund operations for the next twelve months.
Publications
The following publications have included articles discussing the Company’s compounds:
An article in the December 12, 2011edition of the Proceedings of the National Academy of Sciences in the United States reported that the Company’s investigational drug, LB-205 was shown to have therapeutic potential in a laboratory model of the genetic illness Gaucher’s disease. The Company has patent applications pending on the use of LB-205 for this purpose.
On June 18, 2013, an article was published in Clinical Cancer Research showing that LB-100 is a radiotherapy sensitizing agent that increases the effectiveness of x-ray treatment against human pancreatic cancer cells in an animal model, as the Company has shown for two other types of human cancers. These results are in keeping with the ability of LB-100 to enhance the effectiveness of existing cytotoxic treatments, both chemotherapy and radiotherapy, against different types of cancers. Because LB-100 itself does not readily enter the brain in animal models, the Company has developed new related compounds which have been shown to penetrate the blood brain barrier (entering the brain after systemic injection) in mice, and is evaluating the effectiveness of these compounds in the treatment of brain tumors in animal models.
The June 25, 2013 issue of the Proceedings of the National Academy of Sciences reported that scientists at the National Institutes of Health had determined that one of the Company’s 200 series compounds significantly reduced the extent of structural damage in the brain and lessened neurological functional impairment in a rat model of traumatic brain injury (TBI). Given the need for methods to reduce injury to the brain after acute injuries caused by explosive devices, sports injuries and accidental falls, the Company is seeking partners in the private and governmental sectors to assist in developing these compounds for clinical evaluation.
Intellectual Property
The Company’s products will derive directly from its intellectual property, including the property covered by its patents. These patents now cover sole rights to the composition and synthesis of the LB-100 and LB-200 series of drugs. Joint patent applications with the NIH have been filed for the treatment of glioblastoma multiforme, medulloblastoma, and neuroblastoma. The Company has also filed claims for the use of certain homologs of both series of drugs for the potential treatment of neurodegenerative diseases such as Alzheimer’s Disease and Parkinson’s Disease, Amyotrophic Lateral Sclerosis (ALS, or Lou Gehrig’s Disease), stroke, and traumatic brain injury and of homologs of the LB-200 series for treatment of serious systemic fungal infections and for the treatment of common fungal infections of the skin and nails. Other claims cover biomarkers uniquely associated with specific types of cancer that may provide the bases for assays suitable for cancer detection and patents for development of a tool for screening new compounds for anti-cancer activity.
Patents for composition of matter and for several uses of both the LB-100 series (oxabicycloheptanes and –heptenes) and the LB-200 series (histone deacetylase inhibitors; HDACi) have been filed. Patents for the LB-100 series and the LB-200 series have been filed in the U.S. and widely internationally (PCT). International filings are currently all pending.
Issued patents are:
LB-100 Series Compounds
Oxabicycloheptanes and Oxabicycloheptenes, Their Preparation and Use
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Patent
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Priority Date
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Type
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Expiration Date
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US 7,998,957
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Feb 6, 2008
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Composition and Use in Cancer Treatment
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2/20/2030
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US 8,227,473
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Aug 1, 2009
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Composition and Use in Cancer Treatment
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2/20/2030
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US 8,426,444 Divisional
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Feb 6, 2008
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Composition and Use in Cancer Treatment
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2/6/2028
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LB-200 Series Compounds
HDAC Inhibitors
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US 8,143,445
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Oct 1, 2008
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Composition and Use in Cancer Treatment
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8/23/2029
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US 8,455,688 Divisional
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Oct 1, 2008
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Composition and Use in Cancer Treatment
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10/1/2028
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LB-100 and LB-200 Series Compounds
Neuroprotective Agents for the Prevention and Treatment of Neurodegenerative Diseases
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US 8,058,268
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Aug 1, 2009
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Use in Treatment of Multiple CNS Diseases
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12/31/2029
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US 8,329,719 Divisional
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Aug 1, 2009
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Use in Treatment of Multiple CNS Diseases
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7/29/2029
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The Market
Anti-Cancer Drugs
The Company has developed two series of pharmacologically active drugs, the LB-100 series and the LB-200 series. The Company believes that the mechanism by which compounds of the LB-100 series affect cancer cell growth is different from all cancer agents currently approved for clinical use. Lead compounds from each series have activity against a broad spectrum of common and rarer human cancers in cell culture systems. In addition, compounds from both series have anti-cancer activity in animal models of glioblastoma multiforme, neuroblastoma, and medulloblastoma, all cancers of neural tissue. Lead compounds of the LB-100 series also have activity against melanoma, breast cancer and sarcoma in animal models and enhance the effectiveness of commonly used anti-cancer drugs in these model systems. The enhancement of anti-cancer activity of these anti-cancer drugs occurs at doses of LB-100 that do not significantly increase toxicity in animals. It is therefore hoped that when combined with standard anti-cancer regimens against many tumor types, the Company’s compounds will improve therapeutic benefit without enhancing toxicity in humans.
Diagnostic Biomarkers
The Company has filed patents on two biomarkers, one associated primarily with cancers of neural tissue such as glioblastoma multiforme, and a second biomarker that is present not only in brain cancers but also in the more common human cancers.
Discovery of the biomarker associated with GBMs provided the insight to the Company’s team that led to the synthesis and development of the LB-100 and LB-200 series. Apart from therapeutic considerations, a biomarker for GBMs reflecting the presence of the disease in biopsies and in cerebrospinal fluid may be valuable for confirming diagnosis and/or documenting effectiveness of treatment and recurrence of disease. The second biomarker may be useful as a tool for screening new compounds for anti-cancer activity in general because it appears to be present in many human cancers. The Company is not presently pursuing development of use of these biomarkers, but is open to partnering with a diagnostic company to validate the usefulness of one or both markers.
Marketing Plan
The primary goal of the Company is to take LB-100 through Phase 1 clinical trials. Because of the novelty and spectrum of activity of LB-100, the Company believes it is reasonably likely it will find a partner in the pharmaceutical industry with interest in this compound. The Company, however, would prefer to delay partnering/licensing until the potential value of its products is augmented by demonstrating there is no impediment to clinical evaluation and a therapeutic dose level is determined in clinical trials. Demonstration of clinical usefulness would be expected to substantially increase the value of the Company’s product.
Research and Development
Further development of lead compounds from each of the LB-100 and LB-200 series requires pharmacokinetic/pharmacodynamic characterization (how long a drug persists in the blood and how long the drug is active at the intended target) and large animal toxicologic evaluation under conditions meeting FDA requirements. Most anti-cancer drugs fail in development because of unacceptable toxicity. By analogy with mechanistically related compounds, there is good reason to believe, however, that lead compounds of both series of drugs will be able to be given to humans safely by routes and at doses resulting in concentration of drug producing anti-cancer activity in animal model systems. The Company has demonstrated that lead compounds of both types affect their intended targets at doses that produce anti-cancer activity without discernable toxicity in animal models and has completed the large animal toxicity studies that were required for the submission of the IND for the Phase 1 clinical trial of LB-100.
One of the Company’s most valuable resources is its scientific team, a coalition of various experts brought together through contracts and other collaborative arrangements. The team has expertise in cancer biology, proteomics (cancer biomarkers), medicinal and synthetic chemistry, pharmacology, clinical oncology, and drug evaluation. In a short period of time and at very low cost, this group has developed lead compounds of two different classes of drugs that are poised for development as new treatments for several types of cancer. The initial cancer targets are expected to be melanoma or glioblastoma multiforme.
Product Overview
The Company’s products will derive directly from its intellectual property, consisting of patents and applications for patents. The Company’s patents now cover sole rights to the composition and synthesis of the LB-100 and LB-200 series of drugs. Joint patent applications with NIH have been filed for the treatment of glioblastoma multiforme, medulloblastoma, and neuroblastoma. The Company has also filed claims for the use of certain homologs of both series of drugs for the potential treatment of neurodegenerative diseases such as Alzheimer’s Disease and Parkinson’s Disease, Amyotrophic Lateral Sclerosis (ALS, or Lou Gehrig’s Disease), stroke, and traumatic brain injury and of homologs of the LB-200 series for treatment of serious systemic fungal infections and for the treatment of common fungal infections of the skin and nails. Other claims cover biomarkers uniquely associated with specific types of cancer that may provide the bases for assays suitable for cancer detection and patents for development of a tool for screening new compounds for anti-cancer activity.
The Company believes that there are four main markets for potential products that it may develop.
1.
Improved Anti-Cancer Treatments
. The primary focus of the Company is improved chemotherapy regimens for cancers not curable by surgery or radiation.
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Improved Anti-Fungal Treatments
. New drug treatments for the management of life-threatening fungal infections in immuno-suppressed patients such as those with HIV-AIDS or undergoing bone marrow transplantation are needed due to the constant development of drug resistance in these organisms. More effective and less toxic drugs are also needed for the management of skin and particularly nail fungi that affect tens of millions of people worldwide. The Company has demonstrated the activity of several compounds against different fungal pathogens, and is seeking a partner to develop one lead compound for chemical evaluation.
3.
Treatments for Neurodegenerative Diseases
. Most experts believe that at present there are no significantly effective drugs available for the delay of progression, as well as prevention, of the common neurodegenerative diseases, including Alzheimer’s Disease, Parkinson’s Disease, and Amyotrophic Lateral Sclerosis Disease (ALS, or Lou Gehrig’s Disease), among a host of rarer chronic diseases of the brain. The Company is exploring mechanisms to evaluate its compounds for these activities with experts in the field, in academic or other not-for–profit settings.
4.
Biomarker Assays for Diagnosis, Prognosis, and Assessing Treatment Benefit
. Improved assays for biomarkers of specific cancers in the body fluids, primarily blood, for the diagnosis of cancers at stages when cure is possible through surgery and/or radiotherapy. Such assays might also be useful for assessing therapeutic effectiveness of treatment before gross reappearance of disease; and, assays for the molecular classification of otherwise indistinguishable tumor types would be helpful for selection of treatment and also potentially for estimation of prognosis. The Company will need to collaborate with a large diagnostic company to undertake clinical development. Development of biomarkers for useful clinical assays is a complex and expensive process.
Product Development
The Company is subject to FDA regulations as it conducts clinical trials. Additionally, any product for which the Company obtains marketing approval, along with the manufacturing processes, post-approval clinical data and promotional activities for such product, will be subject to continual review and periodic inspections by the FDA and other regulatory bodies. Even if regulatory approval of a product is granted, the approval may be subject to limitations on the indicated uses for which the product may be marketed or contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product. Later discovery of previously unknown problems with the Company’s products, including unanticipated adverse events or adverse events of unanticipated severity or frequency, manufacturer or manufacturing processes, or failure to comply with regulatory requirements, may result in restrictions on such products or manufacturing processes, withdrawal of the products from the market, voluntary or mandatory recall, fines, suspension of regulatory approvals, product seizures, injunctions or the imposition of civil or criminal penalties.
Competition
The life sciences industry is highly competitive and subject to rapid and profound technological change. The Company believes that several companies are investigating biomarkers for every human cancer. These companies include firms seeking a better understanding of molecular variability in human brain tumors with the objective to be able to use such information to design better treatments. The Company’s present and potential competitors include major pharmaceutical companies, as well as specialized biotechnology and life sciences firms in the United States and in other countries. Most of these companies have considerably greater financial, technical and marketing resources than the Company does. Additional mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated in the Company’s competitors. The Company’s existing or prospective competitors may develop processes or products that are more effective than the Company’s or be more effective at implementing their technologies to develop commercial products faster. The Company’s competitors may succeed in obtaining patent protection and/or receiving regulatory approval for commercializing products before the Company does. Developments by the Company’s competitors may render the Company’s product candidates obsolete or non-competitive.
The Company also experiences competition from universities and other research institutions, and the Company is likely to compete with others in acquiring technology from those sources. There can be no assurance that others will not develop technologies with significant advantages over those that the Company is seeking to develop. Any such development could harm the Company’s business.
The Company faces competition from other companies seeking to identify and commercialize cancer biomarkers. The Company also competes with universities and other research institutions engaged in research in these areas. Many of the Company’s competitors have greater technical and financial resources than the Company does.
The Company’s ability to compete successfully is based on numerous factors, including:
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the cost-effectiveness of any product that the Company ultimately commercializes relative to competing products;
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the ease of use and ready availability of any product that the Company brings to market;
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the accuracy of a diagnostic test designed by the Company in detecting cancers, including overcoming the propensity for “false positive” results; and
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the relative speed with which the Company is able to bring any product resulting from its research to market in its target markets.
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If the Company is unable to distinguish its products from competing products, or if competing products reach the market first, the Company may be unable to compete successfully with current or future competitors.
Employees
As of December 31, 2013, the Company had no full-time employees. Dr. Kovach is a Professor (part-time) in the Department of Preventive Medicine at the State University of New York (SUNY) in Stony Brook, New York. He received approvals from the School of Medicine of SUNY-Stony Brook and from the New York State Ethics Commission to operate the Company and to hold greater than 5% of the Company’s outstanding shares.
Dr. Kovach devotes approximately 40% of his efforts per year to research planning and management. Dr. Kovach’s contributions are made outside of his academic responsibilities. He directs, coordinates and manages the scientific and business development of the Company with the advice of the Company’s Board of Directors, the advisory committee, and, from time to time, various consultants with specific expertise.
Government Regulation
Studies done under the CRADA were carried out in compliance with applicable Statutes, Executive Capital Orders, HHS regulations and all FDA, CDC, and NIH policies as specified in Article 13, 13.1 and 13.2, of the PHS CRADA agreement.
The Company’s business is subject to the regulations of the FDA as it conducts clinical trials. Clinical trials are research studies to answer specific questions about new therapies or new ways of using known treatments. Clinical trials determine whether new drugs or treatments are both safe and effective and the FDA has determined that carefully conducted clinical trials are the fastest and safest way to find treatments that work in people.
The first phase of clinical trials, Phase 1 trials, are the initial studies to determine the metabolism and pharmacologic action of drugs in humans and side effects associated with increasing doses, and to gain early evidence of effectiveness. Patients entering such trials are those for whom no means of therapy is known to be associated with benefit. Such studies, including a proposal for the conduct of the clinical trial, require approval by the FDA.
The FDA also requires that an independent review body consider the benefits and risks of a clinical trial and grant approval for the proposed study including selecting of initial doses, plans for escalation of dose, plans for modification of dose if toxicity is encountered, plans for monitoring the wellbeing of individuals participating in the study, and for defining and measuring, to the extent possible, any untoward effects related to drug administration. Serious adverse effects, such as life-threatening toxicities and death, are immediately reportable to the review body and to the FDA. To minimize risk when studying a new drug, the initial dose is well below that expected to cause any toxicity. No more than three patients are entered at a given dose. In general, dose is not escalated within patients. Once safety is established by the absence of toxicity or low toxicity in a group of three patients, a planned higher dose is then evaluated in a subsequent group of three individuals and so on until dose-limiting toxicity is encountered. The dose level producing definite but acceptable toxicity is then selected as the dose level to be evaluated in Phase 2 trials. Thus, the goal of Phase 1 studies is to determine the appropriate dose level for evaluation of drug efficacy in patients with the same type of tumor at comparable stages of progression for whom no beneficial treatment is established.
In addition to regulations imposed by the FDA, depending on the Company’s future activities, the Company may become subject to regulation under various federal and state statutes and regulations, such as the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act, the Research Conservation and Recovery Act, national restrictions on technology transfer, and import, export and customs regulations. From time to time, other federal agencies and congressional committees have indicated an interest in implementing further regulation of biotechnology applications. The Company is not able to predict whether any such regulations will be adopted or whether, if adopted, such regulations will apply to the Company’s business, or whether the Company or its collaborators would be able to comply with any applicable regulations.
In addition, as the Company intends to market its products in international markets, the Company may be required to obtain separate regulatory approvals from the European Union and many other foreign jurisdictions. Approval by the FDA does not ensure approval by regulatory authorities in other countries, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or by the FDA. The Company may not be able to file for regulatory approvals and may not receive necessary approvals to commercialize its products in any market. As the Company is currently in the development stage, the Company cannot predict the impact on it from any such regulations.
The following risk factors, together with the other information presented in this Report, including the financial statements and the notes thereto, should be considered by investors.
Risks Related to Business
We are engaged in early stage research and as such may not be successful in our efforts to develop a portfolio of commercially viable products.
A key element of our strategy is to discover, develop and commercialize a portfolio of new drugs and diagnostic tests. We are seeking to do so through our internal research programs. A significant portion of the research that we are conducting involves new and unproven technologies. Research programs to identify new disease targets and product candidates require substantial technical, financial and human resources whether or not any candidates or technologies are ultimately identified. Our research programs may initially show promise in identifying potential product candidates, yet fail to yield product candidates for clinical development for any of the following reasons:
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the research methodology used may not be successful in identifying potential product candidates. However, the Company has identified two promising lead candidate compounds which have activity in animal models, one of which, LB-100, is proceeding with an IND submission to the FDA to conduct a clinical trial;
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product candidates for diagnostic tests may on further study be shown to not obtain an acceptable level of accuracy; or
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product candidates for drugs may on further study be shown to have harmful side effects or other characteristics that indicate they are unlikely to be effective drugs.
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Although we have identified one potential product candidate in the area of brain tumors, the work needed to demonstrate its commercial viability is at a very early stage. The follow-up research needed to demonstrate the viability of the product is costly and time-consuming and may reveal that the product does not function as expected or that it is otherwise not commercially viable.
If we are unable to discover suitable potential product candidates, develop additional delivery technologies through internal research programs or in-license suitable products or delivery technologies on acceptable business terms, our business prospects will suffer.
Our auditors have included a going concern modification in their opinion; we do not expect to obtain any revenues for several years and there is no assurance that we will ever generate revenue or be profitable.
The Company’s consolidated financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company is in the development stage and has not generated any revenues from operations to date. Furthermore, the Company has experienced recurring losses and negative operating cash flows since inception, and has financed its working capital requirements through the recurring sale of its equity securities. As a result, the Company’s independent registered public accounting firm, in their report on the Company’s 2013 consolidated financial statements, have raised substantial doubt about the Company’s ability to continue as a going concern.
Because the Company is currently engaged in research at an early stage, it will likely take a significant amount of time to develop any product or intellectual property capable of generating revenues, and even if the Company is able to generate revenues in the future through licensing its technologies or through product sales, there can be no assurance that the Company will be able to generate a profit. The Company does not have sufficient resources to fully develop and commercialize any products that may arise from its research. Accordingly, the Company will need to raise additional funds to do so.
The Company believes that it has sufficient funds to continue with the Phase 1 clinical trial of LB-100 and to fund its operating plans through April 30, 2014. Accordingly, in order to continue to fund the Company’s operations in 2014 and thereafter, the Company will need to raise additional capital, likely in the form of equity, aggregating at least $2,000,000 to fund operations for the next twelve months.
The amount and timing of future cash requirements will depend on the pace of these programs, particularly the completion of the Phase 1 trial of LB-100. After completion of the Phase 1 clinical trial, the next step will be to determine the anti-cancer activity against a particular type of human cancer in Phase 2 clinical trials. Market conditions present uncertainty as to the Company’s ability to secure additional funds, as well as its ability to reach profitability. There can be no assurances that the Company will be able to secure additional financing, or obtain favorable terms on such financing if it is available, or as to the Company’s ability to achieve positive earnings and cash flows from operations. If cash resources are insufficient to satisfy the Company’s liquidity requirements, the Company would be required to scale back or discontinue its technology and product development programs, or obtain funds, if available, through strategic alliances that may require the Company to relinquish rights to certain of its technologies products, or to discontinue its operations entirely.
If we were to materially breach any existing or future license or collaboration agreements, we could lose our ability to commercialize the related technologies, and our business could be materially and adversely affected.
We intend to enter into intellectual property licenses and agreements, all of which will be integral to our business. These licenses and agreements impose various research, development, commercialization, sublicensing, royalty, indemnification, insurance and other obligations on us. If we or our collaborators fail to perform under these agreements or otherwise breach obligations imposed by them, we could lose intellectual property rights that are important to our business.
We may not be successful in establishing additional strategic collaborations, which could adversely affect our ability to develop and commercialize products.
In the future, we may seek opportunities to establish new collaborations, joint ventures and strategic collaborations for the development and commercialization of products we discover. We face significant competition in seeking appropriate collaborators and the negotiation process is time-consuming and complex. We may not be successful in our efforts to establish additional strategic collaborations or other alternative arrangements. Even if we are successful in our efforts to establish a collaboration or agreement, the terms that we establish may not be favorable to us. Finally, such strategic alliances or other arrangements may not result in successful products and associated revenue.
The life sciences industry is highly competitive and subject to rapid technological change.
The life sciences industry is highly competitive and subject to rapid and profound technological change. Our present and potential competitors include major pharmaceutical companies, as well as specialized biotechnology and life sciences firms in the United States and in other countries. Most of these companies have considerably greater financial, technical and marketing resources than we do. Additional mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated in our competitors. Our existing or prospective competitors may develop processes or products that are more effective than ours or be more effective at implementing their technologies to develop commercial products faster. Our competitors may succeed in obtaining patent protection and/or receiving regulatory approval for commercializing products before us. Developments by our competitors may render our product candidates obsolete or non-competitive.
We also experience competition from universities and other research institutions, and we are likely to compete with others in acquiring technology from those sources. There can be no assurance that others will not develop technologies with significant advantages over those that we are seeking to develop. Any such development could harm our business.
We may be unable to compete successfully with our competitors.
We face competition from other companies seeking to identify and commercialize cancer biomarkers. We also compete with universities and other research institutions engaged in research in these areas. Many of our competitors have greater technical and financial resources than we do.
Our ability to compete successfully is based on numerous factors, including:
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the cost-effectiveness of any product we ultimately commercialize relative to competing products;
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the ease of use and ready availability of any product we bring to market;
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the accuracy of a diagnostic test designed by us in detecting cancers, including overcoming the propensity for “false positive” results; and
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the relative speed with which we are able to bring any product resulting from our research to market in our target markets.
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If we are unable to distinguish our products from competing products, or if competing products reach the market first, we may be unable to compete successfully with current or future competitors. This would cause our revenues to decline and affect our ability to achieve profitability.
We depend on certain key scientific personnel for our success who do not work full time for us. The loss of any such personnel could adversely affect our business, financial condition and results of operations.
Our success depends on the continued availability and contributions of our Chief Executive Officer and founder, Dr. John S. Kovach. In particular, Dr. Kovach is 77 years old, and, because of his arrangement with the State University of New York, does not devote his full time to us, although Dr. Kovach generally devotes a minimum of twenty hours a week to our business. The loss of services of Dr. Kovach could delay or reduce our product development and commercialization efforts. Furthermore, recruiting and retaining qualified scientific personnel to perform future research and development work will be critical to our success. The loss of members of our scientific personnel, or our inability to attract or retain other qualified personnel or advisors, could significant weaken our management, harm our ability to compete effectively and harm our business.
Dr. Kovach is involved in other business activities and may face a conflict in selecting between their other business interests and our business.
Dr. John Kovach, our Chief Executive Officer, is also a Professor (part-time) in the Department of Preventive Medicine at SUNY-Stony Brook. He may also become involved in the future with other business opportunities which may become available. Accordingly, Dr. Kovach may face a conflict in selecting between us and their other business interests. We have not formulated a policy for the resolution of such conflicts.
We expect to rely heavily on third parties for the conduct of clinical trials of our product candidates. If these clinical trials are not successful, or if we or our collaborators are not able to obtain the necessary regulatory approvals, we will not be able to commercialize our product candidates.
In order to obtain regulatory approval for the commercial sale of our product candidates, we and our collaborators will be required to complete extensive preclinical studies as well as clinical trials in humans to demonstrate to the FDA and foreign regulatory authorities that our product candidates are safe and effective.
Dr. Kovach is experienced in the design and conduct of early clinical cancer trials, having been the lead investigator for a National Cancer Institute Phase I contract for ten years at the Mayo Clinic, Rochester, Minnesota. The Company, however, has no experience in conducting clinical trials and expects to rely heavily on collaborative partners and contract research organizations for their performance and management of clinical trials of our product candidates.
Our products under development may not be effective in treating any of our targeted disorders or may prove to have undesirable or unintended side effects, toxicities or other characteristics that may prevent or limit their commercial use. Institutional review boards or regulators, including the FDA, may hold, suspend or terminate our clinical research or the clinical trials of our product candidates for various reasons, including non-compliance with regulatory requirements or if, in their opinion, the participating subjects are being exposed to unacceptable health risks. Additionally, the failure of third parties conducting or overseeing the operation of the clinical trials to perform their contractual or regulatory obligations in a timely fashion could delay the clinical trials. Failure of clinical trials can occur at any stage of testing. Any of these events would adversely affect our ability to market a product candidate.
The development process necessary to obtain regulatory approval is lengthy, complex and expensive. If we and our collaborative partners do not obtain necessary regulatory approvals, then our business would not be successful and the market price of our common stock could decline substantially.
To the extent that we, or our collaborative partners, are able to successfully advance a product candidate through the clinic, we, or such partner, will be required to obtain regulatory approval prior to marketing and selling such product. The process of obtaining FDA and other required regulatory approvals is expensive. The time required for FDA and other approvals is uncertain and typically takes a number of years, depending on the complexity and novelty of the product.
Any regulatory approval to market a product may be subject to limitations on the indicated uses for which we, or our collaborative partners, may market the product. These limitations may restrict the size of the market for the product and affect reimbursement by third-party payors. In addition, regulatory agencies may not grant approvals on a timely basis or may revoke or significantly modify previously granted approvals.
We, or our collaborative partners, also are subject to numerous foreign regulatory requirements governing the manufacturing and marketing of our potential future products outside of the United States. The approval procedure varies among countries, additional testing may be required in some jurisdictions, and the time required to obtain foreign approvals often differs from that required to obtain FDA approvals. Moreover, approval by the FDA does not ensure approval by regulatory authorities in other countries, and vice versa.
As a result of these factors, we, or our collaborative partners, may not successfully begin or complete clinical trials in the time periods estimated, if at all. Moreover, if we, or our collaborative partners, incur costs and delays in development programs or fail to successfully develop and commercialize products based upon our technologies, we may not become profitable and our stock price could decline substantially.
Even if our products are approved by regulatory authorities, if we fail to comply with ongoing regulatory requirements, or if we experience unanticipated problems with our products, these products could be subject to restrictions or withdrawal from the market.
Any product for which we obtain marketing approval, along with the manufacturing processes, post-approval clinical data and promotional activities for such product, will be subject to continual review and periodic inspections by the FDA and other regulatory bodies. Even if regulatory approval of a product is granted, the approval may be subject to limitations on the indicated uses for which the product may be marketed or contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product. Later discovery of previously unknown problems with our products, including unanticipated adverse events or adverse events of unanticipated severity or frequency, manufacturer or manufacturing processes, or failure to comply with regulatory requirements, may result in restrictions on such products or manufacturing processes, withdrawal of the products from the market, voluntary or mandatory recall, fines, suspension of regulatory approvals, product seizures, injunctions or the imposition of civil or criminal penalties.
Failure to obtain regulatory approval in foreign jurisdictions will prevent us from marketing our products abroad.
We intend to market our products in international markets. In order to market our products in the European Union and many other foreign jurisdictions, we must obtain separate regulatory approvals. The approval procedure varies among countries and can involve additional testing, and the time required to obtain approval may differ from that required to obtain FDA approval. The foreign regulatory approval process may include all of the risks associated with obtaining FDA approval. We may not obtain foreign regulatory approvals on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or by the FDA. We may not be able to file for regulatory approvals and may not receive necessary approvals to commercialize our products in any market.
We are subject to uncertainty relating to health care reform measures and reimbursement policies which, if not favorable to our product candidates, could hinder or prevent our product candidates’ commercial success.
The continuing efforts of the government, insurance companies, managed care organizations and other payors of health care costs to contain or reduce costs of health care may adversely affect:
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our ability to generate revenues and achieve profitability;
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the future revenues and profitability of our potential customers, suppliers and collaborators; and
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the availability of capital.
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In certain foreign markets, the pricing of prescription pharmaceuticals is subject to government control. In the United States, given recent federal and state government initiatives directed at lowering the total cost of health care, the U.S. Congress and state legislatures will likely continue to focus on health care reform, the cost of prescription pharmaceuticals and on the reform of the Medicare and Medicaid systems. While we cannot predict the effects of the implementation of any new legislation or whether any current legislative or regulatory proposals affecting our business will be adopted, the implementation of new legislation or the announcement or adoption of current proposals could have a material and adverse effect on our business, financial condition and results of operations.
Our ability to commercialize our product candidates successfully will depend in part on the extent to which governmental authorities, private health insurers and other organizations establish appropriate reimbursement levels for the cost of our products and related treatments. Third-party payors are increasingly challenging the prices charged for medical products and services. Also, the trend toward managed health care in the United States, which could significantly influence the purchase of health care services and products, as well as legislative proposals to reform health care or reduce government insurance programs, may result in lower prices for our product candidates or exclusion of our product candidates from reimbursement programs. The cost containment measures that health care payors and providers are instituting and the effect of any health care reform could materially and adversely affect our results of operations.
If physicians and patients do not accept the products that we may develop, our ability to generate product revenue in the future will be adversely affected.
The product candidates that we may develop may not gain market acceptance among physicians, healthcare payors, patients and the medical community. This will adversely affect our ability to generate revenue. Market acceptance of and demand for any product that we may develop will depend on many factors, including:
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our ability to provide acceptable evidence of safety and efficacy;
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convenience and ease of administration;
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prevalence and severity of adverse side effects;
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availability of alternative treatments or diagnostic tests;
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effectiveness of our marketing strategy and the pricing of any product that we may develop;
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publicity concerning our products or competitive products; and
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our ability to obtain third-party coverage or reimbursement.
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We face the risk of product liability claims and may not be able to obtain insurance.
Our business exposes us to the risk of product liability claims that is inherent in the testing, manufacturing, and marketing of drugs and related devices. Although we will obtain product liability and clinical trial liability insurance when appropriate, this insurance is subject to deductibles and coverage limitations. We may not be able to obtain or maintain adequate protection against potential liabilities. In addition, if any of our product candidates are approved for marketing, we may seek additional insurance coverage. If we are unable to obtain insurance at acceptable cost or on acceptable terms with adequate coverage or otherwise protect against potential product liability claims, we will be exposed to significant liabilities, which may harm our business. These liabilities could prevent or interfere with our product commercialization efforts. Defending a suit, regardless of merit, could be costly, could divert management attention and might result in adverse publicity or reduced acceptance of our products in the market.
We cannot be certain we will be able to obtain patent protection to protect our product candidates and technology.
We cannot be certain that all patents applied for will be issued. In 2011, the Company received US patents for its lead compound, LB-100, as an anti-cancer agent and for the use of compounds of both the LB-100 and the LB-200 series for the prevention and treatment of neurodegenerative diseases. If a third party has also filed a patent application relating to an invention claimed by us or our licensors, we may be required to participate in an interference proceeding declared by the U.S. Patent and Trademark Office to determine priority of invention, which could result in substantial uncertainties and cost for us, even if the eventual outcome is favorable to us. The degree of future protection for our proprietary rights is uncertain. For example:
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we or our licensors might not have been the first to make the inventions covered by our pending or future patent applications;
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we or our licensors might not have been the first to file patent applications for these inventions;
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others may independently develop similar or alternative technologies or duplicate any of our technologies;
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it is possible that our patent applications will not result in an issued patent or patents, or that the scope of protection granted by any patents arising from our patent applications will be significantly narrower than expected;
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any patents under which we hold ultimate rights may not provide us with a basis for commercially-viable products, may not provide us with any competitive advantages or may be challenged by third parties as not infringed, invalid, or unenforceable under United States or foreign laws;
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any patent issued to us in the future or under which we hold rights may not be valid or enforceable; or
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we may develop additional proprietary technologies that are not patentable and which may not be adequately protected through trade secrets; for example if a competitor independently develops duplicative, similar, or alternative technologies.
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If we are not able to protect and control our unpatented trade secrets, know-how and other technological innovation, we may suffer competitive harm.
We also rely on proprietary trade secrets and unpatented know-how to protect our research and development activities, particularly when we do not believe that patent protection is appropriate or available. However, trade secrets are difficult to protect. We will attempt to protect our trade secrets and unpatented know-how by requiring our employees, consultants and advisors to execute a confidentiality and non-use agreement. We cannot guarantee that these agreements will provide meaningful protection, that these agreements will not be breached, that we will have an adequate remedy for any such breach, or that our trade secrets will not otherwise become known or independently developed by a third party. Our trade secrets, and those of our present or future collaborators that we utilize by agreement, may become known or may be independently discovered by others, which could adversely affect the competitive position of our product candidates.
We may incur substantial costs enforcing our patents, defending against third-party patents, invalidating third-party patents or licensing third-party intellectual property, as a result of litigation or other proceedings relating to patent and other intellectual property rights.
We may not have rights under some patents or patent applications that may cover technologies that we use in our research, drug targets that we select, or product candidates that we seek to develop and commercialize. Third parties may own or control these patents and patent applications in the United States and abroad. These third parties could bring claims against us or our collaborators that would cause us to incur substantial expenses and, if successful against us, could cause us to pay substantial damages. Further, if a patent infringement suit were brought against us or our collaborators, we or they could be forced to stop or delay research, development, manufacturing or sales of the product or product candidate that is the subject of the suit. We or our collaborators therefore may choose to seek, or be required to seek, a license from the third-party and would most likely be required to pay license fees or royalties or both. These licenses may not be available on acceptable terms, or at all. Even if we or our collaborators were able to obtain a license, the rights may be nonexclusive, which would give our competitors access to the same intellectual property. Ultimately, we could be prevented from commercializing a product, or forced to cease some aspect of our business operations, as a result of patent infringement claims, which could harm our business.
There has been substantial litigation and other proceedings regarding patent and other intellectual property rights in the pharmaceutical and biotechnology industries. Although we are not currently a party to any patent litigation or any other adversarial proceeding, including any interference proceeding declared before the United States Patent and Trademark Office, regarding intellectual property rights with respect to our products and technology, we may become so in the future. We are not currently aware of any actual or potential third party infringement claim involving our products. The cost to us of any patent litigation or other proceeding, even if resolved in our favor, could be substantial. The outcome of patent litigation is subject to uncertainties that cannot be adequately quantified in advance, including the demeanor and credibility of witnesses and the identity of the adverse party, especially in biotechnology related patent cases that may turn on the testimony of experts as to technical facts upon which experts may reasonably disagree. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their substantially greater financial resources. If a patent or other proceeding is resolved against us, we may be enjoined from researching, developing, manufacturing or commercializing our products without a license from the other party and we may be held liable for significant damages. We may not be able to obtain any required license on commercially acceptable terms or at all.
Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could harm our ability to compete in the marketplace. Patent litigation and other proceedings may also absorb significant management time.
If we are unable to protect our intellectual property rights, our competitors may develop and market products with similar features that may reduce demand for our potential products.
The following factors are important to our success:
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receiving patent protection for our product candidates;
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preventing others from infringing our intellectual property rights; and
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maintaining our patent rights and trade secrets.
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We will be able to protect our intellectual property rights in patents and trade secrets from unauthorized use by third parties only to the extent that such intellectual property rights are covered by valid and enforceable patents or are effectively maintained as trade secrets.
Because issues of patentability involve complex legal and factual questions, the issuance, scope and enforceability of patents cannot be predicted with certainty. Patents, if issued, may be challenged, invalidated or circumvented. U.S. patents and patent applications may also be subject to interference proceedings, and U.S. patents may be subject to reexamination proceedings in the U.S. Patent and Trademark Office and foreign patents may be subject to opposition or comparable proceedings in corresponding foreign patent offices, which proceedings could result in either loss of the patent or denial of the patent application or loss or reduction in the scope of one or more of the claims of the patent or patent application. In addition, such interference, reexamination and opposition proceedings may be costly. Thus, any patents that we own or license from others may not provide any protection against competitors. Furthermore, an adverse decision in an interference proceeding can result in a third-party receiving the patent rights sought by us, which in turn could affect our ability to market a potential product to which that patent filing was directed. Our pending patent applications, those that we may file in the future, or those that we may license from third parties may not result in patents being issued. If issued, they may not provide us with proprietary protection or competitive advantages against competitors with similar technology. Furthermore, others may independently develop similar technologies or duplicate any technology that we have developed. Many countries, including certain countries in Europe, have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties. For example, compulsory licenses may be required in cases where the patent owner has failed to “work” the invention in that country, or the third-party has patented improvements. In addition, many countries limit the enforceability of patents against government agencies or government contractors. In these countries, the patent owner may have limited remedies, which could materially diminish the value of the patent. Moreover, the legal systems of certain countries, particularly certain developing countries, do not favor the aggressive enforcement of patent and other intellectual property protection, which makes it difficult to stop infringement.
In addition, our ability to enforce our patent rights depends on our ability to detect infringement. It is difficult to detect infringers who do not advertise the compounds that are used in their products. Any litigation to enforce or defend our patent rights, even if we prevail, could be costly and time-consuming and would divert the attention of management and key personnel from business operations.
We will also rely on trade secrets, know-how and technology, which are not protected by patents, to maintain our competitive position. We will seek to protect this information by entering into confidentiality agreements with parties that have access to it, such as strategic partners, collaborators, employees and consultants. Any of these parties may breach these agreements and disclose our confidential information or our competitors might learn of the information in some other way. If any trade secret, know-how or other technology not protected by a patent were disclosed to, or independently developed by, a competitor, our business, financial condition and results of operations could be materially adversely affected.
If our third-party manufacturers’ facilities do not follow current good manufacturing practices, our product development and commercialization efforts may be harmed.
There are a limited number of manufacturers that operate under the FDA’s and European Union’s good manufacturing practices regulations and are capable of manufacturing products. Third-party manufacturers may encounter difficulties in achieving quality control and quality assurance and may experience shortages of qualified personnel. A failure of third-party manufacturers to follow current good manufacturing practices or other regulatory requirements and to document their adherence to such practices may lead to significant delays in the availability of products for commercial use or clinical study, the termination of, or hold on, a clinical study, or may delay or prevent filing or approval of marketing applications for our products. In addition, we could be subject to sanctions being imposed on us, including fines, injunctions and civil penalties. Changing manufacturers may require additional clinical trials and the revalidation of the manufacturing process and procedures in accordance with FDA mandated current good manufacturing practices and will require FDA approval. This revalidation may be costly and time consuming. If we are unable to arrange for third-party manufacturing of our products, or to do so on commercially reasonable terms, we may not be able to complete development or marketing of our products.
If we fail to obtain an adequate level of reimbursement for our products by third-party payors, there may be no commercially viable markets for our products or the markets may be much smaller than expected.
The availability and levels of reimbursement by governmental and other third-party payors affect the market for our products. The efficacy, safety and cost-effectiveness of our products as well as the efficacy, safety and cost-effectiveness of any competing products will determine the availability and level of reimbursement. These third-party payors continually attempt to contain or reduce the costs of healthcare by challenging the prices charged for healthcare products and services. In certain countries, particularly the countries of the European Union, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take six to twelve months or longer after the receipt of regulatory marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we may be required to conduct clinical trials that compare the cost-effectiveness of our products to other available therapies. If reimbursement for our products is unavailable, limited in scope or amount or if pricing is set at unsatisfactory levels, our revenues would be reduced and our results of operations would be negatively impacted.
Another development that may affect the pricing of drugs is regulatory action regarding drug reimportation into the United States. The Medicare Prescription Drug, Improvement and Modernization Act of 2003, which became law in December 2003, requires the Secretary of the U.S. Department of Health and Human Services to promulgate regulations allowing drug reimportation from Canada into the United States under certain circumstances. These provisions will become effective only if the Secretary certifies that such imports will pose no additional risk to the public’s health and safety and result in significant cost savings to consumers. To date, the Secretary has made no such finding, but he could do so in the future. Proponents of drug reimportation may also attempt to pass legislation that would remove the requirement for the Secretary’s certification or allow reimportation under circumstances beyond those anticipated under current law. If legislation is enacted, or regulations issued, allowing the reimportation of drugs, it could decrease the reimbursement we would receive for any products that we may commercialize, negatively affecting our anticipated revenues and prospects for profitability.
Risks Related to Capital Structure
There is no assurance of an established public trading market, which would adversely affect the ability of our investors to sell their securities in the public market.
Although our common stock is registered under the Exchange Act and our stock is traded on the OTCQB operated by the OTC Markets, an active trading market for the securities does not yet exist and may not exist or be sustained in the future. The OTCQB is an over-the-counter market that provides significantly less liquidity than the NASDAQ Stock Market. Quotes for stocks included on the OTCQB are not listed in the financial sections of newspapers as are those for the NASDAQ Stock Market. Therefore, prices for securities traded solely on the OTCQB may be difficult to obtain and holders of common stock may be unable to resell their securities at or near their original offering price or at any price. Market prices for our common stock will be influenced by a number of factors, including:
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the issuance of new equity securities pursuant to a future offering or acquisition;
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changes in interest rates;
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competitive developments, including announcements by competitors of new products or services or significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;
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variations in quarterly operating results;
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changes in financial estimates by securities analysts;
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the depth and liquidity of the market for our common stock;
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investor perceptions of our company and the medical device industry generally; and
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general economic and other national conditions.
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Shares eligible for future sale may adversely affect the market price of our common stock, as the future sale of a substantial amount of outstanding stock in the public marketplace could reduce the price of our common stock.
Dr. John Kovach, our current Chief Executive Officer, was the former stockholder of our operating subsidiary, and received shares of our stock in a reverse merger. He is currently eligible to sell some of his shares of common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144 promulgated under the Securities Act (“Rule 144”), subject to certain limitations. Rule 144 also permits the sale of securities, without any limitations, by a non-affiliate that has satisfied a six-month holding period. Any substantial sale of common stock pursuant to Rule 144 may have an adverse effect on the market price of our common stock by creating an excessive supply. In this connection, we have sold an aggregate of 3,555,220 shares of common stock in private placements occurring in June and July 2006, 999,995 shares in a December 2007 private placement, and an aggregate of 4,575,000 shares of our common stock in private placements in January and February 2010, all of which are currently eligible to be resold under Rule 144. In addition, during the year ended December 31, 2012, we issued 6,082,000 shares of common stock a result of the exercise of various stock warrants, and during the years ended December 31, 2011 and 2012, we issued 181,964 shares and 241,955 shares of common stock as a result of the exercise of various stock options. There were no issuances of common stock in 2013.
Our common stock is considered a “penny stock” and may be difficult to sell.
Our common stock is considered to be a “penny stock” since it meets one or more of the definitions in Rules 15g-2 through 15g-6 promulgated under Section 15(g) of the Exchange Act. These include but are not limited to the following: (i) the stock trades at a price less than $5.00 per share; (ii) it is NOT traded on a “recognized” national exchange; (iii) it is NOT quoted on the NASDAQ Stock Market, or even if so, has a price less than $5.00 per share; or (iv) it is issued by a company with net tangible assets less than $2.0 million, if in business more than a continuous three years, or with average revenues of less than $6.0 million for the past three years. The principal result or effect of being designated a “penny stock” is that securities broker-dealers cannot recommend the stock but must trade in it on an unsolicited basis.
Additionally, Section 15(g) of the Exchange Act and Rule 15g-2 promulgated thereunder by the SEC require 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 before effecting any transaction in a penny stock for the investor’s account.
Potential investors in our common stock are urged to obtain and read such disclosure carefully before purchasing any shares that are deemed to be “penny stock.” 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 for holders of our common stock to resell their shares to third parties or to otherwise dispose of them in the market or otherwise.
Our principal stockholder has significant influence over our company.
As a result of the reverse merger, Dr. John Kovach, our principal stockholder and our Chief Executive Officer, beneficially owns approximately 40.9% of our outstanding voting stock at the current time. As a result, Dr. Kovach possesses significant influence, giving him the practical ability, among other things, to elect all of the members of the Board of Directors and to approve significant corporate transactions. Such stock ownership and control may also have the effect of delaying or preventing a future change in control, impeding a merger, consolidation, takeover or other business combination or discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us.
We do not foresee paying cash dividends in the foreseeable future.
We have not paid any cash dividends on our stock and do not plan to pay cash dividends on our common stock in the foreseeable future.
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ITEM 1B
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UNRESOLVED STAFF COMMENTS
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None
The Company conducts the preclinical research required for bringing a compound to clinical trial at contract research organizations. The Company maintains a single office in a designated area of Dr. Kovach’s residence and receives mail at the post office depot, 248 Route 25A, No. 2, East Setauket, New York 11733. Management does not believe that any additional facilities are needed at this time.
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ITEM 3.
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LEGAL PROCEEDINGS
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The Company is not a party to any threatened or pending legal proceedings.
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ITEM 4.
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MINE SAFETY DISCLOSURES
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Not applicable.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2013 and 2012, and
Period from August 9, 2005 (Inception) to December 31, 2013 (Cumulative)
1. Organization and Business Operations
Organization
On June 30, 2006, Lixte Biotechnology, Inc., a privately-held Delaware corporation (“Lixte”) incorporated on August 9, 2005, completed a reverse merger transaction with SRKP 7, Inc. (“SRKP”), a non-trading public shell company, whereby Lixte became a wholly-owned subsidiary of SRKP. On December 7, 2006, SRKP amended its Certificate of Incorporation to change its name to Lixte Biotechnology Holdings, Inc.
For financial reporting purposes, Lixte was considered the accounting acquirer in the merger and the merger was accounted for as a reverse merger. Accordingly, the historical financial statements presented herein are those of Lixte. The stockholders’ equity section of SRKP was retroactively restated for all periods presented to reflect the accounting effect of the reverse merger transaction. All costs associated with the reverse merger transaction were expensed as incurred.
The Company is considered a “development stage company” under current accounting standards, as it has not yet commenced any revenue-generating operations, does not have any cash flows from operations, and is dependent on debt and equity funding to finance its operations.
The Company’s common stock is presently traded on the OTCQB operated by the OTC Markets under the symbol “LIXT”.
Operating Plans
The Company’s primary focus is developing new treatments for human cancers for which better therapies are urgently needed. However, the scope of potential applications of the Company’s products has expanded to other common non-malignant diseases, including vascular diseases (heart attacks and stroke, diabetes, and genetic diseases, such as Gaucher’s disease) in which errors in normal cellular processing lead to loss of functions important to normal cell function. This has occurred because the targets selected by the Company have multiple functions in the cell, which when altered result in different disorders that may benefit by treatment from the Company’s products.
The Company’s drug discovery process is based on discerning clues to potential new targets for disease treatments reported in the increasingly large body of literature identifying the molecular variants which characterize human cancers and other non-cancer disorders. The Company designs drugs for which there are existing data suggesting that they may affect the altered pathways of the cancer cell and may be given safely to humans. The Company seeks to rapidly arrive at patentable structures through analysis of the literature rather than screening of thousands of structures for activity against a particular biochemical pathway. This approach has led to the development of two classes of drugs for the treatment of cancer, protein phosphatase inhibitors (PTase-i), designated by the Company as the LB-100 series of compounds, and histone deacetylase inhibitors (HDACi), designated by the Company as the LB-200 series of compounds. Compounds of both types also have potential use in the prevention and treatment of neurodegenerative diseases.
On August 16, 2011, the United States Patent and Trademark Office (the “PTO”) awarded a patent to the Company for its lead compound, LB-100, as well as for a number of structurally related compounds. On November 15, 2011, the PTO awarded a patent to the Company for a lead compound in the LB-200 series and a compound in the LB-100 series as neuroprotective agents for the prevention and treatment of neurodegenerative diseases. On March 27, 2012, the PTO awarded a patent to the Company for its lead compound LB-201, as well as for a number of structurally related compounds. Patent applications on these compounds and their use are pending world-wide.
The Company’s primary objective has been to bring one lead compound of the LB-100 series to clinical trial. In 2012, the Company completed the pre-clinical studies needed to prepare an
Investigation New Drug (“
IND”) application to the FDA to conduct a Phase 1 clinical trial of LB-100, and engaged
Theradex Systems, Inc. (“Theradex”),
the contract research organization (“CRO”) responsible for the clinical development of the Company’s lead compound, LB-100, to prepare an IND application for filing with the FDA.
The Company filed an IND application with the FDA on April 30, 2012, and on July 24, 2012, the FDA notified the Company that it would allow initiation of a Phase 1 clinical trial of LB-100. The purpose of the clinical trial is to demonstrate that LB-100 can be administered safely to human beings at a dose and at a frequency that achieves the desired pharmacologic effect; in this case, inhibition of a specific enzyme, without being associated with toxicities considered unacceptable.
The Phase 1 clinical trial of LB-100 began in April 2013 with the entry of patients into the clinical trial (see NCTO 1837667 at www.clinicaltrials.gov) and was initiated at the City of Hope National Medical Center in Duarte, California, and was extended in December 2013 to include the Mayo Clinic in Rochester, Minnesota, both of which are Comprehensive Cancer Centers designated by the National Cancer Institute. The Company estimates that the Phase 1 clinical trial will be completed within the next 12 to 21 months (sometime between March and December 2015) and will cost a total of approximately $2,000,000, which will be paid to or through Theradex, the CRO responsible for the clinical development of LB-100.
As of December 31, 2013, the Company has incurred $278,721 of these clinical trial costs, which have been included in research and development expenses in the statement of operations for the year ended December 31, 2013.. The final cost of the clinical trial is variable, depending upon the number of patients needed to be medically screened to determine if they meet the criteria for entry into the study and ultimately upon the total number of patients entered into the study to establish the proper doses of the drug for Phase 2 clinical trials.
The Company’s approach has been to operate with a minimum of overhead, moving compounds forward as efficiently and inexpensively as possible, and to raise funds to support each of these stages as certain milestones are reached. The commencement of a Phase 1 clinical trial is a milestone in the Company’s goal of developing a successful product platform.
Going Concern
The Company’s consolidated financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company is in the development stage and has not generated any revenues from operations to date, and does not expect to do so in the foreseeable future. The Company has experienced recurring operating losses and negative operating cash flows since inception, and has financed its working capital requirements during this period primarily through the recurring sale of its equity securities and the exercise of outstanding warrants. As a result, the Company’s independent registered public accounting firm, in its report on the Company’s 2013 consolidated financial statements, has raised substantial doubt about the Company’s ability to continue as a going concern.
The Company’s ability to continue as a going concern is dependent upon its ability to raise additional capital and to ultimately achieve sustainable revenues and profitable operations. The Company’s consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
At December 31, 2013, the Company had not yet commenced any revenue-generating operations. All activity through December 31, 2013 has been related to the Company’s formation, capital raising efforts, and research and development activities. As such, the Company has yet to generate any cash flows from operations, and is dependent on debt and equity funding from both related and unrelated parties to finance its operations. Prior to June 30, 2006, the Company’s cash requirements were funded by advances from the Company’s founder aggregating $
92,717
.
Because the Company is currently engaged in research at an early stage, it will likely take a significant amount of time to develop any product or intellectual property capable of generating revenues. As such, the Company’s business is unlikely to generate any sustainable revenues in the next several years, and may never do so. Even if the Company is able to generate revenues in the future through licensing its technologies or through product sales, there can be no assurance that the Company will be able to achieve positive earnings and cash flows from operations.
The Company’s major focus in 2014 is to continue a Phase 1 clinical trial of its lead phosphatase inhibitor, LB-100. The Phase 1 clinical trial of LB-100 began in April 2013 with the entry of patients into the clinical trial, and is being carried out by nationally recognized comprehe
nsive cancer centers. The cost of a clinical trial depends to a considerable extent upon the rate of patient accrual, as well as the number of patients entered into the clinical trial. If screening tests render a patient ineligible for the clinical trial, the screening costs are realized, but patient accrual is not advanced. Accordingly, the costs needed to complete a clinical trial with the planned number of participants may increase under such circumstances.
The Company estimates that the Phase 1 clinical trial will conclude within the next 12 to 21 months (sometime between March and December 2015) and will cost a total of approximately $2,000,000, which will be paid to or through Theradex, the CRO responsible for the clinical development of LB-100.
As of December 31, 2013, the Company has incurred $278,721 of these clinical trial costs, which have been included in research and development expenses in the statement of operations for the year ended December 31, 2013
.
At December 31, 2013, the Company had cash and money market funds aggregating $
481,154
. The Company believes that it has sufficient funds to continue with the Phase 1 clinical trial of LB-100 and to fund its operating plans through April 30, 2014. Accordingly, in order to continue to fund the Company’s operations in 2014 and thereafter,
the Company will need to raise additional capital, likely in the form of equity, aggregating at least $2,000,000 to fund operations for the next twelve months
. Market conditions present uncertainty as to the Company’s ability to secure additional funds. There can be no assurances that the Company will be able to secure additional financing on acceptable terms or at all. If cash resources are insufficient to satisfy the Company’s ongoing cash requirements, the Company would be required to scale back or discontinue its technology and product development programs and/or clinical trials, or obtain funds, if available (although there can be no certainty), through strategic alliances that may require the Company to relinquish rights to certain of its products, or to discontinue its operations entirely.
The amount and timing of future cash requirements will depend on the pace of the Company’s programs, particularly the completion of the Phase 1 clinical trial of LB-100. After completion of the Phase 1 clinical trial, the next step will be to determine the anti-cancer activity of LB-100, in combination with a widely used anti-cancer drug, against a specific type of human cancer in Phase 2 clinical trials. Subject to the availability of funds, the Company intends to continue with its Phase 1 clinical trial of LB-100, continue the two drug development programs currently in process, and expand its patent portfolio, including the maintenance of its applications for international protection of lead compounds of both the LB-100 and LB-200 series.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the financial statements of Holdings and its wholly-owned subsidiary, Lixte. All intercompany balances and transactions have been eliminated in consolidation.
Cash Concentrations
The Company’s cash balances may periodically exceed federally insured limits. The Company has not experienced a loss in such accounts to date. The Company maintains its accounts with financial institutions with high credit ratings.
Research and Development
Research and development costs consist primarily of fees paid to consultants and outside service providers, patent fees and costs, and other expenses relating to the acquisition, design, development and testing of the Company's treatments and product candidates.
Research and development costs are expensed as incurred over the life of the underlying contracts on the straight-line basis, unless the achievement of milestones, the completion of contracted work, or other information indicates that a different expensing schedule is more appropriate. Payments made pursuant to research and development contracts are initially recorded as advances on research and development contract services in the Company’s balance sheet and then charged to research and development costs in the Company’s statement of operations as those contract services are performed. Expenses incurred under research and development contracts in excess of amounts advanced are recorded as research and development contract liabilities in the Company’s balance sheet, with a corresponding charge to research and development costs in the Company’s statement of operations. The Company reviews the status of its research and development contracts on a quarterly basis.
Patent Costs
Due to the significant uncertainty associated with the successful development of one or more commercially viable products based on the Company's research efforts and any related patent applications, all patent costs, including patent-related legal and filing fees, are expensed as incurred. Patent costs were $
405,285
and $
236,784
for the years ended December 31, 2013 and 2012, respectively, and $
1,814,682
for the period from August 9, 2005 (inception) to December 31, 2013 (cumulative). Patent costs are included in research and development costs in the Company's consolidated statements of operations.
Royalties
Pursuant to a Patent License Agreement with the NIH that provides the Company with an exclusive license for all patents submitted jointly with the NIH under the CRADA, various categories of royalties at various rates and amounts are payable, including minimum annual royalties (subject to an offset for royalties from net sales), royalties on net sales, royalties based on the achievement of certain benchmarks, and royalties based on granting sublicense agreements, with respect to joint patents. Such royalties are accrued and paid when they become legal obligations, and are charged to general and administrative costs.
Concentration of Risk
The Company periodically contracts with directors, including companies controlled by or associated with directors, to provide consulting services related to the Company’s research and development and clinical trial activities. Agreements for these services can be for a specific time period (typically one year) or for a specific project or task, and can include both cash and non-cash compensation.
The only such contract that represents 10% or more of general and administrative or research and development costs is described below.
On September 21, 2012, the Company entered into a work order agreement with Theradex, the CRO responsible for the clinical development of the Company’s lead compound, LB-100, to manage and administer the Phase 1 clinical trial of LB-100. Theradex is an international CRO that provides professional services for the clinical research and development of pharmaceutical compounds. The Phase 1 clinical trial of LB-100, which began during April 2013 with the entry of patients into the clinical trial, is being carried out by nationally recognized comprehensive cancer centers, and is estimated to be completed within the next 12 to 21 months (sometime between March and December 2015). The Phase 1 clinical trial is expected to cost a total of approximately $2,000,000, with such payments expected to be divided approximately evenly between payments to Theradex for services rendered and payments for pass-through costs for the clinical center’s laboratory costs and investigator costs. Total costs charged to operations for services paid to Theradex pursuant to this arrangement, which were first incurred in 2013, were $278,721 for the year ended December 31, 2013, or approximately 32% of research and development costs for the year ended December 31, 2013.
The costs charged to operations for amounts paid to Theradex for services relating to the Phase 1 clinical trial of LB-100 are expected to represent a larger percentage of total research and development costs during the fiscal years ending December 31, 2014 and 2015
.
Costs pursuant to this agreement are included in research and development costs in the Company's consolidated statements of operations. On May 2, 2011, Dr. Robert B. Royds, the founder, Chairman of the Board and Medical Director of Theradex, was appointed to the Company’s Board of Directors. Dr. Royds died on March 23, 2013. The death of Dr. Royds is not expected to have any impact on the management and administration of the Phase 1 clinical trial.
In addition to the above described agreement with Theradex, the Company has also from time to time engaged Theradex to assist the Company in bringing LB-100 through the FDA approval process and to provide other services. Total fees charged to operations for services paid to Theradex pursuant to such engagements were $14,964 and $163,661 for the years ended December 31, 2013 and 2012, respectively, or approximately 2% and 16% of research and development costs for the years ended December 31, 2013 and 2012, respectively, and are included in research and development costs in the Company's consolidated statements of operations.
Income Taxes
The Company accounts for income taxes under an asset and liability approach for financial accounting and reporting for income taxes. Accordingly, the Company recognizes deferred tax assets and liabilities for the expected impact of differences between the financial statements and the tax basis of assets and liabilities.
The Company has elected to deduct research and development costs on a current basis for federal income tax purposes. For federal tax purposes, start-up and organization costs were deferred until January 1, 2008 at which time the Company began to amortize such costs over a
180
-month period.
The Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. In the event the Company was to determine that it would be able to realize its deferred tax assets in the future in excess of its recorded amount, an adjustment to the deferred tax assets would be credited to operations in the period such determination was made. Likewise, should the Company determine that it would not be able to realize all or part of its deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to operations in the period such determination was made.
For federal income tax purposes, net operating losses can be carried forward for a period of
20
years until they are either utilized or until they expire.
On January 1, 2007, the Company adopted accounting rules which address the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under these rules, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. These accounting rules also provide guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. As of December 31, 2013, no liability for unrecognized tax benefits was required to be recorded.
The Company files income tax returns in the U.S. federal jurisdiction and is subject to income tax examinations by federal tax authorities for the year 2009 and thereafter. The Company’s policy is to record interest and penalties on uncertain tax provisions as income tax expense. As of December 31, 2013, the Company has no accrued interest or penalties related to uncertain tax positions.
Stock-Based Compensation
The Company periodically issues stock options and warrants to officers, directors and consultants for services rendered. Options vest and expire according to terms established at the grant date.
The Company accounts for stock-based payments to officers and directors by measuring the cost of services received in exchange for equity awards based on the grant date fair value of the awards, with the cost recognized as compensation expense in the Company’s financial statements on a straight-line basis over the vesting period of the awards.
The Company accounts for stock-based payments to consultants by determining the value of the stock compensation based upon the measurement date at either (a) the date at which a performance commitment is reached or (b) at the date at which the necessary performance to earn the equity instruments is complete.
Options granted to members of the Company’s Scientific Advisory Committee and to outside consultants are revalued each reporting period to determine the amount to be recorded as an expense in the respective period. As the options vest, they are valued on each vesting date and an adjustment is recorded for the difference between the value already recorded and the then current value on the date of vesting.
Earnings Per Share
The Company’s computation of earnings per share (“EPS”) includes basic and diluted EPS. Basic EPS is measured as the income (loss) available to common shareholders divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., warrants and options) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.
Loss per common share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the respective periods. Basic and diluted loss per common share is the same for all periods presented because all warrants and stock options outstanding are anti-dilutive.
At December 31, 2013 and 2012, the Company excluded the outstanding securities summarized below, which entitle the holders thereof to acquire shares of common stock, from its calculation of earnings per share, as their effect would have been anti-dilutive.
|
|
|
2013
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
6,828,800
|
|
|
6,828,800
|
|
|
Stock options
|
|
|
3,150,000
|
|
|
3,750,000
|
|
|
Total
|
|
|
9,978,800
|
|
|
10,578,800
|
|
Fair Value of Financial Instruments
The carrying amounts of cash, money market funds, advances on research and development contract services, prepaid expenses and other current assets, accounts payable and accrued expenses, research and development contract liabilities, liquidated damages payable under registration rights agreement and due to stockholder approximate their respective fair values due to the short-term nature of these items.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates.
Recent Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2013-04, Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date. This guidance provides direction for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date, except for obligations addressed within existing guidance in U.S. GAAP. The guidance requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. This guidance will become effective for the Company for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company does not expect the adoption of this guidance to have a material impact on the Company’s consolidated financial statements.
In March 2013, the FASB issued ASU No. 2013-05, Foreign Currency Matters (Topic 830). This guidance resolves the diversity in practice relating to financial reporting involving a parent entity’s accounting for the cumulative translation adjustment of foreign currency into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business (other than a sale of in substance real estate or conveyance of oil and gas mineral rights) within a foreign entity. In addition, this guidance resolves the diversity in practice for the treatment of business combinations achieved in stages (sometimes also referred to as step acquisitions) involving a foreign entity. This guidance will become effective for the Company for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company does not expect the adoption of this guidance to have a material impact on the Company’s consolidated financial statements.
In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Loss, or a Tax Credit Carryforward Exists (a consensus the FASB Emerging Issues Task Force). This guidance provides direction on financial statement presentation of unrecognized tax benefit when a net operating loss carrforward, a similar tax loss, or a tax credit carryforward exists. The FASB’s objective in issuing this guidance was to eliminate diversity in practice resulting from a lack of guidance on this topic in current U.S. GAAP. This guidance applies to all entities with unrecognized tax benefits that also have tax loss or tax credit carryforwards in the same tax jurisdiction as of the reporting date. This guidance will become effective for the Company for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company does not expect the adoption of this guidance to have a material impact on the Company’s consolidated financial statements.
Management does not believe that any other recently issued, but not yet effective, authoritative guidance, if currently adopted, would have a material impact on the Company’s financial statement presentation or disclosures.
3
. Share Exchange Agreement, Private Placements and Common Stock Warrants
Share Exchange Agreement
On June 30, 2006, pursuant to a Share Exchange Agreement dated as of June 8, 2006 (the “Share Exchange Agreement”) by and among the Company, Dr. John S. Kovach (“Seller”) and Lixte, the Company issued
19,021,786
shares of its common stock in exchange for all of the issued and outstanding shares of Lixte (the “Exchange”). Previously, on October 3, 2005, Lixte had issued
1,500
shares of its no par value common stock to its founder for $
1,500
, which constituted all of the issued and outstanding shares of Lixte prior to the Exchange. As a result of the Exchange, Lixte became a wholly-owned subsidiary of the Company.
Pursuant to the Exchange, the Company issued to the Seller 19,021,786 shares of its common stock. The Company had a total of
25,000,832
shares of common stock issued and outstanding after giving effect to the Exchange and the 1,973,869 shares of common stock issued in the initial closing of the private placement.
As a result of the Exchange and the shares of common stock issued in the initial closing of the private placement, on June 30, 2006, the stockholders of the Company immediately prior to the Exchange owned
4,005,177
shares of common stock, equivalent to approximately
16
% of the issued and outstanding shares of the Company’s common stock, and the former stockholder of Lixte acquired control of the Company.
In connection with the Exchange, the Company paid WestPark Capital, Inc. a cash fee of $
50,000
.
Private Placements
On June 30, 2006, concurrently with the closing of the Exchange, the Company sold an aggregate of
1,973,869
shares of its common stock to accredited investors in an initial closing of a private placement at a per share price of $
0.333
, resulting in aggregate gross proceeds to the Company of $
657,299
. The Company paid to WestPark Capital, Inc., as placement agent, a commission of
10
% and a non-accountable fee of
4
% of the gross proceeds of the private placement and issued
five-year warrants
to purchase common stock equal to
(a) 10% of the number of shares sold in the private placement exercisable at $0.333 per share and (b) an additional 2% of the number of shares sold in the private placement also exercisable at $0.333 per share. A total of 236,864 warrants were issued.
Net cash proceeds to the Company, after the deduction of all private placement offering costs and expenses, were $
522,939
.
On July 27, 2006, the Company sold an aggregate of
1,581,351
shares of its common stock to accredited investors in a second closing of the private placement at a per share price of $
0.333
resulting in aggregate gross proceeds to the Company of $
526,590
. The Company paid to WestPark Capital, Inc., as placement agent, a commission of
10
% and a non-accountable fee of
4
% of the gross proceeds of the private placement and issued
five-year warrants
to purchase common stock equal to
(a) 10% of the number of shares sold in the private placement exercisable at $0.333 per share and (b) an additional 2% of the number of shares sold in the private placement also exercisable at $0.333 per share. A total of 189,762 warrants were issued.
Net cash proceeds to the Company were $
446,433
.
In conjunction with the private placement of common stock, the Company issued a total of
426,626
five-year warrants to WestPark Capital, Inc. exercisable at the per share price of the common stock sold in the private placement ($
0.333
per share). The warrants issued to WestPark Capital, Inc. do not contain any price anti-dilution provisions. However, such warrants contained cashless exercise provisions and demand registration rights, but the warrant holder has agreed to waive any claims to monetary damages or financial penalties for any failure by the Company to comply with such registration requirements. Based on the foregoing, the warrants were accounted for as equity and were not accounted for separately from the common stock and additional paid-in capital accounts. The warrants had no accounting impact on the Company’s consolidated financial statements.
As part of the Company’s private placement of its securities completed on July 27, 2006, the Company entered into a registration rights agreement with the purchasers, whereby the Company agreed to register the shares of common stock sold in the private placement, and to maintain the effectiveness of such registration statement, subject to certain conditions.
The agreement required the Company to file a registration statement within 45 days of the closing of the private placement and to have the registration statement declared effective within 120 days of the closing of the private placement.
On September 8, 2006, the Company filed a registration statement on Form SB-2 to register
3,555,220
shares of the common stock sold in the private placement. Since the registration statement was not declared effective by the Securities and Exchange Commission within 120 days of the closing of the private placement, the Company was required to pay each investor prorated liquidated damages equal to
1.0
% of the amount raised per month, payable monthly in cash.
On the date of the closing of the private placement, the Company believed it would meet the deadlines under the registration rights agreement with respect to filing a registration statement and having it declared effective by the Securities and Exchange Commission. As a result, the Company did not record any liabilities associated with the registration rights agreement at June 30, 2006. At December 31, 2006, the Company determined that the registration statement covering the shares sold in the private placement would not be declared effective within the requisite time frame and therefore recorded a current liability representing six months liquidated damages under the registration rights agreement aggregating approximately $
74,000
. The Company’s registration statement on Form SB-2 was declared effective by the Securities and Exchange Commission on May 14, 2007. At December 31, 2013, the registration penalty payable to the investors had not been paid, and has been included in the Company’s balance sheet as a current liability for all periods presented.
On December 12, 2007, the Company sold an aggregate of
999,995
shares of its common stock to accredited investors in a second private placement at a per share price of $
0.65
, resulting in aggregate gross proceeds to the Company of $
650,000
. The Company paid to WestPark Capital, Inc., as placement agent, a commission of
10
% and a non-accountable fee of
4
% of the gross proceeds of the private placement and issued
five-year warrants
to purchase common stock equal to
(a) 10% of the number of shares sold in the private placement exercisable at $0.65 per share and (b) an additional 2% of the number of shares sold in the private placement also exercisable at $0.65 per share. Net cash proceeds to the Company were $531,320.
In conjunction with the second private placement of common stock, the Company issued a total of
120,000
five-year warrants to WestPark Capital, Inc. exercisable at the per share price of the common stock sold in the private placement ($0.65 per share). The warrants issued to WestPark Capital, Inc. did not contain any price anti-dilution provisions. However, such warrants contain cashless exercise provisions and demand registration rights, but the warrant holder has agreed to waive any claims to monetary damages or financial penalties for any failure by the Company to comply with such registration requirements. Based on the foregoing, the warrants were accounted for as equity and were not accounted for separately from the common stock and additional paid-in capital accounts. The warrants had no accounting impact on the Company’s consolidated financial statements. On December 12, 2012, the above described warrants expired unexercised.
As part of the Company’s second private placement of its securities completed on December 12, 2007, the Company entered into a registration rights agreement with the purchasers, whereby the Company agreed to register the shares of common stock sold in the second private placement at its sole cost and expense. The registration rights agreement terminates at such time as the common shares may be sold in market transactions without regard to any volume limitations.
The registration rights agreement requires the Company to file a registration statement within 75 days of receipt of written demand from holders who represent at least 50% of the common shares issued pursuant to the second private placement, provided that no demand shall be made for less than 500,000 shares, and to use its best efforts to cause such registration statement to become and remain effective for the requisite period.
The registration rights agreement also provides for unlimited piggyback registration rights. The registration rights agreement does not provide for any penalties in the event that the Company is unable to comply with its terms.
D
uring the year ended December 31, 2009, the Company completed three closings of the third private placement of common stock units, consisting of a total of
1,420,000
shares of common stock and
1,420,000
warrants to acquire common stock, as follows:
On February 10, 2009, the Company sold an aggregate of
658,000
common stock units to accredited investors in a first closing of a third private placement at a per unit price of $
0.50
, resulting in aggregate gross proceeds to the Company of $
329,000
. Net cash proceeds to the Company were $
269,790
.
On March 2, 2009, the Company sold an aggregate of
262,000
common stock units to accredited investors in a second closing of the third private placement at a per unit price of $
0.50
, resulting in aggregate gross proceeds to the Company of $
131,000
. Net cash proceeds to the Company were $
112,460
.
On April 6, 2009, the Company sold an aggregate of
500,000
common stock units to accredited investors in a third closing of the third private placement at a per unit price of $
0.50
, resulting in aggregate gross proceeds to the Company of $
250,000
. Net cash proceeds to the Company were $
214,800
.
Each unit sold in the third private placement consisted of one share of the Company’s common stock and a five-year warrant to purchase an additional share of the Company’s common stock on a cashless exercise basis at an exercise price of $0.50 per common share.
The Company paid to WestPark Capital, Inc., as placement agent, a commission of
10
% and a non-accountable fee of
4
% of the gross proceeds of the third private placement and issued
five-year warrants
to purchase common stock equal to
(a) 10% of the number of shares sold in the third private placement exercisable at $0.50 per share and 10% of the number of shares issuable upon exercise of warrants issued in the third private placement exercisable at $0.50 per share; and (b) an additional 2% of the number of shares sold in the third private placement also exercisable at $0.50 per share and 2% of the number of shares issuable upon exercise of the warrants issued in the third private placement exercisable at $0.50 per share.
In conjunction with the closings of the third private placement of common stock units during the year ended December 31, 2009, the Company issued a total of
340,800
five-year warrants to WestPark Capital, Inc., which are exercisable at the per unit price of the common stock units sold in the third private placement ($
0.50
per unit). Included in the 340,800 warrants issued to WestPark Capital, Inc. are
170,400
warrants which are only exercisable with respect to common shares that are acquired by investors upon their exercise of the warrants acquired as part of the units sold in the third private placement. The warrants issued to WestPark Capital, Inc. do not contain any price anti-dilution provisions. However, such warrants contain cashless exercise provisions and demand registration rights, but the warrant holder has agreed to waive any claims to monetary damages or financial penalties for any failure by the Company to comply with such registration requirements. Based on the foregoing, the warrants were accounted for as equity and were not accounted for separately from the common stock and additional paid-in capital accounts. The warrants had no accounting impact on the Company’s consolidated financial statements. On May 10, 2012, warrants to purchase
1,440
shares of common stock were exercised.
At the request of the holders, the Company has agreed to include any shares sold in the third private placement and any shares issuable upon exercise of the related warrants to be included in any registration statement filed with the Securities and Exchange Commission permitting the resale of such shares, subject to customary cutbacks, at the Company’s sole cost and expense.
Effective November 6, 2009, the Company sold
1,000,000
common stock units to an accredited investor in a fourth private placement at a per unit price of $0.50, resulting in proceeds to the Company of $
500,000
. There were no commissions paid with respect to the fourth private placement. The closing price of the Company’s common stock on November 6, 2009 was $
0.50
per share.
Each unit sold in the fourth private placement consisted of one share of the Company’s common stock, one
three-year warrant
to purchase an additional share of the Company’s common stock at an exercise price of $
0.50
per share, and one three-year warrant to purchase an additional share of the Company’s common stock at an exercise price of $
0.75
per share. The warrants do not have any reset provisions.
At the request of the holder, the Company has agreed to include the shares sold in the fourth private placement and any shares issuable upon exercise of the related warrants in any registration statement filed by the Company with the Securities and Exchange Commission permitting the resale of such securities, subject to customary cutbacks. The units sold were not registered under the Securities Act of 1933, as amended (the “Act”), in reliance upon the exemption from registration contained in Section 4(2) of the Act and Regulation D promulgated thereunder. Based on the foregoing, the warrants were accounted for as equity and were not accounted for separately from the common stock and additional paid-in capital accounts. The warrants had no accounting impact on the Company’s consolidated financial statements.
Effective January 20, 2010, the Company raised $
1,787,500
in a fifth private placement of units sold to certain of its existing stockholders or their designees, all of whom were accredited investors, consisting of an aggregate of
3,575,000
units at a purchase price of $0.50 per unit. Each unit consisted of one share of common stock, one
three-year warrant
to purchase a share of common stock at an exercise price of $
0.50
per share, and one three-year warrant to purchase a share of common stock at an exercise price of $
0.75
per share. The warrants do not have any reset provisions. The closing price of the Company’s common stock on January 20, 2010 was $
0.49
per share. There were no commissions paid with respect to the private placement. Upon request by the holder, the Company has agreed to include the shares issued and those shares issuable upon exercise of the warrants in any registration statement filed by the Company with the Securities and Exchange Commission permitting the resale of such securities, subject to customary cutbacks. The units sold were not registered under the Act, in reliance upon the exemption from registration contained in Section 4(2) of the Act and Regulation D promulgated thereunder. The Company accounted for the issuance of the units as a capital transaction. As of December 31, 2009, $
1,200,000
had been advanced to the Company under this private placement, with the balance of $
587,500
being received by the Company in January 2010.
Effective February 22, 2010, the Company raised $
500,000
through the sale to an accredited investor of
1,000,000
units at a purchase price of $
0.50
per unit. Each unit consisted of one share of common stock, one three-year warrant to purchase a share of common stock at an exercise price of $0.50 per share, and one
three year-year warrant
to purchase a share of common stock at an exercise price of $
0.75
per share. The warrants do not have any reset provisions. The closing price of the Company’s common stock on February 22, 2010 was $
0.50
per share. There were no commissions paid with respect to the private placement. Upon request by the holder, the Company has agreed to include the shares issued and those shares issuable upon exercise of the warrants in any registration statement filed by the Company with the Securities and Exchange Commission permitting the resale of such securities, subject to customary cutbacks. The units sold were not registered under the Act, in reliance upon the exemption from registration contained in Section 4(2) of the Act and Regulation D promulgated thereunder. The Company accounted for the issuance of the units as a capital transaction.
If and when the aforementioned stock warrants are exercised, the Company expects to satisfy such stock obligations through the issuance of authorized but unissued shares of common stock.
Common Stock Warrants
On July 27, 2009, the Company entered into an agreement with Pro-Active Capital Group, LLC (“Pro-Active”) to retain Pro-Active on a non-exclusive basis for a period of twelve months to provide consulting advice to assist the Company in obtaining research coverage, gaining web-site exposure and coverage on financial blogs and web-sites, enhancing the Company’s visibility to the institutional, retail brokerage and on-line trading communities, and organizing, or assisting in organizing, investor road-shows and presentations. In exchange for such consulting advice, at the initiation of the agreement, the Company agreed to issue to Pro-Active
150,000
shares of restricted common stock and three-year warrants to purchase an aggregate of
150,000
shares of common stock, exercisable
50,000
at $
0.75
per share,
50,000
at $
1.00
per share, and
50,000
at $
1.25
per share. The fair value of the 150,000 shares issued was determined to be $
100,500
($
0.67
per share), reflecting the price per share of the Company’s common stock, as quoted on the OTC Bulletin Board, on the transaction date. The fair value of the three-year warrants, as calculated pursuant to the Black-Scholes option-pricing model, was determined to be $
97,500
($
0.65
per share). The $
198,000
aggregate fair value of the shares and warrants issued was charged to operations as stock-based compensation on July 27, 2009, since the shares and warrants were fully vested and non-forfeitable on the date of issuance. On July 27, 2012, the above described warrants expired unexercised.
On June 30, 2011, WestPark Capital, Inc. exercised warrants to acquire
152,874
shares of common stock, obtained in connection with its role as placement agent for the June 30, 2006 private placement, on a cashless basis. Such cashless exercise resulted in WestPark Capital, Inc. receiving a net of
100,929
shares of common stock.
On July 27, 2011, the Company agreed to extend the remaining portion of the warrants obtained by WestPark Capital, Inc. in connection with its role as placement agent for the June 30, 2006 private placement, consisting of warrants to acquire
273,752
shares of common stock, from July 27, 2011 to July 27, 2012. In conjunction with the extension of these warrants, the cashless exercise feature was deleted. The fair value of the warrant extension, as calculated pursuant to the Black-Scholes option-pricing model, was determined to be $
199,839
($
0.73
per share), and was charged to operations on July 27, 2011. The fair value of the warrant extension was calculated using the following input variables: stock price - $
0.79
per share; exercise price - $
0.333
per share; expected life -
1
year; expected volatility –
308.8
%; expected dividend yield -
0
%; risk-free interest rate –
0.14
%.
On July 16, 2012, the Company’s Board of Directors agreed to permit the exercise of the above described warrants to acquire
273,752
shares of common stock of the Company on a cashless basis, provided that the cashless exercise price was increased by
20
%, from $
0.333
to $
0.3996
per share. Accordingly, on July 16, 2012, warrants to acquire
273,752
shares of common stock, issued in connection with WestPark Capital, Inc.’s role as placement agent for the June 30, 2006 private placement, were exercised on a cashless basis. Such cashless exercise resulted in the net issuance of
141,955
shares of common stock. The Company’s closing stock price on July 16, 2012 was $
0.83
per share. As the fair value of the warrants immediately after the modification was less than the fair value of the warrants immediately prior to the modification (both amounts being calculated pursuant to the Black-Scholes option-pricing model), the Company did not record any accounting adjustment with respect to the warrant modification.
On May 3, 2012, the Company offered to all of its warrant holders an inducement to exercise early, by reducing the exercise price of currently outstanding warrants by
25
%, if exercised on a cash basis by June 15, 2012. The exercise prices of the warrants before reduction ranged from $
0.333
to $
1.25
per share, and the offer was open until the sooner of receiving $
3,000,000
in net proceeds, or June 15, 2012, subject to the Company’s right to extend the offer to June 30, 2012. The offer was subject to certain conditions. As a result of the discount warrant offer, warrants to acquire 6,082,000 shares of the Company’s common stock were exercised at discounts ranging from $
0.125
to $
0.188
per share. The exercise of the warrants generated aggregate net proceeds to the Company of $
2,468,250
. The aggregate fair value of the warrant discounts, as calculated pursuant to the Black-Scholes option-pricing model, was determined to be $
334,024
(an average of $0.05 per share issued), and such amount was charged to operations during the months of May and June of 2012. The fair value of the warrant discounts attributed to the exercise of
5,082,000
warrants was calculated using the following input variables: stock price on date of exercise - $
0.69
to $
0.84
per share; stated exercise price – $
0.50
; discounted exercise price – $
0.375
per share; expected life –
157
days to
661
days; expected volatility –
150.1
%; expected dividend yield -
0
%; risk-free interest rate –
0.24
%. The fair value of the warrant discounts attributed to the exercise of
1,000,000
warrants was calculated using the following input variables: stock price on date of exercise - $
0.69
per share; stated exercise price – $
0.75
; discounted exercise price – $
0.563
per share; expected life –
157
days; expected volatility –
150.1
%; expected dividend yield -
0
%; risk-free interest rate –
0.24
%.
On September 11, 2012, the Company’s Board of Directors extended outstanding warrants to acquire
5,080,000
shares of the Company’s common stock that were purchased by investors as part of the offerings that closed on January 20, 2010 and February 22, 2010, to June 30, 2014. Included in such extension were warrants to acquire
505,000
shares of common stock at $
0.50
per share scheduled to expire on January 20, 2013, warrants to acquire
3,575,000
shares of common stock at $
0.75
per share scheduled to expire on January 20, 2013, and warrants to acquire
1,000,000
shares at $
0.75
per share scheduled to expire on February 22, 2013. The fair value of the warrant extensions, as calculated pursuant to the Black-Scholes option-pricing model, was determined to be $
1,139,592
(average of $
0.22
per share), and such amount was charged to operations on September 11, 2012. The fair value of the warrant extensions were calculated using the following input variables: stock price - $
0.65
per share; exercise price - $
0.50
and $
0.75
per share; expected life –
526
days and
493
days; expected volatility –
148.4
%; expected dividend yield -
0
%; risk-free interest rate –
0.29
%.
A summary of common stock warrant activity, including warrants to purchase common stock that were issued in conjunction with the Company’s private placements, is presented in the tables below. For presentation purposes, warrants that were extended are considered as outstanding for the entire period in which such extension occurs.
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Weighted
|
|
Remaining
|
|
|
|
|
Number
|
|
Average
|
|
Contractual
|
|
|
|
|
of
|
|
Exercise
|
|
Life
|
|
|
|
|
Shares
|
|
Price
|
|
(in Years)
|
|
|
Warrants outstanding at December 31, 2011
|
|
|
13,454,552
|
|
$
|
0.607
|
|
|
|
|
|
Issued
|
|
|
—
|
|
|
—
|
|
|
|
|
|
Exercised
|
|
|
(6,355,752)
|
|
|
0.535
|
|
|
|
|
|
Expired
|
|
|
(270,000)
|
|
|
0.844
|
|
|
|
|
|
Warrants outstanding at December 31, 2012
|
|
|
6,828,800
|
|
|
0.667
|
|
|
|
|
|
Issued
|
|
|
—
|
|
|
—
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
—
|
|
|
|
|
|
Expired
|
|
|
—
|
|
|
—
|
|
|
|
|
|
Warrants outstanding at December 31, 2013
|
|
|
6,828,800
|
|
$
|
0.667
|
|
|
0.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants exercisable at December 31, 2012
|
|
|
6,659,840
|
|
$
|
0.672
|
|
|
|
|
|
Warrants exercisable at December 31, 2013
|
|
|
6,659,840
|
|
$
|
0.672
|
|
|
0.42
|
|
The exercise prices of common stock warrants outstanding and exercisable are as follows at December 31, 2013:
|
|
|
Warrants
|
|
Warrants
|
|
|
Exercise
|
|
Outstanding
|
|
Exercisable
|
|
|
Prices
|
|
(Shares)
|
|
(Shares)
|
|
|
|
|
|
|
|
|
|
|
$
|
0.500
|
|
2,253,800
|
|
2,084,840
|
|
|
$
|
0.750
|
|
4,575,000
|
|
4,575,000
|
|
|
|
|
|
6,828,800
|
|
6,659,840
|
|
Based on a fair market value of $
0.13
per share on December 31, 2013, there were no exercisable but unexercised in-the-money common stock warrants on that date. Accordingly, there was no intrinsic value attributed to exercisable but unexercised common stock warrants at December 31, 2013.
Based on a fair market value of $
0.25
per share on December 31, 2012, there were no exercisable but unexercised in-the-money common stock warrants on that date. Accordingly, there was no intrinsic value attributed to exercisable but unexercised common stock warrants at December 31, 2012
At December 31, 2013, warrants exercisable do not include warrants to acquire
168,960
shares of common stock that are contingent upon the exercise of warrants contained in units sold as part of the third private placement, as described above.
Effective January 28, 2014, the Company entered into various transactions involving its outstanding warrants, as described at Note 9.
4. Money Market Funds — Fair Value
Money market funds at December 31, 2013 and 2012 consisted of investments in shares of Morgan Stanley New York Municipal Money Market Trust with market values of $
6,135
and $
6,134
, respectively. The Morgan Stanley New York Municipal Money Market Trust is an open-end fund incorporated in the USA. The Fund's objective is as high level of daily income exempt from federal and New York income tax as is consistent with stability of principal and liquidity. The Fund invests in high quality, short- term municipal obligations that pay interest exempt from federal and NY taxes.
The authoritative guidance with respect to fair value established a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels, and requires that assets and liabilities carried at fair value be classified and disclosed in one of three categories, as presented below. Disclosure as to transfers in and out of Levels 1 and 2, and activity in Level 3 fair value measurements, is also required.
Level 1: quoted prices (unadjusted) in active markets for an identical asset or liability that the Company has the ability to access as of the measurement date. Financial assets and liabilities utilizing Level 1 inputs include active-exchange traded securities and exchange-based derivatives.
Level 2: inputs other than quoted prices included within Level 1 that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data. Financial assets and liabilities utilizing Level 2 inputs include fixed income securities, non-exchange based derivatives, mutual funds, and fair-value hedges.
Level 3: unobservable inputs for the asset or liability are only used when there is little, if any, market activity for the asset or liability at the measurement date. Financial assets and liabilities utilizing Level 3 inputs include infrequently-traded non-exchange-based derivatives and commingled investment funds, and are measured using present value pricing models.
The Company determines the level in the fair value hierarchy within which each fair value measurement falls in its entirety, based on the lowest level input that is significant to the fair value measurement in its entirety. In determining the appropriate levels, the Company performs an analysis of the assets and liabilities at each reporting period end.
Money market funds are the only financial instrument that is measured and recorded at fair value on the Company’s balance sheet on a recurring basis.
The following table presents money market funds at their level within the fair value hierarchy at December 31, 2013 and 2012.
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
6,135
|
|
$
|
6,135
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
6,134
|
|
$
|
6,134
|
|
$
|
—
|
|
$
|
—
|
|
5. Related Party Transactions
Prior to June 30, 2006, the Company’s founding stockholder and Chief Executive Officer, Dr. John Kovach, had periodically made advances to the Company to meet operating expenses. Such advances are non-interest-bearing and are due on demand. At December 31, 2013 and 2012, stockholder advances outstanding and due to Dr. Kovach totaled $
92,717
.
The Company’s office facilities have been provided without charge by Dr. Kovach. Such costs were not material to the financial statements and, accordingly, have not been reflected therein.
In view of the Company’s development stage status and limited resources, Dr. Kovach did not receive any compensation from the Company prior to 2011. However, on February 18, 2011, the Company’s Board of Directors approved a salary for Dr. Kovach of $
5,000
per month beginning
March 15, 2011
. Dr. Kovach was paid a salary of $
60,000
for the years ended December 31, 2013 and 2012, and $
167,500
for the period from August 9, 2005 (inception) to December 31, 2013 (cumulative), which amounts are included in general and administrative costs in the Company's consolidated statements of operations.
Dr. Kovach is not involved in other business activities but could, in the future, become involved in other business opportunities that become available. Accordingly, he may face a conflict in selecting between the Company and his other business interests. The Company has not yet formulated a policy for the resolution of such potential conflicts.
On April 7, 2010, the Company entered into an agreement with Dr. Mel Sorensen, a member of the Company’s Board of Directors,
for consultation and advice regarding the preparation and strategy for obtaining FDA allowance of a clinical trial of the lead compound of the LB-100 series. The initial term of the agreement was for one year and provided for an annual fee of $
25,000
, payable in two installments of $
12,500
on April 15, 2010 and October 15, 2010. On February 18, 2011, the Company’s Board of Directors approved a one-year extension of the agreement for an additional annual fee of $
25,000
, payable in two installments of $
12,500
on April 15, 2011 and October 15, 2011. On May 21, 2012,
the Company entered into a new agreement with Dr. Mel Sorensen
for continuing consultation and advice. The term of the new agreement was for the period from May 21, 2012 to May 31, 2013 and provided for a fee of $
25,000
, payable in two installments of $
12,500
on May 21, 2012 and December 1, 2012. All installments have been paid as due.
Consulting and advisory fees charged to operations pursuant to these agreements were $
10,417
and $
21,875
for the years ended December 31, 2013 and 2012, respectively, and $
75,000
for the period from August 9, 2005 (inception) to December 31, 2013 (cumulative), and are included in research and development costs in the Company's consolidated statements of operations.
On September 21, 2012, the Company entered into a work order agreement with Theradex
to manage and administer the Phase 1 clinical trial of LB-100. Theradex is an international CRO that provides professional services for the clinical research and development of pharmaceutical compounds. The Phase 1 clinical trial of LB-100, which began during April 2013 with the entry of patients into the clinical trial, is being carried out by nationally recognized comprehensive cancer centers, and is estimated to be completed within the next 12 to
21 months (sometime between March and December 2015).
The Phase 1 clinical trial is
estimated
to cost a total of approximately
$
2,000,000
, with such payments expected to be divided approximately evenly between payments to Theradex for services rendered and payments for pass-through costs for the clinical center’s laboratory costs and investigator costs. Total costs charged to operations for services paid to Theradex pursuant to this arrangement, which were first incurred in 2013, were $
278,721
for the year ended December 31, 2013. Costs pursuant to this agreement are included in research and development costs in the Company's consolidated statements of operations. On May 2, 2011, Dr. Robert B. Royds, the founder, Chairman of the Board and Medical Director of Theradex, was appointed to the Company’s Board of Directors. Dr. Royds died on March 23, 2013. The death of Dr. Royds is not expected to have any impact on the management and administration of the Phase 1 clinical trial.
In addition to the above described agreement with Theradex, the Company has also from time to time engaged Theradex to assist the Company in bringing LB-100 through the FDA approval process and to provide other services. Total fees charged to operations for services paid to Theradex pursuant to such engagements were $
14,964
and $
163,661
for the years ended December 31, 2013 and 2012, respectively, and $
194,551
for the period from August 9, 2005 (inception) to December 31, 2013 (cumulative), and are included in research and development costs in the Company's consolidated statements of operations.
On December 24, 2013, the Company entered into an agreement with NDA Consulting Corp. ("NDA") for consultation and advice in the field of oncology research and drug development. As part of the agreement, NDA agreed to cause its president, Dr.
Daniel D.
Von Hoff,
M.D.,
to become a member of the Company's Scientific Advisory
Committee
.
The term of the agreement was for one year and provides for a quarterly cash fee of $
4,000
. The first such quarterly cash payment was made on January 12, 2014.
There were no consulting or advisory fees charged to operations pursuant to this quarterly cash fee prior to January 1, 2014.
In connection with this agreement, NDA was granted stock options to purchase
100,000
shares of the Company’s common stock, vesting
25,000
shares on June 24, 2014, and
25,000
shares annually on June 24 thereafter
25,000
shares annually on June 24, 2015, 2016 and 2017, exercisable for a period of five years from the date of grant at $
0.13
per share, which was the fair market value of the common stock on the grant date.
Effective January 1, 2014, the Company entered into an Advisory Agreement with Dr. Kathleen P. Mullinix, a member of the Company’s Board of Directors, as described at Note 9.
Stock-based compensation arrangements involving members of the Company’s Board of Directors are described at Note 6. Total stock-based compensation expense relating to directors, officers and other related parties was $
119,250
and $
1,017,004
for the years ended December 31, 2013 and 2012, respectively, and $
3,598,461
for the period from August 9, 2005 (inception) to December 31, 2013 (cumulative).
6. Stock-Based Compensation
The Company grants stock options as incentive compensation to directors and as compensation for the services of independent contractors and consultants of the Company.
The fair value of each option awarded is estimated on the date of grant and subsequent measurement dates using the Black-Scholes option-pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s stock options have characteristics significantly different from those of traded options, and because changes in the subjective assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. The expected dividend yield assumption is based on the Company’s expectation of dividend payouts. Expected volatilities are based on historical volatility of the Company’s stock. The risk-free interest rate is based on the U.S. treasury yield curve in effect as of the grant date. Expected life of the options is the average of the vesting term and the full contractual term of the options.
New transactions during the year ended December 31, 2013 that required an assessment of value pursuant to the Black-Scholes option-pricing model utilized the following inputs: exercise price per share - $
0.13
; stock price per share – $0.13; expected dividend yield –
0.00
%; expected volatility –
262.0
%; average risk-free interest rate –
1.51
%; expected life –
5
years. There were no transactions entered into in prior periods that required re-evaluation of assessed value at December 31, 2013.
New transactions during the year ended December 31, 2012 that required an assessment of value pursuant to the Black-Scholes option-pricing model utilized the following inputs: exercise price per share - $
0.65
to $
1.00
; stock price per share – $
0.65
; expected dividend yield –
0.00
%; expected volatility –
148.4
%; average risk-free interest rate –
0.78
%; expected life –
5
years. For the purpose of assessing value for transactions requiring re-evaluation at December 31, 2012 that were entered into in prior periods, the Black-Scholes option-pricing model utilized the following inputs for the year ended December 31, 2012: exercise price per share - $
0.98
to $
1.00
; stock price per share – $
0.25
; expected dividend yield –
0.00
%; expected volatility –
128.4
%; average risk-free interest rate –
0.24
%; expected life –
3.50
to
4.00
years.
As the Company’s common stock commenced trading on September 24, 2007, the Company was able to utilize such trading data to generate revised volatility factors as of the various measurement dates.
On June 30, 2006, effective with the closing of the Exchange, the Company granted to Dr. Philip Palmedo, an outside director of the Company, stock options to purchase an aggregate of
200,000
shares of common stock, exercisable for a period of five years at $
0.333
per share, with one-third of the options (
66,666
shares) vesting immediately upon joining the Board and one-third vesting annually on each of June 30, 2007 and 2008. The fair value of these options, as calculated pursuant to the Black-Scholes option-pricing model, was determined to be $
62,000
($
0.31
per share), of which $
20,666
was charged to operations on June 30, 2006, and the remaining $
41,334
was charged to operations ratably from July 1, 2006 through June 30, 2008. On June 30, 2011, these options to acquire
200,000
shares of common stock expired unexercised.
On June 30, 2006, effective with the closing of the Exchange, the Company also granted to Dr. Palmedo additional stock options to purchase
190,000
shares of common stock exercisable for a period of five years at $
0.333
per share for services rendered in developing the business plan for Lixte, all of which were fully vested upon issuance. The fair value of these options, as calculated pursuant to the Black-Scholes option-pricing model, was determined to be $
58,900
($
0.31
per share), and was charged to operations at June 30, 2006. On June 30, 2011, Dr. Palmedo exercised options to acquire
100,000
shares of common stock, which were part of this grant, on a cashless basis. Such cashless exercise resulted in Dr. Palmedo receiving a net of
66,020
shares of common stock. The remaining options to acquire
290,000
shares of common stock, which were also a part of this grant, expired unexercised on June 30, 2011.
On June 30, 2011, the Company granted to Dr. Palmedo stock options to purchase
200,000
shares of common stock, exercisable for a period of five years from the date of grant at $
0.98
per share, which was the fair market value of the Company’s common stock on such date. The options vest ratably in equal quarterly installments of
25,000
shares beginning July 1, 2011. The fair value of these options, as calculated pursuant to the Black-Scholes option-pricing model, was initially determined to be $
196,000
($
0.98
per share). During the years ended December 31, 2013 and 2012, the Company recorded charges to operations of $
48,530
and $
98,134
, respectively, with respect to these options.
On June 30, 2006, effective with the closing of the Exchange, the Company granted to Dr. Stefan Madajewicz and Dr. Iwao Ojima, two members of its Scientific Advisory Committee, stock options to purchase an aggregate of
100,000
shares of common stock (
50,000
each) exercisable for a period of five years at $
0.333
per share, with one-half of the options vesting annually on each of June 30, 2007 and June 30, 2008. The fair value of these options, as calculated pursuant to the Black-Scholes option-pricing model, was charged to operations ratably from July 1, 2006 through June 30, 2008.
In August 2008, Dr. Madajewicz resigned from his position and waived his right to his vested stock option to purchase
50,000
shares of common stock.
On June 30, 2011, Dr. Ojima exercised options to acquire
15,015
shares of common stock for a cash payment of $
5,000
. Dr. Ojima’s remaining options to acquire
34,985
shares of common stock expired unexercised.
On June 30, 2011, the Company granted to Dr. Ojima stock options to purchase 50,000 shares of common stock, exercisable for a period of five years from the date of grant at $0.98 per share, which was the fair market value of the Company’s common stock on such date. The options vest ratably in equal quarterly installments of
6,250
shares beginning July 1, 2011. The fair value of these options, as calculated pursuant to the Black-Scholes option-pricing model, was initially determined to be $
49,000
($0.98 per share). During the years ended December 31, 2013 and 2012, the Company recorded a charge (credit) to operations of $
3,357
and $(650), respectively, with respect to these options.
On February 5, 2007, the Company entered into an agreement (the “Chem-Master Agreement”) with Chem-Master International, Inc. (“Chem-Master”), a company co-owned by Francis Johnson, a consultant to the Company, pursuant to which the Company granted a five-year option to purchase
100,000
shares of the Company’s common stock at an exercise price of $
0.333
per share. The fair value of this option, as calculated pursuant to the Black-Scholes option-pricing model, was determined to be $
31,000
($
0.31
per share) which was charged to operations as research and development costs on February 5, 2007 as the option was fully vested and non-forfeitable on the date of issuance. The Company has the right to terminate the Chem-Master Agreement at any time during its term upon sixty days prior written notice. On February 5, 2009, provided that the Chem-Master Agreement had not been terminated prior to such date, the Company agreed to grant Chem-Master a second five-year option to purchase an additional
100,000
shares of the Company’s common stock at an exercise price of $
0.333
per share. As of September 30, 2008, the Company determined that it was likely that this option would be issued. Accordingly, the fair value of the option was reflected as a charge to operations for the period from October 1, 2008 through February 5, 2009. The Company granted the second five-year option on February 5, 2009. On February 4, 2012, Chem-Master exercised the option to acquire
100,000
shares of common stock previously granted on February 5, 2007 for a cash payment of $
33,333
.
On January 29, 2008, the Chem-Master Agreement was amended to extend its term to February 15, 2014. Pursuant to the amendment, the Company issued
100,000
shares of its restricted common stock and granted an option to purchase
200,000
shares of common stock. The option was exercisable for a period of two years from the vesting date at $
1.65
per share, with one-half (
100,000
shares) vesting on August 1, 2009, and one-half (
100,000
shares) vesting on February 1, 2011. The restricted common stock issued, which was valued at $
75,000
, was charged to operations as research and development costs on January 29, 2008. The initial fair value of the option, as calculated pursuant to the Black-Scholes option-pricing model, was determined to be $
96,000
($
0.48
per share) and was charged to operations ratably during the period from February 1, 2008 through February 1, 2011. On August 1, 2011, the option to acquire 100,000 shares of common stock that vested on August 1, 2009 expired unexercised. On February 1, 2013, the option to acquire the remaining 100,000 shares of common stock that vested on February 1, 2011 also expired unexercised.
On September 11, 2012, the Company granted to Chem-Master a stock option to purchase
500,000
shares of common stock, exercisable for a period of five years from the date of grant at $
0.65
per share, which was the fair market value of the Company’s common stock on such date. The fair value of this option, as calculated pursuant to the Black-Scholes option-pricing model, was determined to be $
293,450
($
0.59
per share), which was charged to operations as research and development costs on September 11, 2012, as the option was fully vested and non-forfeitable on the date of issuance. The option includes cashless exercise provisions.
On June 20, 2007, the Board of Directors of the Company approved the 2007 Stock Compensation Plan (the “2007 Plan”), which provides for the granting of awards, consisting of common stock options, stock appreciation rights, performance shares, or restricted shares of common stock, to employees and independent contractors, for up to
2,500,000
shares of the Company’s common stock, under terms and condition, as determined by the Company’s Board of Directors.
On September 12, 2007, in conjunction with his appointment as a director of the Company, the Company granted to Dr. Stephen Carter stock options to purchase an aggregate of
200,000
shares of common stock under the 2007 Plan, exercisable for a period of five years from vesting date at $
0.333
per share, with one-half (
100,000
shares) vesting annually on each of September 12, 2008 and 2009. The fair value of these options, as calculated pursuant to the Black-Scholes option-pricing model, was determined to be $
204,000
($
1.02
per share), and was charged to operations ratably from September 12, 2007 through September 12, 2009. Effective April 20, 2010, Dr. Carter resigned as a director for personal reasons. Consequently, pursuant to the stock option agreement, Dr. Carter had twelve months from April 20, 2010 to exercise his stock options to acquire
200,000
shares of the Company’s common stock. On April 20, 2011, Dr. Carter’s stock options expired unexercised.
On September 12, 2007, the Company entered into a consulting agreement with Gil Schwartzberg, pursuant to which the Company granted to Mr. Schwartzberg stock options to purchase an aggregate of
1,000,000
shares of common stock, exercisable for a period of the earlier of four years from the vesting date or the termination of the consulting agreement at $1.00 per share, with one-half of the options (
500,000
shares) vesting immediately and one-half of the options (
500,000
shares) vesting on September 12, 2008. The fair value of these options, as calculated pursuant to the Black-Scholes option-pricing model, was initially determined to be $
945,000
($
0.945
per share), of which $
465,000
was attributed to the fully-vested options and was thus charged to operations on September 12, 2007. The remaining unvested portion of the fair value of the options was charged to operations ratably from September 12, 2007 through September 12, 2008. On September 12, 2011, options to acquire
500,000
shares of common stock expired unexercised. On September 12, 2012, options to acquire the remaining
500,000
shares of common stock expired unexercised.
On October 15, 2009, the Company approved a first amendment to the above described consulting agreement with Gil Schwartzberg to extend it for an additional four years and granted to Mr. Schwartzberg stock options to purchase an additional aggregate of
1,000,000
shares of common stock, exercisable for a period of the earlier of four years from the vesting date or the termination of the consulting agreement at $
1.00
per share, with one-half of the options (
500,000
shares) vesting immediately and one-half (500,000 shares) vesting on October 15, 2010. The fair value of these options, as calculated pursuant to the Black-Scholes option-pricing model, was determined to be $
750,000
($
0.75
per share) on October 15, 2009, of which $
375,000
was attributed to the fully-vested options and was thus charged to operations on October 15, 2009. The remaining unvested portion of the fair value of the options was charged to operations ratably from October 15, 2009 through October 15, 2010. On October 15, 2013, options to acquire 500,000 shares of common stock expired unexercised.
On January 28, 2014, the Company entered into a second amendment to the Company’s consulting agreement with Gil Schwartzberg, a consultant and significant shareholder of the Company, as described at Note 9.
On October 5, 2011, the Company granted to Mr. Schwartzberg stock options to purchase an aggregate of
500,000
shares of common stock, exercisable for a period of the earlier of five years from the grant date or the termination of the consulting agreement at $
1.00
per share. One-quarter of the options vested immediately, with the balance vesting in three equal quarterly installments beginning on January 5, 2012. The fair value of these options, as calculated pursuant to the Black-Scholes option-pricing model, was initially determined to be $
325,000
($
0.65
per share) and was charged to operations ratably from October 5, 2011 through October 4, 2012. During the year ended December 31, 2012, the Company recorded a charge to operations of $
210,410
with respect to these options.
On September 11, 2012, the Company granted to Mr. Schwartzberg stock options to purchase
500,000
shares of common stock, exercisable for a period of the earlier of
five
years from the date of grant or the termination of the consulting agreement at $
1.00
per share, which was the fair market value of the Company’s common stock on such date. The fair value of these options, as calculated pursuant to the Black-Scholes option-pricing model, was determined to be $
286,100
($
0.57
per share), which was charged to operations on September 11, 2012, as the options were fully vested and non-forfeitable on the date of issuance.
On September 12, 2007, the Company entered into a consulting agreement with Francis Johnson, a co-owner of Chem-Master International, Inc., and granted to Professor Johnson stock options to purchase an aggregate of
300,000
shares of common stock, exercisable for a period of four years from the vesting date at $
0.333
per share, with one-third (
100,000
shares) vesting annually on each of September 12, 2008, 2009 and 2010. The fair value of these options, as calculated pursuant to the Black-Scholes option-pricing model, was initially determined to be $
300,000
($
1.00
per share). The unvested portion of the fair value of the options was charged to operations from September 12, 2007 through September 12, 2010. On September 12, 2013 and 2012, options to acquire 100,000 shares expired unexercised.
On September 20, 2007, the Company entered into a one-year consulting agreement (the “Mirador Agreement”) with Mirador Consulting, Inc. (“Mirador”), pursuant to which Mirador was to provide the Company with various financial services. Pursuant to the Mirador Agreement, the Company agreed to pay Mirador $
5,000
per month and also agreed to sell Mirador
250,000
shares of the Company’s restricted common stock for $
250
($
0.001
per share). The fair value of this transaction was determined to be in excess of the purchase price by $
262,250
($
1.049
per share), reflecting the difference between the $
0.001
purchase price and the $
1.05
price per share as quoted on the OTC Bulletin Board on the transaction date, and was charged to operations as stock-based compensation on September 20, 2007, since the shares were fully vested and non-forfeitable on the date of issuance.
On October 7, 2008, the Company appointed Dr. Mel Sorensen to its Board of Directors. Dr. Sorensen was paid an annual consulting fee of $
40,000
, payable in quarterly installments over a one year period commencing October 7, 2008, to assist the Company in identifying a strategic partner. Dr. Sorensen was also granted a stock option to purchase
200,000
shares of the Company’s common stock, exercisable at $
0.50
per share for a period of five years from each tranche’s vesting date. The option vested as to
25,000
shares on January 1, 2009, and a further
25,000
shares vested on the first day of each subsequent calendar quarter until all of the shares were vested. The fair value of these options, as calculated pursuant to the Black-Scholes option-pricing model, was determined to be $
100,000
($
0.50
per share), and was charged to operations ratably from October 7, 2008 through October 7, 2010.
Effective May 1, 2011, in connection with his election to the Company’s Board of Directors, Dr. Robert B. Royds was granted stock options to purchase
200,000
shares of the Company’s common stock, vesting
25,000
shares on May 1, 2011, and 25,000 shares quarterly thereafter until all of the shares are vested, exercisable for a period of five years from each tranche’s vesting date, at $
0.98
per share, which was the fair market value of the Company’s common stock on such date. The fair value of these options, as calculated pursuant to the Black-Scholes option-pricing model, was determined to be $196,000 ($
0.98
per share), and was charged to operations ratably from May 2, 2011 through February 1, 2013. During the year ended December 31, 2013 and 2012, the Company recorded charges to operations of $
8,548
and $
97,770
, respectively, with respect to these options. Dr. Royds died on March 23, 2013. As a result of the death of Dr. Royds, pursuant to the stock option agreement, Dr. Royds' executor has twelve months from March 23, 2013 to exercise his stock options to acquire 200,000 shares of the Company’s common stock.
Effective September 16, 2012, in connection with her election to the Company’s Board of Directors, Dr. Kathleen P. Mullinix was granted stock options to purchase
200,000
shares of the Company’s common stock, vesting
25,000
shares on September 16, 2012, and 25,000 shares quarterly thereafter until all of the shares are vested, exercisable for a period of
five
years from the date of grant at $
0.65
per share, which was the fair market value of the Company’s common stock on such date. The fair value of these options, as calculated pursuant to the Black-Scholes option-pricing model, was determined to be $
118,000
($
0.59
per share), and is being charged to operations from September 16, 2012 through June 16, 2014. During the years ended December 31, 2013 and 2012, the Company recorded charges to operations of $
58,690
and $
31,790
, respectively, with respect to these options.
On
December 24, 2013, the Company entered into an agreement with NDA Consulting Corp. ("NDA") for consultation and advice in the field of oncology research and drug development. As part of the agreement, NDA agreed to cause its president, Dr.
Daniel D.
Von Hoff,
M.D.,
to become a member of the Company's Scientific Advisory
Committee
.
In connection with this agreement, NDA was granted stock options to purchase 100,000 shares of the Company’s common stock, vesting
25,000
shares on June 24, 2014, and thereafter
25,000
shares annually on June 24, 2015, 2016 and 2017, exercisable for a period of five years from the date of grant at $
0.13
per share, which was the fair market value of the Company’s common stock on
the grant
date. The fair value of these options, as calculated pursuant to the Black-Scholes option-pricing model, was initially determined to be $
12,960
($0.13 per share), and is being charged to operations from December 24, 2013 through June 24, 2017. During the year ended December 31, 2013, the Company recorded a charge to operations of $
125
with respect to these options.
If and when the aforementioned stock options are exercised, the Company expects to satisfy such stock obligations through the issuance of authorized but unissued shares of common stock.
A summary of stock option activity is presented in the tables below.
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Weighted
|
|
Remaining
|
|
|
|
|
Number
|
|
Average
|
|
Contractual
|
|
|
|
|
of
|
|
Exercise
|
|
Life
|
|
|
|
|
Shares
|
|
Price
|
|
(in Years)
|
|
|
Options outstanding at December 31, 2011
|
|
|
3,250,000
|
|
$
|
0.884
|
|
|
|
|
|
Granted
|
|
|
1,200,000
|
|
|
0.796
|
|
|
|
|
|
Exercised
|
|
|
(100,000)
|
|
|
0.333
|
|
|
|
|
|
Expired
|
|
|
(600,000)
|
|
|
0.889
|
|
|
|
|
|
Options outstanding at December 31, 2012
|
|
|
3,750,000
|
|
|
0.870
|
|
|
|
|
|
Granted
|
|
|
100,000
|
|
|
0.130
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
—
|
|
|
|
|
|
Expired
|
|
|
(700,000)
|
|
|
1.045
|
|
|
|
|
|
Options outstanding at December 31, 2013
|
|
|
3,150,000
|
|
$
|
0.818
|
|
|
2.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31, 2012
|
|
|
3,512,500
|
|
$
|
0.876
|
|
|
|
|
|
Options exercisable at December 31, 2013
|
|
|
3,000,000
|
|
$
|
0.843
|
|
|
2.52
|
|
Total deferred compensation expense for the outstanding value of unvested stock options was approximately $
40,000
at December 31, 2013, which is being recognized subsequent to December 31, 2013 over a weighted-average period of approximately seventeen months.
The exercise prices of common stock options outstanding and exercisable are as follows at December 31, 2013:
|
|
|
|
Options
|
|
Options
|
|
|
Exercise
|
|
Outstanding
|
|
Exercisable
|
|
|
Prices
|
|
(Shares)
|
|
(Shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.130
|
|
|
100,000
|
|
|
—
|
|
|
$
|
0.333
|
|
|
200,000
|
|
|
200,000
|
|
|
$
|
0.500
|
|
|
200,000
|
|
|
200,000
|
|
|
$
|
0.650
|
|
|
700,000
|
|
|
650,000
|
|
|
$
|
0.980
|
|
|
450,000
|
|
|
450,000
|
|
|
$
|
1.000
|
|
|
1,500,000
|
|
|
1,500,000
|
|
|
|
|
|
|
3,150,000
|
|
|
3,000,000
|
|
Based on a fair market value of $
0.13
per share on December 31, 2013, there were no exercisable but unexercised in-the-money common stock options on that date. Accordingly, there was no intrinsic value attributed to exercisable but unexercised common stock warrants at December 31, 2013.
Based on a fair market value of $
0.25
per share on December 31, 2012, there were no exercisable but unexercised in-the-money stock options on that date. Accordingly, there was no intrinsic value attributed to exercisable but unexercised stock options at December 31, 2012.
Outstanding options to acquire
150,000
shares of the Company’s common stock had not vested at December 31, 2013.
7.
Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets as of December 31, 2013 and 2012 are summarized below.
|
|
|
December 31,
|
|
|
|
|
2013
|
|
2012
|
|
|
Start-up and organization costs
|
|
$
|
56,000
|
|
$
|
63,000
|
|
|
Research credits
|
|
|
95,000
|
|
|
68,000
|
|
|
Contingent liability
|
|
|
31,000
|
|
|
31,000
|
|
|
Net operating loss carryforwards
|
|
|
2,939,000
|
|
|
2,421,000
|
|
|
Total deferred tax assets
|
|
|
3,121,000
|
|
|
2,583,000
|
|
|
Valuation allowance
|
|
|
(3,121,000)
|
|
|
(2,583,000)
|
|
|
Net deferred tax assets
|
|
$
|
—
|
|
$
|
—
|
|
In assessing the potential realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the Company attaining future taxable income during the periods in which those temporary differences become deductible. As of December 31, 2013 and 2012, management was unable to determine if it is more likely than not that the Company’s deferred tax assets will be realized, and has therefore recorded an appropriate valuation allowance against deferred tax assets at such dates.
No federal tax provision has been provided for the years ended December 31, 2013 and 2012 due to the losses incurred during such periods. Reconciled below is the difference between the income tax rate computed by applying the U.S. federal statutory rate and the effective tax rate for the years ended December 31, 2013 and 2012.
|
|
|
Years Ended
December 31,
|
|
|
|
2012
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. federal statutory tax rate
|
|
|
(34.0)
|
%
|
|
|
(34.0)
|
%
|
|
Non-deductible stock-based compensation
|
|
|
2.9
|
%
|
|
|
8.6
|
%
|
|
Non-deductible fair value of warrant extensions
|
|
|
—
|
%
|
|
|
10.8
|
%
|
|
Non-deductible fair value of warrant discounts
|
|
|
—
|
%
|
|
|
3.2
|
%
|
|
Adjustment to deferred tax asset
|
|
|
(1.3)
|
%
|
|
|
(2.0)
|
%
|
|
Change in valuation allowance
|
|
|
32.4
|
%
|
|
|
13.4
|
%
|
|
Effective tax rate
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
At December 31, 2013, the Company has available net operating loss carryforwards for federal income tax purposes of approximately $
7,099,000
which, if not utilized earlier, expire through
2032
.
8.
Commitments and Contingencies
Cooperative Research and Development Agreement (CRADA)
Effective March 22, 2006, the Company entered into a CRADA with the NINDS of the NIH. The CRADA was extended through a series of amendments and remained in effect until April 1, 2013. The CRADA provided for the collaboration between the parties in the identification and evaluation of agents that target the Nuclear Receptor CoRepressor (N-CoR) pathway for glioma cell differentiation. The CRADA also provided that NINDS and the Company would conduct research to determine if expression of N-CoR correlates with prognosis in glioma patients. Pursuant to the CRADA, the Company initially agreed to provide funds under the CRADA in the amount of $
200,000
per year to fund two technical assistants for the technical, statistical and administrative support for the research activities, as well as to pay for supplies and travel expenses. The first $
200,000
was due within 180 days of the effective date and was paid in full on July 6, 2006. The second $
200,000
was paid in full on June 29, 2007. In June 2008, the CRADA was extended to September 30, 2009, with no additional funding required for the period between July 1, 2008 and September 30, 2008. For the period from October 1, 2008 through September 30, 2009, the Company agreed to provide additional funding under the CRADA of $
200,000
, to be paid in four quarterly installments of $
50,000
, each commencing on October 1, 2008. The first and second quarterly installments of $
50,000
were paid on September 29, 2008 and March 5, 2009, respectively. During August 2009, the Company entered into an amendment to the CRADA to extend its term from September 30, 2009 through September 30, 2011. Pursuant to such amendment, the Company agreed to aggregate payments of $
100,000
in two installments of $
50,000
, payable on October 1, 2010 and January 5, 2011, inclusive of any prior unpaid commitments. The October 1, 2010 installment was paid on September 29, 2010 and the January 5, 2011 installment was paid on December 27, 2010. In September 2011, the CRADA was amended to extend its term to June 1, 2012 and to provide additional funding of $
50,000
, payable in two installments of $
25,000
each on October 1, 2011 and February 5, 2012. The October 1, 2011 installment was paid on October 12, 2011, and by mutual agreement, the February 5, 2012 installment was paid on May 1, 2012. In August 2012, the CRADA was extended to April 1, 2013, with no additional funding requirement. The CRADA terminated as scheduled on April 1, 2013.
Patent License Agreement
Effective September 19, 2008, the Company entered into a Patent License Agreement (the “PLA”) with the NIH providing the Company with an exclusive license for all patents submitted jointly with the NIH under the CRADA. The PLA provided for an initial payment of $
25,000
to the NIH within 60 days of September 19, 2008, and for a minimum annual royalty of $30,000 on January 1 of each calendar year following the year in which the CRADA is terminated. The PLA also provided for the Company to pay (i) specified royalties based on net sales by the Company and its sub-licensees, reduced by the amount of the minimum annual royalty for that year, (ii) certain benchmark royalties upon the achievement of certain clinical benchmarks, and (iii) sublicensing royalties for the granting of sublicenses, with respect to joint patents. The Company paid the initial $
25,000
obligation on November 10, 2008, which was charged to general and administrative costs. As of December 31, 2013 and 2012, no amounts were due pursuant to the PLA. Due to the termination of the CRADA on April 1, 2013, the Company currently expects to pay a minimum annual royalty of $
30,000
to the NIH beginning in 2014 and each year thereafter.
Materials Cooperative Research and Development Agreement (M-CRADA)
Effective
October 18, 2013,
t
he Company
entered into
a Materials Cooperative Research and Development Agreement (M-CRADA) with the National Institute of Neurological Disorders and Stroke of the National Institutes of Health (NINDS, NIH) for a term of four years.
The Surgical Neurology Branch of NINDS, NIH will conduct research characterizing a variety of compounds proprietary to the Company, and will examine the compounds’ potential for anti-cancer activity, reducing neurological deficit due to ischemia and brain injury, and stabilizing catalytic function of misfolded proteins for inborn brain diseases.
Under an M-CRADA, a party provides research material, in this case proprietary compounds from the Company’s pipeline, for study by scientists at NIH.
The exchange of material is for research only and implies no endorsement of the material on the part of either party.
Under the M-CRADA the NIH grants a collaborator an exclusive option to elect an exclusive or non-exclusive commercialization license. The M-CRADA does not generate any incremental cost to the Company.
Research and Development Contracts
On February 5, 2007, the Company entered into a two-year agreement pursuant to which the Company engaged Chem-Master to synthesize a compound designated as LB-100, and any other compound synthesized by Chem-Master pursuant to the Company’s request, which have potential use in treating a disease, including, without limitation, cancers such as glioblastomas. Pursuant to the Chem-Master Agreement, the Company agreed to reimburse Chem-Master for the cost of materials, labor, and expenses for other items used in the synthesis process, and also agreed to grant Chem-Master a five-year option to purchase shares of the Company’s common stock.
On January 29, 2008, the Chem-Master Agreement was amended to extend its term to February 15, 2014; thereafter, Chem-Master will be engaged as needed. The Company also periodically enters into other agreements with Chem-Master for other services. During the years ended December 31, 2013 and 2012, the Company recorded charges to operations of $
7,275
and $
24,500
, respectively, with respect to this agreement.
On September 21, 2012, the Company entered into a work order agreement with Theradex
t
o manage and administer the Phase 1 clinical trial of LB-100. Theradex is an international CRO that provides professional services for the clinical research and development of pharmaceutical compounds. The Phase 1 clinical trial of LB-100, which began during April 2013 with the entry of patients into the clinical trial, is being carried out by nationally recognized comprehensive cancer centers, and is estimated to
be completed within the next 12
to 21 months
(sometime between March and December 2015)
.
The Phase 1 clinical trial is estimated to cost a total of
approximately $
2,000,000
, with such payments expected to be divided approximately evenly between payments to Theradex for services rendered and payments for pass-through costs for the clinical center’s laboratory costs and investigator costs. Total costs charged to operations for services paid to Theradex pursuant to this arrangement, which were first incurred in 2013, were $
278,721
for the year ended December 31, 2013. Costs pursuant to this agreement are included in research and development costs in the Company's consolidated statements of operations. On May 2, 2011, Dr. Robert B. Royds, the founder, Chairman of the Board and Medical Director of Theradex, was appointed to the Company’s Board of Directors. Dr. Royds died on March 23, 2013. The death of Dr. Royds is not expected to have any impact on the management and administration of the Phase 1 clinical trial.
In addition to the above described agreement with Theradex, the Company has also from time to time engaged Theradex to assist the Company in bringing LB-100 through the FDA approval process and to provide other services. Total fees charged to operations for services paid to Theradex pursuant to such engagements were $
14,964
and $
163,661
for the years ended December 31, 2013 and 2012, respectively, and $
194,551
for the period from August 9, 2005 (inception) to December 31, 2013 (cumulative), and are included in research and development costs in the Company's consolidated statements of operations.
Periodically, the Company has entered into agreements with Ascentage Pharma Group to conduct various studies. As of December 31, 2013, contracts with a total estimated cost of $
29,025
, of which $
17,415
had been paid, were in process. Ascentage Pharma Group is an offshoot of Ascenta Therapeutics, of which Dr. Mel Sorensen, a director of the Company, is the President and Chief Executive Officer and a director. Ascentage Pharma Group and Ascenta Therapeutics have a continuing business relationship and certain common shareholders. However, Dr. Sorensen does not have any direct business relationship with or ownership in Ascentage Pharma Group.
At various times, the Company has entered into agreements with other unrelated vendors to conduct certain required studies. As of December 31, 2013, contracts outstanding with such vendors and in currently process had a total estimated cost of $
104,100
, of which $
75,325
had been paid.
Consulting Agreement
On December 24, 2013, the Company entered into an agreement with NDA Consulting Corp. ("NDA") for consultation and advice in the field of oncology research and drug development. As part of the agreement, NDA agreed to cause its president, Dr. Daniel D. Von Hoff, M.D., to become a member of the Company's Scientific Advisory Committee.
The term of the agreement is for one year and provides for a quarterly cash fee of $
4,000
. The first such quarterly cash payment was made on January 12, 2014.
There were no consulting or advisory fees charged to operations
prior to January 1, 2014.
In connection with this agreement, NDA was granted stock options to purchase
100,000
shares of the Company’s common stock, vesting
25,000
shares on June 24, 2014, and thereafter
25,000
shares annually on June 24, 2015, 2016 and 2017, exercisable for a period of five years from the date of grant at $
0.13
per share.
The following table sets forth the Company’s principal cash obligations and commitments for the next five fiscal years as of December 31, 2013 aggregating $
2,119,565
, of which $
213,000
is included in current liabilities in the consolidated balance sheet at December 31, 2013.
|
|
|
|
|
Payments Due By Year
|
|
|
|
|
Total
|
|
2014
|
|
2015
|
|
2016
|
|
2017
|
|
2018
|
|
|
Research and development contracts
|
|
$
|
40,385
|
|
$
|
40,385
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
Theradex work order agreement
|
|
|
1,746,463
|
|
|
1,346,463
|
|
|
400,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Patent license agreement
|
|
|
150,000
|
|
|
30,000
|
|
|
30,000
|
|
|
30,000
|
|
|
30,000
|
|
|
30,000
|
|
|
Consulting agreement
|
|
|
16,000
|
|
|
16,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Liquidated damages payable under registration rights agreement
|
|
|
74,000
|
|
|
74,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Due to stockholder
|
|
|
92,717
|
|
|
92,717
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total
|
|
$
|
2,119,565
|
|
$
|
1,599,565
|
|
$
|
430,000
|
|
$
|
30,000
|
|
$
|
30,000
|
|
$
|
30,000
|
|
9
. Subsequent Events
Effective January 1, 2014, the Company entered into an Advisory Agreement with Dr. Kathleen P. Mullinix, a member of the Board of Directors of the Company, effective for an initial term of one year through December 31, 2014 to advise on business development matters.
The initial term and any subsequent one year term shall be automatically extended on an annual basis unless a notice of intent to terminate is given by either party at least 90 days before the end of the applicable term.
The Advisory Agreements provides for compensation of $25,000 annually, payable in two installments of $12,500, with the first payment due on January 31, 2014 and the second payment due on July 1, 2014.
On January 28, 2014, the Company approved a second amendment to the Company’s consulting agreement with Gil Schwartzberg to extend it to January 28, 2019 and granted to Mr. Schwartzberg stock options to purchase an additional aggregate of
4,000,000
shares of common stock, exercisable for a period of the earlier of five years from the grant date or the termination of the consulting agreement at $
0.50
per share, with one-half of the options (
2,000,000
shares) vesting immediately and one-half (
2,000,000
shares) vesting on January 28, 2015. The fair value of these options, as calculated pursuant to the Black-Scholes option-pricing model, was determined to be $
596,400
($
0.15
per share) on January 28, 2014, of which $
298,200
is attributed to the options fully-vested on January 28, 2014 and as such will be charged to operations on that date. The remaining unvested portion of the fair value of the options will be charged to operations ratably from January 28, 2014 through January 28, 2015.
On January 28, 2014, the Company’s Board of Directors extended to June 30, 2014 its outstanding warrants to acquire
1,748,800
shares of the Company’s common stock exercisable at
$
0.50
per share that were issued to investors and placement agent in connection with private placements that closed on February 10, 2009, March 2, 2009 and April 6, 2009
. On September 30, 2012, the Company had previously extended all other outstanding warrants to June 30, 2014. Included in the January 2014 extension were warrants to acquire
815,920
shares of common stock scheduled to expire on February 10, 2014, warrants to acquire
312,880
shares of common stock scheduled to expire on March 2, 2014, and warrants to acquire
620,000
shares of common stock scheduled to expire on April 6, 2014. The fair value of the warrant extensions, as calculated pursuant to the Black-Scholes option-pricing model, was determined to be $
78,617
(average of $
0.04
per share), and such amount will be charged to operations on January 28, 2014. The fair value of the warrant extensions were calculated using the following input variables: stock price - $
0.15
per share; exercise price - $0.50 per share; expected life – 13 to 153 days; expected volatility –
262
%; expected dividend yield -
0
%; risk-free interest rate –
1.51
%.
On January 28, 2014, the Company offered to all of its warrant holders an inducement to exercise early by reducing the exercise price of currently outstanding warrants by
50
%, if exercised on a cash basis by April 15, 2014. The exercise prices of the warrants before reduction were $
0.50
per share (
2,253,800
warrants) and $
0.75
per share (
4,575,000
warrants). The aggregate fair value of the warrant discounts, as calculated pursuant to the Black-Scholes option-pricing model, was determined to be $
134,420
(an average of $
0.02
per share), and such amount will be charged to operations on January 28, 2014. The fair value of the warrant extensions were calculated using the following input variables: stock price - $
0.15
per share; exercise price - $
0.50
and $
0.75
per share; expected life –
77
days (the period during which the discount was available); expected volatility –
262
%; expected dividend yield -
0
%; risk-free interest rate –
1.51
%.
