UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| (Mark One) | |
| x | Annual Report Under Section 13 Or 15(d) Of The Securities Exchange Act Of 1934 |
| For the fiscal year ended December 31, 2016 | |
| or | |
| ¨ | Transition Report Under Section 13 Or 15(d) Of The Securities Exchange Act Of 1934 |
| For the transition period from to | |
COMMISSION FILE NUMBER: 001-36351
DIPEXIUM PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
|
Delaware
(State or other jurisdiction of incorporation or organization) |
46-4995704
(I.R.S. Employer Identification No.) |
14 Wall Street, 3rd Floor
New York, NY, 10005
(Address of principal executive offices)(Zip Code)
(212) 269-2834
Registrant’s telephone number, including area code
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No x
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of the chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer ¨ | Accelerated filer ¨ |
Non-accelerated filer
¨
(Do not check if a smaller reporting company) |
Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 126-2 of the act): Yes ¨ No x
The aggregate market value of voting stock held by nonaffiliates of the registrant as of June 30, 2016, the last business day of the registrant’s most recently completed second fiscal quarter, based on the closing price of the common stock on the NASDAQ stock exchange on June 30, 2016 was $61,386,831.
As of January 16, 2017, 11,115,747 shares of common stock, $0.001 par value per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of our Proxy Statement for the Annual Meeting of Shareholders for the fiscal year ended December 31, 2016, are incorporated by reference in Items 10, 11, 12, 13 and 14 of Part III.
Table of Contents
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
We are including the following cautionary statement in this Annual Report on Form 10-K to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statements made by, or on behalf of us. With the exception of historical matters, the matters discussed in this Annual Report on Form 10-K are forward-looking statements (as defined in Section 21E of the Exchange Act) that involve risks and uncertainties that could cause actual results to differ materially from projected results. Accordingly, investors should not place undue reliance on forward-looking statements as a prediction of actual results. The forward-looking statements may include projections and estimates concerning the timing and success of specific projects and our future production, revenues, income and capital spending. When we use the words “believe,” “intend,” “expect,” “may,” “should,” “anticipate,” “could,” “estimate,” “plan,” “predict,” “project,” or their negatives, or other similar expressions, the statements which include those words are usually forward-looking statements. When we describe strategy that involves risks or uncertainties, we are making forward-looking statements. The forward-looking statements in this Annual Report on Form 10-K speak only as of the date of this Annual Report on Form 10-K; we disclaim any obligation to update these statements unless required by securities law, and we caution you not to rely on them unduly. We have based these forward-looking statements on our current expectations and assumptions about future events. While our management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control. These risks, contingencies and uncertainties relate to, among other matters, the following:
| • | whether our proposed merger transaction with PLx Pharma Inc. (“PLx Pharma”) may be fully realized or takes longer to realize than expected; whether the businesses may be combined successfully or in a timely and cost-efficient manner; whether the transaction will close due to, among other things, the need to obtain stockholder approval; and whether the dilution to Dipexium stockholders in the proposed merger may be greater than expected; |
| • | whether our previous findings from clinical studies and assessments of Locilex® in mild infections of diabetic foot ulcers are predictive of potential future clinical trial results in other clinical indications should any be identified as promising; |
| • | our ability to protect our intellectual property; |
| • | risks and uncertainties associated with our research and development activities, including our clinical trials; |
| • | our dependence on Locilex® as our only product; |
| • | our ability to raise capital when needed; |
| • | the terms of future licensing arrangements, and whether we can enter into such arrangements at all; |
| • | risks associated with the timing and receipt of licensing and milestone revenues, if any; |
| • | our ability to maintain or protect the validity of our patents and other intellectual property, including in connection with pending or future litigation against us; |
| • | our ability to secure registration for our current and future patent applications; |
| • | our ability to extend our licensed composition of matter patent No. 5,912,231 under Patent Term Restoration Act of 1984 (or the Hatch-Waxman Act) with the cooperation of Scripps Research Institute (or Scripps); |
| • | our ability to continue as a going concern; |
| • | our expectations regarding minimizing our development risk; |
| • | our ability to establish new relationships and maintain current relationships; and |
| • | our ability to attract and retain key personnel. |
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Overview
We are a biopharmaceutical company that historically has been focused on the development and commercialization of Locilex ® (pexiganan cream 0.8%), a novel, first-in-class, broad spectrum, topical antibiotic. Locilex ® is a chemically synthesized, 22-amino acid peptide isolated from the skin of the African Clawed Frog. Its novel mechanism of action kills microbial targets by disrupting the bacterial cell membrane; a process known as cell membrane permeability. However, in light of recent clinical trial disappointments in our development programs for Locilex ® , and our decision to discontinue its development for the treatment of mild infections of diabetic foot ulcers, we have shifted our strategic emphasis to external business opportunities not related to developing Locilex ® . As such, although we continue to describe our intellectual property assets and programs herein and continue to maintain our intellectual property rights in the U.S. and internationally, we are no longer pursuing drug development activities for Locilex ® pending the outcome of the proposed merger with PLx Pharma Inc. (“PLx Pharma”) and further review of the clinical data from our recently completed Phase 3 program.
Recent Developments
On December 22, 2016, we announced our entry into a definitive Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with PLx Pharma, pursuant to which, among other things, subject to the satisfaction or waiver of the conditions set forth in the Merger Agreement, a wholly-owned subsidiary of ours will be merged with and into PLx Pharma, with PLx Pharma continuing as the surviving corporation and a wholly-owned subsidiary of ours (the “Proposed Merger”). Immediately following the effective time of the Proposed Merger, existing PLx Pharma stockholders are expected to own approximately 76.75% of the capital stock of the combined company, and existing Dipexium stockholders are expected to own approximately 23.25% of the capital stock of the combined company, in each case, subject to certain adjustments set forth in the Merger Agreement related to our cash on a determination date which approaches the closing of the Proposed Merger.
We expect to consummate the Proposed Merger in the second quarter of 2017.
We continue to believe that Locilex ® has advantages compared to systemic antibiotics and that it may have potential to be approved in a different clinical indication although our medical and scientific team has yet to identify any such indication since the clinical trial data was released on October 25, 2016. We believe that the key attributes of Locilex ® are: (i) it has not generated resistant bacteria systemically; (ii) it has not generated cross resistance with other antibiotics; (iii) it has demonstrated activity against a broad spectrum of pathogens, including difficult to treat gram negative, and anaerobic bacteria; (iv) it has not been systemically absorbed; (v) it has not caused any significant safety or tolerability issues in over 1,500 patients treated, including the recently completed OneStep-1 and OneStep-2 Phase 3 clinical trials; and (vi) it has demonstrated significant success treating multi-drug resistant bacteria in several laboratory tests and clinical trials performed to date. These attributes lead us to believe that Locilex ® could be repositioned to target a different clinical indication despite its failure to achieve any of the primary or secondary endpoints in the OneStep Phase 3 clinical trials in mild infections of diabetic foot ulcers. If pursued, a restart of clinical trials in a yet-to-be-identified clinical indication would involve significant risk, resources and time to design and complete a clinical development program that may very well begin with Phase 1 clinical trials.
Our Business Strategy
We seek to develop and commercialize Locilex ® (pexiganan cream 0.8%) either directly or through one or more potential partnerships. In the light of the disappointing outcomes of our OneStep-1 and OneStep-2 Phase 3 clincial trials of Locilex ® for the treatment of patients with mild infections of diabetic foot ulcers, we have identified and assessed a broad range of strategic options, culminating in our decision to enter into the Merger Agreement with PLx Pharma.
| • | Restart clinical and regulatory development of Locilex ® in one or more new clinical indications/Proposed Merger with PLx Pharma. Based upon the advice of our research and development consultants, in order to maintain a viable drug development strategy for Locilex ® , we need to identify one or more new clinical indications potentially well served by Locilex ® and restart drug development activities in at least one new indication. Based on the clinicial evidence from the recently completed OneStep Phase 3 clinical trials, our research and development team has been unable to identify an appropriate clinical indication that we may target with Locilex ® for further drug development activities. If identified, a new clinical and regulatory pathway for Locilex ® may very well involve restarting with Phase 1 clinical trials and involve significant resources and risk to get back to Phase 3 clinical trials and beyond. Accordingly, we decided to enter into an agreement with respect to the Proposed Merger with PLx Pharma. Assuming the Proposed Merger is consummated as planned in the second quarter of 2017, the combined company will focus its development on PLx Pharma’s product pipeline. |
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| • | Seek value for Locilex ® either directly through a restart in a new clinical indication or through one or more partnerships. Whether or not our Proposed Merger with PLx Pharma is completed as planned, we will continue to preserve the Locilex ® asset including by maintaining our patent portfolio and preparing and submitting all required regulatory submissions while we evaluate whether or not to develop Locilex ® ourselves or through one or more potential future partnerships with third parties. |
Because of the high risk nature of restarting clinical development in a yet-to-be-identified clinical indication within which no clinical trials have been performed to date using Locilex ® and the high cost of this endeavor, our board of directors and management team have concluded that the Proposed Merger with PLx Pharma is a more attractive alternative to preserve and recapture stockholder value.
Corporate Conversion
We were organized originally as a limited liability company under the laws of the State of Delaware in January 2010. On March 12, 2014, we converted Dipexium Pharmaceuticals, LLC from a Delaware limited liability company to a Delaware corporation. As a result of the corporate conversion:
| • | the Class A Membership Interests of Dipexium Pharmaceuticals, LLC became shares of common stock of Dipexium Pharmaceuticals, Inc. pursuant to a conversion ratio of seven shares of common stock of Dipexium Pharmaceuticals, Inc. for each Class A membership interest of Dipexium Pharmaceuticals, LLC previously held. Accordingly, 767,911 Class A Membership Interests of Dipexium Pharmaceuticals, LLC issued and outstanding immediately prior to the corporate conversion were converted automatically into 5,375,377 shares of Dipexium Pharmaceuticals, Inc.; |
| • | all of the outstanding warrants to purchase Class A Membership Interests of Dipexium Pharmaceuticals, LLC became warrants to purchase shares of common stock of Dipexium Pharmaceuticals, Inc. in a ratio of seven shares of common stock of Dipexium Pharmaceuticals, Inc. for each Class A membership interest of Dipexium Pharmaceuticals, LLC underlying such warrants, with the effect that warrants to purchase 4,900 Class A Membership Interests of Dipexium Pharmaceuticals, LLC outstanding immediately prior to the corporate conversion automatically converted into warrants to purchase 34,300 shares of Dipexium Pharmaceuticals, Inc. upon consummation of the corporate conversion; and |
| • | the exercise price of all of the outstanding warrants was adjusted in the same ratio as the seven-for-one conversion ratio noted above such that all of our outstanding warrants to purchase Class A Membership Interests of Dipexium Pharmaceuticals, LLC which were exercisable at $60 per Class A membership interest were automatically adjusted such that the new exercise price for the outstanding warrants upon consummating the corporate conversion was $8.57 per share, subject to certain adjustments noted in each of the warrants. |
In connection with the corporate conversion, Dipexium Pharmaceuticals, Inc. continued to hold all property of Dipexium Pharmaceuticals, LLC and assumed all of the debts and obligations of Dipexium Pharmaceuticals, LLC. Dipexium Pharmaceuticals, Inc. is governed by a certificate of incorporation filed with the Delaware Secretary of State and bylaws. On the effective date of the corporate conversion, the members of the board of directors of Dipexium Pharmaceuticals, LLC became the members of the board of directors of Dipexium Pharmaceuticals, Inc. and the officers of Dipexium Pharmaceuticals, LLC became the officers of Dipexium Pharmaceuticals, Inc. The purpose of the corporate conversion was to reorganize our corporate structure so that our company would continue as a corporation rather than a limited liability company, and so that our existing investors would own our common stock rather than equity interests in a limited liability company. In order to consummate the corporate conversion, a certificate of conversion was filed with the Secretary of State of the State of Delaware on March 12, 2014.
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Manufacturing and Supply
Historically, we used three contract manufacturers (or CMOs) to produce Locilex ® . Our manufacturing supply chain for Locilex ® started with PolyPeptide Laboratories, Inc. which manufactures pexiganan, the active pharmaceutical ingredient (API) in Locilex ® . At our direction, PolyPeptide Laboratories delivered the API to DPT Laboratories, Inc., which formulated the API into a cream formulation on our behalf. DPT Laboratories then delivered the formulated product to Almac Group Limited, which labeled, packaged, and delivered the finished goods for clinical trials as we requested.
In the late 1990s, the prior sponsor engaged in an FDA review process for a prior formulation of Locilex®. In its 1999 non-approvable letter, the FDA identified two cGMP manufacturing issues. The first issue concerned the stability of the formulated product. Examination of the formulated product over time showed evidence of water separation from the cream matrix. The second issue related to the purity level of the API in the product. The prior source of the API yielded a purity level as low as 95%.
After acquiring the rights to Locilex®, we developed a detailed product development plan to arrive at an optimized formulation to address these issues to the satisfaction of the FDA. We believe that the changes we made to the formulation have resolved the previously observed product separation and impurity levels.
We also scaled up the size of our API lots and have completed successfully our scale-up of the first formulated batch of Locilex® cream at the 140 kg batch size. The scale-up was achieved successfully in the view of our manufacturing advisors. We used this commercial-scale batch in the OneStep Phase 3 trials.
If we are able to identify a clinical and regulatory pathway forward in light of the recent failure of the OneStep Phase 3 clincial trials, we or a partner who acquires the rights to Locilex® will have adequate stability data on three cGMP registration batches of product supply. Our stability testing is conducted in compliance with the ICH Guideline Q1A(R2): International Conference on Harmonisation of Technical Requirements for Registration of Pharmaceuticals for Human Use, ICH Harmonised Tripartate Guideline, Stability Testing of New Drug Substances and Products, Current Step 4 version, Dated 6 February 2003 . The purpose of the stability testing is to provide evidence on how the quality of a drug substance or drug product varies with time under the influence of a variety of environmental factors such as temperature, humidity, and light, and to establish a re-test period for the drug substance or a shelf life for the drug product and recommended storage conditions. Our contract research organizations (or CROs) have confirmed that we have sufficient stability data on the three cGMP batches of commercial supply to support any new drug development pathway for Locilex® that may develop or be developed in the future. Our manufacturing experts believe that the stability data supports a shelf life of at least 24 months for Locilex ® .
We also believe our peptide is highly purified. The impurity levels of the API used in our commercial scale batch of Locilex® has been confirmed to be 99.4% pure for the API used in our cGMP batches.
In October 2013, we submitted our manufacturing data, including data from the first 30 kg cGMP batch as well as 18-month stability data on our 30 kg non-cGMP batch, to the FDA, and in December 2013 the FDA indicated in written communications with us that Locilex®’s stability and purity levels were acceptable for use in our Phase 3 studies. As a result of the aforementioned activities, we believe we have resolved the stability and purity concerns previously articulated by the FDA. We continued by preparing two additional cGMP batches of Locilex ® and monitored stability over the past several years. In addition, we performed a scale up to a 140 kg batch size, filed relevant stability data with the FDA and used a portion of this scaled-up batch in our Phase 3 clinical trial program.
Intellectual Property
We hold rights to a U.S. patent covering our proprietary formulation of Locilex ® and the method of using it for the treatment of skin and wound infections (U.S. Patent Number 8,530,409). This patent was granted in September 2013 and expires in the U.S. in June 2032. The patent incorporates discoveries made by Dow Pharmaceutical Sciences, Inc. (later acquired by Valeant Pharmaceuticals International, Inc.). The application which gave rise to U.S. Patent No. 8,520,409 was assigned to us in June 2013. In addition, we have filed a Patent Cooperation Treaty (or PCT) application claiming priority to U.S. Patent No. 8,520,409 that will allow us to seek corresponding protection outside of the U.S., including in Europe, Japan, China, Australia, and Korea, as well as in other PCT jurisdictions. We announced in February 2016 that patents were granted by patent offices in Australia and New Zealand and in March 2016 a patent was granted in Japan. In June 2016, July 2016, September 2016 and October 2016, we were notified that a patent was granted by the patent offices in Hong Kong, Europe, Korea and Israel, respectively. All of these newly issued patents provide patent protection into 2033. We anticipate completing the national stage patent prosecutions in other international regions throughout 2017.
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In addition to this patent, we hold an exclusive sublicense to the composition-of-matter patent covering the pexiganan technology (U.S. Patent No. 5,912,231) which would have expired in June 2016 had we not filed an interim patent extension, not including any patent term extension that we expect to seek under the Drug Price Competition and Patent Term Restoration Act of 1984 (or the Hatch-Waxman Act). We acquired this sublicense when we acquired the rights to Locilex ® in April 2010. Our rights to practice the pexiganan technology are originally derived through a license agreement between Scripps Research Institute (or Scripps), the inventor of the pexiganan technology, and Multiple Peptide Systems, Inc. (or MPS). MPS then sublicensed the pexiganan technology to the prior sponsor of the pexiganan program. In October 1996, both of the license and sublicense agreements were amended by Scripps, MPS and the prior sponsor of Locilex ® to confirm that the license and sublicense were fully-paid, royalty free and of indefinite duration, with no further economic obligations for the practice of the pexiganan technology. We filed an interim patent extension on the ’231 patent in June 2016 which was granted by the U.S. Patent and Trademark Office in June 2016.
Although U.S. Patent 5,912,231 supplements our existing intellectual property portfolio, we are chiefly reliant on our U.S. Patent 8,530,409, which covers the novel formulation and method of use for Locilex ® and provides for substantially longer patent coverage than U.S. Patent 5,912,231. Further, U.S. Patent 8,530,409’s attributes as a topical formulation, its potentially broader scope of coverage and opportunity for foreign patent protection offer greater benefits to us than U.S. Patent 5,912,231. As such, we have not yet engaged in any discussions with Scripps regarding a possible patent term extension for U.S. Patent No. 5,912,231. If and when we decide to apply for an extension, we will we will need to work with Scripps throughout the application process to facilitate its approval.
Competition
The pharmaceutical and biotechnology industry is characterized by intense competition, rapid product development and technological change. Competition is intense among manufacturers of prescription pharmaceuticals and other product areas where we may develop and market products in the future. Most of our competitors are large, well established pharmaceutical or healthcare companies with considerably greater financial, marketing, sales and technical resources than are available to us. Additionally, many of our competitors have research and development capabilities that may allow such competitors to develop new or improved products that may compete with Locilex ® in a clinical setting that has yet to be identified. Our product could be rendered obsolete or made uneconomical by the development of new products to treat various acute bacterial skin infections even if Locilex® is proven to work in any such indications.
Our business, financial condition and results of operations could be materially adversely affected by any one or more of such developments. We cannot assure you that we will be able to compete successfully against current or future competitors or that competition will not have a material adverse effect on our business, financial condition and results of operations.
Even if Locilex ® receives regulatory approval in a clinical indication other than mild infections of diabetic foot ulcers, of which there can be no assurance, our competitors’ drugs may be more effective, more effectively marketed and sold, or less costly than Locilex ® , and may render our product obsolete or non-competitive before we can recover the expenses of developing and commercializing Locilex ® .
In addition, some of our competitors have greater experience than we do in conducting preclinical and clinical trials and obtaining U.S. Food and Drug Administration (“FDA”) and other regulatory approvals. Accordingly, our competitors may succeed in obtaining FDA or other regulatory approvals for drug candidates more rapidly than we do. Companies that complete clinical trials, obtain required regulatory agency approvals and commence commercial sale of their drugs before their competitors may achieve a significant competitive advantage. Locilex ® therefore may not be commercially competitive with existing products or products under development. Competitors in the dermatology market generally include some very large international organizations such as Pfizer, Inc., Eli Lilly and Company, Johnson & Johnson, Merck & Co., and GlaxoSmithKline plc.
History of Locilex ®
In August 1992, the prior sponsor of Locilex ® , Magainin, submitted an initial Investigational New Drug (or IND) application for the prior formulation of Locilex ® to study broad spectrum anti-infective activity for the treatment of superficial and complicated dermatological infections. Another IND was submitted in November 1993 to cover a new indication for the treatment of DFI. In the late 1990s, the prior sponsor tested the prior formulation of Locilex ® , with over 1,000 human subjects exposed without safety concerns, including 835 evaluable patients in two Phase 3 clinical trials. The Phase 3 trial results showed that such prior formulation of topical Locilex ® had an approximate 80% response rate measured as resolution or improvement in infection in patients who under today’s standards would be considered to have Mild or Moderate diabetic foot infections (or DFI).
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The FDA Advisory Committee reviewing Locilex ® at the time unanimously approved the safety of the product, but did not approve its efficacy and recommended an additional Phase 3 placebo controlled trial. In its 1999 non-approvable letter, the FDA identified certain cGMP manufacturing deficiencies, namely stability and quality control issues, and questions regarding the comparability of the product used in the Phase 3 program versus that which was produced at commercial scale. We believe that these hurdles and a lack of financing ultimately caused Magainin (later renamed Genaera Corporation) to deprioritize the product within their product pipeline. MacroChem Corporation (or MacroChem) licensed the technology in late 2007, after several years of attempting to remediate the manufacturing deficiencies. In February 2009, MacroChem was acquired by Access Pharmaceuticals, Inc. (or Access), which focused on oncology and oncology supportive care product candidates. Rights to Locilex ® reverted to Genaera Liquidating Trust (established to sell the drug related assets of Genaera Corporation in liquidation) when Access failed to start a Phase 3 trial by the two-year anniversary of the effective date of the license agreement, triggering a termination right for Genaera Liquidating Trust in December 2009.
In April 2010, we acquired the worldwide rights to pexiganan, the API in Locilex ® , and the prior formulation of the product and all related assets after participating in a public auction for the product conducted by Genaera Liquidating Trust. During the period between the FDA non-approval letter received in July 1999 and the second half of 2006, SmithKline Beecham Corporation (now part of GlaxoSmithKline plc) held the exclusive distribution rights to Locilex ® in the U.S.
In March 2011, we exercised our exclusive option to buy out the downstream, success-based milestones and royalty obligations related to Locilex ® and currently own 100% of our product candidate.
In 2015 and the first half of 2016, we successfully completed two Phase 1 clinical trials, a skin irritation trial and a skin sensitization trial, using Locilex® in healthy volunteers.
In October 2016, we reported that the OneStep-1 and OneStep-2 Phase 3 clinical trials failed to meet any of the primary or secondary endpoints. The OneStep trials were identical studies conducted simultaneously using Locilex ® (versus placebo cream with standardized local wound care in both arms of each study) to treat patients with mild infections of diabetic foot ulcers.
Government Regulation and Product Approval
Governmental authorities in the U.S., at the federal, state and local level, and other countries extensively regulate, among other things, the research, development, testing, manufacture, labeling, packaging, promotion, storage, advertising, distribution, marketing and export and import of products such as those we are developing. Our product candidates must be approved by the FDA through the New Drug Application (or NDA) process before they may be legally marketed in the U.S. and by the European Medicines Agency (or EMA) through the Marketing Authorisation Application (or MAA) process before they may be legally marketed in Europe. Our product candidates will be subject to similar requirements in other countries prior to marketing in those countries. The process of obtaining regulatory approvals and the subsequent compliance with applicable federal, state, local and foreign statutes and regulations require the expenditure of substantial time and financial resources.
U.S. Government Regulation
NDA Approval Processes
In the U.S., the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act (or FDCA) and implementing regulations. Failure to comply with the applicable U.S. requirements at any time during the product development process or approval process, or after approval, may subject an applicant to administrative or judicial sanctions, any of which could have a material adverse effect on us. These sanctions could include:
| • | refusal to approve pending applications; |
| • | withdrawal of an approval; |
| • | imposition of a clinical hold; |
| • | warning letters; |
| • | product seizures; |
| • | total or partial suspension of production or distribution; or |
| • | injunctions, fines, disgorgement, or civil or criminal penalties. |
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The process required by the FDA before a drug may be marketed in the U.S. generally involves the following:
| • | completion of nonclinical laboratory tests, animal studies and formulation studies conducted according to Good Laboratory Practices (or GLPs) or other applicable regulations; |
| • | submission to the FDA of an IND, which must become effective before human clinical trials may begin; |
| • | performance of adequate and well-controlled human clinical trials according to Good Clinical Practices (or GCPs) to establish the safety and efficacy of the proposed drug for its intended use; |
| • | submission to the FDA of an NDA; |
| • | satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the product is produced to assess compliance with current cGMPs to assure that the facilities, methods and controls are adequate to preserve the drug’s identity, strength, quality and purity; and |
| • | FDA review and approval of the NDA. |
Once a pharmaceutical candidate is identified for development, it enters the preclinical or nonclinical testing stage. Nonclinical tests include laboratory evaluations of product chemistry, toxicity and formulation, as well as animal studies. An IND sponsor must submit the results of the nonclinical tests, together with manufacturing information and analytical data, to the FDA as part of the IND. Some nonclinical testing may continue even after the IND is submitted. In addition to including the results of the nonclinical studies, the IND will also include a protocol detailing, among other things, the objectives of the clinical trial, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated if the first phase lends itself to an efficacy determination. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA, within the 30-day time period, places the IND on clinical hold. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before clinical trials can begin. A clinical hold may occur at any time during the life of an IND, and may affect one or more specific studies or all studies conducted under the IND.
All clinical trials must be conducted under the supervision of one or more qualified investigators in accordance with GCPs. They must be conducted under protocols detailing the objectives of the trial, dosing procedures, research subject selection and exclusion criteria and the safety and effectiveness criteria to be evaluated. Each protocol must be submitted to the FDA as part of the IND, and progress reports detailing the status of the clinical trials must be submitted to the FDA annually. Sponsors also must timely report to FDA serious and unexpected adverse reactions, any clinically important increase in the rate of a serious suspected adverse reaction over that listed in the protocol or investigation brochure, or any findings from other studies or animal or in vitro testing that suggest a significant risk in humans exposed to the drug. An institutional review board, or IRB, at each institution participating in the clinical trial must review and approve the protocol before a clinical trial commences at that institution and must also approve the information regarding the trial and the consent form that must be provided to each research subject or the subject’s legal representative, monitor the study until completed and otherwise comply with IRB regulations.
Human clinical trials are typically conducted in three sequential phases that may overlap or be combined:
| • | Phase 1. The drug is initially introduced into healthy human subjects and tested for safety, dosage tolerance, absorption, metabolism, distribution and elimination. In the case of some products for severe or life-threatening diseases, such as cancer, especially when the product may be inherently too toxic to ethically administer to healthy volunteers, the initial human testing is often conducted in patients. |
| • | Phase 2. Clinical trials are performed on a limited patient population intended to identify possible adverse effects and safety risks, to preliminarily evaluate the efficacy of the product for specific targeted diseases and to determine dosage tolerance and optimal dosage. |
| • | Phase 3. Clinical trials are undertaken to further evaluate dosage, clinical efficacy and safety in an expanded patient population at geographically dispersed clinical study sites. These studies are intended to establish the overall risk-benefit ratio of the product and provide an adequate basis for product labeling. |
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Human clinical trials are inherently uncertain and Phase 1, Phase 2 and Phase 3 testing may not be successfully completed. The FDA or the sponsor may suspend a clinical trial at any time for a variety of reasons, including a finding that the research subjects or patients are being exposed to an unacceptable health risk. Similarly, an IRB can suspend or terminate approval of a clinical trial at its institution if the clinical trial is not being conducted in accordance with the IRB’s requirements or if the drug has been associated with unexpected serious harm to patients.
During the development of a new drug, sponsors are given opportunities to meet with the FDA at certain points. These points may be prior to the submission of an IND, at the end of Phase 2 and before an NDA is submitted. Meetings at other times may be requested. These meetings can provide an opportunity for the sponsor to share information about the data gathered to date and for the FDA to provide advice on the next phase of development. Sponsors typically use the meeting at the end of Phase 2 to discuss their Phase 2 clinical results and present their plans for the pivotal Phase 3 clinical trial that they believe will support the approval of the new drug. If a Phase 2 clinical trial is the subject of discussion at the end of Phase 2 meeting with the FDA, a sponsor may be able to request a SPA, the purpose of which is to reach agreement with the FDA on the Phase 3 clinical trial protocol design and analysis that will form the primary basis of an efficacy claim.
According to published guidance on the SPA process, a sponsor which meets the prerequisites may make a specific request for a SPA and provide information regarding the design and size of the proposed clinical trial. The FDA is supposed to evaluate the protocol within 45 days of the request to assess whether the proposed trial is adequate, and that evaluation may result in discussions and a request for additional information. A SPA request must be made before the proposed trial begins, and all open issues must be resolved before the trial begins. If a written agreement is reached, it will be documented and made part of the record. The agreement will be binding on the FDA and may not be changed by the sponsor or the FDA after the trial begins except with the written agreement of the sponsor and the FDA or if the FDA determines that a substantial scientific issue essential to determining the safety or efficacy of the drug was identified after the testing began.
Concurrent with clinical trials, sponsors usually complete additional animal safety studies and also develop additional information about the chemistry and physical characteristics of the drug and finalize a process for manufacturing commercial quantities of the product in accordance with cGMP requirements. The manufacturing process must be capable of consistently producing quality batches of the drug and the manufacturer must develop methods for testing the quality, purity and potency of the drug. Additionally, appropriate packaging must be selected and tested and stability studies must be conducted to demonstrate that the drug candidate does not undergo unacceptable deterioration over its proposed shelf-life.
The results of product development, nonclinical studies and clinical trials, along with descriptions of the manufacturing process, analytical tests and other control mechanisms, proposed labeling and other relevant information are submitted to the FDA as part of an NDA requesting approval to market the product. The submission of an NDA is subject to the payment of user fees, but a waiver of such fees may be obtained under specified circumstances. The FDA reviews all NDAs submitted to ensure that they are sufficiently complete for substantive review before it accepts them for filing. It may request additional information rather than accept an NDA for filing. In this event, the NDA must be resubmitted with the additional information. The resubmitted application also is subject to review before the FDA accepts it for filing.
Once the submission is accepted for filing, the FDA begins an in-depth review. NDAs receive either standard or priority review. A drug representing a significant improvement in treatment, prevention or diagnosis of disease may receive priority review. The FDA may refuse to approve an NDA if the applicable regulatory criteria are not satisfied or may require additional clinical or other data. Even if such data are submitted, the FDA may ultimately decide that the NDA does not satisfy the criteria for approval. The FDA reviews an NDA to determine, among other things, whether a product is safe and effective for its intended use and whether its manufacturing is cGMP-compliant. The FDA may refer the NDA to an advisory committee for review and recommendation as to whether the application should be approved and under what conditions. The FDA is not bound by the recommendation of an advisory committee, but it generally follows such recommendations. Before approving an NDA, the FDA will inspect the facility or facilities where the product is manufactured and tested. We anticipate that our NDA submission, which may technically be classified as an amended NDA (a so-called Class II resubmission), will address the manufacturing concerns previously articulated by the FDA regarding the prior formulation of Locilex ® . Should our NDA be accepted for review, the FDA is supposed to respond within six months of submission.
Recent Changes to the Regulatory Landscape for Anti-Infective Drugs
The analytic approach of the FDA’s Anti-Infective Drugs Division has undergone evolution in recent years, primarily driven by concerns that increasingly less effective antibiotics may have been approved in the last 10 to 15 years. The impact of these changes was a rethinking of how antibiotic efficacy is measured in clinical trials, and a review of the statistical tools used to analyze the data. In March 2009, the FDA published a draft guidance entitled “Guidance for Industry Community-Acquired Bacterial Pneumonia: Developing Drugs for Treatment” and in August 2010, it published draft guidance (subsequently published as final guidance in October 2013) entitled “Guidance for Industry Acute Bacterial Skin and Skin Structure Infections: Developing Drugs for Treatment” (or 2010 Guidance). The purpose of this guidance was to address many of the uncertainties regarding what the FDA expected from sponsors and clinical trials for the indications of acute bacterial skin and skin structure infections and community-acquired bacterial pneumonia.
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The FDA asked sponsors to include additional measurements in their evaluation of efficacy that the FDA believes are more objective and less susceptible to interpretation by investigators. Non-inferiority comparisons of drugs are the standards for antibiotics, and non-inferiority margins are the margins used in the statistical analysis comparing two treatment arms in a study. These are the statistical margins or rules used to distinguish the degree of potential difference between two antibiotics in a study. In September 2010, one month after issuing the 2010 Guidance, the FDA approved the first antibiotic NDA reviewed pursuant to these new endpoints and non-inferiority margins. The clinical protocol that was reviewed by the FDA in support of our SPA with the FDA includes provisions that are consistent with the 2010 Guidance, as well as the FDA’s final guidance published in October 2013.
Expedited Review and Approval
The FDA has various programs, including Fast Track, priority review, and accelerated approval, which are intended to expedite or simplify the process for reviewing drugs, and/or provide for the approval of a drug on the basis of a surrogate endpoint. Even if a drug qualifies for one or more of these programs, the FDA may later decide that the drug no longer meets the conditions for qualification or that the time period for FDA review or approval will be shortened. Generally, drugs that are eligible for these programs are those for serious or life-threatening conditions, those with the potential to address unmet medical needs and those that offer meaningful benefits over existing treatments. For example, Fast Track is a process designed to facilitate the development and expedite the review of drugs to treat serious or life-threatening diseases or conditions and fill unmet medical needs. Priority review is designed to give drugs that offer major advances in treatment or provide a treatment where no adequate therapy exists an initial review within six months as compared to a standard review time of ten months.
Although Fast Track and priority review do not affect the standards for approval, the FDA will attempt to facilitate early and frequent meetings with a sponsor of a Fast Track designated drug and expedite review of the application for a drug designated for priority review. Accelerated approval, which is described in Subpart H of 21 CFR Part 314, provides for an earlier approval for a new drug that is intended to treat a serious or life-threatening disease or condition and that fills an unmet medical need based on a surrogate endpoint. A surrogate endpoint is a laboratory measurement or physical sign used as an indirect or substitute measurement representing a clinically meaningful outcome. As a condition of approval, the FDA may require that a sponsor of a product candidate receiving accelerated approval perform post-marketing clinical trials.
In the Food and Drug Administration Safety and Innovation Act (or FDASIA), which was signed into law in July 2012, Congress encouraged the FDA to utilize innovative and flexible approaches to the assessment of products under accelerated approval. The law required the FDA to issue related draft guidance within a year after the law’s enactment and also promulgate confirming regulatory changes. In June 2013, the FDA published a draft Guidance for Industry entitled, “Expedited Programs for Serious Conditions—Drugs and Biologics” which provides guidance on FDA programs that are intended to facilitate and expedite development and review of new drugs as well as threshold criteria generally applicable to concluding that a drug is a candidate for these expedited development and review programs. In addition to the Fast Track, accelerated approval and priority review programs discussed above, the FDA also provided guidance on a new program for Breakthrough Therapy designation. A request for Breakthrough Therapy designation should be submitted concurrently with, or as an amendment to an IND. FDA has already granted this designation to around 30 new drugs and recently approved a couple of Breakthrough Therapy designated drug.
Patent Term Restoration and Marketing Exclusivity
Depending upon the timing, duration and specifics of FDA approval of the use of our drug candidates, some of our U.S. patents may be eligible for limited patent term extension under the Hatch-Waxman Act. The Hatch-Waxman Act permits a patent restoration term of up to five years as compensation for patent term lost during product development and the FDA regulatory review process. However, patent term restoration cannot extend the remaining term of a patent beyond a total of 14 years from the product’s approval date. The patent term restoration period is generally one-half the time between the effective date of an IND, and the submission date of an NDA, plus the time between the submission date of an NDA and the approval of that application. Only one patent applicable to an approved drug is eligible for the extension and the application for extension must be made prior to expiration of the patent. The United States Patent and Trademark Office, in consultation with the FDA, reviews and approves the application for any patent term extension or restoration. In the future, we intend to apply for restorations of patent term for some of our currently owned or licensed patents to add patent life beyond their current expiration date, depending on the expected length of clinical trials and other factors involved in the submission of the relevant NDA.
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Market exclusivity provisions under the FDCA also can delay the submission or the approval of certain applications. The FDCA provides a five-year period of non-patent marketing exclusivity within the U.S. to the first applicant to gain approval of an NDA for a new chemical entity. A drug is a new chemical entity if the FDA has not previously approved any other new drug containing the same active moiety, which is the molecule or ion responsible for the action of the drug substance. During the exclusivity period, the FDA may not accept for review an abbreviated new drug application (or ANDA) or a 505(b)(2) NDA submitted by another company for another version of such drug where the applicant does not own or have a legal right of reference to all the data required for approval. However, an application may be submitted after four years if it contains a certification of patent invalidity or non-infringement. The FDCA also provides three years of marketing exclusivity for an NDA, 505(b)(2) NDA or supplement to an approved NDA if new clinical investigations, other than bioavailability studies, that were conducted or sponsored by the applicant are deemed by the FDA to be essential to the approval of the application, for example, for new indications, dosages or strengths of an existing drug. This three-year exclusivity covers only the conditions associated with the new clinical investigations and does not prohibit the FDA from approving ANDAs for drugs containing the original active agent. Five-year and three-year exclusivity will not delay the submission or approval of a full NDA; however, an applicant submitting a full NDA would be required to conduct or obtain a right of reference to all of the preclinical studies and adequate and well-controlled clinical trials necessary to demonstrate safety and effectiveness.
Post-approval Requirements
Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory requirements is not maintained or if problems occur after the product reaches the market. Later discovery of previously unknown problems with a product may result in restrictions on the product or even complete withdrawal of the product from the market. After approval, some types of changes to the approved product, such as adding new indications, manufacturing changes and additional labeling claims, are subject to further FDA review and approval. In addition, the FDA may require testing and surveillance programs to monitor the effect of approved products that have been commercialized, and the FDA has the power to prevent or limit further marketing of a product based on the results of these post-marketing programs.
Any drug products manufactured or distributed by us pursuant to FDA approvals are subject to continuing regulation by the FDA, including, among other things:
| • | record-keeping requirements; |
| • | reporting of adverse experiences with the drug; |
| • | providing the FDA with updated safety and efficacy information; |
| • | drug sampling and distribution requirements; |
| • | notifying the FDA and gaining its approval of specified manufacturing or labeling changes; and |
| • | complying with FDA promotion and advertising requirements. |
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Drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and some state agencies for compliance with cGMP and other laws.
We rely, and expect to continue to rely, on third parties for the production of clinical and commercial quantities of our products. Future FDA and state inspections may identify compliance issues at the facilities of our contract manufacturers that may disrupt production or distribution, or require substantial resources to correct.
From time to time, legislation is drafted, introduced and passed in Congress that could significantly change the statutory provisions governing the approval, manufacturing and marketing of products regulated by the FDA. In addition, FDA regulations and guidance are often revised or reinterpreted by the agency in ways that may significantly affect our business and our products. It is impossible to predict whether legislative changes will be enacted, or FDA regulations, guidance or interpretations changed or what the impact of such changes, if any, may be.
Regulation Outside of the U.S.
In addition to regulations in the U.S., we will be subject to regulations of other countries governing clinical trials and commercial sales and distribution of our products. Whether or not we obtain FDA approval for a product, we must obtain approval by the comparable regulatory authorities of countries outside of the U.S. before we can commence clinical trials in such countries and approval of the regulators of such countries or economic areas, such as the E.U., before we may market products in those countries or areas. The approval process and requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from place to place, and the time may be longer or shorter than that required for FDA approval.
Under E.U. regulatory systems, a company may submit marketing authorization applications either under a centralized or decentralized procedure. The centralized procedure, which is compulsory for medicines produced by biotechnology or those medicines intended to treat AIDS, cancer, neurodegenerative disorders or diabetes and optional for those medicines which are highly innovative, provides for the grant of a single marketing authorization that is valid for all E.U. member states. The decentralized procedure provides for mutual recognition of national approval decisions. Under this procedure, the holder of a national marketing authorization may submit an application to the remaining member states. Within 90 days of receiving the applications and assessments report, each member state must decide whether to recognize approval. If a member state does not recognize the marketing authorization, the disputed points are eventually referred to the European Commission, whose decision is binding on all member states.
Reimbursement
Sales of our products will depend, in part, on the extent to which the costs of our products will be covered by third-party payors, such as government health programs, commercial insurance and managed healthcare organizations. These third-party payors are increasingly challenging the prices charged for medical products and services. Additionally, the containment of healthcare costs has become a priority of federal and state governments and the prices of drugs have been a focus in this effort. The U.S. government, state legislatures and foreign governments have shown significant interest in implementing cost-containment programs, including price controls, restrictions on reimbursement and requirements for substitution of generic products. Adoption of price controls and cost-containment measures, and adoption of more restrictive policies in jurisdictions with existing controls and measures, could further limit our net revenue and results. If these third-party payors do not consider our products to be cost-effective compared to other therapies, they may not cover our products after approved as a benefit under their plans or, if they do, the level of payment may not be sufficient to allow us to sell our products on a profitable basis.
The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (or MMA) imposed new requirements for the distribution and pricing of prescription drugs for Medicare beneficiaries. Under Part D, Medicare beneficiaries may enroll in prescription drug plans offered by private entities which will provide coverage of outpatient prescription drugs. Part D plans include both stand-alone prescription drug benefit plans and prescription drug coverage as a supplement to Medicare Advantage plans. Unlike Medicare Part A and B, Part D coverage is not standardized. Part D prescription drug plan sponsors are not required to pay for all covered Part D drugs, and each drug plan can develop its own drug formulary that identifies which drugs it will cover and at what tier or level. However, Part D prescription drug formularies must include drugs within each therapeutic category and class of covered Part D drugs, though not necessarily all the drugs in each category or class. Any formulary used by a Part D prescription drug plan must be developed and reviewed by a pharmacy and therapeutic committee. Government payment for some of the costs of prescription drugs may increase demand for our products for which we receive marketing approval. However, any negotiated prices for our products covered by a Part D prescription drug plan will likely be lower than the prices we might otherwise obtain. Moreover, while the MMA applies only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own payment rates. Any reduction in payment that results from the MMA may result in a similar reduction in payments from non-governmental payors.
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The American Recovery and Reinvestment Act of 2009 provides funding for the federal government to compare the effectiveness of different treatments for the same illness. A plan for the research will be developed by the Department of Health and Human Services, the Agency for Healthcare Research and Quality and the National Institutes for Health, and periodic reports on the status of the research and related expenditures will be made to Congress. Although the results of the comparative effectiveness studies are not intended to mandate coverage policies for public or private payors, it is not clear what effect, if any, the research will have on the sales of any product, if any such product or the condition that it is intended to treat is the subject of a study. It is also possible that comparative effectiveness research demonstrating benefits in a competitor’s product could adversely affect the sales of our product candidates. If third-party payors do not consider our products to be cost-effective compared to other available therapies, they may not cover our products as a benefit under their plans or, if they do, the level of payment may not be sufficient to allow us to sell our products on a profitable basis.
The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act of 2010 (or collectively, the ACA), enacted in March 2010, is expected to have a significant impact on the health care industry. ACA is expected to expand coverage for the uninsured while at the same time containing overall healthcare costs. With regard to pharmaceutical products, among other things, the ACA is expected to expand and increase industry rebates for drugs covered under Medicaid programs and make changes to the coverage requirements under the Medicare Part D program. We cannot predict the impact of the ACA on pharmaceutical companies, as many of the ACA reforms require the promulgation of detailed regulations implementing the statutory provisions which has not yet occurred. In addition, some members of the U.S. Congress have been seeking to overturn at least portions of the legislation and we expect they will continue to review and assess this legislation and alternative health care reform proposals. Any legal challenges to the ACA, as well as Congressional efforts to repeal the ACA, add to the uncertainty of the legislative changes enacted as part of the ACA.
In addition, in some non-U.S. jurisdictions, the proposed pricing for a drug must be approved before it may be lawfully marketed. The requirements governing drug pricing vary widely from country to country. For example, the E.U. provides options for its member states to restrict the range of medicinal products for which their national health insurance systems provide reimbursement and to control the prices of medicinal products for human use. A member state may approve a specific price for the medicinal product or it may instead adopt a system of direct or indirect controls on the profitability of the company placing the medicinal product on the market. There can be no assurance that any country that has price controls or reimbursement limitations for pharmaceutical products will allow favorable reimbursement and pricing arrangements for any of our products. Historically, products launched in the E.U. do not follow price structures of the U.S. and generally tend to be significantly lower.
Our Management
Our management team has extensive experience in leading the development of innovative therapeutics and significant expertise in operational, financial and corporate development functions. Our co-founder, President and Chief Executive Officer, David P. Luci, Esq., has managed multiple drug development companies including Bioenvision, Inc. (sold to Genzyme Corporation for $345 million in 2007), MacroChem (sold to Access in 2009), Access Pharmaceuticals (now named Abeona Therapeutics) and our company. Our co-founder and Executive Chairman, Robert J. DeLuccia, has extensive product development, sales and marketing experience as well as senior level experience in management and operation of pharmaceutical and biotechnology companies of various sizes, including Pifzer, Inc. and Sanofi. Collectively, Messrs. Luci and DeLuccia have over 60 years of combined experience in the pharmaceutical and biotechnology sectors.
Employees
As of December 31, 2016, we had a total of three employees, all of which are full-time employees. We believe our relationships with our employees and consultants are satisfactory. We have never experienced employment-related work stoppages and consider that we maintain good relations with our personnel. In the fourth quarter of 2016 after the failure of the OneStep-1 and OneStep-2 Phase 3 clinical trials, we terminated two employees and discontinued nearly all open work orders with our medical and scientific consultants, manufacturers, laboratories, and contract research organizations that specialize in various aspects of drug development including clinical development, preclinical development, manufacturing and regulatory affairs.
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Available Information
Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (which we refer to herein as the Exchange Act), are filed with the Securities and Exchange Commission (or SEC). Such reports and other information that we file with the SEC are available free of charge on our website at http://dipexiumpharmaceuticals.com and such filings also are available on the SEC website. The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at http://www.sec.gov. The contents of these websites are not incorporated into this filing. Further, the foregoing references to the URLs for these websites are intended to be inactive textual references only.
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An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below, together with all of the other information included in this annual report on Form 10-K, before making an investment decision. If any of the following risks actually occurs, our business, financial condition or results of operations could suffer. In that case, the trading price of our shares of common stock could decline and you may lose all or part of your investment. See “Cautionary Note Regarding Forward Looking Statements” above for a discussion of forward-looking statements and the significance of such statements in the context of this annual report on Form 10-K.
Risks Related to Dipexium
We have never generated revenues and do not expect to in the near future. We have a history of operating losses, expects continuing losses and may never become profitable.
In order to generate revenue, we must develop and commercialize successfully our own product or enter into strategic partnering agreements with others who can develop and commercialize them successfully, or acquire additional new products that generate or have the potential to generate revenues. Because of the numerous risks and uncertainties associated with our product development program and our ability to acquire new products, we are unable to predict when we will be able to generate significant revenue or become profitable, if at all. We incurred a net loss of $21.3 million for the year ended December 31, 2016. As of December 31, 2016, our accumulated deficit was $62.4 million. We expect to continue to incur substantial and continuing losses for the foreseeable future. These losses will increase if we decide to pursue clinical trials of Locilex® in yet to be identified, new clinical indications or if we were to in-license new products that require further development. Even if our Locilex® or any new products we may acquire or in-license are introduced commercially, we may never achieve market acceptance and may never generate sufficient revenues to achieve or sustain future profitability.
Because we have no source of revenue, we must depend on financing or partnering to sustain our operations. We likely will need to raise substantial additional capital or enter into strategic partnering agreements to fund our operations and we are very likely unable to raise such funds or enter into strategic partnering agreements when needed and on acceptable terms because our lead and only product candidate recently failed in Phase 3 clinical trials.
Developing products requires substantial amounts of capital. We have not yet identified a potential new clinical and regulatory pathway forward for Locilex® and therefore cannot estimate the cost of any such pathway to market. If we are not able to identify a promising clinical and regulatory pathway forward, it is likely that we will need to raise substantial additional capital or enter into strategic partnering agreements to fund our operations and it may be unable to raise such funds or enter into strategic partnering agreements when needed and on acceptable terms, particularly given that Locilex® has recently failed in two Phase 3 clinical trials.
Our future capital requirements will depend upon numerous factors, including:
| · | the ability to identify a clinical and regulatory pathway forward for Locilex® given the recent failure in Phase 3 clinical trials in infected diabetic foot ulcers; |
| · | the progress, timing, cost and results of our yet-to-be identified clinical development program if we decide to pursue them; |
| · | the cost, timing and outcome of regulatory actions with respect to our product; |
| · | the success, progress, timing and costs of our business development efforts to implement business collaborations, licenses and other business combinations or transactions, and our efforts to evaluate various strategic alternatives available with respect to our product. |
| · | our ability to acquire or in-license additional new products and technologies and the costs and expenses of such acquisitions or licenses; |
| · | the timing and amount of any royalties, milestone or other payments we may receive from or be obligated to pay to potential licensors, licensees and other third parties; |
| · | the costs of preparing, filing, prosecuting, maintaining and enforcing patent claims and other intellectual property rights; |
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| · | the emergence of competing products and technologies, and other adverse market developments; |
| · | the perceived, potential and actual commercial success of our product; |
| · | our operating expenses; and |
| · | the resolution of our pending litigation and any amount it may be required to pay in excess of our directors’ and officers’ liability insurance. |
Our future capital requirements and projected expenditures are based upon numerous assumptions and subject to many uncertainties, and actual requirements and expenditures may differ significantly from our projections. To date, we have relied entirely upon proceeds from sales of our equity securities to finance our business and operations. We likely will need to raise additional capital to fund our operations. As of December 31, 2016, Dipexium had $16.7 million of cash. We do not have any existing credit facilities under which we may borrow funds. Absent the receipt of any licensing income or financing, we expect our cash balance to decrease as we continue to use cash to fund our operations. Assuming the Proposed Merger is completed during the first half of 2017, we expect our cash as of December 31, 2016 to meet our liquidity requirements through at least the anticipated close of the Proposed Merger, including the closing condition under the Merger Agreement to have at least $12.0 million of “cash,” as defined in the Merger Agreement, available upon the closing of the Proposed Merger. If the Proposed Merger is not completed, we will need to reevaluate our strategic alternatives, which may include continuing to operate our business as an independent, stand-alone company, a sale of the company, liquidation of the company or other strategic transaction. Our liquidity position will be dependent upon the strategic alternative selected; however, assuming we do not enter into another strategic transaction, we expect our cash as of December 31, 2016 will be sufficient to meet our liquidity requirements for at least the next 12 months. Additional financing would be required should we decide to commence a new clinical program for Locilex® in a new, yet-to-be-identified clinical indication. Cash needs to pursue a new clinical indication cannot even be estimated until a promising new indication for Locilex® to target is identified, if ever.
The October 2016 announcement of the disappointing results of our prior completed OneStep-1 and OneStep-2 Phase 3 clinical trials has significantly depressed the trading price of our common stock and harmed our ability to raise additional capital. We can provide no assurance that additional financing will be available on terms favorable to us, or at all.
We and our management are parties to a lawsuit which, if adversely decided against, could impact our rights to Locilex®.
In April 2010, we acquired the worldwide rights to develop pexiganan, the active pharmaceutical ingredient in Locilex®, from Genaera Liquidating Trust, which was put in place to liquidate the assets of Genaera Corporation. In June 2012, we, along with our two senior executives and several other unrelated defendants, were sued in the Federal District Court for the Eastern District of Pennsylvania by a former shareholder of Genaera Corporation and purported to be on behalf of other Genaera Corporation shareholders, alleging, in pertinent part, that our company’s acquisition of the rights to pexiganan (the active ingredient in Locilex®, and which rights included the rights to the prior formulation of Locilex®) was for what was alleged to be inadequate consideration, and as a result, it was alleged that we and our senior executives aided and abetted a breach of fiduciary duty by Genaera Corporation and the Genaera Liquidating Trust to the former shareholders of Genaera Corporation. It was also alleged that we and our senior executives aided and abetted a breach of the duty of the trustee at common law and under a certain trust agreement which was alleged to exist and which was executed by Argyce LLC (or Argyce), as trustee. The agreement called for Argyce to create the Genaera Liquidating Trust pursuant to which Argyce apparently was appointed to liquidate the assets formerly held by Genaera Corporation. One of these assets was pexiganan, which we acquired via public auction conducted by Argyce on behalf of the Genaera Liquidating Trust.
The case against our company and our senior executives was dismissed with prejudice by the Federal District Court, without leave to refile, on August 12, 2013 based on the argument that Plaintiff’s claims were time barred, and a subsequent motion to reconsider such dismissal was denied by the Federal District Court. Prior to the dismissal there was no request or action to seek class certification by the plaintiff though it was purportedly filed on behalf of other former Genaera Corporation shareholders. Plaintiff appealed the dismissal of the suit as well as the denial of the motion to reconsider to the Third Circuit Appellate Court, which granted Plaintiff’s appeal.
On October 17, 2014, the Third Circuit Appellate Court, in a 2-1 decision with a strong dissenting opinion, reversed the trial court’s dismissal of Plaintiff’s claims based on the expiration of the applicable statutes of limitation and remanded the case to the Federal District Court. In a 2-1 decision, the Third Circuit held that more information was necessary to determine when Plaintiff should have been on notice of his claims to determine the applicability of the discovery rule, which could serve to extend the time frame in which Plaintiff could bring his claims. Due to the strong dissent, all Defendants filed the necessary documents requesting a petition for rehearing en banc, by the majority of the Third Circuit justices who are in active service. The Third Circuit denied the request for en banc hearing and remanded this case to District Court.
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Upon remand to the Federal District Court, all Defendants moved to dismiss the complaint for reasons other than being time barred. The Company and the executives moved for dismissal based on Plaintiff’s inability to make a case for aiding and abetting a breach of fiduciary duty because there was no underlying breach and such an aiding and abetting claim requires an element of knowing participation in the fiduciary breach which cannot be established by Plaintiff.
The District Court held a hearing on this in September 2015 and the District Court delivered an Order on November 10, 2015 pursuant to which the District Court granted the Motion to Dismiss filed by each and every defendant including the Company and its executives. In December 2015, Plaintiff appealed the Federal District Court’s decision to the Third Circuit Appellate Court and we anticipate a decision on whether to grant Plaintiff’s appeal by the Third Circuit Appellate Court in the first quarter of 2017. The Company will continue to vigorously defend Plaintiff’s claims on the factual record, which it believes will prove that the Company is not liable to the Plaintiff in any regard.
If we were to lose such case, our rights to the prior formulation of Locilex® could be lost, which may impair the commercial viability of our product or the timeline to potential regulatory approval. If we were required to settle the case, we may lose certain rights to Locilex® or be required to pay damages, which could have a material adverse effect on our company, our business plans and results of operations.
Our two pivotal OneStep-1 and OneStep-2 clinical trials did not meet the primary or secondary endpoints, which could continue to harm our business and further disappoint our stockholders and cause the trading price of our common stock to continue to decrease.
Our lead and only product in development is Locilex® for the treatment of mildly infected diabetic foot ulcers, for which there is currently no FDA-approved product. In October 2016, we announced disappointing top-line data from our OneStep-1 and OneStep-2 pivotal Phase 3 clinical trials and both trials failed to meet any of the primary or secondary endpoints. Currently, management in conjunction with its clinical and regulatory advisors have not been able to identify a new clinical and regulatory pathway forward although this is subject to ongoing review and evaluation. No assurance can be given that a promising clinical and regulatory pathway will be identified or that, if identified, any such pathway could be achieved, without significantly more capital invested in the Company. No assurance can be given that additional capital would be available or that such capital would be available at acceptable terms.
We have not yet identified a clinical or regulatory pathway forward for Locilex ® , our only product, and the likelihood is that Locilex ® will not be approved by regulatory authorities or introduced commercially for at least several years, if at all.
In October 2016, we released top-line data on our only ongoing clinical trials, OneStep-1 and OneStep-2, which were two identical Phase 3 clincial trials testing Locilex® in patients with mildly infected diabetic foot ulcers. Both trials failed to meet all primary and secondary endpoints. We currently are evaluating whether or not there is any clinical and regulatory pathway forward based on the data from the OneStep trials. Going forward, Locilex® will require further development, preclinical and clinical testing and investment prior to obtaining required regulatory approvals, if ever, and commercialization in the United States and abroad, even if a viable regulatory pathway forward is identified. We currently have no other product candidates. We cannot provide assurance that a new clinical and regulatory pathway will be identified or that Locilex® will be developed successfully. Even if a viable clinical and regulatory pathway forward is identified, we cannot provide assurance that Locilex® will:
| · | prove to be safe and effective in clinical studies; |
| · | meet applicable regulatory standards or obtain required regulatory approvals; |
| · | demonstrate substantial protective or therapeutic benefits in the prevention or treatment of any disease; |
| · | be capable of being produced in commercial quantities at reasonable costs; |
| · | obtain coverage and favorable reimbursement rates from insurers and other third-party payors; or |
| · | be marketed successfully or achieve market acceptance by physicians and patients. |
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If we reallocate our resources to acquire one or more new product candidates, we may not be successful in developing such newly acquired product candidates and we will once again be subject to all the risks and uncertainties associated with research and development of products and technologies.
We have explored the possibility of reallocating our resources toward acquiring, by acquisition or in-license, new product candidates. If we decide to acquire one or more new product candidates, we cannot guarantee that any such acquisition would result in the identification and successful development of one or more approved and commercially viable products. The development of products and technologies is subject to a number of risks and uncertainties, including:
| · | the time, costs and uncertainty associated with the clinical testing required to demonstrate the safety and effectiveness of a product candidate to obtain regulatory approvals; |
| · | the ability to raise sufficient funds to fund the research and development of any one or more new product candidates; |
| · | the ability to find third party strategic partners to assist or share in the costs of product development, and potential dependence on such strategic partners, to the extent Dipexium may rely on strategic partners for future sales, marketing or distribution; |
| · | the ability to protect the intellectual property rights associated with any one or more new product candidates; |
| · | litigation; |
| · | competition; |
| · | ability to comply with ongoing regulatory requirements; |
| · | government restrictions on the pricing and profitability of products in the United States and elsewhere; and |
| · | the extent to which third-party payers, including government agencies, private health care insurers and other health care payers, such as health maintenance organizations, and self-insured employee plans, will cover and pay for newly approved therapies. |
We have very limited staffing and we are dependent upon key employees and the limited use of independent contractors, the loss of some of which could affect adversely our operations.
Our success is dependent upon the efforts of a relatively small management team and staff. We also have engaged independent contractors from time-to-time on an as needed, project by project, basis. During November 2016, in order to reduce our operating expenses, we terminated all of our major independent contractor arrangements and reduced the total employee headcount. Such reductions in force, combined with our future business prospects and financial condition, put us at risk of losing key personnel who we will need going forward to implement our business strategies. We have no redundancy of personnel in key development areas, including clinical, regulatory, strategic planning and finance. We have employment arrangements in place with our executive and other officers, but none of these executive and other officers is bound legally to remain employed with us for any specific term. We do not have key man life insurance policies covering our executive and other officers or any of our other employees. If key individuals leave our company, our business could be affected adversely if suitable replacement personnel are not recruited quickly. There is competition for qualified personnel in the biotechnology and biopharmaceutical industry in the New York, New York area in all functional areas, which makes it difficult to retain and attract the qualified personnel necessary for any potential turn around or restart of our business. Our financial condition and recent reductions in force and expense reductions may make it difficult for us to retain current personnel and attract qualified employees and independent contractors in the future.
Our business is subject to increasingly complex corporate governance, public disclosure and accounting requirements that could affect adversely our business and financial results.
We are subject to changing rules and regulations of federal and state governments as well as the stock exchange on which our common stock is listed. These entities, including the SEC and The NASDAQ Stock Market, continue to issue new requirements and regulations in response to laws enacted by Congress. In July 2010, the Dodd-Frank Wall Street Reform and Protection Act (the Dodd-Frank Act) was enacted. There are significant corporate governance and executive compensation-related provisions in the Dodd-Frank Act that require the SEC and The NASDAQ Stock Market to adopt additional rules and regulations in these areas. Our efforts to comply with these requirements have resulted in, and are likely to continue to result in, an increase in expenses and a diversion of management’s time from our other business activities.
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The trading price of our common stock has been volatile, and your investment in our common stock could decline in value.
The price of our common stock has dropped dramatically since the failure of our OneStep Phase 3 clinical trials, OneStep-1 and OneStep-2, in October 2016 and it is likely that the price of our common stock will continue to fluctuate in the future. From January 1, 2015 through December 31, 2016, the sale price of our common stock ranged from $12.38 per share to $1.60 per share. The market price of our common stock may fluctuate significantly in the future due to a variety of factors, including:
| · | general stock market and general economic conditions in the United States and abroad, not directly related to our company or our business; |
| · | actual or anticipated governmental agency actions, including in particular decisions or actions by the FDA or FDA advisory committee panels with respect to other antibiotic candidates in development; |
| · | termination of the previously announced Proposed Merger with PLx Pharma; |
| · | entering into new strategic partnering arrangements; |
| · | developments concerning our efforts to identify and implement strategic opportunities and the terms and timing of any resulting transactions; |
| · | public concern as to the safety or efficacy of or market acceptance of products developed by us or our competitors; |
| · | our cash and our need and ability to obtain additional financing; |
| · | equity sales by us to fund our operations; |
| · | the resolution of our pending litigation matter; |
| · | developments or disputes concerning patents or other proprietary rights; |
| · | period-to-period fluctuations in our financial results, including our cash, operating expenses, cash burn rate or revenues; |
| · | loss of key management; |
| · | common stock sales and purchases in the public market by one or more of our larger stockholders, officers or directors; |
| · | reports issued by securities analysts regarding our common stock and articles published regarding our business and/or products; |
| · | changes in the market valuations of other life science or biotechnology companies; and |
| · | other financial announcements, including delisting of our common stock from The NASDAQ Capital Market, review of any of our filings by the SEC, changes in accounting treatment or restatement of previously reported financial results, delays in our filings with the SEC or our failure to maintain effective internal control over financial reporting. |
In addition, the occurrence of any of the risks described in this report or in subsequent reports we file with or submit to the SEC from time to time could have a material and adverse impact on the market price of our common stock. Securities class action litigation is sometimes brought against a company following periods of volatility in the market price of our securities or for other reasons. Securities litigation, whether with or without merit, could result in substantial costs and divert management’s attention and resources, which could harm our business and financial condition, as well as the market price of our common stock.
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We do not intend to pay any cash dividends in the foreseeable future; and, therefore, any return on an investment in our common stock must come from increases in the fair market value and trading price of our common stock.
We do not intend to pay any cash dividends in the foreseeable future; and, therefore, any return on an investment in our common stock must come from increases in the fair market value and trading price of our common stock.
Risks Related to the Proposed Merger between us and PLx Pharma
Our stockholders and the stockholders of PLx Pharma may not approve the Proposed Merger of the two companies.
We have signed a Merger Agreement with PLx Pharma, pursuant to which we have agreed to merge with PLx Pharma subject to among other closing conditions, the approval of the stockholders of both companies. Although we believe the Proposed Merger is in the best interests of our and PLx Pharma’s stockholders, one or both companies may not be able to obtain the stockholder vote required to approve the Proposed Merger. If our stockholders or the stockholders of PLx Pharma do not approve the Proposed Merger, we will pursue other strategic alternatives or potentially pursue a dissolution our company.
The issuance of shares of our common stock to PLx Pharma stockholders in connection with the Proposed Merger will dilute substantially the voting power of our current stockholders.
Pursuant to the terms of the Merger Agreement, it is anticipated that we will issue shares of our common stock to PLx Pharma stockholders representing approximately 76% of the outstanding shares of common stock of the combined company as of immediately following completion of the Proposed Merger, assuming our cash is $12.5 million as of the determination date. After such issuance, the shares of our common stock outstanding immediately prior to completion of the Proposed Merger will represent 23.25% of the outstanding shares of common stock of the combined company as of immediately following completion of the Proposed Merger. These ownership percentages may change depending upon the amount of our cash as of a determination date prior to completion of the Proposed Merger. Accordingly, the issuance of shares of our common stock to PLx Pharma stockholders in connection with the Proposed Merger will reduce significantly the relative voting power of each share of our common stock held by our current stockholders. Consequently, our stockholders as a group will have significantly less influence over the management and policies of the combined company after the completion of the Proposed Merger than prior to completion of the Proposed Merger.
The exchange ratio in the Merger Agreement is subject to adjustment based on our cash as of a determination date prior to completion of the Proposed Merger, which could dilute further the ownership of our stockholders in the combined company.
Subject to the terms and conditions of the Merger Agreement, at the effective time of and as a result of the Proposed Merger, each share of PLx Pharma capital stock issued and outstanding immediately prior to the effective time of the Proposed Merger will be converted into the right to receive that number of shares of our common stock, if any, as determined pursuant to the exchange ratio described in the Merger Agreement. The exchange ratio is subject to potential adjustment as described in the Merger Agreement depending upon the amount of our “cash,” as defined in the Merger Agreement and generally consisting of our cash including certain credits for deal-related expenses and security deposits, as of a determination date prior to the closing date of the Proposed Merger. If we have more than $12.5 million of cash as of the determination date, then the percentage ownership of our current stockholders will be 23.25% in the combined company. If we have less than $12.5 million of cash as of the determination date but more than $12.0 million, then the percentage ownership of our current stockholders will be 22.5% of the combined company, which would constitute further dilution for our stockholders in the combined company. In addition, one of the conditions to PLx Pharma’s obligations to complete the Proposed Merger is our cash as of the closing date being no less than $12.0 million as calculated and as adjusted pursuant to the provisions of the Merger Agreement. The items that will constitute our cash at the determination date set forth in the Merger Agreement are subject to a number of factors, some of which are outside our control and many of which are outside the control of PLx Pharma.
The exchange ratio is not adjustable based on issuances by us of additional shares of our common stock either upon the exercise of options or warrants or otherwise, which issuances would result in additional dilution to our stockholders.
As of December 31, 2016, we had outstanding options to purchase an aggregate of 1,445,013 million shares of our common stock and warrants to purchase an aggregate of approximately 10,500 shares of our common stock. We are not prohibited under the terms of the Merger Agreement from issuing additional equity securities under certain circumstances, including securities issued pursuant to the exercise of outstanding options or warrants or to certain vendors or suppliers. It is possible that prior to completion of the Proposed Merger, we may issue additional equity securities, which would result in additional dilution to our stockholders.
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The market price of our common stock following the Proposed Merger may decline as a result of the Proposed Merger.
The market price of our common stock may decline as a result of the Proposed Merger for a number of reasons, including if:
| · | investors react negatively to the prospects of the combined organization’s business and prospects from the Proposed Merger; |
| · | third parties may seek to terminate and/or renegotiate their relationships with us as a result of the Proposed Merger, whether pursuant to the terms of their existing agreements with us or otherwise; |
| · | the effect of the Proposed Merger on the combined organization’s business and prospects is not consistent with the expectations of financial or industry analysts; or |
| · | the combined organization does not achieve the perceived benefits of the Proposed Merger as rapidly or to the extent anticipated by financial or industry analysts. |
Failure to complete the Proposed Merger could negatively impact our business, financial condition or results of operations or the trading price of our common stock.
The completion of the Proposed Merger is subject to a number of conditions and there can be no assurance that the conditions to the completion of the Proposed Merger will be satisfied. If the Proposed Merger is not completed, we will be subject to several risks, including:
| · | the current trading price of our common stock may reflect a market assumption that the Proposed Merger will occur, meaning that a failure to complete the Proposed Merger could result in a decline in the trading price of our common stock; |
| · | certain of our executive officers and/or directors may seek other employment opportunities, and the departure of any of our executive officers and the possibility that the Company would be unable to recruit and hire an executive could impact negatively our business and operating result; |
| · | our board of directors will need to reevaluate our strategic alternatives, which alternatives may include a sale of the Company, liquidation of the Company or other strategic transaction; |
| · | we may be required to pay a termination fee of $700,000 to PLx Pharma if the Merger Agreement is terminated by PLx Pharma or by us under certain circumstances; |
| · | we have incurred and are expected to continue to incur substantial transaction costs in connection with the Proposed Merger whether or not the Proposed Merger is completed; |
| · | we would not realize any of the anticipated benefits of having completed the Proposed Merger; and |
| · | pursuant to the Merger Agreement, we are subject to certain restrictions on the conduct of our business prior to completion of the Proposed Merger, which restrictions could adversely affect our ability to realize certain of our business strategies or take advantage of certain business opportunities. |
If the Proposed Merger is not completed, these risks may materialize and affect materially and adversely our business, financial condition, results of operations, or the trading price of our common stock.
We have incurred and will continue to incur significant transaction costs in connection with the Proposed Merger, some of which will be required to be paid even if the Proposed Merger is not completed.
We have incurred and will continue to incur significant transaction costs in connection with the Proposed Merger. These costs are primarily associated with the fees of our attorneys, accountants and financial advisors. We will be required to pay most of these costs even if the Proposed Merger is not completed. In addition, if the Merger Agreement is terminated due to certain triggering events specified in the Merger Agreement, we may be required to pay PLx Pharma a termination fee of $700,000. The Merger Agreement also provides that under specified circumstances, if the Proposed Merger is completed, the combined company will bear our transaction costs as well as those of PLx Pharma in connection with the Proposed Merger, including financial advisor, legal and accounting fees and expenses.
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Third party lawsuits may be filed against us in connection with the Proposed Merger which may be frivolous but costly to defend.
Third parties may assert claims against us alleging that the terms of the Proposed Merger are somehow unfair or inappropriate. Although our board of directors and management team may disagree, any claims against us, with or without merit, as well as claims initiated by us against third parties, can be time-consuming and expensive to defend or prosecute and resolve. We cannot assure you that litigation asserting claims against the Company will not be initiated or that we would prevail in any litigation. We cannot assure you that the Proposed Merger with PLx Pharma would close if and to the extent a claim or claims were filed against the Company in this regard.
Because the Proposed Merger will be completed after the date of our annual meeting of stockholders, it is possible under certain limited circumstances described below that at the time of the annual meeting, our stockholders will not know the exact number of shares of our common stock that the PLx Pharma stockholders will receive upon completion of the Proposed Merger.
Subject to the terms of the Merger Agreement, at the effective time of the Proposed Merger, each share of PLx Pharma common stock issued and outstanding immediately prior to the Proposed Merger will be canceled, extinguished and automatically converted into the right to receive that number of shares of our common stock as determined pursuant to the exchange ratio described in the Merger Agreement. The exchange ratio depends on our cash as of a determination date prior to completion of the Proposed Merger. The determination date is defined as the date that is three days prior to the closing date. Under the Merger Agreement, our “cash” is defined as generally consisting of our cash plus certain credits for transaction-related costs and security deposits, as of a determination date prior to the closing date of the Proposed Merger.
Some of our directors and executive officers have interests in the Proposed Merger that are different from, or in addition to, those of our other stockholders.
When considering the recommendation by our board of directors that our stockholders vote “for” each of the proposals being submitted to our stockholders at the annual meeting of our stockholders, our stockholders should be aware that certain of our directors and executive officers have arrangements that provide them with interests in the Proposed Merger that are different from, or in addition to, those of our other stockholders. For instance, in connection with the Proposed Merger, David P. Luci, Esq., Dipexium’s President & CEO and a current member of our board of directors, will continue to serve as a director of the combined company following completion of the Proposed Merger and will receive cash and equity compensation in consideration for such service. The employment of our three executive officers will terminate immediately following completion of the Proposed Merger and they will be entitled to receive severance cash payments ranging from $213,000 to $1,238,000, and other severance benefits such as continuing health insurance, in connection with such termination. Our directors and executive officers also have certain rights to indemnification and to directors’ and officers’ liability insurance that will be provided by the combined company following completion of the Proposed Merger. Our board of directors was aware of these potential interests and considered them in making its recommendations to approve the proposals being submitted to our stockholders at the special meeting of our stockholders.
Certain provisions of the Merger Agreement may discourage third parties from submitting alternative takeover proposals, including proposals that may be superior to the arrangements contemplated by the Merger Agreement.
The terms of the Merger Agreement prohibit each of us and PLx Pharma from soliciting alternative takeover proposals or cooperating with persons making unsolicited takeover proposals, except in limited circumstances when our board of directors determines in good faith that an unsolicited alternative takeover proposal is or is reasonably likely to lead to a superior takeover proposal and is reasonably capable of being consummated and that failure to cooperate with the proponent of the proposal could reasonably be considered a breach of our board of directors’ fiduciary duties. The PLx Pharma board of directors is not permitted under any circumstances to solicit alternative takeover proposals or cooperate with any person making unsolicited takeover proposals. In addition, if we or PLx Pharma terminate the Merger Agreement under certain circumstances, we or PLx Pharma would be required to pay a termination fee of $700,000 or $500,000, respectively, to the other party. This termination fee may discourage third parties from submitting alternative takeover proposals to us or PLx Pharma or their stockholders, and may cause the respective boards of directors to be less inclined to recommend an alternative proposal.
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Because the lack of a public market for shares of PLx Pharma capital stock makes it difficult to evaluate the fairness of the Proposed Merger, PLx Pharma stockholders may receive consideration in the Proposed Merger that is greater than the fair value of the shares of capital stock of PLx Pharma.
PLx Pharma is privately held and its outstanding capital stock is not traded in any public market. The lack of a public market makes it extremely difficult to determine the fair value of PLx Pharma or its shares of capital stock. Since the percentage of PLx Pharma’s equity to be issued to the PLx Pharma stockholders was determined based on negotiations between the parties, it is possible that the value of our common stock to be issued in connection with the Proposed Merger will be greater than the fair value of PLx Pharma.
We may waive one or more of the conditions to the Proposed Merger without resoliciting stockholder approval for the Proposed Merger.
Certain conditions to our obligations to complete the Proposed Merger may be waived, in whole or in part, to the extent legally allowed, either unilaterally or by agreement between us and PLx Pharma. In the event of a waiver of a condition, our board of directors will evaluate the materiality of any such waiver to determine whether amendment of the proxy statement/prospectus and resolicitation of proxies is necessary. In the event that our board of directors determines any such waiver is not significant enough to require resolicitation of stockholders, it will have the discretion to complete the Proposed Merger without seeking further stockholder approval. The conditions requiring the approval of each company’s stockholders cannot, however, be waived.
Risks Related to the Combined Company if the Proposed Merger is Completed
The success of the Proposed Merger will depend, in large part, on the ability of the combined company following completion of the Proposed Merger to realize the anticipated benefits from combining our business with the business of PLx Pharma.
The Proposed Merger involves the integration of two companies that previously have operated independently with principal offices in two distinct locations. Due to legal restrictions, we and PLx Pharma are able to conduct only limited planning regarding the integration of the two companies prior to completion of the Proposed Merger. Significant management attention and resources will be required to integrate the two companies after completion of the Proposed Merger. The failure to integrate successfully and to manage successfully the challenges presented by the integration process may result in the combined company’s failure to achieve some or all of the anticipated benefits of the Proposed Merger.
Potential difficulties that may be encountered in the integration process include the following:
| · | using the combined company’s cash and other assets efficiently to develop the business of the combined company; |
| · | appropriately managing the liabilities of the combined company; |
| · | potential unknown or currently unquantifiable liabilities associated with the Proposed Merger and the operations of the combined company; |
| · | potential unknown and unforeseen expenses, delays or regulatory conditions associated with the Proposed Merger; and |
| · | performance shortfalls at one or both of the companies as a result of the diversion of management’s attention caused by completing the Proposed Merger and integrating the companies’ operations. |
Delays in the integration process could adversely affect the combined company’s business, financial results, financial condition and stock price following the Proposed Merger. Even if the combined company were able to integrate the business operations successfully, there can be no assurance that this integration will result in the realization of the full benefits of synergies, innovation and operational efficiencies that may be possible from this integration and that these benefits will be achieved within a reasonable period of time.
The Proposed Merger will result in changes to the combined company’s board of directors and the combined company may pursue different strategies than we may have pursued independently.
If we and PLx Pharma complete the Proposed Merger, the composition of the combined company’s board of directors will change in accordance with the Merger Agreement. Following completion of the Proposed Merger, the combined company’s board of directors will consist of seven members, including David P. Luci, Esq., our President & CEO, from our current board of directors. Currently, it is anticipated that the combined company will continue to advance the product development efforts and business strategies of PLx Pharma. However, because the composition of the board of directors of the combined company will consist of directors from both our company and PLx Pharma, the combined company may determine to pursue certain business strategies that we would not have pursued independently.
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Ownership of the combined company’s common stock may be highly concentrated, and it may prevent our stockholders from influencing significant corporate decisions and may result in conflicts of interest that could cause the combined company’s stock price to decline.
Upon completion of the Proposed Merger, PLx Pharma’s directors, executive officers continuing with the combined company and stockholders, together with their respective affiliates, are expected to beneficially own or control a majority of the combined company. Accordingly, these directors, executive officers and their affiliates and stockholders, acting individually or as a group, will have substantial influence over the outcome of a corporate action of the combined company requiring stockholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of the combined company’s assets or any other significant corporate transaction. These stockholders also may exert influence in delaying or preventing a change in control of the combined company, even if such change in control would benefit the other stockholders of the combined company. In addition, the significant concentration of stock ownership may affect adversely the market value of the combined company’s common stock due to investors’ perception that conflicts of interest may exist or arise.
The combined company’s ability to utilize our or PLx Pharma’s net operating loss and tax credit carryforwards in the future is subject to substantial limitations and may be further limited as a result of the Proposed Merger.
Under Section 382 of the Internal Revenue Code of 1986, as amended (the Code), if a corporation undergoes an “ownership change” (generally defined as a greater than 50 percent change (by value) in its equity ownership over a three-year period), the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes to offset its post-change income may be limited. Further, if our historic business is not treated as being continued by the combined entity for the two-year period beginning on the date of the Proposed Merger (referred to as the “continuity of business requirement”), the pre-transaction net operating loss carryforward deductions become substantially reduced or unavailable for use by the surviving corporation in the transaction. It is expected that the Proposed Merger with PLx Pharma will result in an “ownership change” of our company. Accordingly, the combined company’s ability to utilize our net operating loss and tax credit carryforwards may be substantially limited. These limitations, in turn, could result in increased future tax payments for the combined company, which could have a material adverse effect on the business, financial condition or results of operations of the combined company.
Under Section 384 of the Code, available net operating loss carryovers of ours or PLx Pharma may not be available to offset certain gains arising after the Proposed Merger from assets held by the other corporation at the effective time of the Proposed Merger. This limitation will apply to the extent that the gain is attributable to an unrealized built-in-gain in our assets or the assets of PLx Pharma existing at the effective time of the Proposed Merger. To the extent that any such gains are recognized in the five year period after the Proposed Merger upon the disposition of any such assets, the net operating loss carryovers of the other corporation will not be available to offset such gains (but the net operating loss carryovers of the corporation that owned such assets will not be limited by Section 384 although they may be subject to other limitations under Section 382 as described above).
The price of our common stock after the Proposed Merger is completed may be affected by factors different from those currently affecting the price of our common stock.
Our business differs significantly from the business of PLx Pharma and, accordingly, the results of operations of the combined company and the trading price of the combined company’s common stock following completion of the Proposed Merger may be affected significantly by factors different from those currently affecting the independent results of our ongoing operations.
The NASDAQ Capital Market considers the anticipated Proposed Merger of Dipexium and PLx Pharma to be a business combination with a non-NASDAQ entity, resulting in a change in control of our company; and, therefore, has required that we submit a new initial listing application, which requires certain actions on the part of the combined company which may not be successful and, if unsuccessful, could make it more difficult for holders of shares of the combined company to sell their shares.
The NASDAQ Capital Market considers the Proposed Merger to be a business combination with a non-NASDAQ entity, resulting in a change in control of our company and has required that we submit a new initial listing application. The NASDAQ Capital Market may not approve our new initial listing application for The NASDAQ Capital Market on a timely basis, or at all. If this occurs and the Proposed Merger is still completed, stockholders may have difficulty converting their investments into cash effectively. Additionally, as part of the new initial listing application, we may be required to submit, among other things, a plan for the combined company to effect a reverse stock split. A reverse stock split likely would increase the per share trading price by an as yet undetermined multiple. The change in share price may affect the volatility and liquidity of the combined company’s stock, as well as the marketplace’s perception of the stock. As a result, the relative price of the combined company’s stock may decline and/or fluctuate more than in the past, and stockholders may have trouble converting their investments in the combined company into cash effectively.
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The combined company’s management will be required to devote substantial time to comply with public company regulations.
As a public company, the combined company will incur significant legal, accounting and other expenses that PLx Pharma did not incur as a private company. The Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act as well as rules implemented by the SEC and The NASDAQ Capital Market, impose various requirements on public companies, including those related to corporate governance practices. The combined company’s management and other personnel will need to devote a substantial amount of time to these requirements. Certain members of PLx Pharma’s management, which will continue as the management of the combined company, do not have significant experience in addressing these requirements. Moreover, these rules and regulations will increase the combined company’s legal and financial compliance costs relative to those of PLx Pharma and will make some activities more time consuming and costly.
After completion of the Proposed Merger, the combined company will possess not only all of the assets but also all of the liabilities of ours and of PLx Pharma. Discovery of previously undisclosed or unknown liabilities could have an adverse effect on the combined company’s business, operating results and financial condition.
Acquisitions involve risks, including inaccurate assessment of undisclosed, contingent or other liabilities or problems. After completion of the Proposed Merger, the combined company will possess not only all of the assets, but also all of the liabilities of both companies. Although we conducted a due diligence investigation of PLx Pharma and its known and potential liabilities and obligations, and PLx Pharma conducted a due diligence investigation of our company and its known and potential liabilities and obligations, it is possible that undisclosed, contingent or other liabilities or problems may arise after completion of the Proposed Merger, which could have an adverse effect on the combined company’s business, operating results and financial condition.
We and PLx Pharma do not anticipate that the combined company will pay any cash dividends in the foreseeable future.
The current expectation is that the combined company will retain its future earnings to fund the development and growth of the combined organization’s business. As a result, capital appreciation, if any, of the common stock of the combined organization will be your sole source of gain, if any, for the foreseeable future.
Anti-takeover provisions in the combined company charter documents and under Delaware law could make an acquisition of the combined company more difficult and may prevent attempts by the combined company stockholders to replace or remove the combined company management.
Provisions in the combined company’s certificate of incorporation and bylaws may delay or prevent an acquisition or a change in management. In addition, because the combined company will be incorporated in Delaware, it is governed by the provisions of Section 203 of the DGCL, which prohibits stockholders owning in excess of 15% of the outstanding combined company voting stock from merging or combining with the combined company. Although we and PLx Pharma believe these provisions collectively will provide for an opportunity to receive higher bids by requiring potential acquirors to negotiate with the combined company’s board of directors, they would apply even if the offer may be considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent any attempts by the combined company’s stockholders to replace or remove then current management by making it more difficult for stockholders to replace members of the board of directors, which is responsible for appointing the members of management.
Future sales of common stock by our existing or PLx Pharma’s existing stockholders may cause the price of common stock to fall.
For the six-month period ended December 31, 2016, the average daily trading volume of our common stock on the NASDAQ Capital Market has been approximately 500,000 shares. Subject to the lock-up agreements entered into between each of us and PLx Pharma and certain of each other’s stockholders, if our existing stockholders or PLx Pharma’s stockholders receiving shares of our common stock in the Proposed Merger sell substantial amounts of the combined company’s common stock in the public market, or investors perceive that these sales could occur, the market price of such common stock could decrease significantly.
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Risks Relating to Our Intellectual Property
Our ability to achieve commercial success depends to a material extent on our ability to maintain adequate intellectual property protection for our products and technology. If we are unable to obtain and maintain adequate intellectual property rights for Locilex®, it may materially and adversely affect our ability to market and generate sales of the product.
Due to the exclusivity that intellectual property protection can afford, our commercial success depends to a material extent on our ability to obtain and maintain adequate intellectual property protection for Locilex® (and any other products we may develop in the future) in the U.S. and other countries.
As of January 8, 2017, our patent estate included a U.S. patent (U.S. Patent No. 8,530,409), corresponding granted patents in Australia, New Zealand, Korea, Israel, Europe and Japan, as well as corresponding applications pending in Brazil, Canada, China, Eurasia, Indonesia, Mexico, Singapore and South Africa. We also have an exclusive sublicense from Scripps Research Institute (or Scripps) , the inventor of the pexiganan technology, to a U.S. patent (U.S. Patent No. 5,912,231), directed to pexiganan, the API used in Locilex®. We consider our U.S. Patent No. 8,530,409, which relates to our new, proprietary formulation of Locilex® and methods of using it to treat skin or wound infection, to be particularly important to our company primarily due to its substantially longer patent term coverage, its novel attributes as a topical formulation, its potentially broader scope of coverage and its opportunity for foreign patent protection. While we currently have pending applications in foreign jurisdictions corresponding to U.S. Patent No. 8,530,409, no assurance can be given that any foreign patents will issue, or that even if any such patents were to issue, such patents would provide meaningful protection for Locilex®.
Our patent estate related to Locilex® is critical to our commercial viability. There is a risk that our pending patent applications may not result in issued patents, and that any of our issued patents will not include claims that are sufficiently broad to provide adequate protection for Locilex®, including meaningful protection from our competitors. Additionally, the success of an application for the patent term extension of our licensed patent will require the cooperation of the licensor, which cooperation cannot be guaranteed. We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that Locilex® (and any other products we may develop in the future) is covered by valid and enforceable patents that are of sufficient scope to effectively prevent competitive products or are effectively maintained as trade secrets within our organization. If third parties disclose or misappropriate or design around our proprietary rights, it may materially and adversely impact our position in the market.
We apply for patents covering both our technologies and product candidates, as we deem appropriate. However, we may fail to apply for patents on important technologies or improvements in our technologies in a timely fashion, or at all. Our existing patents and any future patents we obtain may not be sufficiently broad to prevent others from using our technologies or from developing competing products and technologies. Moreover, the patent positions of numerous biotechnology and pharmaceutical companies are highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. As a result, the validity and enforceability of our patents cannot be predicted with certainty. In addition, no assurances can be given that:
| • | we were the first to make the inventions covered by each of our issued patents and pending patent applications; |
| • | we were the first to file patent applications for these inventions; |
| • | others will not independently develop similar or alternative technologies or duplicate any of our technologies by inventing around our claims; |
| • | a third party will not challenge our proprietary rights, and if challenged that a court will hold that our patents are valid and enforceable; |
| • | any patents issued to us or our collaboration partners will cover our product as ultimately developed, or provide us with any competitive advantages, or will not be challenged by third parties; |
| • | we will develop additional proprietary technologies that are patentable; or |
| • | the patents of others will not have an adverse effect on our business. |
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In addition, there are numerous recent changes to the patent laws and proposed changes to the rules of the USPTO which may have a significant impact on our ability to protect our technology and enforce our intellectual property rights. For example, on September 16, 2011, President Obama signed the Leahy-Smith America Invents Act which codifies several significant changes to the U.S. patent laws, including, among other things, changing from a “first to invent’ to a “first inventor to file” system, limiting where a patentee may file a patent suit, eventually eliminating interference proceedings while maintaining derivation actions, and creating a set of procedures to challenge patents in the USPTO after they have issued. The effects of these changes are currently uncertain as the USPTO has just implemented regulations related to these changes and the courts have yet to address many of these provisions in the context of a dispute. Furthermore, we have not assessed the applicability of the act and new regulations on the specific patents discussed herein. The U.S. Supreme Court has also issued decisions, the full impact of which is not yet known. For example, on March 20, 2012 in Mayo Collaborative Services, DBA Mayo Medical Laboratories, et al. v. Prometheus Laboratories, Inc. , the Court held that several claims drawn to measuring drug metabolite levels from patient samples and correlating them to drug doses were not patentable subject matter. The decision appears to impact diagnostics patents that merely apply a law of nature via a series of routine steps and it has created uncertainty around the ability to patent certain biomarker-related method claims. Additionally, on June 13, 2013 in Association for Molecular Pathology v. Myriad Genetics, Inc. , the Court held that claims to isolated genomic DNA are not patentable, but claims to complementary DNA (or cDNA) molecules were held to be valid. The effect of the decision on patents for other isolated natural products is uncertain.
We are dependent on a third party to maintain the patent exclusivity for the API in Locilex®
We hold an exclusive, worldwide sublicense to the composition-of-matter patent, U.S. Patent No. 5,912,231, which could have expired in June 2016 without the interim patent term restoration which we received from the USPTO in June 2016. Our rights to practice the pexiganan technology are derived through a license agreement between Scripps and Multiple Peptide Systems Inc. (or MPS). MPS subsequently sublicensed the pexiganan technology to the prior sponsor of the pexiganan clinical and regulatory program. On October 1, 1996, both the license agreement and sublicense agreement were amended by the parties to confirm that the license and sublicense were fully-paid and royalty-free with no further economic obligations for the practice of the pexiganan technology.
In June 2016, we received the cooperation of Scripps and filed an interim patent extension of U.S Patent No. 5,912,231 under the Hatch Waxman Act which was approved by the USPTO in June 2016. In the future, should we decide to file for a formal five-year patent term extension of U.S. Patent No. 5,912,231 under the Hatch-Waxman Act, we would need further cooperation from Scripps to complete the submission and such cooperation is not guaranteed. Although U.S. Patent 5,912,231 supplements our existing intellectual property portfolio, we are chiefly reliant on our U.S. Patent 8,530,409, which covers the novel formulation and method of use for Locilex® and provides for substantially longer patent coverage (until June 2032) than U.S. Patent 5,912,231. Because a patent term extension is filed only after regulatory approval, we would need to consider the possibility for a patent term extension at a later date even if we are able to identify a promising new clinical indication to target for further clinical development. An inability to extend the patent past June 2017 may impair our competitive position if other companies use pexiganan as an API to develop a product that, once approved by the FDA, competes with Locilex®.
We may become subject to third parties’ claims alleging infringement of their patents and proprietary rights or seeking to invalidate our patents or proprietary rights, or we may need to become involved in lawsuits to protect or enforce our patents, which could be costly, time consuming, delay or prevent the development and commercialization of our product candidates, or put our patents and other proprietary rights at risk.
Litigation relating to infringement or misappropriation of patent and other intellectual property rights in the pharmaceutical and biotechnology industries is common. We may become subject to third-party claims in the future relating to our technologies, processes, formulations, methods, or products that would cause us to incur substantial expenses and which, if successful, could cause us to pay substantial damages and attorney’s fees, if we are found to be infringing a third party’s patent rights. We may also become subject to claims that we have misappropriated the trade secrets of others. These risk are exacerbated by the fact that the validity and breadth of claims covered in pharmaceutical patents is, in most instances, uncertain and highly complex. We would be particularly at risk if any such claims relate to our key U.S. Patent No. 8,530,409 covering our particular formulation of and method of use for Locilex®.
Furthermore, if a patent infringement suit is brought against us relating to Locilex® (or any other products we may develop or acquire in the future), our research, development, manufacturing or sales activities relating to Locilex® or the product candidate that is the subject of the suit may be delayed or terminated. As a result of patent infringement claims, or in order to avoid potential infringement claims, we or our collaborators may choose to seek, or be required to seek, a license from the third party, which would be likely to include a requirement to pay license fees or royalties or both. These licenses may not be available on acceptable terms, or at all. Even if a license can be obtained on acceptable terms, the rights may be nonexclusive, which would give our competitors access to the same intellectual property rights. If we are unable to enter into a license on acceptable terms, we or our collaborators could be prevented from commercializing Locilex® (or any other products we may develop or acquire in the future), or forced to modify such product candidates, or to cease some aspect of our business operations, which could harm our business significantly.
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In addition, competitors may infringe our patents, or misappropriate or violate our other intellectual property rights. To counter infringement or unauthorized use, we may find it necessary to file infringement or other claims to protect our intellectual property rights. In addition, in any infringement proceeding brought by us against a third party to enforce our rights, a court may decide that a patent of ours is invalid or unenforceable, or may refuse to stop the other party from using the technology at issue on the basis that our patents do not cover the technology in question. An adverse result in any such litigation proceeding could put one or more of our patents at risk of being invalidated or interpreted narrowly, which could open us up to additional competition and have a material adverse effect on our business.
The cost to us of any patent litigation or other proceedings, even if resolved in our favor, could be substantial. Such litigation or proceedings could substantially increase our operating losses and reduce our resources available for development activities. We may not have sufficient financial or other resources to adequately conduct such litigation or proceedings, and such litigation could impair our ability to raise funding for our company. 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. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments, and, if securities analysts or investors perceive these results to be negative, there could be a substantial adverse effect on the price of our common stock. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace. Patent litigation and other proceedings may also require significant time and attention of management and technical staff, which may materially and adversely impact our financial position and results of operations. Furthermore, because of the substantial amount of discovery required in connection with any intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation.
As a result of any such litigation, we may also be required to: (i) cease selling, making, importing, incorporating or using one or more or all of our products that incorporate intellectual property of others, which would adversely affect our revenue; or (ii) redesign our products, which would be costly and time-consuming.
Restrictions on our patent rights relating to Locilex® may limit our ability to prevent third parties from competing against us.
Assuming FDA approval, our ability to market and sell Locilex® will depend, in part, on our ability to obtain and maintain patent protection for Locilex® (or any products we may develop in the future), preserve our trade secrets, prevent third parties from infringing upon our proprietary rights and operate without infringing upon the proprietary rights of others. The U.S. patent that we sublicense from Scripps (U.S. Patent No. 5,912,231), which is directed to the composition of matter of pexiganan, expires in June 2017 without any term extension. The foreign patents corresponding to U.S. Patent No. 5,912,231 expired in 2009. As a result, we have no foreign patent protection for the pexiganan API. We have recently been issued a U.S. patent, U.S. Patent No. 8,530,409, covering our new formulation of Locilex® as well as a method of using this new formulation to treat skin or wound infections. The U.S. Patent No. 8,530,409 claims are directed to very specific formulations of the pexiganan API, and their methods of use to treat skin or wound infections. As a result, U.S. Patent No. 8,530,409 would not prevent third party competitors from creating, making and marketing alternative formulations of pexiganan, including topical formulations, that fall outside the scope of the U.S. Patent No. 8,530,409 claims. There can be no assurance that any such alternative formulations will not be equally effective as Locilex®. Introduction of any such competitive product could have a material adverse effect on sales of Locilex®. Moreover, even if these competitors do not actively promote their product for our targeted indication, physicians may prescribe these products “off-label.” Although off-label prescriptions may infringe or contribute to the infringement of method-of-use patents, the practice is common and such infringement is difficult to prevent or prosecute.
We may not be able to protect our intellectual property rights throughout the world.
Filing, prosecuting and defending patents on Locilex® or any product candidates we may develop or acquire in the future throughout the world would be prohibitively expensive. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and furthermore, may export otherwise infringing products to territories where we have patent protection, but where enforcement is not as strong as that in the U.S. These products may compete with our future products in jurisdictions where we do not have any issued patents and our patent claims or other intellectual property rights may not be effective or sufficient to prevent them from so competing.
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Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to biopharmaceuticals, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial cost and divert our efforts and attention from other aspects of our business.
Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.
The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other provisions during the patent process. There are situations in which noncompliance can result in abandonment or lapse of a patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, competitors might be able to enter the market earlier than would otherwise have been the case.
If our Locilex® trademark is not adequately protected, then we may not be able to build name recognition in our markets of interest and our business may be adversely affected.
Our registered trademark, Locilex®, may be challenged, infringed, circumvented or declared generic or determined to be infringing on other marks. We may not be able to protect our rights to this trademark, which we need to build name recognition by potential partners or customers in our markets of interest. Over the long term, if we are unable to establish name recognition based on our trademark, then we may not be able to compete effectively and our business may be adversely affected.
If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed.
In addition to seeking patent protection for Locilex®, we also rely on trade secrets, including unpatented know-how, technology and other proprietary information, to maintain our competitive position. We seek to protect these trade secrets, in part, by entering into non-disclosure and confidentiality agreements with parties who have access to them, such as our employees, corporate collaborators, outside scientific collaborators, contract manufacturers, consultants, advisors and other third parties. We also enter into confidentiality and invention or patent assignment agreements with our employees and consultants that obligate them to assign their inventions to us. Despite these efforts, any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, some courts inside and outside the U.S., including in foreign jurisdictions, are less willing or unwilling to protect trade secrets. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we would have no right to prevent them from using that technology or information to compete with us. If any of our trade secrets were to be disclosed to or independently developed by competitor, our competitive position would be harmed.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
Effective May 2014, the Company entered into a sublease agreement for office space with monthly payments of $13,098 with inflationary escalations in 2015 and the first three months of 2016. The term of the sublease ended on March 30, 2016.
In January 2016, the Company entered into a lease for office space commencing in March 2016 with current monthly payments of $18,857, subject to inflationary escalations and adjustments thereafter. The term of the lease is for five years and five months. We believe this space is adequate as our principal executive office location.
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The Company and its two original executives were three of some 30 defendants in a lawsuit filed by a former stockholder of Genaera Corporation, which was the predecessor of the Genaera Liquidating Trust, the party from which the Company purchased the worldwide rights to pexiganan, the active pharmaceutical ingredient of the Locilex® , on April 8, 2010. The complaint was filed on June 8, 2012 in the United States District Court for the Eastern District of Pennsylvania (Civil Action No. 12-3265) by Alan W. Schmidt, individually and on behalf of former Genaera Corporation shareholders. Among others, the suit was filed against the Company, as well as John A. Skolas and Argyce, LLC, who were responsible for the administration of the Trust and who sold pexiganan to the Company via a public auction. The defendants listed in the complaint included several individuals and companies formerly associated with Genaera Corporation, the Trust and/or Argyce, LLC. Also included in the defendant group were several other pharmaceutical companies that were involved in acquiring the former drug-related assets of Genaera Corporation. The complaint alleged, among other things, that the Company and its two executives aided and abetted a breach of fiduciary duty alleged to have been committed by the former directors and officers of Genaera Corporation before it was approved for dissolution by its shareholders and also Argyce, LLC, the trustee of the Liquidating Trust. Plaintiff claims that the Company, and its executives, aided and abetted a breach of the duties of the board of directors and the trustee under common law and under a certain trust agreement allegedly signed between Argyce, LLC, as the trustee, and the Liquidating Trust. With regard to the claims made against the Company and its two executives, the plaintiff alleged, in pertinent part, that the Company’s acquisition of the pexiganan rights was for alleged inadequate consideration, and that the Company and its management aided and abetted a breach of fiduciary duty by the Genaera Corporation defendants who were formerly associated with Genaera Corporation and/or the Trust.
The Company and its two executives filed a motion to dismiss the complaint within the prescribed time period. All of the other defendants in this litigation also filed motions to dismiss, and a court order by the Federal District Court granted each and every motion to dismiss, with prejudice, without leave to refile, on August 12, 2013 based on the argument that plaintiff’s claims were time barred. A subsequent motion to reconsider such dismissal was denied by the Federal District Court. Plaintiff appealed the dismissal to the United States Third Circuit Court of Appeals seeking reversal of the dismissal and the Third Circuit Court granted plaintiff’s appeal. On October 17, 2014, the Third Circuit Appellate Court, in a 2-1 decision with a strong dissenting opinion, reversed the trial court’s dismissal of plaintiff’s claims based on the expiration of the applicable statutes of limitation. In a 2-1 decision, the Third Circuit held that more information was necessary to determine when plaintiff should have been on notice of his claims to determine the applicability of the discovery rule, which could serve to extend the time frame in which plaintiff could bring his claims. Due to the strong dissent, all defendants filed the necessary documents requesting a petition for rehearing en banc, by the majority of the Third Circuit justices who are in active service. The Third Circuit denied the request for en banc hearing and remanded this case to District Court.
Upon remand to the Federal District Court, all defendants moved to dismiss the complaint for reasons other than being time barred. The Company and its two executives moved for dismissal based on plaintiff’s inability to make a case for aiding and abetting a breach of fiduciary duty because there was no underlying breach and such an aiding and abetting claim requires an element of knowing participation in the fiduciary breach which cannot be established by plaintiff.
The District Court held a hearing on this in September 2015 and the District Court delivered an Order on November 10, 2015 pursuant to which the District Court granted the Motion to Dismiss filed by each and every defendant including the Company and its two executives. In December 2015, plaintiff appealed the Federal District Court’s decision to the Third Circuit Appellate Court and the Company anticipates a decision on whether to grant plaintiff’s appeal by the Third Circuit Appellate Court in the first quarter of 2017. The Company will continue to vigorously defend against plaintiff’s claims on the factual record, which it believes will prove that neither the Company nor its executives is liable to the plaintiff in any regard.
ITEM 4. MINE SAFETY DISCLOSURES.
Not Applicable.
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| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. |
Market Information
Our Common Stock is listed the NASDAQ Capital Market, under the symbol “DPRX”.
The following table shows, for the periods indicated, the high and low sales prices per share of our common stock as reported by the NASDAQ Capital Market.
| Low | High | |||||||
| 2016 | ||||||||
| Quarter ended March 31, 2016 | $ | 6.04 | $ | 12.23 | ||||
| Quarter ended June 30, 2016 | $ | 8.54 | $ | 13.20 | ||||
| Quarter ended September 30, 2016 | $ | 9.50 | $ | 17.75 | ||||
| Quarter ended December 31, 2016 | $ | 1.15 | $ | 15.84 | ||||
| 2015 | ||||||||
| Quarter ended March 31, 2015 | $ | 10.70 | $ | 15.14 | ||||
| Quarter ended June 30, 2015 | $ | 11.25 | $ | 15.00 | ||||
| Quarter ended September 30, 2015 | $ | 10.80 | $ | 17.10 | ||||
| Quarter ended December 31, 2015 | $ | 10.12 | $ | 14.66 | ||||
Holders
As of December 31, 2016, there were 67 holders of record of our common stock.
Dividends
We have never declared or paid any cash dividends on our equity interests and we do not anticipate paying any cash dividends in the foreseeable future. The payment of dividends, if any, in the future is within the discretion of our board of directors and will depend on our earnings, capital requirements and financial condition and other relevant facts. We currently intend to retain all future earnings, if any, to finance the development and growth of our business.
Securities Authorized for Issuance under Equity Compensation Plans
Securities Authorized for Issuance Under Equity Compensation Plans
The following table indicates shares of common stock authorized for issuance under our 2013 Equity Incentive Plan as of December 31, 2016:
| Plan category |
Number of securities
to
be issued upon exercise of outstanding options, warrants and unvested common shares |
Weighted-average
exercise price of outstanding options, warrants and unvested |
Number of securities
remaining available for future issuance |
|||||||||
| Equity compensation plans approved by security holders | 1,445,013 | $ | 12.64 | 696,156 | ||||||||
| Equity compensation plans not approved by security holders | ||||||||||||
| Total | 1,445,013 | $ | 12.64 | 696,156 | ||||||||
| ITEM 6. | SELECTED FINANCIAL DATA. |
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this annual report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. The actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those which are not within our control.
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Overview
We are a biopharmaceutical company that historically has been focused on the development and commercialization of Locilex ® (pexiganan cream 0.8%), a novel, first-in-class, broad spectrum, topical antibiotic. Locilex ® is a chemically synthesized, 22-amino acid peptide isolated from the skin of the African Clawed Frog. Its novel mechanism of action kills microbial targets by disrupting the bacterial cell membrane; a process known as cell membrane permeability. However, in light of recent clinical trial disappointments in our development programs for Locilex ® , and our decision to discontinue its development for the treatment of mild infections of diabetic foot ulcers, we have shifted our strategic emphasis to external business opportunities not related to developing Locilex ® . As such, although we continue to describe our intellectual property assets and programs herein and are continuing to fund and maintain our intellectual property portfolio, we have temporarily discontinued drug development activities as we continue to evaluate the data from the recently completed Phase 3 clinical trials. Dipexium Pharmaceuticals, LLC (“Dipexium LLC”) was organized under the laws of the State of Delaware in January 2010. In March 2014, we effected a corporate conversion pursuant to which we succeeded to the business of Dipexium LLC and the holders of membership interests of Dipexium LLC became our stockholders.
Recent Developments
On October 25, 2016, we announced that our lead and sole product candidate, Locilex® , failed to meet the primary clinical endpoint or secondary endpoints in our OneStep-1 and OneStep-2 Phase 3 clinical trials. Our scientific team has evaluated the data from the OneStep clinical trials but has found no clear signal that Locilex® would be a strong product candidate for other possible clinical indications. Accordingly, we have explored strategic alternatives with our professional advisors and on December 22, 2016, we announced our entry into a Merger Agreement with PLx Pharma, pursuant to which, among other things, subject to the satisfaction or waiver of the conditions set forth in the Merger Agreement, a wholly-owned subsidiary of ours will be merged with and into PLx Pharma, with PLx Pharma continuing as the surviving corporation and a wholly-owned subsidiary of ours. Immediately following the effective time of the Proposed Merger, existing PLx Pharma stockholders are expected to own approximately 76.75% of the capital stock of the combined company, and existing Dipexium stockholders are expected to own approximately 23.25% of the capital stock of the combined company, in each case, subject to certain adjustments set forth in the Merger Agreement related to our cash on a determination date which approaches the closing of the Proposed Merger.
We expect to consummate the Proposed Merger in the second quarter of 2017.
We continue to believe that Locilex ® has advantages compared to systemic antibiotics and that it may have potential to be approved in a different clinical indication although our medical and scientific team has yet to identify any such indication since the clinical trial data was released on October 25, 2016. We believe that the key attributes of Locilex ® are: (i) it has not generated resistant bacteria systemically; (ii) it has not generated cross resistance with other antibiotics; (iii) it has demonstrated activity against a broad spectrum of pathogens, including difficult to treat gram negative, and anaerobic bacteria; (iv) it has not been systemically absorbed; (v) it has not caused any significant safety or tolerability issues in over 1,500 patients treated, including the recently completed OneStep-1 and OneStep-2 Phase 3 clinical trials; and (vi) it has demonstrated significant success treating multi-drug resistant bacteria in several laboratory tests and clinical trials performed to date. These attributes lead us to believe that Locilex ® could be repositioned to target a different clinical indication despite its failure to achieve any of the primary or secondary endpoints in the OneStep Phase 3 clinical trials in mild infections of diabetic foot ulcers. If pursued, a restart of clinical trials in a yet-to-be-identified clinical indication would involve significant risk, resources and time to design and complete a clinical development program that may very well begin with Phase 1 clinical trials.
Plan of Operation
Our primary objective is to close the Proposed Merger with PLx Pharma in the second quarter of calendar 2017 and operate our business in the ordinary course until the closing is completed. We will rely on our strong management team and board of directors to execute our strategy.
Opportunities, Challenges and Risks
We are a late-stage pharmaceutical company and have never generated revenue. Currently we do not have a stable recurring source of revenues sufficient to cover our operating costs. We incurred net losses of $21.3 million and $18.7 million for the years ended December 31, 2016 and 2015, respectively.
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Our business and ability to execute our business strategy are subject to a number of risks and challenges:
| • | whether our Proposed Merger with PLx Pharma may be fully realized or takes longer to realize than expected; whether the businesses may be combined successfully or in a timely and cost-efficient manner; whether the transaction will close due to, among other things, the need to obtain shareholder approval; and whether the dilution to Dipexium stockholders in the Proposed Merger may be greater than expected; |
| • | whether our previous findings from clinical studies and assessments of Locilex ® in mild infections of diabetic foot ulcers are predictive of potential future clinical trial results in other clinical indications should any be identified as promising; |
| • | our ability to protect our intellectual property; |
| • | risks and uncertainties associated with our research and development activities, including our clinical trials; |
| • | our dependence on Locilex® as our only product; |
| • | our ability to raise capital when needed; |
| • | the terms of future licensing arrangements, and whether we can enter into such arrangements at all; |
| • | risks associated with the timing and receipt of licensing and milestone revenues, if any; |
| • | our ability to maintain or protect the validity of our patents and other intellectual property, including in connection with pending or future litigation against us; |
| • | our ability to secure registration for our current and future patent applications; |
| • | our ability to extend our licensed composition of matter patent No. 5,912,231 under the Hatch-Waxman Act with the cooperation of Scripps; |
| • | our ability to continue as a going concern; |
| • | our expectations regarding minimizing our development risk; |
| • | our ability to establish new relationships and maintain current relationships; and |
| • | our ability to attract and retain key personnel. |
Results of Operations
Year Ended December 31, 2016 Compared to the Year Ended December 31, 2015
Summary Table
The following table presents a summary of the changes in our results of operations for the year ended December 31, 2016 compared with the year ended December 31, 2015:
|
Years Ended
December 31, |
Percentage | |||||||||||
| 2016 | 2015 | Increase | ||||||||||
| (in thousands) | ||||||||||||
| Research and Development Expenses | $ | 12,754 | $ | 11,286 | 13 | % | ||||||
| Selling, General and Administrative Expenses | $ | 8,614 | $ | 7,479 | 15 | % | ||||||
| Total Operating Expenses | $ | 21,368 | $ | 18,765 | 14 | % | ||||||
| Interest Income | $ | 47 | $ | 22 | 114 | % | ||||||
| Net Loss | $ | 21,321 | $ | 18,743 | 14 | % | ||||||
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Research and Development Expenses
Research and development expenses were $12.8 million for the year ended December 31, 2016, and $11.3 million for the year ended December 31, 2015, an increase of $1.5 million. The increase was due to increased clinical trial related expenses associated with the increased enrollment and clinical trial completion in 2016.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $8.6 million for the year ended December 31, 2016, and $7.5 million for the year ended December 31, 2015, an increase of $1.1 million. The increase was due primarily to a $0.8 million increase in merger related professional fees and a $0.3 million increase in employee severance related compensation expenses.
Net Loss
Net loss was $21.3 million for the year ended December 31, 2016, and $18.7 million for the year ended December 31, 2015, an increase of $2.6 million, primarily due to an increase in research and development expenses and an increase in selling, general and administrative expenses due to the reasons stated above.
Liquidity and Capital Resources
Overview
We have generated no revenue from operations and we have incurred cumulative losses of approximately $62.4 million since inception. We have funded our operations primarily from equity issuances. On March 18, 2014, we closed an initial public offering of 3,162,500 shares of our common stock at a public offering price of $12.00 per share. Gross proceeds raised by us in the offering were approximately $38.0 million, and net proceeds to us were approximately $34.5 million.
On June 30, 2015, we completed a stock offering issuing 1,702,000 shares of common stock at a price of $12.50 per share, resulting in gross proceeds of $21.3 million and net proceeds of $19.7 million after deducting underwriting discounts of $1.3 million and offering costs of approximately $0.3 million.
Assuming the merger is completed during the first half of 2017, Dipexium expects its cash as of December 31, 2016 to meet its liquidity requirements through at least its anticipated close of the merger, including the closing condition under the Merger Agreement to have at least $12.0 million of “cash,” as defined in the Merger Agreement, available upon the closing of the merger. If the merger is not completed, Dipexium will need to reevaluate its strategic alternatives, which may include continuing to operate its business as an independent, stand-alone company, a sale of the Company, liquidation of the Company or other strategic transaction. Dipexium’s liquidity position will be dependent upon the strategic alternative selected; however, assuming Dipexium does not enter into another strategic transaction, Dipexium expects its cash as of December 31, 2016 will be sufficient to meet its liquidity requirements for at least the next 12 months. Additional financing would be required should Dipexium decide to commence a new clinical program for Locilex® in a new, yet-to-be-identified clinical indication. Cash needs to pursue a new clinical indication cannot reasonably be estimated until a promising new indication for Locilex® to target is identified, if ever.
As of December 31, 2016, we had working capital of approximately $14.9 million, consisting primarily of $16.7 million of cash and short-term investments, offset by $2.1 million of accounts payable and accrued expenses. The following tables sets forth selected cash flow information for the periods indicated:
|
For the years ended
December 31, |
||||||||
| 2016 | 2015 | |||||||
| (in thousands) | ||||||||
| Net cash used in operating activities | $ | (15,583 | ) | $ | (14,592 | ) | ||
| Net cash provided by (used in) investing activities | 27,023 | (26,957 | ) | |||||
| Net cash provided by financing activities | — | 19,744 | ||||||
| Net increase (decrease) in cash | $ | 11,440 | $ | (21,805 | ) | |||
Net Cash Used in Operating Activities
Net cash used in operating activities was $15.6 million for the year ended December 31, 2016. The net loss for this period was greater than the net cash used in operating activities by $5.7 million, which was primarily attributable to $4.4 million of stock-based compensation, a $1.6 million increase in accounts payable and accrued expenses and offset by a $0.2 million increase in prepaid expenses.
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Net cash used in operating activities was $14.6 million for the year ended December 31, 2015. The net loss for this period was greater than the net cash used in operating activities by $4.1 million, which was primarily attributable to $3.8 million of share-based compensation offset by a $0.3 million increase in accounts payable and accrued expenses.
Net Cash Provided by (Used in) Investing Activities
Net cash provided by investing activities for the year ended December 31, 2016 was $27.0 million, which was attributable to the Company’s net investments and maturities of United States Treasury Bills.
Net cash used in investing activities for the year ended December 31, 2015 was $27.0 million, which was attributable to the Company’s net investments and maturities of United States Treasury Bills.
Net Cash Provided by Financing Activities
Net cash provided by financing activities for the year ended December 31, 2015 was $19.7 million, which was attributable to the net proceeds from the Company’s June 2015 public offering.
Contractual Obligations
In January 2016, the Company entered into a lease for office space commencing in March 2016. The term of the lease is for five years and five months with total minimum lease payments of approximately $1.28 million.
Recent Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business , in an effort to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments of this ASU are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The adoption of this guidance is not expected to have a material impact on our financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments , in an effort to reduce the diversity of how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments of this ASU are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently assessing the potential impact this ASU will have on the financial statements and related disclosures.
In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718) : Improvements to Employee Share-Based Payment Accounting, in an effort to simplify accounting for certain aspects of income tax accounting and accounting for forfeitures. The amendments of this ASU are effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently assessing the potential impact this ASU will have on the financial statements and related disclosures.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) , which includes amendments that require lessees to recognize a lease liability for all long-term leases (lease terms more than 12 months), at the commencement date. The lease liability is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis. The amendments also require lessees to recognize a right-of-use asset for all long-term leases. The right-of-use asset is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset to not recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. The amendments in this ASU require qualitative disclosures along with specific quantitative disclosures. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early application is permitted. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases), must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. The Company is currently evaluating the provisions of this ASU.
In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740), which requires that all deferred income tax assets and liabilities be presented as noncurrent in the balance sheet. The pronouncement is effective for financial statements issued for annual periods beginning after December 15, 2018 with early application permitted. The adoption of this guidance is not expected to have a material impact on our financial statements.
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In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements—Going Concern , which requires management of an entity to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued or available to be issued. This update is effective for annual periods ending after December 15, 2016. The adoption of this standard did not have a material impact on our financial statements.
Critical Accounting Policies and Estimates
Basis of Presentation
On April 5, 2012, the JOBS Act was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company,” we may, under Section 7(a)(2)(B) of the Securities Act of 1933 (or Securities Act), delay adoption of new or revised accounting standards applicable to public companies until such standards would otherwise apply to private companies. We may take advantage of this extended transition period until the first to occur of the date that we (i) are no longer an “emerging growth company” or (ii) affirmatively and irrevocably opt out of this extended transition period. We have elected to take advantage of the benefits of this extended transition period. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards. Until the date that we are no longer an “emerging growth company” or affirmatively and irrevocably opt out of the exemption provided by Securities Act Section 7(a)(2)(B), upon issuance of a new or revised accounting standard that applies to our financial statements and that has a different effective date for public and private companies, we will disclose the date on which adoption is required for non-emerging growth companies and the date on which we will adopt the recently issued accounting standard. Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. On an ongoing basis, we evaluate these estimates and judgments, including those described below. We base our estimates on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results and experiences may differ materially from these estimates.
Share-Based Compensation
We account for the cost of services performed by directors received in exchange for an award of Class A Membership Interests, common stock, or stock options, based upon the grant date fair value of the award. In accordance with the Accounting Standards Codification, we recognize compensation expense, net of estimated forfeitures, on a straight-line basis over the vesting period.
We account for the cost of services performed by vendors in exchange for an award of membership interests or common stock based upon the grant date fair value of the award or fair value of the services rendered, whichever is more readily determinable. In accordance with the Accounting Standards Codification, we recognize the expense in the same period and in the same manner as if we had paid cash for the services.
Research and Development Expenses
Although the Company manages the conduct of our own clinical trials, we rely on third parties to conduct our preclinical studies and to provide services, including data management, statistical analysis and electronic compilation for our clinical trials, as well as for the manufacture of our clinical trial supplies. At the end of each reporting period, the Company compares the payments made to each service provider to the estimated progress towards completion of the related project. Factors that are considered in preparing these estimates include the number of subjects enrolled in studies, milestones achieved and other criteria related to the efforts of our vendors. These estimates are subject to change as additional information becomes available. Depending on the timing of payments to vendors and estimated services provided, the Company records net prepaid or accrued expenses related to these costs.
Off-Balance Sheet Arrangements
We did not have, during the periods presented, and we are currently not party to, any off-balance sheet arrangements.
Seasonality
We do not have a seasonal business cycle. Our operating results are generally derived evenly throughout the calendar year.
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Subsequent Events
On January 6, 2017, in connection with the execution of the Merger Agreement, Dipexium loaned PLx Pharma $2.0 million (the “Bridge Loan”).
The Bridge Loan accrues interest on all outstanding principal at a rate of 8% per annum and has a maturity date that is the later of (a) October 15, 2017, or (b) the date that is two hundred seventy (270) days following the termination of the Merger Agreement, subject to acceleration in the event that (i) the Merger Agreement is terminated by Dipexium if PLx Pharma has breached any of its representations, warranties, covenants or agreements contained in the Merger Agreement such that the conditions to the closing of the merger would not be satisfied as of the time of such breach or inaccuracy, but if such breach or inaccuracy is curable, then the Merger Agreement will not terminate pursuant to this provision as a result of a particular breach or inaccuracy until the expiration of a 30-day period after delivery of written notice of such breach or inaccuracy if such breach has not been cured; and (ii) PLx Pharma thereafter consummates a financing of at least $10.0 million or conducts a reorganization, consolidation, or merger of PLx Pharma pursuant to which the holders of PLx Pharma’s securities prior to such transaction beneficially own less than 50% of the outstanding voting securities of the surviving entity after the transaction or the consummation of the sale, lease, transfer, conveyance or other disposition in one or a series of transactions, of all or substantially all of PLx Pharma’s assets, or PLx Pharma and its subsidiaries, taken as a whole, to any person or entity.
The Bridge Loan is secured by a first priority perfected security interest in and lien on all right, title and interest of PLx Pharma in and to substantially all of its assets. Upon the occurrence of any of the following events that results in a termination of the Merger Agreement, any security interest created by the promissory note shall immediately cease to be effective:
| · | if the closing shall not have occurred on or before April 30, 2017 (or such later date as agreed to by the parties to the Merger Agreement) (the “outside date”), except that the right to so terminate the Merger Agreement will not be available to Dipexium or PLx Pharma if its failure to fulfill any obligation under the Merger Agreement has been a principal cause of, or resulted in the failure of the closing to occur by such date; and provided, further, however, that, in the event that this joint proxy statement/prospectus is still being reviewed or commented on by the SEC after March 15, 2017, either party shall be entitled to extend the outside date by an additional sixty (60) days; |
| · | (i) if the Dipexium board of directors changes its recommendation to approve the issuance of shares of Dipexium common stock necessary to complete the merger, (ii) if Dipexium materially breaches its non-solicitation covenants in the Merger Agreement, or (iii) if Dipexium breaches any of its representations, warranties, covenants or other agreements contained in the Merger Agreement, which breach or failure would render the conditions precedent to PLx Pharma’s obligations under the Merger Agreement not to be satisfied and which breach is not cured within 30 days following written notice of such breach or by its nature or timing cannot be cured within that time; or |
| · | if Dipexium enters into an agreement providing for a “superior proposal”. |
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. |
Our financial statements required to be filed pursuant to this Item 8 appear in a separate section of this report beginning on page F-1.
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. |
None.
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ITEM 9A. CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
Our management is responsible for establishing and maintaining adequate controls over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Our management, with the participation of our principal executive officer and principal financial and accounting officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and principal financial and accounting officer each concluded that, as of the end of such period, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported on a timely basis, and is accumulated and communicated to our management, including our principal executive officer and principal financial and accounting officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Controls Over Financial Reporting
Our management, including our principal executive officer, and principal financial and accounting officer, conducted an evaluation of any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during our most recently completed fiscal quarter. Based on that evaluation, our principal executive officer, and principal financial and accounting officer concluded that there has not been any change in our internal control over financial reporting during that quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Internal Control Over Financial Reporting
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to the rules of the SEC that permit the Company to provide only management’s report in this annual report.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2016. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework issued in 2013. Based upon the assessments, management has concluded that as of December 31, 2016 our internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. GAAP.
None.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The information required by this Item is incorporated herein by reference from the information under the captions “MANAGEMENT OF DIPEXIUM BEFORE AND AFTER THE MERGER—Directors and Executive Officers of Dipexium Prior to the Merger,” “MANAGEMENT OF DIPEXIUM BEFORE AND AFTER THE MERGER— Compliance with Section 16(a) of the Exchange Act,” “MANAGEMENT OF DIPEXIUM BEFORE AND AFTER THE MERGER— Corporate Governance,” in the Proxy Statement for the annual meeting of shareholders for the fiscal year ended December 31, 2016 (the “Proxy Statement”).
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Executive Officers of Dipexium Pharmaceuticals
The following table, as of December 31, 2016, sets forth the names of our executive officers along with their respective ages and positions:
| Name | Age | Title | ||
| Robert J. DeLuccia | 71 | Executive Chairman and Director | ||
| David P. Luci, Esq. | 50 | President, Chief Executive Officer, Secretary and Director | ||
| Robert G. Shawah | 50 | Chief Accounting Officer and Treasurer |
Robert J. DeLuccia. Mr. DeLuccia serves as Executive Chairman of our company and is one of the two co-founders and managing partners of our company, which was formed in 2010. Mr. DeLucia has served as our Executive Chairman since March 2014. From 2004 to 2009, Mr. DeLuccia served in several capacities at MacroChem, a development-stage, publicly traded pharmaceutical company using topical drug delivery technology for products in dermatology, podiatry, urology and cancer, including as Chairman, President and Chief Executive Officer, and as director. Mr. DeLuccia currently serves as a member of the board of directors of IBEX Technologies Inc., which manufactures and markets proprietary enzymes (heparinases and chondroitinases) for use in pharmaceutical research and Heparinase I, used in many leading hemostasis monitoring devices.
David P. Luci. Since March 2014, Mr. Luci has served as President, Chief Executive Officer, and Secretary of our company, is a member of the board of directors and is one of the two co-founders and managing partners of our company, which predecessor was formed in 2010. Prior to co-founding our company, from June 2006 to January 2010, Mr. Luci served as a member of the board of directors of Access Pharmaceuticals, where he also served as Chairman of the Audit Committee and Chairman of the Compensation Committee, as well as serving in a consulting capacity following the disposition of MacroChem to Access Pharmaceuticals. From December 2007 through February 2009, Mr. Luci served as a member of the board of directors and President of MacroChem. Prior to that, Mr. Luci served as Executive Vice President, Chief Financial Officer, General Counsel and Corporate Secretary of Bioenvision, Inc. (or Bioenvision), an international biopharmaceutical company focused upon the development, marketing and commercialization of oncology products and product candidates. Mr. Luci created and managed Bioenvision’s principal executive offices located in New York as well as its satellite office located in Tokyo, Japan. Mr. Luci was instrumental in creating Bioenvision’s international commercial enterprise; managed the worldwide development of Evoltra (clofarabine) as a member of the product’s Joint Steering Committee in conjunction with senior executives of Bioenvision’s partner, Genzyme Corporation; and orchestrated, structured and negotiated the sale of Bioenvision in 2007 to Genzyme Corporation for $345 million. Mr. Luci began his career with Ernst & Whinney LLP (now Ernst &Young LLP) in New York as a certified public accountant working in the Healthcare Practice Group. He later practiced corporate law at Paul Hastings LLP in New York, where his practice encompassed all aspects of public and private mergers and acquisitions, corporate finance, restructurings and private equity transactions, with a core focus in the healthcare industry. Mr. Luci graduated from Bucknell University with a degree as a Bachelor of Science in Business Administration with a concentration in Accounting and graduated from Albany Law School of Union University ( Cum Laude : 1994) where he served as Managing Editor of the Journal of Science & Technology . Mr. Luci became a certified public accountant in the State of Pennsylvania in 1990 (inactive) and is a member of the New York State Bar Association.
Robert G. Shawah. Since March 2014 Mr. Shawah has served as our Chief Accounting Officer and Treasurer. From 2005 to 2013, Mr. Shawah served as a Vice President of Baldwin Pearson & Co., Inc. focusing on structuring transactions in the commercial and industrial real estate market in Fairfield County, Connecticut, as well as financial reporting responsibility. From 1997 to 2005, he served Sales and Financial Engineer for CC1 Inc., a private New Hampshire firm that designed and manufactured camera-based technical equipment for the printing industry. Prior to 1997, Mr. Shawah held financial management positions at Victorinox/Swiss Army Brands and Grace Cocoa, a division of W.R. Grace. His responsibilities at these firms included accounting, financial reporting, and foreign currency transactions. Mr. Shawah is a certified public accountant in the Commonwealth of Pennsylvania (inactive) and spent the first five years of his career in the audit division of Arthur Andersen LLP. Mr. Shawah received his Bachelor’s Degree in Business Administration from Bucknell University.
We have a written Code of Business Conduct that applies to our Chief Executive Officer (Principal Executive Officer), Chief Financial Officer (Principal Financial and Accounting Officer) and others. The Code of Business Conduct is available on our websi te at www.dipexiumpharmaceuticals.com . Any amendments to, or waivers from, a provision of our code of employee business conduct and ethics that applies to our principal executive officer, our principal financial and accounting officer and that relates to any element of the code of ethics enumerated in paragraph (b) of Item 406 of Regulation S-K shall be disclosed by posting such information on our website.
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| ITEM 11. | EXECUTIVE COMPENSATION. |
The information required on executive compensation is incorporated by reference from the discussion under the heading “DIPEXIUM EXECUTIVE COMPENSATION,” of the Company’s Proxy Statement for the Annual Meeting of Shareholders for the fiscal year ended December 31, 2016.
The required information on director compensation is incorporated by reference from the discussion under the heading “DIPEXIUM EXECUTIVE COMPENSATION,” of the Company’s Proxy Statement for the Annual Meeting of Shareholders for the fiscal year ended December 31, 2016.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. |
The information required by this Item is incorporated by reference from the information under the headings “PRINCIPAL STOCKHOLDERS OF DIPEXIUM” and “MARKET PRICE INFORMATION—Securities Authorized for Issuance under Equity Compensation Plans” of the Company’s Proxy Statement for the Annual Meeting of Shareholders for the fiscal year ended December 31, 2016.
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE. |
The required information on transactions with related persons and director independence is incorporated by reference from the discussion under the headings “RELATED PARTY TRANSACTIOS OF DIRECTORS AND EXECUTIVE OFFICERS OF THE COMBINED ORGANIZATION” and “MANAGEMENT OF DIPEXIUM BEFORE AND AFTER THE MERGER—Director Independence,” of the Company’s Proxy Statement for the Annual Meeting of Shareholders for the fiscal year ended December 31, 2016.
| ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES. |
The information required for this item is incorporated by reference from the discussion under the heading “MATTERS BEING SUBMITTED TO A VOTE OF DIPEXIUM STOCKHOLDERS—Dipexium Proposal No. 6: Ratification of Dipexium’s Independent Registered Public Accounting Firm” of the Company’s Proxy Statement for the Annual Meeting of Shareholders for the fiscal year ended December 31, 2016.
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| ITEM 15. | FINANCIAL STATEMENT SCHEDULES, EXHIBITS. |
|
Exhibit
Number |
Description of Document | |
| 2.1 | Asset Purchase Agreement, dated April 8, 2010, by and between the registrant and Genaera Liquidating Trust (incorporated by reference to Exhibit 2.1 to Form S-1 filed on February 6, 2014). | |
| 2.2 | Form of Certificate of Conversion pursuant to which the registrant will be reorganized into a corporation. (incorporated by reference to Exhibit 2.2 to Form S-1 filed on February 6, 2014). | |
| 2.3 | Agreement and Plan of Merger and Reorganization, dated as of December 22, 2016, among PLx Phama Inc., Dipexium Pharmaceuticals, Inc. and Dipexium Acquisition Corp. (incorporated by reference to Exhibit 2.1 to Form 8-K filed on December 22, 2016). | |
| 3.1 | Certificate of Formation of Dipexium Pharmaceuticals, LLC. (incorporated by reference to Exhibit 3.1 to Form S-1 filed on March 18, 2014). | |
| 3.2 | Amended and Restated Certificate of Incorporation of Dipexium Pharmaceuticals, Inc. | |
| 3.3 | Amended and Restated Bylaws of Dipexium Pharmaceuticals, Inc. | |
| 10.1 | 2013 Equity Incentive Plan. (incorporated by reference to Exhibit 10.1 to Form S-1 filed on February 6, 2014). | |
| 10.2 | Form of Director Indemnification Agreement (incorporated by reference to Exhibit 10.2 to Form S-1 filed on February 6, 2014). | |
| 10.3 | Amended and Restated Employment Agreement, dated February 3, 2014, between Dipexium Pharmaceuticals, Inc. and David P. Luci (incorporated by reference to Exhibit 10.3 to Form S-1 filed on February 6, 2014). | |
| 10.4 | Amended and Restated Employment Agreement, dated February 3, 2014, between Dipexium Pharmaceuticals, Inc. and Robert J. DeLuccia (incorporated by reference to Exhibit 10.4 to Form S-1 filed on February 6, 2014). | |
| 10.5 | Employment Agreement, dated February 3, 2014, between Dipexium Pharmaceuticals, Inc. and David Garrett (incorporated by reference to Exhibit 10.5 to Form S-1 filed on February 6, 2014). | |
| 10.6 | Employment Agreement, dated February 3, 2014, between Dipexium Pharmaceuticals, Inc. and Robert G. Shawah (incorporated by reference to Exhibit 10.6 to Form S-1 filed on February 6, 2014). | |
| 10.7 | Form of Securities Purchase Agreement, dated July 23, 2010, by and between the registrant and each of the named purchasers (incorporated by reference to Exhibit 10.7 to Form S-1 filed on February 6, 2014). | |
| 10.8 | Form of Securities Purchase Agreement, dated March 11, 2011, by and between the registrant and each of the named purchasers (incorporated by reference to Exhibit 10.8 to Form S-1 filed on February 6, 2014). | |
| 10.9 | Form of Securities Purchase Agreement, dated October 14, 2011, by and between the registrant and each of the named purchasers (incorporated by reference to Exhibit 10.9 to Form S-1 filed on February 6, 2014). | |
| 10.10 | Form of Securities Purchase Agreement, dated March 30, 2012, by and between the registrant and each of the named purchasers (incorporated by reference to Exhibit 10.10 to Form S-1 filed on February 6, 2014). | |
| 10.11 | Form of Securities Purchase Agreement, dated November 21, 2012, by and between the registrant and each of the named purchasers (incorporated by reference to Exhibit 10.11 to Form S-1 filed on February 6, 2014). | |
| 10.12 | Form of Securities Purchase Agreement, dated February 13, 2013, by and between the registrant and each of the named purchasers (incorporated by reference to Exhibit 10.12 to Form S-1 filed on February 6, 2014). | |
| 10.13 | Form of Securities Purchase Agreement, dated July 12, 2013, by and between the registrant and each of the named purchasers (incorporated by reference to Exhibit 10.13 to Form S-1 filed on February 6, 2014). | |
| 10.14 | Form of Warrant, dated July 23, 2010, issued by the registrant to certain purchasers (incorporated by reference to Exhibit 10.14 to Form S-1 filed on February 6, 2014). | |
| 10.15 | Form of Warrant, dated March 11, 2011, issued by the registrant to certain purchasers (incorporated by reference to Exhibit 10.15 to Form S-1 filed on February 6, 2014). | |
| 10.16 | Form of Warrant, dated October 14, 2011, issued by the registrant to certain purchasers (incorporated by reference to Exhibit 10.16 to Form S-1 filed on February 6, 2014). | |
| 10.17 | Form of Warrant, dated March 30, 2012, issued by the registrant to certain purchasers (incorporated by reference to Exhibit 10.17 to Form S-1 filed on February 6, 2014). | |
| 10.18 | Form of Warrant, dated November 21, 2012, issued by the registrant to certain purchasers (incorporated by reference to Exhibit 10.18 to Form S-1 filed on February 6, 2014). | |
| 10.19 | Form of Warrant, dated February 13, 2013, issued by the registrant to certain purchasers (incorporated by reference to Exhibit 10.19 to Form S-1 filed on February 6, 2014). | |
| 10.20 | Form of Warrant, dated July 12, 2013, issued by the registrant to certain purchasers (incorporated by reference to Exhibit 10.20 to Form S-1 filed on February 6, 2014). | |
| 10.21 | Form of Investor Rights Agreement, dated July 23, 2010, between the registrant and certain purchasers (incorporated by reference to Exhibit 10.21 to Form S-1 filed on February 6, 2014). | |
| 10.22 | Form of Investor Rights Agreement Joinder, between the registrant and certain purchasers (incorporated by reference to Exhibit 10.22 to Form S-1 filed on February 6, 2014). | |
| 10.23 | Master Services Agreement, dated August 23, 2010, between the registrant and RRD International, LLC (incorporated by reference to Exhibit 10.23 to Form S-1 filed on February 6, 2014). |
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|
Exhibit
Number |
Description of Document | |
| 10.24 | Bill of Sale and Assignment Agreement, dated March 21, 2011, between the registrant and Genaera Liquidating Trust (incorporated by reference to Exhibit 10.24 to Form S-1 filed on February 6, 2014). | |
| 10.25 | Research and Development Agreement, dated December 8, 2011, between the registrant and DPT Laboratories, Inc. (incorporated by reference to Exhibit 10.25 to Form S-1 filed on February 6, 2014). | |
| 10.26 | Laboratory Services Agreement, dated May 22, 2012, between the registrant and Covance Laboratories Inc. (incorporated by reference to Exhibit 10.26 to Form S-1 filed on February 6, 2014). | |
| 10.27 | Master Services Agreement, dated September 3, 2013, between the registrant and PolyPeptide Laboratories, Inc. (incorporated by reference to Exhibit 10.27 to Form S-1 filed on February 6, 2014). | |
| 10.28 | Quality Agreement, dated September 3, 2013, between registrant and PolyPeptide Laboratories, Inc. (incorporated by reference to Exhibit 10.28 to Form S-1 filed on February 6, 2014). | |
| 10.29 | Master Agreement for the Provision of Pharmaceutical Support Services, dated October 9, 2013, between registrant and Almac Group Limited (incorporated by reference to Exhibit 10.29 to Form S-1 filed on February 6, 2014). | |
| 10.30 | Master Services Agreement, dated October 25, 2013, between the registrant and Research Pharmaceutical Sciences, Inc. (incorporated by reference to Exhibit 10.30 to Form S-1 filed on February 6, 2014). | |
| 10.31 | License Agreement, dated October 20, 1988, by and between Scripps Research and Clinic Foundation and Multiple Peptide Systems (incorporated by reference to Exhibit 10.31 to Form S-1 filed on February 6, 2014). | |
| 10.32 | Second Amendment to License Agreement, dated September 24, 1996, by and between Scripps Research and Clinic Foundation and Multiple Peptide Systems (incorporated by reference to Exhibit 10.32 to Form S-1 filed on February 6, 2014). | |
| 10.33 | Agreement, dated November 4, 1988, by and between Multiple Peptide Systems and Magainin Sciences Inc. (incorporated by reference to Exhibit 10.33 to Form S-1 filed on February 6, 2014). | |
| 10.34 | Second Amendment to Agreement, dated September 24, 1996, by and between Multiple Peptide Systems and Magainin Pharmaceuticals Inc. (incorporated by reference to Exhibit 10.34 to Form S-1 filed on February 6, 2014). | |
| 10.35 | Product Development Agreement, dated January 1, 2014, between the registrant and RRD International, LLC (incorporated by reference to Exhibit 10.35 to Form S-1 filed on February 6, 2014). | |
| 10.36 | Sublease, effective May 5, 2014 (incorporated by reference to Exhibit 10.1 to Form 8-K filed on May 13, 2014). | |
| 10.37 | Product Development Agreement, dated May 22, 2014 by and between RRD International, LLC and Dipexium Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.1 to Form 8-K filed on May 29, 2014). | |
| 10.38 | Consulting Agreement, dated June 4, 2014 by and between Drug Development Advisors and Dipexium Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.1 to Form 8-K filed on June 9, 2014). | |
| 10.39 | Amendment No. 1 to the 2013 Equity Incentive Plan, dated March 24, 2015 (incorporated by reference to Exhibit 10.39 to Form 10-K filed on March 22, 2015). | |
| 10.40 | Severance and Release Agreement, dated December 13, 2016 and effective as of November 30, 2016, by and between Dipexium Pharmaceuticals, Inc. and David Garrett (incorporated by reference to Exhibit 10.1 to Form 8-K filed December 14, 2016). | |
| 10.41 | Form of Dipexium Voting Agreement, dated as of December 22, 2016, by and among Dipexium Pharmaceuticals, Inc., PLx Pharma Inc. and the holder named therein (incorporated by reference to Exhibit 10.1 to Form 8-K filed December 22, 2016). | |
| 10.42 | Form of PLx Voting Agreement, dated as of December 22, 2016, by and among Dipexium Pharmaceuticals, Inc., PLx Pharma Inc. and the holder named therein (incorporated by reference to Exhibit 10.2 to Form 8-K filed December 22, 2016). | |
| 10.43 | Form of Dipexium Lock-Up Agreement (incorporated by reference to Exhibit 10.3 to Form 8-K filed December 22, 2016). | |
| 10.44 | Form of PLx Lock-Up Agreement (incorporated by reference to Exhibit 10.4 to Form 8-K filed December 22, 2016). | |
| 14.1 | Code of Ethics (incorporated by reference to Exhibit 24.1 to Form 10-K filed on March 23, 2015). | |
| 21.1 | List of Subsidiaries (incorporated by reference to Exhibit 21.1 to Form 10-K filed on March 23, 2015). | |
| 23.1 | Consent of Independent Registered Public Accounting Firm | |
| 31.1 | Certification of Principal Executive Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2 | Certification of Principal Financial and Accounting Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32.1* | Certification of Principal Executive Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 32.2* | Certification of Principal Financial and Accounting Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Taxonomy Schema | |
| 101.CAL | XBRL Taxonomy Calculation Linkbase | |
| 101.DEF | XBRL Taxonomy Definition Linkbase | |
| 101.LAB | XBRL Taxonomy Label Linkbase | |
| 101.PRE | XBRL Taxonomy Presentation Linkbase |
| * | In accordance with SEC Release 33-8238, Exhibits 32.1 and 32.2 are being furnished and not filed. |
| 42 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person on behalf of the Registrant.
| Dated: January 20, 2017 | DIPEXIUM PHARMACEUTICALS, INC. | |
| By: | /s/ David P. Luci | |
| David P. Luci | ||
| President and Chief Executive Officer (Authorized Officer and Principal Executive Officer) | ||
| By: | /s/ Robert G. Shawah | |
| Robert G. Shawah | ||
| Chief Accounting Officer and Treasurer (Authorized Officer and Principal Financial And Accounting Officer) | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person on behalf of the Registrant and in the capacities and on the dates indicated.
| Person | Capacity | Date | ||
| /s/ Robert J. DeLuccia | Executive Chairman and Director | |||
| Robert J. DeLuccia | January 20, 2017 | |||
| /s/ David P. Luci | President, Chief Executive Officer, Director | |||
| David P. Luci, Esq. | (Principal Executive Officer) | January 20, 2017 | ||
| /s/ Robert G. Shawah | Chief Accounting Officer and Treasurer | |||
| Robert G. Shawah | (Principal Financial and Accounting Officer) | January 20, 2017 | ||
| /s/ Jack H. Dean | Director | |||
| Dr. Jack H. Dean | January 20, 2017 | |||
| /s/ Michael Duffy | Director | |||
| Michael Duffy, Esq. | January 20, 2017 | |||
| /s/ Thomas Harrison | Director | |||
| Thomas Harrison | January 20, 2017 | |||
| /s/ William J. McSherry | Director | |||
| William J. McSherry, Jr., Esq. | January 20, 2017 | |||
| /s/ Barry Kagan | Director | |||
| Barry Kagan | January 20, 2017 |
| 43 |
DIPEXIUM PHARMACEUTICALS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
| F- 1 |
Report of Independent Registered Public Accounting Firm
The Board of Directors and Members
Dipexium Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheets of Dipexium Pharmaceuticals, Inc. as of December 31, 2016 and 2015, and the related consolidated statements of operations, changes in shareholders’ equity and cash flows for each of the years in the two-year period ended December 31, 2016. Dipexium Pharmaceuticals, Inc.’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Dipexium Pharmaceuticals, Inc. as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.
/s/ CohnReznick LLP
Roseland, New Jersey
January 19, 2017
| F- 2 |
DIPEXIUM PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2016 and 2015
The accompanying notes are an integral part of these consolidated financial statements.
| F- 3 |
DIPEXIUM PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2016 and 2015
| 2016 | 2015 | |||||||
| REVENUES | $ | - | $ | - | ||||
| EXPENSES | ||||||||
| OPERATING EXPENSES | ||||||||
| Research and Development Expenses | 12,753,917 | 11,286,236 | ||||||
| Selling, General and Administrative Expenses | 8,613,981 | 7,478,527 | ||||||
| TOTAL OPERATING EXPENSES | 21,367,898 | 18,764,763 | ||||||
| LOSS FROM OPERATIONS | (21,367,898 | ) | (18,764,763 | ) | ||||
| Interest Income | 46,769 | 22,057 | ||||||
| NET LOSS | $ | (21,321,129 | ) | $ | (18,742,706 | ) | ||
| LOSS PER SHARE | ||||||||
| Basic and diluted net loss per common share | $ | (2.06 | ) | $ | (1.99 | ) | ||
| Weighted average common shares outstanding basic and diluted | 10,365,840 | 9,432,705 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F- 4 |
DIPEXIUM PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Years Ended December 31, 2016 and 2015
| Common Stock | Additional Paid-In | Accumulated | Total Shareholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||
| Balance at January 1, 2015 | 8,538,329 | $ | 8,538 | $ | 48,259,451 | $ | (22,318,749 | ) | $ | 25,949,240 | ||||||||||
| Issuance of Common Stock, Net of Issuance Costs | 1,702,000 | 1,702 | 19,742,183 | 19,743,885 | ||||||||||||||||
| Share-Based payments to vendors | 43,953 | 44 | 575,167 | 575,211 | ||||||||||||||||
| Share-Based Compensation | 14,000 | 14 | 3,275,894 | 3,275,908 | ||||||||||||||||
| Cashless Exercise of Warrants | 2,832 | 3 | (3 | ) | ||||||||||||||||
| Net Loss | (18,742,706 | ) | (18,742,706 | ) | ||||||||||||||||
| Balance at December 31, 2015 | 10,301,114 | 10,301 | 71,852,692 | (41,061,455 | ) | 30,801,538 | ||||||||||||||
| Share-Based payments to vendors | 82,964 | 83 | 739,685 | 739,768 | ||||||||||||||||
| Shares issued to vendors to settle final invoices | 714,625 | 715 | 1,116,805 | 1,117,520 | ||||||||||||||||
| Share-Based compensation | 14,000 | 14 | 3,631,269 | 3,631,283 | ||||||||||||||||
| Cashless Exercise of Warrants | 3,044 | 3 | (3 | ) | - | |||||||||||||||
| Net Loss | (21,321,129 | ) | (21,321,129 | ) | ||||||||||||||||
| Balance at December 31, 2016 | 11,115,747 | $ | 11,116 | $ | 77,340,448 | $ | (62,382,584 | ) | $ | 14,968,980 | ||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F- 5 |
DIPEXIUM PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2016 and 2015
| 2016 | 2015 | |||||||
| Operating Activities: | ||||||||
| Net Loss | $ | (21,321,129 | ) | $ | (18,742,706 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Share-Based Compensation | 3,631,283 | 3,275,908 | ||||||
| Share-Based Payments to Vendors | 739,768 | 575,211 | ||||||
| Amortization of short-term investment interest income | (46,043 | ) | (20,621 | ) | ||||
| (Increase) / Decrease In: | ||||||||
| Prepaid Expenses | (212,870 | ) | (26,017 | ) | ||||
| Security Deposits | (7,245 | ) | - | |||||
| Accounts Payable and Accrued Expenses | 1,633,075 | 345,708 | ||||||
| Net Cash Used In Operating Activities | (15,583,161 | ) | (14,592,517 | ) | ||||
| Investing Activities: | ||||||||
| Proceeds of Short-term Investments | 40,000,000 | 4,000,000 | ||||||
| Purchase of Short-term Investments | (12,976,564 | ) | (30,956,740 | ) | ||||
| Net Cash Provided by (Used In) Investing Activities | 27,023,436 | (26,956,740 | ) | |||||
| Financing Activities: | ||||||||
| Proceeds from issuance of Common Stock, net of issuance costs | - | 19,743,885 | ||||||
| Net Cash Provided By Financing Activities | - | 19,743,885 | ||||||
| Net Increase (Decrease) In Cash | 11,440,275 | (21,805,372 | ) | |||||
| Cash at Beginning of Year | 5,234,953 | 27,040,325 | ||||||
| Cash at End of Year | $ | 16,675,228 | $ | 5,234,953 | ||||
| Supplemental Disclosure of Non-Cash Operating Activities: | ||||||||
| Shares issued to Vendors to settle final invoices | $ | 1,117,520 | $ | - | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| F- 6 |
DIPEXIUM PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — NATURE OF OPERATIONS and SIGNIFICANT ACCOUNTING POLICIES
Business
Dipexium Pharmaceuticals, Inc. (the “Company” or “Dipexium”), a Delaware corporation, formerly Dipexium Pharmaceuticals, LLC, is a late stage pharmaceutical company focused on the development and commercialization of Locilex® (pexiganan cream 0.8%). The Company was formed on January 14, 2010. On October 25, 2016, the Company announced that its lead and sole product candidate, Locilex®, failed to meet the primary clinical endpoint or secondary endpoints in its OneStep-1 and OneStep-2 Phase 3 clinical trials. Dipexium’s scientific team has evaluated the data from the OneStep clinical trials but has found no clear signal that Locilex® would be a strong product candidate for other possible clinical indications. Accordingly, Dipexium has explored strategic alternatives with its professional advisors and entered into a Merger Agreement with PLx Pharma Inc. (“PLx”) on December 22, 2016 (“proposed merger”), pursuant to which PLx is expected to take control over Dipexium and Dipexium’s stockholders are expected to maintain approximately 23.25% of the combined ownership upon completion of the merger, subject to certain adjustments set forth in the Merger Agreement. The merger is expected to close in the second quarter of 2017. The Company or PLx may be required to pay a termination fee of $700,000 or $500,000, respectively, if the proposed merger is terminated under certain circumstances.
The Company has experienced net losses and negative cash flows from operations since inception and expects these conditions to continue for the foreseeable future. The Company has needed to raise capital from sales of its securities to sustain operations. In March 2014, the Company completed an initial public offering (“IPO”) of common stock with proceeds, net of issuance costs, of approximately $34.5 million. In June 2015, the Company completed an additional public offering of common stock with net proceeds of approximately $19.7 million. As of December 31, 2016, the Company had cash and short-term investments totaling approximately $16.7 million. Assuming the merger is completed during the first half of 2017, Dipexium expects its cash as of December 31, 2016 to meet its liquidity requirements through at least its anticipated close of the merger, including the closing condition under the Merger Agreement to have at least $12.0 million of “cash,” as defined in the Merger Agreement, available upon the closing of the merger. If the merger is not completed, Dipexium will need to reevaluate its strategic alternatives, which may include continuing to operate its business as an independent, stand-alone company, a sale of the Company, liquidation of the Company or other strategic transaction. Dipexium’s liquidity position will be dependent upon the strategic alternative selected; however, assuming Dipexium does not enter into another strategic transaction, Dipexium expects its cash as of December 31, 2016 will be sufficient to meet its liquidity requirements for at least the next 12 months. Additional financing would be required should Dipexium decide to commence a new clinical program for Locilex® in a new, yet-to-be-identified clinical indication. Cash needs to pursue a new clinical indication cannot even be estimated until a promising new indication for Locilex® to target is identified, if ever.
Under the proposed merger, the combined company will initially be focused on completion of manufacturing scale-up and label finalization for the previously conditionally approved AspertecTM 325 mg. aspirin dosage form thereby satisfying the open conditional items, and filing of a supplemental new drug application (sNDA) for Aspertec 81 mg. maintenance dose form. Aspertec is being developed to provide high-risk cardiovascular and neurology patients with more reliable and predictable antiplatelet efficacy as compared to enteric coated aspirin while also reducing the adverse gastric events common in an acute setting.
PLx stockholders will receive newly issued shares of common stock of Dipexium in connection with the Proposed Merger contemplated by the Merger Agreement. Upon the closing of the Proposed Merger, existing PLx stockholders are expected to own 76.75% of Dipexium common shares outstanding and existing Dipexium stockholders are expected to own 23.25% of Dipexium common shares outstanding, subject to certain adjustments set forth in the Merger Agreement.
The Company is subject to risks common to companies in the biopharmaceutical industry including, but not limited to, dependence on collaborative arrangements, development by the Company or its competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, development of sales and marketing infrastructure and compliance with the Food and Drug Administration (“FDA”) and other governmental regulations and approval requirements.
Basis of Consolidation
The Company’s consolidated financial statements include the accounts of the parent, Dipexium Pharmaceuticals, Inc., and Dipexium Pharmaceuticals Ireland, Limited, a wholly-owned subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation.
| F- 7 |
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates.
Cash and Short-Term Investments
The Company considers all highly-liquid instruments purchased with a maturity of three months or less to be cash. Instruments with maturities greater than three months, but less than twelve months are included in short-term investments. The Company purchases United States Treasury bills with maturities ranging from six to twelve months which are classified as being held to maturity and are carried at amortized cost. Securities classified as held to maturity securities are those securities that management has the intent and ability to hold to maturity.
The Company maintains its cash balance in one financial institution. The balance is insured up to the maximum allowable by the Federal Deposit Insurance Company (“FDIC”). The Company has not experienced any losses in such accounts and does not believe it is exposed to any significant risk of loss on cash. At times, the cash balance may exceed the maximum limit of the FDIC.
Research and Development
In accordance with Accounting Standards Codification (“ASC”) 730, Accounting for Research and Development Costs , the Company expenses research and development costs when incurred. At times, the Company may make cash advances for research and development services. These amounts are capitalized and expensed in the period the service is provided. The Company incurred research and development expenses in the amounts of $12,753,917 and $11,286,236 for the years ended December 31, 2016 and 2015, repsectively.
Although the Company manages the conduct of its clinical trials, it relies on third parties to conduct its clinical and preclinical studies and to provide services, including data management, statistical analysis and electronic compilation for clinical trials, as well as for the manufacture of clinical trial supplies. At the end of each reporting period, the Company compares the payments made to each service provider to the estimated progress towards completion of the related project. Factors that are considered in preparing these estimates include the number of subjects enrolled in studies, milestones achieved and other criteria related to the efforts of the vendors. These estimates are subject to change as additional information becomes available. Depending on the timing of payments to vendors and estimated services provided, the Company records net prepaid or accrued expenses related to these costs.
Share-Based Compensation
The Company accounts for the cost of services performed by officers and directors received in exchange for an award of Company membership interests, common stock, or stock options, based on the grant-date fair value of the award. In accordance with ASC 718, Stock Compensation , the Company recognizes compensation expense, net of estimated forfeitures, on a straight-line basis over the service period.
Share-Based Payments to Vendors
The Company accounts for the cost of services performed by vendors in exchange for an award of common stock of the Company based on the grant-date fair value of the award or fair value of the services rendered, whichever is more readily determinable and adjusted to fair value at each reporting date. Such fair value is measured as of the earlier of the date the other party becomes committed to provide goods or services or the date performance by the other party is complete. The Company recognizes the expense in the same period and in the same manner as if the Company had paid cash for the services.
| F- 8 |
Foreign Currency Translation and Transactions
The consolidated financial statements are presented in U.S. Dollars (“USD”), the reporting currency of the Company. The functional currency for the Company’s subsidiary located in Ireland is the USD. Transactions denominated in Euro were translated to USD at rates which approximate those in effect on transaction dates. Monetary assets and liabilities denominated in foreign currencies at December 31, 2016 were translated at the exchange rate in effect as of those dates. Nonmonetary assets, liabilities, and shareholders’ equity are translated at the appropriate historical rates.
The Company has intercompany loans between the parent company, Dipexium Pharmaceuticals, Inc., based in New York, NY, and its wholly owned subsidiary, Dipexium Pharmaceuticals Ireland, Limited, based in Ireland. The intercompany loans outstanding are not expected to be repaid in the foreseeable future.
Income Taxes
The Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting bases and the tax bases of the Company’s assets and liabilities and the expected benefits of net operating loss carryforwards. The impact of changes in tax rates and laws on deferred taxes, if any, applied during the years in which temporary differences are expected to be settled, is reflected in the financial statements in the period of enactment. The measurement of deferred tax assets is reduced, if necessary, based on weight of the evidence, it is more likely than not that some, or all, of the deferred tax assets will not be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that such tax rate changes are enacted. The Company had no material amounts recorded for uncertain tax positions, interest or penalties in the accompanying consolidated financial statements. The Company currently estimates an annual effective tax rate of 0% as the Company incurred losses for the years ended December 31, 2016 and 2015, respectively, for both financial statement and tax purposes. Therefore, no Federal or state income tax expense has been recorded in the consolidated financial statements.
Based on the Company’s history of generating operating losses and its anticipation of operating losses continuing in the foreseeable future, the Company has determined that it is more likely than not that the tax benefits from these net operating losses would not be realized and a full valuation allowance against all deferred tax assets has been recorded at December 31, 2016 and 2015.
| F- 9 |
Recent Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business , in an effort to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments of this ASU are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The adoption of this guidance is not expected to have a material impact on our financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments , in an effort to reduce the diversity of how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments of this ASU are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently assessing the potential impact this ASU will have on the financial statements and related disclosures.
In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718) : Improvements to Employee Share-Based Payment Accounting, in an effort to simplify accounting for certain aspects of income tax accounting and accounting for forfeitures. The amendments of this ASU are effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on our financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) , which includes amendments that require lessees to recognize a lease liability for all long-term leases (lease terms more than 12 months) at the commencement date. The lease liability is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis. The amendments also require lessees to recognize a right-of-use asset for all long-term leases. The right-of-use asset is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset to not recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. The amendments in this ASU require qualitative disclosures along with specific quantitative disclosures. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early application is permitted. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. The Company is currently evaluating the provisions of this ASU.
In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740), which requires that all deferred income tax assets and liabilities be presented as noncurrent in the balance sheet. The pronouncement is effective for financial statements issued for annual periods beginning after December 15, 2018 with early application permitted. The adoption of this guidance is not expected to have a material impact on our financial statements.
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements—Going Concern , which requires management of an entity to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued or available to be issued. This update is effective for annual periods ending after December 15, 2016. The adoption of this standard did not have a material impact on our financial statements.
NOTE 2 — FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of certain of the Company’s financial instruments, including cash and accounts payable, is shown at cost, which approximates fair value. Short-term investments with maturities ranging from six to twelve months are classified as being held to maturity and are carried at amortized cost. The cost, gross unrealized gains, and the fair value of related securities at December 31, 2016 and 2015 were as follows:
| Total (maturities within 12 months) | ||||||||||||
| Cost | Unrealized Gain | Fair Value | ||||||||||
| Held to Maturity: | ||||||||||||
| Debt Securities: | ||||||||||||
| U.S. Government sponsored bonds at December 31, 2016 | $ | - | $ | - | $ | - | ||||||
| U.S. Government sponsored bonds at December 31, 2015 | $ | 26,958,214 | $ | 4,646 | $ | 26,962,860 | ||||||
The Company had total amortized interest income for the years ended December 31, 2016 and 2015 of $46,043 and $20,621, respectively. The carrying value of short term investments was $26,977,362 as of December 31, 2015, and is equal to the cost of the securities plus the accumulated amortized interest income of $19,148 on the remaining bonds held at December 31, 2015.
| F- 10 |
NOTE 3 — ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at December 31, 2016 and 2015 are as follows:
| December 31, 2016 | December 31, 2015 | |||||||
| Accrued compensation expense | $ | 579,207 | $ | 663,404 | ||||
| Accrued research and development | 460,219 | 859,053 | ||||||
| Accrued professional fees | 1,040,184 | 55,787 | ||||||
| Other accounts payable and accrued expenses | 42,283 | 28,063 | ||||||
| Totals | $ | 2,121,893 | $ | 1,606,307 | ||||
NOTE 4 — SHARE-BASED COMPENSATION and STOCK OPTIONS
Prior to the Company’s IPO, the Company granted awards of restricted Class A Membership Interests to board members in exchange for services. These membership interests awards, which were converted to restricted common shares (7:1 ratio) at the time of the corporate conversion in March 2014, were originally scheduled to vest over a period of either three or four years with the first year beginning on the date the member joined the board. In each case, the restricted common shares involved accelerated vesting upon a change of control or other business combination. The fair value of the membership interests, at the time they were granted, was equal to the per-membership interest value of the most recent private placement ($50 per membership interest on a pre-conversion basis). Total compensation expense in the amount of $100,000 has been recognized as director fees for each of the years ended December 31, 2016 and 2015.
The following table summarizes the restricted common stock at December 31, 2016:
| Restricted Common Stock | ||||
| Nonvested at January 1, 2015 | 42,000 | |||
| Granted | — | |||
| Forfeited | — | |||
| Vested | (14,000 | ) | ||
| Nonvested at December 31, 2015 | 28,000 | |||
| Granted | — | |||
| Forfeited | — | |||
| Vested | (14,000 | ) | ||
| Nonvested at December 31, 2016 | 14,000 | |||
As of December 31, 2016, there was $20,833 of total unrecognized compensation expense related to these awards. That expense is expected to be recognized over a weighted average period of 0.25 years.
In November 2013, the board of directors adopted the 2013 Equity Incentive Plan. The plan became effective as of the completion of the corporate conversion and the closing of the IPO. The 2013 Equity Incentive Plan currently reserves 2,141,169 common shares, of which 696,156 are still available for issuance. The purpose of the plan is to attract and retain directors, officers, and employees whose services are considered valuable to the Company.
In January 2015, the Company granted stock options to purchase 251,000 common shares to its five employees, outside directors, and certain non-employee consultants. The options were issued pursuant to the 2013 Equity Incentive Plan at an exercise price of $11.35, with one-half of the options vesting upon issuance and the balance vesting evenly over the subsequent 24 months. A portion of the January stock option grant, 35,000 fully vested options, were granted to non-employees for services rendered. As such, the Company expensed $353,150, the entire portion of those non-employee grants, at the grant date.
In January 2016, the Company granted stock options to purchase 287,500 common shares to its employees, outside directors, and certain non-employee consultants. The options were issued pursuant to the 2013 Equity Incentive Plan at an exercise price of $10.16, with one-half of the options vesting upon issuance and the balance vesting evenly over the subsequent 24 months. A portion of the January stock option grant, 27,500 fully vested options, were granted to non-employees for services rendered. As such, the Company expensed $181,775, the entire portion of those non-employee grants, at the grant date.
| F- 11 |
In the third quarter of 2016, the Company granted stock options to purchase 45,226 common shares to an outside director and non-employee consultant. The options were issued pursuant to the 2013 Equity Incentive Plan at respective exercise prices ranging from $11.42 to $12.59, with vesting periods consistent with the services rendered.
In the fourth quarter of 2016, two Company employees were terminated. In accordance with their employment agreements, their options became fully vested as of the date of their termination. As such, the Company expensed $144,920, the entire balance of the remaining unrecognized compensation for the unvested options. The Company also modified the compensation agreement of a director of Dipexium Pharmaceuticals Ireland, Ltd. In lieu of any additional directors fees, the Company agreed to fully vest the directors outstanding options resulting in an expense of $274,139.
Compensation expense associated with these awards is recognized over the vesting period based on the fair value of the option at the grant date determined based on the Black-Scholes model. Option valuation models require the input of highly subjective assumptions including the expected price volatility. The Company’s employee stock options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimate.
Because there is no public market for the Company’s stock options and very little historical experience with the Company’s stock, similar public companies were used for comparison and expectations as to the price volatility assumptions required for fair value computation using the Black-Scholes methodology.
The Company determined the fair value of the option awards using the Black-Scholes option pricing model and the following weighted average assumptions for options issued during the respective periods:
| Year Ended | Year Ended | |||||||
| December 31, 2016 | December 31, 2015 | |||||||
| Expected term | 5.67 years | 5.65 years | ||||||
| Volatility | 63.4 | 62.1 | % | |||||
| Dividend yield | 0 | % | 0 | % | ||||
| Risk free interest rate | 1.53 | % | 1.58 | % | ||||
ASC 718 requires stock compensation expense to be recorded net of estimated forfeitures. The Company currently estimates there will be no forfeitures of options.
A summary of the Company’s stock option activity is as follows:
| Weighted Average | ||||||||
| Number of Options | Exercise Price | |||||||
| Outstanding at January 1, 2015 | 861,287 | $ | 13.90 | |||||
| Granted | 251,000 | $ | 11.35 | |||||
| Forfeited | — | |||||||
| Outstanding and expected to vest at December 31, 2015 | 1,112,287 | $ | 13.32 | |||||
| Granted | 332,726 | $ | 10.35 | |||||
| Forfeited | — | |||||||
| Outstanding and expected to vest at December 31, 2016 | 1,445,013 | $ | 12.64 | |||||
Compensation expense relating to options for the years ended December 31, 2016 and 2015 was $3,538,914 and $3,175,908, respectively. The total compensation expense not yet recognized as of December 31, 2016 was $565,470. The weighted average vesting period over which the total compensation expense will be recorded related to unvested options not yet recognized as of December 31, 2016 was approximately 0.6 years. The weighted average grant date fair value of options granted during the year were $5.02 and $7.61 as of December 31, 2016 and 2015, respectively. The intrinsic value of the stock options was $0 as of both December 31, 2016 and 2015, with a remaining weighted average contractual life of 5.24 years. Total options excercisable at December 31, 2016 were 1,315,229.
| F- 12 |
NOTE 5 — SHARE-BASED PAYMENTS TO VENDORS
In the ordinary course of business, the Company may issue restricted stock for services rendered by a vendor. The vesting of restricted stock and the associated expense for the services rendered are recorded over the term of the related contract. Research and development expenses resulting from vendor equity issuances for the years ended December 31, 2016 and 2015 were $739,768 and $575,211, respectively. In December 2016, the Company issued 714,625 restricted shares to two vendors to settle outstanding balances of $1,117,520.
NOTE 6 — LEASE OF OFFICE SPACE
In January 2016, the Company entered into a lease for office space commencing in March 2016. The term of the lease is for five years and five months with total minimum lease payments of approximately $1.28 million. The future minimum lease payments under this lease are as follows:
| Year ending December 31: | ||||
| 2017 | $ | 231,534 | ||
| 2018 | 238,004 | |||
| 2019 | 244,658 | |||
| 2020 | 251,522 | |||
| 2021 | 150,347 | |||
| Total | $ | 1,116,065 | ||
NOTE 7 — INCOME TAXES
The Company has $28.2 million of net operating loss carryforwards and $1.8 million of research tax credit carryforwards as of December 31, 2016. The net operating loss carryforwards and research tax credit carryforwards begin to expire in 2034 and will be utilized for tax purposes at such time the Company generates taxable income. The utilization of these net operating loss carryforwards may also be limited to the extent the Company has certain ownership changes.
The components of the net deferred income tax asset at December 31, 2016 and 2015 are as follows:
| 2016 | 2015 | |||||||
| Deferred tax assets: | ||||||||
| Net operating loss carryforwards | $ | 12,577,138 | $ | 11,353,162 | ||||
| Share-based compensation | 3,578,769 | 2,023,572 | ||||||
| Research and development credit carryforwards | 1,808,123 | 1,205,464 | ||||||
| Gross deferred tax assets | 17,964,030 | 14,582,198 | ||||||
| Less valuation allowance | (17,964,030 | ) | (14,582,198 | ) | ||||
| Net deferred tax asset | $ | — | $ | — | ||||
In assessing the realizability of deferred tax assets, the Company considers whether it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the temporary differences representing net future deductible amounts become deductible. After consideration of all the evidence, both positive and negative, the Company has recorded a full valuation allowance against their net deferred tax assets at December 31, 2016 because the Company has determined that it is more-likely-than-not that these assets will not be fully realized.
The Company reserves 100% of the deferred tax asset because under GAAP accounting rules this is required for all pre-revenue companies. In the event the Company becomes profitable for a period of two or more years, with future expectations at that time of profitability for future years prior to any significant change in its equity capitalization, the Company would have an opportunity to realize benefit from the deferred tax asset at such time in the future.
Utilization of the Company’s net operating loss carryforwards and research and development credit carryforwards may be subject to a substantial annual limitation due to an “ownership change” that may have occurred, or that could occur in the future, as defined and required by Section 382 of the Internal Revenue Code of 1986, as amended, as well as similar state provisions. These ownership changes may limit the amount of net operating loss carryforwards and research and development credit carryforwards, and other tax attributes that can be utilized annually to offset future taxable income and tax, respectively. Any limitation may result in the expiration of a portion of the net operating loss carryforwards or research and development credit carryforwards before utilization.
| F- 13 |
In general, an “ownership change” results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50% of the outstanding stock of a company by certain stockholders or public groups. The Company has not performed a study to assess whether an ownership change has occurred or whether there have been multiple ownership changes since the Company’s formation, and will complete such study before the use of any of the aforementioned attributes.
The Company did not have unrecognized tax benefits as of December 31, 2016, and does not expect this to change significantly over the next twelve months. The Company recognizes interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of December 31, 2016, the Company has not accrued interest or penalties related to any uncertain tax positions.
A reconciliation of income tax expense (benefit) at the statutory Federal income tax rate and income taxes as reflected in the financial statements for each of the years ended December 31, 2016 and 2015 is as follows:
| 2016 | 2015 | |||||||
| Federal income tax expense at statutory rate | (34.0 | )% | (34.0 | )% | ||||
| Permanent differences | 15.3 | 0.1 | ||||||
| Change in valuation allowance | 15.8 | 33.9 | ||||||
| Other | 2.9 | — | ||||||
| Effective income tax rate | — | % | — | % | ||||
The Company has generated research credits but has not conducted a study to document the qualified activities. This study may result in an adjustment to research and development credit carryforwards; however, until a study is completed and any adjustment is known, no amounts are being presented as an uncertain tax position for these years. A full valuation allowance has been provided against research and development credits and, if an adjustment is required, this adjustment to the deferred tax asset established for the research and development credit carryforwards would be offset by an adjustment to the valuation allowance.
The Company files income tax returns in the U.S. Federal jurisdiction, and various state and local jurisdictions.
| F- 14 |
NOTE 8 — LEGAL MATTERS
The Company and its two original executives were three of some 30 defendants in a lawsuit filed by a former stockholder of Genaera Corporation, which was the predecessor of the Genaera Liquidating Trust, the party from which the Company purchased the worldwide rights to pexiganan, the active pharmaceutical ingredient of Locilex ® , on April 8, 2010. The complaint was filed on June 8, 2012 in the United States District Court for the Eastern District of Pennsylvania (Civil Action No. 12-3265) by Alan W. Schmidt, individually and on behalf of former Genaera Corporation shareholders. Among others, the suit was filed against the Company, as well as John A. Skolas and Argyce, LLC, who were responsible for the administration of the Trust and who sold pexiganan to the Company via a public auction. The defendants listed in the complaint included several individuals and companies formerly associated with Genaera Corporation, the Trust and/or Argyce, LLC. Also included in the defendant group were several other pharmaceutical companies that were involved in acquiring the former drug-related assets of Genaera Corporation.
The complaint alleged, among other things, that the Company and its two executives aided and abetted a breach of fiduciary duty alleged to have been committed by the former directors and officers of Genaera Corporation before it was approved for dissolution by its shareholders and also Argyce, LLC, the trustee of the Liquidating Trust. Plaintiff claims that the Company, and its executives, aided and abetted a breach of the duties of the board of directors and the trustee under common law and under a certain trust agreement allegedly signed between Argyce, LLC, as the trustee, and the Liquidating Trust. With regard to the claims made against the Company and its two executives, the plaintiff alleged, in pertinent part, that the Company’s acquisition of the pexiganan rights was for alleged inadequate consideration, and that the Company and its management aided and abetted a breach of fiduciary duty by the Genaera Corporation defendants who were formerly associated with Genaera Corporation and/or the Trust.
The Company and its two executives filed a motion to dismiss the complaint within the prescribed time period. All of the other defendants in this litigation also filed motions to dismiss, and a court order by the Federal District Court granted each and every motion to dismiss, with prejudice, without leave to refile, on August 12, 2013 based on the argument that plaintiff’s claims were time barred. A subsequent motion to reconsider such dismissal was denied by the Federal District Court. Plaintiff appealed the dismissal to the United States Third Circuit Court of Appeals seeking reversal of the dismissal and the Third Circuit Court granted plaintiff’s appeal. On October 17, 2014, the Third Circuit Appellate Court, in a 2-1 decision with a strong dissenting opinion, reversed the trial court’s dismissal of Plaintiff’s claims based on the expiration of the applicable statutes of limitation. In a 2-1 decision, the Third Circuit held that more information was necessary to determine when plaintiff should have been on notice of his claims to determine the applicability of the discovery rule, which could serve to extend the time frame in which plaintiff could bring his claims. Due to the strong dissent, all Defendants filed the necessary documents requesting a petition for rehearing en banc, by the majority of the Third Circuit justices who are in active service. The Third Circuit denied the request for en banc hearing and remanded this case to District Court.
Upon remand to the Federal District Court, all Defendants moved to dismiss the complaint for reasons other than being time barred. The Company and its two executives moved for dismissal based on plaintiff’s inability to make a case for aiding and abetting a breach of fiduciary duty because there was no underlying breach and such an aiding and abetting claim requires an element of knowing participation in the fiduciary breach which cannot be established by plaintiff.
The District Court held a hearing on this in September 2015 and the District Court delivered an Order on November 10, 2015 pursuant to which the District Court granted the Motion to Dismiss filed by each and every defendant including the Company and its two executives. In December 2015, plaintiff appealed the Federal District Court’s decision to the Third Circuit Appellate Court and the Company anticipates a decision on whether to grant plaintiff’s appeal by the Third Circuit Appellate Court in the first quarter of 2017. The Company will continue to vigorously defend against plaintiff’s claims on the factual record, which it believes will prove that neither the Company nor its executives is liable to the plaintiff in any regard.
NOTE 9 — RELATED PARTY TRANSACTIONS
The Company engaged the consulting services of Drug Development Advisors (“DDA”) pursuant to which DDA performed detailed analysis on a number of the Company’s preclinical studies in connection with the NDA process. DDA is owned and operated by a member of the Company’s board of directors. The Company incurred expenses for services provided by DDA in the amounts of $20,541 and $24,550 for the years ended December 31, 2016 and 2015, respectively, all of which were recorded in research and development expenses.
NOTE 10 — NET LOSS PER SHARE
Basic and diluted net loss per common share for the years ended December 31, 2016 and 2015 were determined by dividing net loss by the weighted average common shares outstanding during the period. The Company’s potentially dilutive shares, which include 1,445,013 stock options, 14,000 unvested common shares, and 10,500 warrants (exercisable at $8.57 per share), have not been included in the computation of diluted net loss per share for all periods as the result would be antidilutive.
| F- 15 |
NOTE 11 — SUBSEQUENT EVENT
On January 6, 2017, in connection with the execution of the Merger Agreement, Dipexium loaned PLx $2.0 million (the “Bridge Loan”).
The Bridge Loan accrues interest on all outstanding principal at a rate of 8% per annum and has a maturity date that is the later of (a) October 15, 2017, or (b) the date that is two hundred seventy (270) days following the termination of the Merger Agreement, subject to acceleration in the event that (i) the Merger Agreement is terminated by Dipexium if PLx has breached any of its representations, warranties, covenants or agreements contained in the Merger Agreement such that the conditions to the closing of the Proposed Merger would not be satisfied as of the time of such breach or inaccuracy, but if such breach or inaccuracy is curable, then the Merger Agreement will not terminate pursuant to this provision as a result of a particular breach or inaccuracy until the expiration of a 30-day period after delivery of written notice of such breach or inaccuracy if such breach has not been cured; and (ii) PLx thereafter consummates a financing of at least $10.0 million or conducts a reorganization, consolidation, or merger of PLx pursuant to which the holders of PLx’s securities prior to such transaction beneficially own less than 50% of the outstanding voting securities of the surviving entity after the transaction or the consummation of the sale, lease, transfer, conveyance or other disposition in one or a series of transactions, of all or substantially all of PLx’s assets, or PLx and its subsidiaries, taken as a whole, to any person or entity.
The Bridge Loan is secured by a first priority perfected security interest in and lien on all right, title and interest of PLx in and to substantially all of its assets. Upon the occurrence of any of the following events that results in a termination of the Merger Agreement, any security interest created by the promissory note shall immediately cease to be effective:
| · | if the closing shall not have occurred on or before April 30, 2017 (or such later date as agreed to by the parties to the Merger Agreement) (the “outside date”), except that the right to so terminate the Merger Agreement will not be available to Dipexium or PLx if its failure to fulfill any obligation under the Merger Agreement has been a principal cause of, or resulted in the failure of the closing to occur by such date; and provided, further, however, that, in the event that this joint proxy statement/prospectus is still being reviewed or commented on by the SEC after March 15, 2017, either party shall be entitled to extend the outside date by an additional sixty (60) days; |
| · | (i) if the Dipexium board of directors changes its recommendation to approve the issuance of shares of Dipexium common stock necessary to complete the Proposed Merger, (ii) if Dipexium materially breaches its non-solicitation covenants in the Merger Agreement, or (iii) if Dipexium breaches any of its representations, warranties, covenants or other agreements contained in the Merger Agreement, which breach or failure would render the conditions precedent to PLx’s obligations under the Merger Agreement not to be satisfied and which breach is not cured within 30 days following written notice of such breach or by its nature or timing cannot be cured within that time; or |
| · | if Dipexium enters into an agreement providing for a “superior proposal”. |
| F- 16 |
Exhibit 3.2
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
DIPEXIUM PHARMACEUTICALS, INC.
The undersigned, for the purposes of forming a corporation for conducting the business and promoting the purposes hereinafter stated, under the provisions and subject to the requirements of the laws of the State of Delaware (particularly Chapter 1, Title 8 of the Delaware Code and the acts amendatory thereof and supplemental hereto, and generally known as the “ Delaware General Corporation Law ”), does hereby make, file and record this Certificate of Incorporation, and does hereby certify as follows:
FIRST : The name of the corporation is Dipexium Pharmaceuticals, Inc. (hereinafter sometimes referred to as the “ Corporation ”).
SECOND : The address of the Corporation’s registered office in the State of Delaware is 1811 Silverside Road, Wilmington, DE 19810, New Castle County; and the name of the registered agent of the Corporation in the State of Delaware at such address is Vcorp Services LLC. The Corporation shall have the authority to designate other registered offices and registered agents both in the State of Delaware and in other jurisdictions.
THIRD: The nature of the business and the purposes to be conducted and promoted by the Corporation shall be to engage in any lawful business, to promote any lawful purpose, and to engage in any lawful act or activity for which corporations may be organized under the Delaware General Corporation Law.
FOURTH: The capital stock of the Corporation shall be as follows:
1. Classes of Stock . The Corporation is authorized to issue one class of shares of capital stock to be designated as common stock (“ Common Stock ”). The number of shares of Common Stock authorized to be issued is thirty million (30,000,000), par value $0.001 per share.
2. Rights of the Common Stock . Except as otherwise provided by law or by the resolution or resolutions, the holders of outstanding shares of Common Stock shall have the exclusive right to vote for the election of directors and for all other purposes. Except as otherwise required by law or this Certificate of Incorporation of the Corporation, each holder of Common Stock is entitled to one vote for each share of Common Stock held of record by such holder with respect to all matters on which holders of Common Stock are entitled to vote. Subject to the Delaware General Corporation Law, dividends may be declared and paid on the Common Stock at such times and in such amounts as the Board of Directors of the Corporation (the “ Board of Directors ”) in its discretion shall determine. Upon the dissolution, liquidation or winding up of the Corporation, the holders of the Common Stock, as such, shall be entitled to receive the assets of the Corporation available for distribution to its stockholders ratably in proportion to the number of shares held by them.
3. Rights and Options . The Corporation has the authority to create and issue rights, warrants, options and other convertible securities entitling the holders thereof to purchase shares of any class or series of the Corporation’s capital stock or other securities of the Corporation, and such rights, warrants, options and other convertible securities shall be evidenced by instrument(s) approved by the Board of Directors. The Board of Directors is empowered to set the exercise price, duration, times for exercise and other terms and conditions of such rights, warrants, options or other convertible securities; provided , however , that the consideration to be received for any shares of capital stock subject thereto may not be less than the par value thereof.
FIFTH: The Corporation shall have perpetual existence.
SIXTH: For the management of the business, and for the conduct of the affairs, of the Corporation, and in further definition, limitation and regulation of the powers of the Corporation and of its directors and of its stockholders or any class thereof, as the case may be, it is further provided that:
1. The business of the Corporation shall be conducted by the officers of the Corporation under the supervision of the Board of Directors.
2. The number of directors which shall constitute the whole Board of Directors shall be fixed by, or in the manner provided in, the Bylaws of the Corporation (the “ Bylaws ”). No election of Directors need be by written ballot.
3. Notwithstanding any other provision of law, all action required to be taken by the stockholders of the Corporation shall be taken at a meeting duly called and held in accordance with the law, this Certificate of Incorporation and the Bylaws, or by written consent signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted.
SEVENTH:
1. The Corporation may, to the fullest extent permitted by Section 145 of the Delaware General Corporation Law, as the same may be amended and supplemented, indemnify any and all persons whom it shall have power to indemnify under said section from and against any and all of the expenses, liabilities, costs, fees or other matters referred to in or covered by said section, and the indemnification provided for herein shall not be deemed exclusive of any other rights to which a person indemnified may be entitled under any Bylaw, agreement, insurance, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person.
2. No director shall be personally liable to the Corporation or its stockholders for monetary damages for any breach of fiduciary duty by such director as a director. Notwithstanding the foregoing sentence, a director shall be liable to the extent provided by applicable law: (i) for breach of the director’s duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) pursuant to Section 174 of the Delaware General Corporation Law or (iv) for any transaction from which the director derived an improper personal benefit. No amendment to or repeal of this paragraph (2) of this Article Seventh shall apply to or have any effect on the liability or alleged liability of any director of the Corporation for or with respect to any acts or omissions of such Director occurring prior to such amendment.
EIGHTH: From time to time any of the provisions of this Certificate of Incorporation may be amended, altered or repealed, and other provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted in the manner and at the time prescribed by said laws, and all rights at any time conferred upon the stockholders of the Corporation by this Certificate of Incorporation are granted subject to the provisions of this Article EIGHTH.
NINTH: Whenever a compromise or arrangement is proposed between this Corporation and its creditors or any class of them and/or between this Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for this Corporation under the provisions of Section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this Corporation under the provisions of Section 279 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this Corporation as a consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of this Corporation, as the case may be, and also on this Corporation.
TENTH : In furtherance and not in limitation of the power conferred by statute, the Board of Directors is expressly authorized to make, alter, amend or repeal the Bylaws of the Company.
Exhibit 3.3
AMENDED AND RESTATED BYLAWS OF
DIPEXIUM PHARMACEUTICALS, INC.
(a Delaware Corporation)
ARTICLE 1
OFFICES
SECTION 1.1. Principal Office . The principal offices of the Dipexium Pharmaceuticals, Inc., a Delaware corporation (the “ Corporation ”) shall be in such location as the Board of Directors of the Corporation (the “ Board of Directors ”) may determine.
SECTION 1.2. Other Offices . The Corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the Corporation may require.
ARTICLE 2
MEETINGS OF STOCKHOLDERS
SECTION 2.1. Place of Meeting; Chairman . All meetings of stockholders shall be held at such place, either within or without the State of Delaware, as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting. The Chairman of the Board of the Corporation (the “ Chairman of the Board ”) or any other person specifically designated by the Board of Directors shall act as the Chairman for any meeting of stockholders of the Corporation. The Chairman of the Board (or his or her designee) shall have full authority to control the process of any stockholder meeting, including, without limitation, determining whether any proposals or nominations were properly brought before such meeting, establishing an agenda or order of business for the meeting, rules and procedures for maintaining order at the meeting, limitations on participation in such meeting to stockholders of record of the Corporation and their duly authorized and constituted proxies and such other persons as the Chairman of the Board (or his or her designee) shall permit, restrictions on entry to the meeting after the time fixed for the commencement thereof, requiring ballots by written consent (except as limited by the Certificate of Incorporation of the Corporation, as amended (the “ Certificate of Incorporation ”), or by the Delaware General Corporation Law (“ DGCL ”), limitations on the time allotted to questions or comments by participants and regulation of the opening and closing of the polls for balloting on matters which are to be voted on by ballot.
SECTION 2.2. Annual Meetings . The annual meeting of stockholders of the Corporation shall be held at such date and time as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting, subject to any postponement in the Board of Directors’ sole discretion, upon notice of such postponement given in any manner deeded reasonable by the Board of Directors.
SECTION 2.3. Special Meetings . Special meetings of the stockholders of the Corporation, for any purpose or purposes, unless otherwise proscribed by the DGCL or by the Certificate of Incorporation, may be called exclusively by: (i) the Chairman of the Board or the Chief Executive Officer, President or other executive officer of the Corporation, (ii) an action of the Board of Directors or (iii) request in writing of the stockholders of record, and only of record, owning not less than sixty-six and two-thirds percent (66 2/3%) of the entire capital stock of the Corporation issued and outstanding and entitled to vote. Such request shall state the purpose or purposes of the proposed meeting. The officers or directors shall fix the time and any place, either within or without the State of Delaware, as the place for holding such meeting.
SECTION 2.4. Notice of Meeting . Written notice of the annual and each special meeting of stockholders of the Corporation, stating the time, place and purpose or purposes thereof, and the means of remote communications, if any, by which stockholders or proxy holders may be deemed to be present in person and able to vote at such meeting, shall be given to each stockholder entitled to vote thereat, not less than ten (10) nor more than sixty (60) days before the meeting and shall be signed by the Chairman of the Board, the President or the Secretary of the Corporation (the “ Secretary ”). The Board of Directors may postpone a special meeting in its sole discretion in any manner it deems reasonable.
SECTION 2.5. Business Conducted at Meetings .
Section 2.5.1 (a) At any meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before a meeting, business must be:
(i) specified in the notice of meeting (or any supplement thereto provided within the notice period specified in Section 2.4) given by or at the direction of the Chairman of the Board, the President or the Board of Directors;
(ii) otherwise properly brought before the meeting by or at the direction of the Board of Directors; or
(iii) otherwise properly brought before the meeting by any stockholder of the Corporation (subject to Section 2.3 and 2.5.1(b) of these Bylaws) who (A) is a stockholder of record on the date of the giving of the notice provided for in this Section 2.5 and on the record date for the determination of stockholders entitled to notice of and to vote at the meeting and (B) complies with the advance notice procedures set forth in this Section 2.5.
(b) Except for proposals properly made in accordance with Rule 14a-8 under the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”), and included in the Corporation’s notice of meeting, the foregoing clause 2.5.1(a)(iii) shall be the exclusive means for a stockholder to propose business to be brought before an annual or special meeting of stockholders, provided that in the case of a special meeting of stockholders, the item of business is presented by the requisite number of stockholders of the Corporation in accordance with Section 2.3 of these Bylaws. Stockholders seeking to nominate persons for election to the Board of Directors must comply with Section 2.6.2 hereof and this Section 2.5.1 shall not be applicable to director nominations.
(c) In addition to any other applicable requirements set forth in these Bylaws, the U.S. federal securities laws or otherwise, for business to be properly brought before a meeting called by stockholders, such stockholder(s) must have given timely notice thereof in writing to the Secretary. Any special meeting of the Corporation proposed to be called by a stockholder or stockholders in such capacity shall not be required to be held: (i) with respect to any matter, within 12 months after any annual or special meeting of stockholders at which the same matter was included on the agenda, or if the same matter will be included on the agenda at an annual meeting to be held within 90 days after the receipt by the Corporation of such request (the election or removal of directors to be deemed the same matter with respect to all matters involving the election or removal of directors) or (ii) if the purpose of the special meeting is not a lawful purpose or if such request violates applicable law. A stockholder may revoke a request for a special meeting at any time by written revocation delivered to the Secretary, and if, following such revocation, there are un-revoked requests from stockholders holding in the aggregate less than the requisite number of shares entitling the stockholders to request the calling of a special meeting, the Board of Directors, in its discretion, may cancel the special meeting. If none of the stockholders who submitted the request for a special meeting appears or sends a qualified representative to present the nominations proposed to be presented or other business proposed to be conducted at the special meeting, the Corporation need not present such nominations or other business for a vote at such meeting.
Section 2.5.2 To be timely, a stockholder’s notice of a proposal to be included at an annual meeting must be delivered to or mailed and received at the principal executive offices of the Corporation not less than ninety (90) days nor more than one hundred twenty (120) days prior to the annual meeting of stockholders; provided, however, that if the date of the annual meeting is advanced more than thirty (30) days prior to or delayed by more than sixty (60) days after the anniversary of the preceding year’s annual meeting, to be timely, notice by the stockholder must be so received not later than the close of business on the tenth (10th) day following the day on which public disclosure of the date of the annual meeting is first given or made (which shall include the making of any and all filings of the Corporation made on the EDGAR system of the U.S. Securities and Exchange Commission (“ SEC ”) or any similar public database maintained by the SEC, whichever first occurs). In the case of a special meeting of stockholders, notice must be provided not later than the close of business on the tenth (10th) day following the day on which public disclosure of the date of the special meeting is first given or made.
Section 2.5.3 A record stockholders’ notice to the Secretary shall set forth in writing as to each matter the stockholder(s) propose to bring before the meeting: (a) a detailed description of the business desired to be brought before the meeting and the reasons for proposing such business, including the complete text of any resolutions, bylaws or certificate of incorporation amendments proposed for consideration, (b) the name and address, as they appear on the Corporation’s books, of the stockholders proposing such business, (c) the class and number of shares of the Corporation which are owned directly or indirectly of record and directly or indirectly beneficially owned by the stockholders and each of its affiliates (within the meaning of Rule 144 promulgated under the Securities Act of 1933, as amended, or any successor rule thereto (“ Rule 144 ”)), including any shares of the Corporation owned or controlled via derivatives, synthetic securities, hedged positions and other economic and voting mechanisms, (d) any material interest of the stockholders in such proposed business and any agreements or understandings to which such stockholders are a party which relate in any way, directly or indirectly, to the proposed business to be conducted, including a description of all arrangements or understandings between such stockholder and any other person or persons (including their names), (e) a representation as to whether or not such stockholder intends to solicit proxies; (f) a representation as to whether or not such stockholder intends to appear in person or by proxy at the applicable meeting, (g) any pending or threatened litigation in which such stockholder is a party or material participant involving the Corporation or any of its officers or directors, or any affiliate of the Corporation, and (g) such other information regarding the stockholder in his, her or its capacity as a proponent of a stockholder proposal that would be required to be disclosed in a proxy statement or other filing with the SEC required to be made in connection with the contested solicitation of proxies pursuant to the SEC’s proxy rules.
Section 2.5.4 Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at a meeting except in accordance with the procedures set forth in this Section 2.5. The Chairman of the meeting shall, in his or her sole discretion, determine and declare to the meeting whether or not any business was properly brought before the meeting. Any such business not properly brought before the meeting shall not be transacted. If and to the extent that shares of the Corporation’s capital stock is registered under or the Corporation is otherwise subject to the reporting requirements of the Exchange Act, nothing in this Section 2.5 shall affect the right of a stockholder to request inclusion of a proposal in the Corporation’s proxy statement to the extent that such right is provided by an applicable rule of the SEC. Notwithstanding the foregoing, the advance notice provisions of these Bylaws shall apply to all stockholder proposals regardless of whether such proposal is sought to be included in the Corporation’s proxy statement or in a separate proxy statement.
SECTION 2.6. Nomination of Directors . Nomination of candidates for election as directors of the Corporation at any meeting of stockholders called for the election of directors, in whole or in part (an “ Election Meeting ”), must be made by the Board of Directors or by any stockholder entitled to vote at such Election Meeting, in accordance with the following procedures.
Section 2.6.1. Nominations made by the Board of Directors shall be made at a meeting of the Board of Directors or by written consent of the directors in lieu of a meeting prior to the date of the Election Meeting. At the request of the Secretary, and if and to the extent that shares of the Corporation’s capital stock is registered under or the Corporation is otherwise subject to the reporting requirements of the Exchange Act, each proposed nominee nominated by the Board of Directors shall provide the Corporation with such information concerning himself or herself as is required, under the rules of the SEC and any applicable securities exchange, to be included in the Corporation’s proxy statement soliciting proxies for his or her election as a director.
Section 2.6.2. The exclusive means by which a stockholder may nominate a director shall be by delivery of a notice to the Secretary, not less than sixty (60) days prior to the date of an Election Meeting, setting forth: (a) the name, age, business address and the primary legal residence address of each nominee proposed in such notice, (b) the principal occupation or employment of such nominee, (c) the number of shares of capital stock of the Corporation which are owned directly or indirectly of record and directly or indirectly beneficially owned by the nominee and each of its affiliates (within the meaning of Rule 144), including any shares of the Corporation owned or controlled via derivatives, hedged positions and other economic and voting mechanisms, (d) any material agreements, understandings or relationships, including financial transactions and compensation, between the nominating stockholder and the proposed nominees and (d) such other information concerning each such nominee as would be required, under the rules of the SEC, in a proxy statement soliciting proxies in a contested election of such nominees. Such notice shall include a signed consent of each such nominee to serve as a director of the Corporation, if elected. In addition, any stockholder nominee, to be validly nominated, shall submit to the Secretary the questionnaire required pursuant to Section 2.6.3 of these Bylaws. A stockholder intending to nominate one or more candidates for election as directors must comply with the advance notice bylaw provisions specifically applicable to the nomination of candidates for election as directors for such nomination to be properly brought before the meeting.
Section 2.6.3 To be eligible to be a director nominee nominated by a stockholder or stockholders for election or reelection as a director of the Corporation, such nominee must deliver (in accordance with the time periods prescribed for delivery of notice under Section 2.6.2 of these Bylaws) to the Secretary at the principal executive offices of the Corporation a written questionnaire (the “ Questionnaire ”) with respect to the background, qualification and experience of such person and the background of any other person or entity on whose behalf the nomination is being made (which questionnaire shall be in the form approved by the Corporation and provided by the Secretary or such Secretary’s designee) and a written representation and agreement that such person: (a) will abide by the requirements of these Bylaws and the Certificate of Incorporation as in effect at the time of their nomination and as validly amended, (b) is not and will not become a party to (1) any agreement, arrangement or understanding with, and has not given any commitment or assurance to, any person or entity as to how such person, if elected as a director of the Corporation, will act or vote on any issue or question (a “ Voting Commitment ”) that has not been disclosed to the Corporation or (2) any Voting Commitment that could limit or interfere with such person’s ability to comply, if elected as a director of the Corporation, with such person’s fiduciary duties under applicable law, (c) is not and will not become a party to any agreement, arrangement or understanding with any person or entity other than the Corporation with respect to any direct or indirect compensation, reimbursement or indemnification in connection with service or action as a director that has not been disclosed therein, and (d) in such person’s individual capacity and on behalf of any person or entity on whose behalf the nomination is being made, would be in compliance, if elected as a director of the Corporation, and will comply with all applicable publicly disclosed corporate governance, conflict of interest, confidentiality and stock ownership and trading policies and guidelines of the Corporation. If, prior to the Election Meeting, there is a change in any information set forth on the Questionnaire, then such director candidate shall promptly notify the Secretary by submitting a revised Questionnaire.
Section 2.6.4. In the event that a person is validly designated by the Board of Directors as a nominee in accordance with this Section 2.6 and shall thereafter become unable or willing to stand for election to the Board of Directors, the Board of Directors may designate a substitute nominee who meets all applicable standards under these Bylaws.
Section 2.6.5. If the Chairman of the Election Meeting determines that a nomination was not made in accordance with the foregoing procedures, such nomination shall be void.
SECTION 2.7. Quorum; Adjournment .
Section 2.7.1 The holders of a majority of the shares of capital stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy (provided the proxy has authority to vote on at least one matter at such meeting), shall constitute a quorum at any meeting of stockholders for the transaction of business, except when stockholders are required to vote by class, in which event a majority of the issued and outstanding shares of the appropriate class shall be present in person or by proxy (provided the proxy has authority to vote on at least one matter at such meeting) in order to constitute a quorum as to such class vote, and except as otherwise provided by the DGCL or by the Certificate of Incorporation. The stockholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough stockholders to have less than a quorum if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum.
Section 2.7.2 Notwithstanding any other provision of the Certificate of Incorporation or these Bylaws, at any annual or special meeting of stockholders of the Corporation, whether or not a quorum is present, the Chairman of the Board or the person presiding as Chairman of the meeting shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, whether or not a quorum shall be present or represented. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting in accordance with Section 2.4 of these Bylaws. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified.
SECTION 2.8. Voting; Proxies .
Section 2.8.1 Except as provided for below or by applicable law, rule or regulation, when a quorum is present at any meeting of the stockholders, any action by the stockholders on a matter except the election of directors shall be approved if approved by the majority of the votes cast. Except as provided below with respect to Contested Elections, each nominee for director shall be elected by the majority of the votes cast (which includes votes withheld) with respect to that nominee’s election at any meeting for the election of directors at which a quorum is present. Directors shall be elected by a plurality of the votes cast in any Contested Election. For purposes of these Bylaws, a “ Contested Election ” means an election of directors with respect to which, as of five days prior to the date the Corporation first mails the notice of meeting for such meeting to stockholders, there are more nominees for election than positions on the Board of Directors to be filled by election at the meeting. In determining the number of votes cast in a Contested Election, abstentions and broker non-votes, if any, will not be treated as votes cast. The provisions of this paragraph will govern with respect to all votes of stockholders except as otherwise provided for in the Certificate of Incorporation or by a specific statutory provision superseding the provisions of these Bylaws.
Section 2.8.2 Every stockholder having the right to vote shall be entitled to vote in person, or by proxy: (a) appointed by an instrument in writing subscribed by such stockholder or by his or her duly authorized attorney or (b) authorized by the transmission of an electronic record by the stockholder to the person who will be the holder of the proxy or to a firm which solicits proxies or like agent who is authorized by the person who will be the holder of the proxy to receive the transmission subject to any procedures the Board of Directors may adopt from time to time to determine that the electronic record is authorized by the stockholder; provided, however, that no such proxy shall be valid after the expiration of six (6) months from the date of its execution, unless coupled with an interest, or unless the person executing it specifies therein the length of time for which it is to continue in force, which in no case shall exceed seven (7) years from the date of its execution. If such instrument or record shall designate two (2) or more persons to act as proxies, unless such instrument shall provide the contrary, a majority of such persons present at any meeting at which their powers thereunder are to be exercised shall have and may exercise all the powers of voting or giving consents thereby conferred, or if only one (1) be present, then such powers may be exercised by that one (1). Unless required by the DGCL or determined by the Chairman of the meeting to be advisable, the vote on any matter need not be by written ballot. No stockholder shall have cumulative voting rights.
SECTION 2.9. Consent of Stockholders . Whenever the vote of the stockholders at a meeting thereof is required or permitted to be taken for or in connection with any corporate action, the meeting and vote of stockholders may be dispensed with if stockholders, having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted, consent in writing to such corporate action being taken; provided, that in no case shall the written consent be by the holders of stock having less than the minimum percentage of the vote required by the DGCL. Any action by consent of the stockholders pursuant to this Section 2.9 must follow the notice and timing procedures of Section 2.5 applicable to any business to be conducted at a stockholder meeting. Further, upon the request of a stockholder to conduct a consent solicitation, the Board of Directors shall adopt a resolution fixing a record date within ten (10) days of the date on which a request therefor is received, provided that such record date shall not be more than ten (10) days after the date of the adoption of such resolution.
SECTION 2.10. Voting of Stock of Certain Holders . Shares standing in the name of another entity, domestic or foreign, may be voted by such officer, agent or proxy as the governing documents of such entity may prescribe, or in the absence of such provision, as the Board of Directors or governing body of such entity may determine. Shares standing in the name of a deceased person may be voted by the executor or administrator of such deceased person, either in person or by proxy. Shares standing in the name of a guardian, conservator or trustee may be voted by such fiduciary, either in person or by proxy, but no such fiduciary shall be entitled to vote shares held in such fiduciary capacity without a transfer of such shares into the name of such fiduciary. Shares outstanding in the name of a receiver may be voted by such receiver. A stockholder whose shares are pledged shall be entitled to vote such shares, unless in the transfer by the pledgor on the books of the Corporation, he or she has expressly empowered the pledgee to vote thereon, in which case only the pledgee, or his or her proxy, may represent the stock and vote thereon.
SECTION 2.11. Treasury Stock . The Corporation shall not vote, directly or indirectly, shares of its own stock owned by it; and such shares shall not be counted in determining the total number of outstanding shares.
SECTION 2.12. Fixing Record Date . The Board of Directors may fix in advance a date for any meeting of stockholders (which date shall not be more than sixty (60) nor less than ten (10) days preceding the date of any such meeting of stockholders), a date for payment of any dividend or distribution, a date for the allotment of rights, a date when any change or conversion or exchange of capital stock shall go into effect, or a date in connection with obtaining a consent of stockholders (which date shall not precede or be more than ten (10) days after the date the resolution setting such record date is adopted by the Board of Directors), in each case as a record date (the “ Record Date ”) for the determination of the stockholders entitled to notice of, and to vote at, any such meeting and any adjournment thereof, to receive payment of any such dividend or distribution, to receive any such allotment of rights, to exercise the rights in respect of any such change, conversion or exchange of capital stock, or to give such consent, as the case may be. In any such case such stockholders and only such stockholders as shall be stockholders of record on the Record Date shall be entitled to such notice of and to vote at any such meeting and any adjournment thereof, to receive payment of such dividend or distribution, to receive such allotment of rights, to exercise such rights, or to give such consent, as the case may be, notwithstanding any transfer of any stock on the books of the Corporation after any such Record Date.
SECTION 2.13. Inspectors . The Board of Directors, in advance of any meeting, may, but need not, appoint one or more inspectors of election to act at the meeting or any adjournment thereof. If an inspector or inspectors are not so appointed, the person presiding at the meeting may, but need not, appoint one or more inspectors. In case any person who may be appointed as an inspector fails to appear or act, the vacancy may be filled by appointment made by the directors in advance of the meeting or at the meeting by the person presiding thereat. Each inspector, if any, before entering upon the discharge of his or her duties, shall take and sign an oath faithfully to execute the duties of inspector at such meeting with strict impartiality and according to the best of his ability. The inspectors, if any, shall determine the number of shares of stock outstanding and the voting power of each, the shares of stock represented at the meeting, the existence of a quorum, and the validity and effect of proxies, and shall receive votes, ballots or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots or consents, determine the result, and do such acts as are proper to conduct the election or vote with fairness to all stockholders. On request of the person presiding at the meeting, the inspector or inspectors, if any, shall make a report in writing of any challenge, question or matter determined by such inspector or inspectors and execute a certificate of any fact found by such inspector or inspectors.
ARTICLE 3
BOARD OF DIRECTORS
SECTION 3.1. Powers . The business, properties and affairs of the Corporation shall be managed by, or under the direction of, its Board of Directors, which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these Bylaws directed or required to be exercised or done by the stockholders. Subject to compliance with the provisions of the DGCL, the powers of the Board of Directors shall include the power to make a liquidating distribution of the assets, and wind up the affairs of, the Corporation.
SECTION 3.2. Number, Qualifications Term.
Section 3.2.1 The number of directors which shall constitute the whole Board of Directors shall be not less than one (1) and not more than eleven (11). Within such limitations, the number of the directors of the Corporation shall be determined solely in the discretion of the Board of Directors. Directors need not be residents of Delaware or stockholders of the Corporation. Each director shall be at least eighteen (18) years of age.
Section 3.2.2 Directors who are elected at an annual meeting of stockholders, and directors who are elected in the interim to fill vacancies and newly created directorships, shall hold office until the next annual meeting of stockholders and until their successors are elected and qualified or until their earlier death, incapacity, resignation or removal. No decrease in the number of directors shall shorten the term of any incumbent director.
SECTION 3.3. Vacancies, Additional Directors; Removal From Office; Resignation . If any vacancy occurs in the Board of Directors caused by death, resignation, retirement, disqualification, removal from office or otherwise, or if any new directorship is created by an increase in the authorized number of directors, a majority of the directors then in office, though less than a quorum, or a sole remaining director, but not the stockholders of the Corporation, may choose a successor or fill the newly created directorship. Any director so chosen shall hold office for the unexpired term of his or her predecessor in his or her office and until his or her successor shall be elected and qualified, unless sooner displaced. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. If the Board of Directors is not classified, a director, or the entire Board of Directors, may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors, provided such action is taken in accordance with the provisions of Article 2 hereof. If the Board of Directors is classified, the stockholders of the Corporation may only remove a member of the Board of Directors for cause, which removal shall only occur at a meeting of the stockholders, duly called, by the affirmative vote of sixty-six and two-thirds percent (66 2/3%) of the stockholders entitled to vote thereat. Any director may resign or voluntarily retire upon giving written notice to the Chairman of the Board or the Board of Directors. Any retirement or resignation of a director shall be effective upon the giving of the notice, unless the notice specifies a later time for its effectiveness. If such retirement or resignation is effective at a future time, the Board of Directors may elect a successor to take office when the retirement or resignation becomes effective. For purposes of this Section 3.3, “ cause ” shall mean: (i) the director’s conviction or plea of nolo contendere of a serious felony involving (a) moral turpitude or (b) a violation of federal or state securities laws, but excluding any conviction based entirely on vicarious liability, (ii) the director’s commission of fraud or any material act of dishonesty resulting or intended to result in material personal gain or enrichment of such director at the expense of the Corporation or any of its subsidiaries and which act, if made the subject of criminal charges, would be reasonably likely to be charged as a felony, (iii) the willful failure by such director to perform, or the gross negligence of such director in performing, the duties of a director or (iv) the director being adjudged legally incompetent by a court of competent jurisdiction.
SECTION 3.4. Regular Meetings . A regular meeting of the Board of Directors shall be held each year, without notice other than this Bylaw provision, at the place of, and immediately prior to and/or following, the annual meeting of stockholders; and other regular meetings of the Board of Directors shall be held during each year, at such time and place as the Board of Directors may from time to time provide by resolution, either within or without the State of Delaware, without other notice than such resolution.
SECTION 3.5. Special Meeting . A special meeting of the Board of Directors may be called by the Chairman of the Board or by the President and shall be called by the Secretary on the written request of a majority of the directors. The Chairman of the Board or President so calling, or the directors so requesting, any such meeting shall fix the time and any place, either within or without the State of Delaware, as the place for holding such meeting.
SECTION 3.6. Notice of Special Meeting . Written notice (including via email) of special meetings of the Board of Directors shall be given to each director at least twenty-four (24) hours prior to the time of a special meeting. Any director may waive notice of any meeting. The attendance of a director at any meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting solely for the purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any special meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting, except that notice shall be given with respect to any matter when notice is required by the DGCL.
SECTION 3.7. Quorum . A majority of the Board of Directors then serving shall constitute a quorum for the transaction of business at any meeting of the Board of Directors, and the act of a majority of the directors present at any meeting at which there is quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by the DGCL, by the Certificate of Incorporation or by these Bylaws. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting, without notice other than announcement at the meeting, until a quorum shall be present. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved of by at least a majority of the required quorum for that meeting.
SECTION 3.8. Action Without Meeting . Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof as provided in Article 4 of these Bylaws, may be taken without a meeting, if a written consent thereto is signed by all of the members of the Board of Directors or of such committee, as the case may be. Evidence of any consent to action under this Section 3.8 may be provided in writing, including electronically via email or facsimile.
SECTION 3.9. Meeting by Telephone . Any action required or permitted to be taken by the Board of Directors or any committee thereof may be taken by means of a meeting by telephone conference or similar communications method (including by means of the Internet) so long as all persons participating in the meeting can hear each other. Any person participating in such meeting shall be deemed to be present in person at such meeting.
SECTION 3.10. Compensation . Directors, as such, may receive reasonable compensation for their services, which shall be set by the Board of Directors, and expenses of attendance at each regular or special meeting of the Board of Directors; provided, however, that nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity and receiving additional compensation therefor. Members of special or standing committees may be allowed like compensation for their services on committees.
SECTION 3.11. Rights of Inspection . Every director shall have the absolute right at any reasonable time to inspect and copy all books, records and documents of every kind and to inspect the physical properties of the Corporation and also of its subsidiary corporations, domestic or foreign. Such inspection by a director may be made in person or by agent or attorney and includes the right to copy and obtain extracts.
ARTICLE 4
COMMITTEES OF DIRECTORS
SECTION 4.1. Generally . The Board of Directors may, by resolution passed by a majority of the whole Board of Directors, designate one or more additional special or standing committees, each such additional committee to consist of one or more of the directors of the Corporation. Each such committee shall have and may exercise such of the powers of the Board of Directors in the management of the business and affairs of the Corporation as may be provided in such resolution, except as delegated by these Bylaws or by the Board of Directors to another standing or special committee or as may be prohibited by law.
SECTION 4.2. Committee Operations . A majority of a committee shall constitute a quorum for the transaction of any committee business. Such committee or committees shall have such name or names and such limitations of authority as provided in these Bylaws or as may be determined from time to time by resolution adopted by the Board of Directors. The Corporation shall pay all expenses of committee operations. The Board of Directors may designate one or more appropriate directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of such committee. In the absence or disqualification of any members of such committee or committees, the member or members thereof present at any meeting and not disqualified from voting, whether or not he, she or they constitute a quorum, may unanimously appoint another appropriate member of the Board of Directors to act at the meeting in the place of any absent or disqualified member.
SECTION 4.3. Minutes . Each committee of directors shall keep regular minutes of its proceedings and report the same to the Board of Directors when required. The Corporation’s Secretary, any Assistant Secretary or any other designated person shall (a) serve as the Secretary of the special or standing committees of the Board of Directors of the Corporation, (b) keep regular minutes of standing or special committee proceedings, (c) make available to the Board of Directors, as required, copies of all resolutions adopted or minutes or reports of other actions recommended or taken by any such standing or special committee and (d) otherwise as requested keep the members of the Board of Directors apprised of the actions taken by such standing or special committees.
ARTICLE 5
NOTICE
SECTION 5.1. Methods of Giving Notice .
SECTION 5.1.1. Notice to Directors or Committee Members . Whenever under the provisions of the DGCL, the Certificate of Incorporation or these Bylaws, notice is required to be given to any director or member of any committee of the Board of Directors, personal notice is not required but such notice may be: (a) given in writing and mailed to such director or committee member, (b) sent by electronic transmission (including via e-mail) to such director or committee member, or (c) given orally or by telephone; provided, however, that any notice from a stockholder to any director or member of any committee of the Board of Directors must be given in writing and mailed to such director or member and shall be deemed to be given upon receipt by such director or member. If mailed, notice to a director or member of a committee of the Board of Directors shall be deemed to be given when deposited in the United States mail first class, or by overnight courier, in a sealed envelope, with postage thereon prepaid, addressed, to such person at his or her business address. If sent by electronic transmission, notice to a director or member of a committee of the Board of Directors shall be deemed to be given if by (i) facsimile transmission, when receipt of the fax is confirmed electronically, (ii) electronic mail, when delivered to an electronic mail address of the director or member, (iii) a posting on an electronic network together with a separate notice to the director or member of the specific posting, upon the later of (1) such posting and (2) the giving of the separate notice (which notice may be given in any of the manners provided above), or (iv) any other form of electronic transmission, when delivered to the director or member.
SECTION 5.1.2. Notices to Stockholders . Whenever under the provisions of the DGCL, the Certificate of Incorporation or these Bylaws, notice is required to be given to any stockholder, personal notice is not required but such notice may be given: (a) in writing and mailed to such stockholder, (b) by a form of electronic transmission consented to by the stockholder to whom the notice is given or (c) as otherwise permitted by the SEC. If mailed, notice to a stockholder shall be deemed to be given when deposited in the United States mail in a sealed envelope, with postage thereon prepaid, addressed to the stockholder at the stockholder’s address as it appears on the records of the Corporation. If sent by electronic transmission, notice to a stockholder shall be deemed to be given if by (i) facsimile transmission, when directed to a number at which the stockholder has consented to receive notice, (ii) electronic mail, when directed to an electronic mail address at which the stockholder has consented to receive notice, (iii) a posting on a website or an electronic network together with a separate notice to the stockholder of the specific posting, upon the later of (1) such posting and (2) the giving of the separate notice (which notice may be given in any of the manners provided above), or (iv) any other form of electronic transmission, when directed to the stockholder.
SECTION 5.2. Written Waiver . Whenever any notice is required to be given by the DGCL, the Certificate of Incorporation or these Bylaws, a waiver thereof in a signed writing or sent by the transmission of an electronic record attributed to the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto.
SECTION 5.3. Consent . Whenever all parties entitled to vote at any meeting, whether of directors or stockholders, consent, either by a writing on the records of the meeting or filed with the Secretary, or by presence at such meeting and oral consent entered on the minutes, or by taking part in the deliberations at such meeting without objection, the actions taken at such meeting shall be as valid as if had at a meeting regularly called and noticed. At such meeting any business may be transacted which is not excepted from the written consent or to the consideration of which no objection for lack of notice is made at the time, and if any meeting be irregular for lack of notice or such consent, provided a quorum was present at such meeting, the proceedings of such meeting may be ratified and approved and rendered valid and the irregularity or defect therein waived by a writing signed by all parties having the right to vote thereat. Such consent or approval, if given by stockholders, may be by proxy or power of attorney, but all such proxies and powers of attorney must be in writing.
ARTICLE 6
OFFICERS
SECTION 6.1. Officers . The officers of the Corporation shall include the Chairman of the Board, the President, the Treasurer and the Secretary. The officers of the Corporation may include a Chief Financial Officer or Chief Accounting Officer and such other officers and agents with such titles as the Board of Directors may prescribe, including, without limitation, one or more Vice Presidents of any class or designation, Assistant Vice Presidents, Assistant Secretaries and Assistant Treasurers. All officers of the Corporation shall hold their offices for such terms and shall exercise such powers and perform such duties as prescribed by these Bylaws, the Board of Directors or President, as applicable. Any two or more offices may be held by the same person. The Chairman of the Board shall be elected from among the directors. No officer need be a director or a stockholder of the Corporation. The Board of Directors may delegate to any officer of the Corporation the power to appoint other officers and to prescribe their respective duties and powers.
SECTION 6.2. Election and Term of Office . The President, Chairman of the Board, Treasurer and Secretary shall be elected only by, and shall serve only at the pleasure of, the Board of Directors. All other officers of the Corporation may be appointed as the Board of Directors or the Chairman of the Board or President deem necessary and elect or appoint. The officers of the Corporation shall be elected or ratified annually by the Board of Directors at its first regular meeting held after the annual meeting of stockholders or as soon thereafter as conveniently possible (or, in the case of those officers elected or appointed other than by the Board of Directors, ratified at the Board of Directors’ first regular meeting held following their election or appointment or as soon thereafter as conveniently possible). Each officer shall hold office until his or her successor shall have been chosen and shall have qualified or until his or her death or the effective date of his or her resignation or removal, or until he or she shall cease to be a director in the case of the Chairman of the Board.
SECTION 6.3. Removal and Resignation . Any officer or agent may be removed, either with or without cause, by the affirmative vote of a majority of the Board of Directors and, other than the Chairman of the Board, the Chief Financial Officer and the President, may also be removed, either with or without cause, by action of the Chairman of the Board or President whenever, in his, her or their judgment, as applicable, the best interests of the Corporation shall be served thereby, but such right of removal and any purported removal shall be without prejudice to the contractual rights, if any, of the person so removed. Any executive officer or other officer or agent may resign at any time by giving written notice to the Corporation. Any such resignation shall take effect at the date of the receipt of such notice or at any later time specified therein, and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective.
SECTION 6.4. Vacancies . Any vacancy occurring in any required office of the Corporation by death, resignation, removal or otherwise, shall be filled by the Board of Directors for the unexpired portion of the term. Any vacancy in any other office may be filled as the Board of Directors, the Chairman of the Board or President deem necessary.
SECTION 6.5. Compensation . The compensation of the President shall be determined by the Board of Directors or a designated committee thereof. Compensation of all other officers of the Corporation shall be determined by the President in consultation with the Board of Directors or a designated committee thereof. No officer who is also a director shall be prevented from receiving such compensation by reason of his or her also being a director.
SECTION 6.6. Chairman of the Board . The Chairman of the Board (who may also be designated as Executive Chairman if serving as an employee of the Corporation), if such an officer be elected, shall preside at all meetings of the Board of Directors and of the stockholders of the Corporation. In the Chairman of the Board’s absence, such duties shall be attended to by any vice chairman of the Board of Directors, or if there is no vice chairman, or such vice chairman is absent, then by the President. The Chairman of the Board shall act as liaison between the Board of Directors and the executive officers of the Corporation and shall be responsible for general oversight of such executive officers. The Chairman of the Board may also, but shall not be required to, hold the position of Chief Executive Officer of the Corporation, if so elected or appointed by the Board of Directors. The Chairman of the Board shall formulate and submit to the Board of Directors matters of general policy for the Corporation and shall perform such other duties as usually appertain to the office or as may be prescribed by the Board of Directors. He or she may sign with the President or any other officer of the Corporation thereunto authorized by the Board of Directors certificates for shares of the Corporation, the issuance of which shall have been authorized by resolution of the Board of Directors, and any deeds or bonds, which the Board of Directors has authorized to be executed, except in cases where the signing and execution thereof has been expressly delegated or reserved by these Bylaws or by the Board of Directors to some other officer or agent of the Corporation, or shall be required by law to be otherwise executed.
SECTION 6.7. President . The President shall, subject to the oversight by and control of the Board of Directors and the Chairman of the Board, have general and active management of the business of the Corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect. The President may also, but shall not be required to, hold the position of Chief Executive Officer of the Corporation, if so elected or appointed by the Board of Directors. The President shall keep the Board of Directors and the Chairman of the Board fully informed and shall consult them concerning the business of the Corporation. Subject to the supervisory powers of the Board and the Chairman of the Board, the President may sign with the Chairman of the Board or any other officer of the Corporation thereunto authorized by the Board of Directors, certificates for shares of capital stock of the Corporation, the issuance of which shall have been authorized by resolution of the Board of Directors, and any deeds, bonds, mortgages, contracts, checks, notes, drafts or other instruments which the Board of Directors has authorized to be executed, except in cases where the signing and execution thereof has been expressly delegated by these Bylaws or by the Board of Directors to some other officer or agent of the Corporation, or shall be required by law to be otherwise executed. In general, he or she shall perform all other duties normally incident to the office of the President, except any duties expressly delegated to other persons by these Bylaws, the Board of Directors and such other duties as may be prescribed by the stockholders, Chairman of the Board or the Board of Directors from time to time.
SECTION 6.8. Chief Executive Officer. The Chief Executive Officer, if any, shall, in general, perform such duties as usually pertain to the position of chief executive officer and such duties as may be prescribed by the Board of Directors.
SECTION 6.9. Treasurer . The Treasurer shall (a) have charge and custody of and be responsible for all funds and securities of the Corporation; receive and give receipts for monies due and payable to the Corporation from any source whatsoever and deposit all such moneys in the name of the Corporation in such banks, trust companies or other depositories as shall be selected in accordance with the provisions of Section 7.3 of these Bylaws; (b) prepare, or cause to be prepared, for submission at each regular meeting of the Board of Directors, at each annual meeting of stockholders, and at such other times as may be required by the Board of Directors, the Chairman of the Board or the President, a statement of financial condition of the Corporation in such detail as may be required; and (c) in general, perform all the duties incident to the office of Treasurer and such other duties as from time to time may be assigned to him or her by the Chairman of the Board, the President or the Board of Directors. If required by the Board of Directors, the Treasurer shall give a bond for the faithful discharge of his or her duties in such sum and with such surety or sureties as the Board of Directors shall determine.
SECTION 6.10. Secretary . The Secretary shall (a) keep the minutes of the meetings of the stockholders, the Board of Directors and committees of directors; (b) see that all notices are duly given in accordance with the provisions of these Bylaws and as required by law; (c) be custodian of the corporate records and of the seal of the Corporation, and see that the seal of the Corporation or a facsimile thereof is affixed to all certificates for shares prior to the issuance thereof and to all documents, the execution of which on behalf of the Corporation under its seal is duly authorized in accordance with the provisions of these Bylaws; (d) keep or cause to be kept a register of the post office address of each stockholder which shall be furnished by such stockholder; (e) have general charge of other stock transfer books of the Corporation; and (f) in general, perform all duties normally incident to the office of the Secretary and such other duties as from time to time may be assigned to him or her by the Chairman of the Board, the President or the Board of Directors.
ARTICLE 7
CORPORATE INSTRUMENTS AND
VOTING OF SECURITIES OWNED BY THE CORPORATION
SECTION 7.1. Contracts, etc . Subject to the provisions of Section 6.1 of these Bylaws, the Board of Directors may authorize any officer, officers, agent or agents to enter into and/or execute any and all agreements, deeds, bonds, mortgages, contracts and other obligations or instruments in the name of and on behalf of the Corporation, and such authority may be general or confined to specific instances.
SECTION 7.2. Checks, etc . All checks, demands, drafts or other orders for the payment of money, and notes or other evidences of indebtedness issued in the name of the Corporation shall be signed by such officer or officers or such agent or agents of the Corporation, and in such manner, as shall be determined by the Board of Directors.
SECTION 7.3. Bank Accounts and Drafts . In addition to such bank accounts as may be authorized by the Board of Directors, the primary financial officer or any person designated by said primary financial officer, whether or not an employee of the Corporation, may authorize such bank accounts to be opened or maintained in the name and on behalf of the Corporation as he or she may deem necessary or appropriate, payments from such bank accounts to be made upon and according to the check of the Corporation in accordance with the written instructions of said primary financial officer, or other person so designated by such primary financial officer.
SECTION 7.4. Voting of Securities Owned by Corporation . All stock and other securities of any other corporation owned or held by the Corporation for itself, or for other parties in any capacity, and all proxies with respect thereto shall be executed by the person authorized to do so by resolution of the Board of Directors or, in the absence of such authorization, by the Chairman of the Board, the Chief Executive Officer, the President or any Vice President.
ARTICLE 8
SHARES OF STOCK
SECTION 8.1. Issuance . Each stockholder of the Corporation shall be entitled to a certificate or certificates showing the number of shares of stock registered in his or her name on the books of the Corporation. The certificates shall be in such form as may be determined by the Board of Directors, shall be issued in numerical order and shall be entered in the books of the Corporation as they are issued. They shall exhibit the holder’s name and the number of shares and shall be signed by the Chairman of the Board and the President or such other officers as may from time to time be authorized by resolution of the Board of Directors. Any or all the signatures on the certificate may be a facsimile. In case any officer who has signed or whose facsimile signature has been placed upon any such certificate shall have ceased to be such officer before such certificate is issued, such certificate may nevertheless be issued by the Corporation with the same effect as if such officer had not ceased to be such officer at the date of its issue. If the Corporation shall be authorized to issue more than one class of stock or more than one series of any class, the designation, preferences and relative participating, option or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and rights shall be set forth in full or summarized on the face or back of the certificate which the Corporation shall issue to represent such class of stock; provided that except as otherwise provided by the DGCL, in lieu of the foregoing requirements there may be set forth on the face or back of the certificate which the Corporation shall issue to represent such class or series of stock, a statement that the Corporation will furnish to each stockholder who so requests the designations, preferences and relative participating, option or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and rights. All certificates surrendered to the Corporation for transfer shall be canceled and no new certificate shall be issued until the former certificate for a like number of shares shall have been surrendered and canceled, except that in the case of a lost, stolen, destroyed or mutilated certificate a new certificate (or uncertificated shares in lieu of a new certificate) may be issued therefor upon such terms and with such indemnity, if any, to the Corporation as the Board of Directors may prescribe. In addition to the above, all certificates (or uncertificated shares in lieu of a new certificate) evidencing shares of the Corporation’s stock or other securities issued by the Corporation shall contain such legend or legends as may from time to time be required by the DGCL.
SECTION 8.2. Lost Certificates . The Board of Directors may direct that a new certificate or certificates (or uncertificated shares in lieu of a new certificate) be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates (or uncertificated shares in lieu of a new certificate), the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his or her legal representative, to advertise the same in such manner as it shall require or to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate or certificates alleged to have been lost, stolen or destroyed, or both.
SECTION 8.3. Transfers . In the case of shares of stock represented by a certificate, upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Transfers of shares shall be made only on the books of the Corporation by the registered holder thereof, or by his or her attorney thereunto authorized by power of attorney and filed with the Secretary and the Corporation’s transfer agent, if any.
SECTION 8.4. Registered Stockholders . The Corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of the State of Delaware.
SECTION 8.5. Uncertificated Shares . The Board of Directors may approve the issuance of uncertificated shares of some or all of the shares of any or all of its classes or series of capital stock.
ARTICLE 9
DIVIDENDS
SECTION 9.1. Declaration . Dividends upon the capital stock of the Corporation, subject to the provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property or in shares of capital stock, subject to the provisions of the Certificate of Incorporation.
SECTION 9.2. Reserve . Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Board of Directors from time to time, in its absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for such other purpose as the Board of Directors shall think conducive to the interests of the Corporation, and the Board of Directors may modify or abolish any such reserve in the manner in which it was created.
ARTICLE 10
INDEMNIFICATION
The Corporation shall provide indemnification to the fullest extent provided for by law, as specified in the Certificate of Incorporation.
ARTICLE 11
MISCELLANEOUS
SECTION 11.1. Books . The books of the Corporation may be kept within or without the State of Delaware (subject to any provisions contained in the DGCL) at such place or places as may be designated from time to time by the Board of Directors.
SECTION 11.2. Fiscal Year . The fiscal year of the Corporation shall be such fiscal year as may be designated by the Board of Directors.
SECTION 11.3. Ratification . Any transaction, questioned in any lawsuit on the ground of lack of authority, defective or irregular execution, adverse interest of director, officer or stockholder, non-disclosure, miscomputation or the application of improper principles or practices of accounting, may be ratified before or after judgment, by the Board of Directors or by the stockholders, and if so ratified shall have the same force and effect as if the questioned transaction had been originally duly authorized. Such ratification shall be binding upon the Corporation and its stockholders and shall constitute a bar to any claim or execution of any judgment in respect of such questioned transaction.
SECTION 11.4. Exclusive Forum . Unless the Corporation consents in writing to the selection of an alternative forum, the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Corporation, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director or officer or other employee of the Corporation to the Corporation or the Corporation's stockholders, (iii) any action asserting a claim against the Corporation or any director or officer or other employee of the Corporation arising pursuant to any provision of the DGCL or the Corporation's Certificate of Incorporation or ByLaws (as either may be amended from time to time), or (iv) any action asserting a claim against the Corporation or any director or officer or other employee of the Corporation governed by the internal affairs doctrine, shall be a state or federal court located within the State of Delaware. Any person or entity holding, purchasing or otherwise acquiring any interest in shares of capital stock of the Corporation shall be deemed to have notice of and consented to the provisions of this ByLaw.
ARTICLE 12
AMENDMENTS
The stockholders of the Corporation may alter, amend, repeal or the remove any Bylaw only by the affirmative vote of sixty-six and two-thirds percent (66 2/3%) of the stockholders entitled to vote at a meeting of the stockholders, duly called ; provided, however, that no such change to any Bylaw shall alter, modify, waive, abrogate or diminish the Corporation’s obligation to provide the indemnity called for by Article 10 of these Bylaws, the Certificate of Incorporation or applicable law. Subject to the laws of the State of Delaware, the Board of Directors may, by majority vote of those present at any meeting at which a quorum is present, alter, amend or repeal these Bylaws, or enact such other Bylaws as in their judgment may be advisable for the regulation of the conduct of the affairs of the Corporation.
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement No. 333-204830 on Form S-3 and Registration Statements No. 333-196824 and 333-212421 on Form S-8 of Dipexium Pharmaceuticals, Inc. of our report, dated January 19, 2017, on our audits of the consolidated financial statements of Dipexium Pharmaceuticals, Inc. as of December 31, 2016 and 2015 and for each of the years in the two-year period ended December 31, 2016, which report is included in the Annual Report on Form 10-K of Dipexium Pharmaceuticals, Inc. for the year ended December 31, 2016.
/s/ CohnReznick LLP
Roseland, New Jersey
January 19, 2017
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C SECTION 1350
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXELY ACT OF 2002
I, David P. Luci, certify that:
1. I have reviewed this report on Form 10-K of Dipexium Pharmaceuticals, Inc. for the fiscal year ended December 31, 2016.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
|
/s/ David P. Luci |
|
| David P. Luci | |
| President and Chief Executive Officer | |
| (Principal Executive Officer) | |
| Date: January 20, 2017 |
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER
PURSUANT TO 18 U.S.C SECTION 1350 AS ADOPTED
PURSUANT TO SECTION 302 OF THE SARBANES-OXELY ACT OF 2002
I, Robert G. Shawah, certify that:
1. I have reviewed this report on Form 10-K of Dipexium Pharmaceuticals, Inc. for the fiscal year ended December 31, 2016.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
|
/s/ Robert G. Shawah |
|
| Robert G, Shawah | |
| Chief Accounting Officer and Treasurer | |
| (Principal Financial and Accounting Officer) | |
| Date: January 20, 2017 |
Exhibit 32.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER, PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Dipexium Pharmaceuticals, Inc. a Delaware corporation (the “Company”), on Form 10-K for the year ended December 31, 2016 as filed with the Securities and Exchange Commission (the “Report”), I, David P. Luci, President and Chief Executive Officer of the Company, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350), that to my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
|
/s/ David P. Luci |
|
| David P. Luci | |
| President and Chief Executive Officer | |
| (Principal Executive Officer) | |
| Date: January 20, 2017 |
Exhibit 32.2
CERTIFICATION OF PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER, PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Dipexium Pharmaceuticals, Inc. a Delaware corporation (the “Company”), on Form 10-K for the year ended December 31, 2016 as filed with the Securities and Exchange Commission (the “Report”), I, Robert G. Shawah, Chief Accounting Officer and Treasurer of the Company, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350), that to my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
|
/s/ Robert G. Shawah |
|
| Robert G. Shawah | |
| Chief Accounting Officer and Treasurer | |
| (Principal Financial and Accounting Officer) | |
| Date: January 20, 2017 |