UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE 

 

ACT OF 1934 

 

FOR THE FISCAL YEAR ENDED JUNE 30, 2013

 

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM _____ TO __________

 

Commission File Number: 000-52321

 

Cellceutix Corporation

(Exact name of registrant as specified in its charter)

 

Nevada   30-0565645
(State or other jurisdiction   (IRS Employer
of incorporation)   Identification No.)

 

100 Cummings Center, Suite 151-B 

Beverly, MA 01915

(Address of principal executive offices and zip code)

 

(978)-633-3623

(Registrant’s telephone number, including area code)

 

SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: NONE SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT: COMMON STOCK, CLASS A, PAR VALUE $0.0001 PER SHARE

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.

Yes No

 

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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 past 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 No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 

Yes No .

 

Indicate by check mark if disclosure of delinquent filers in response 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.

 

Yes No .

 

Indicate by check mark whether the registrant is a large accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of "accelerated filer and large accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company .

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes No .

 

Issuer's revenues for its most recent fiscal year were $0.00

 

The aggregate market value of voting stock held by non-affiliates of the Registrant at December 31, 2012 was $101,015,081computed by reference to the last traded sale price as reported on the Over the Counter market on such date.

 

There were 101,518,984 and -0- shares, respectively, of the registrant’s $ 0.0001 par value Class A and Class B common stock outstanding as of September 17, 2013.

 

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CELLCEUTIX CORPORATION 

FORM 10-K

For the Fiscal Year Ended June 30, 2013

TABLE OF CONTENTS

 

        PAGE NO
PART I        
         
ITEM 1   DESCRIPTION OF BUSINESS   5
ITEM 1A   RISK FACTORS   20
ITEM 1B   UNRESOLVED STAFF COMMENTS   31
ITEM 2   DESCRIPTION OF PROPERTY   31
ITEM 3   LEGAL PROCEEDINGS   32
ITEM 4   MINE SAFETY DISCLOSURES   32
         
PART II        
         
ITEM 5   MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS   32
ITEM 6   SELECTED FINANCIAL DATA   33
ITEM 7   MANAGEMENT'S DISCUSSION AND FINANCIAL CONDITION AND RESULTS OF OPERATIONS   33
ITEM 7A   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK   36
ITEM 8   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA   37
ITEM 9   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE   54
ITEM 9A   CONTROLS AND PROCEDURES   54
ITEM 9B   OTHER INFORMATION   57
         
PART III        
         
ITEM 10   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT   57
ITEM 11   EXECUTIVE COMPENSATION   58
ITEM 12   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS   59
ITEM 13   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE   60
ITEM 14   PRINCIPAL ACCOUNTANTS FEES AND SERVICES   61
         
PART IV        
         
ITEM 15   EXHIBITS   62
SIGNATURES       65
     

 

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FORWARD-LOOKING STATEMENTS

 

This report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, and Section 27A of the Securities Act of 1933. Any statements contained in this report that are not statements of historical fact may be forward-looking statements. When we use the words “ intends,” “estimates,” “predicts,” “potential,” “continues,” “anticipates,” “plans,” “expects,” “believes,” “should,” “could,” “may,” “will”     or the negative of these terms or other comparable terminology,  we are identifying forward-looking statements. Forward-looking statements involve risks and uncertainties, which may cause our actual results, performance or achievements to be materially different from those expressed or implied by forward-looking statements.  These factors include our; research and development activities, distributor channel; compliance with regulatory impositions; and our capital needs. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.

 

Except as may be required by applicable law, we do not undertake or intend to update or revise our forward-looking statements, and we assume no obligation to update any forward-looking statements contained in this report as a result of new information or future events or developments. Thus, you should not assume that our silence over time means that actual events are bearing out as expressed or implied in such forward-looking statements. You should carefully review and consider the various disclosures we make in this report and our other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks, uncertainties and other factors that may affect our business.

 

For further information about these and other risks, uncertainties and factors, please review the disclosure included in this report under “Part I, Item 1A, Description of Business - Risk Factors.”

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ITEM 1. DESCRIPTION OF BUSINESS

 

OVERVIEW ABOUT OUR BUSINESS

 

Cellceutix Corporation (the “Company” or Cellceutix or the “Registrant”) is a clinical stage biotechnology company focused on discovering small molecule drugs for hard to treat diseases, including drug-resistant cancers, psoriasis, autism and inflammatory disease.

 

Our flagship compound, Kevetrin, is a drug that has shown promising laboratory data as a new cancer treatment. A Phase 1 clinical trial is in progress at Harvard Cancer Center's Dana-Farber Cancer Institute and partner Beth Israel Deaconess Medical Center, to test Kevetrin against advanced solid tumors.

 

We have acquired exclusive rights to a total of eight (8) pharmaceutical compound candidates that are designed for treatment of diseases which may be either existing or diseases identified in the future. The Company has spent most of its efforts and resources on its anti-cancer compound, Kevetrin, for the treatment of certain cancers, and on Prurisol, for the treatment of psoriasis. Based on the studies to date, the Company has decided to advance these drugs along the regulatory and clinical pathway. We anticipate using our expertise to manage and perform what we believe are the most critical aspects of the product development process which include: (i) the design and oversight of clinical trials; (ii) the development and execution of strategies for the protection and maintenance of intellectual property rights; and (iii) the interaction with regulatory authorities internationally. We expect to concentrate on product development and engage in a limited way in product discovery, avoiding the significant investment of time and financial resources that is generally required before a compound is identified and brought into clinical trials. 

 

On September 4, 2013, we purchased substantially all of the assets of Polymedix Inc, and Polymedix Pharmaceuticals, Inc. from the Chapter 7 trustee for the bankrupt estate of these entities. The aggregate purchase price for the sale and transfer of these Purchased Assets was $2.1 million in cash, plus 1.4 million shares of our Class A common stock. For further information see the Polymedix Asset Acquisition section below in this Part I, Item 1 section and Note 13 of the Notes to our Financial Statements included in this Annual Report on Form 10-K for information regarding the Polymedix Assets Acquisition.

 

OUR BUSINESS STRATEGY

 

We are in the business of developing and or acquiring innovative small molecule therapies to treat diseases with significant medical need.  Our strategy is to use our business and scientific expertise to maximize the value of our diverse pipeline. We expect to develop the highest quality data and broadest intellectual property to support our compounds.  

 

We currently own all development and marketing rights to our products.  In order to successfully develop and market our products, we may have to partner with other companies.  Prospective partners may require that we grant them significant development and/or commercialization rights in return for agreeing to share the risk of development and/or commercialization. 

 

HISTORY AND CORPORATE STRUCTURE

 

Cellceutix Corporation, formerly known as EconoShare, Inc., was incorporated on August 1, 2005 in the State of Nevada and was organized for the purpose of developing a B2B (Business to Business) website for an Asset Sharing market place and transaction system.

 

On December 6, 2007, the Company acquired CellceutixPharma, Inc., a privately owned Delaware corporation pursuant to an Agreement and Plan of Share Exchange (the “Exchange”). CellceutixPharma, Inc. was incorporated under the laws of the State of Delaware on June 20, 2007. Its assets consisted of rights assigned to it for six early stage pharmaceutical compounds by three different scientists.

 

Pursuant to the terms of the Exchange, the Company acquired CellceutixPharma, Inc. in exchange for an aggregate of 82,000,000 newly issued shares of the Company’s common stock, par value $0.0001 per share (the “Common Stock”). As a result of the Exchange, CellceutixPharma, Inc. became a wholly-owned subsidiary of the Company. The Company’s shares were issued to the CellceutixPharma, Inc. shareholders on a pro rata basis, on the basis of 82 shares of Common Stock for each share of CellceutixPharma, Inc. common stock held by such CellceutixPharma, Inc. shareholder at the time of the Exchange. This resulted in the former holders of CellceutixPharma, Inc. Common Stock, upon Exchange, owning approximately 89% of the outstanding shares of the Company’s Common Stock. Accordingly, the Exchange represented a change in control. For financial accounting purposes, the acquisition was a reverse acquisition of the Company by CellceutixPharma, Inc., under the purchase method of accounting, and was treated as a recapitalization with CellceutixPharma, Inc. as the legal acquirer. Upon consummation of the Exchange, the Company adopted the business plan of CellceutixPharma, Inc. We are an early stage developmental biopharmaceutical company. The Company has no customers, products or revenues to date, and may never achieve revenues or profitable operations.

 

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On January 14, 2008, a majority of the shareholders of the Company approved an amendment to the Registrant’s articles of incorporation to change the name of the Registrant to Cellceutix Corporation. Upon the filing of a Definitive Information Statement and effectiveness of the name change on February 1, 2008, the Company applied to the National Association of Security Dealers (NASD) to change its stock symbol on the Over the Counter Bulletin Board which resulted in the Company’s stock symbol being changed to CTIX.

 

On September 13, 2012, the company filed a Certificate of Correction with the State of Nevada to correct the par value of the preferred shares from the amended articles of incorporation filed June 24, 2011 from $.0001 per share to $.001 per share. 

 

POLYMEDIX ASSET ACQUISITION

 

On September 4, 2013, the Company purchased substantially all of the assets (“Purchased Assets”) of Polymedix Inc, and Polymedix Pharmaceuticals, Inc. (“Seller”) from the U.S. Bankruptcy Court.  The Bankruptcy Cases were pending before the Bankruptcy Court for the District of Delaware and were being jointly administered under Case No. 13-10690 (BLS).

The aggregate purchase price for the sale and transfer of the Purchased Assets was $2.1 million in cash, plus 1.4 million shares of the Company’s Class A common stock (the “Registrable Securities”), total aggregate purchase price of approximately $4.8 million. These common shares were valued at $1.93 per share, based on the September 4, 2013 opening stock price as quoted on the OTB Bulletin Board, resulting in approximately $2.7 million of stock issued to acquire the Purchased Assets. The Company shall, not later than sixty days from the date of acquisition prepare and deliver to the Seller for their consent a schedule allocating the Purchase Price among the Purchased Assets acquired by the Company.

 

The Company is required to file a Registration with the Securities and Exchange Commission to register the common stock within 60 days.   At any time between one day after the Closing and three hundred and sixty-five (365) days after the Closing, the Seller or any holder of the Registrable Securities may make written demand upon the Purchaser for the Purchaser to repurchase the Registrable Securities for $1 per share. 

 

The Asset Purchase Agreement was included in a Form 8-K filed with the US Securities and Exchange Commission on September 4, 2013. Included in the purchase are rights to intellectual property (IP), compounds, clinical studies and equipment; the most significant value being the clinical studies and IP.

 

The following is a summary of the acquired assets as described in the last quarterly filing by Polymedix with the US Securities and Exchange Commission on November 9, 2012.

 

Brilacidin™

 

The intravenous formulation of Polymedix’s lead product candidate, brilacidin, is an antibiotic which has the potential to treat a variety of indications, including ACUTE BACTERIAL SKIN AND SKIN STRUCTURE INFECTIONS (“ABSSSI”) caused by either drug-sensitive or drug-resistant strains of Staphylococcus aureus bacteria.

 

ABSSSI

 

In April 2012, Polymedix completed and announced positive results from a Phase 2 clinical trial with brilacidin.  This randomized, blinded, active-controlled, multinational Phase 2 clinical trial was conducted at multiple sites in Canada, Russia and Ukraine.  The study objectives were to evaluate the safety and efficacy of brilacidin as treatment for ABSSSI caused by Staphylococcus aureus, including methicillin-resistant Staphylococcus aureus (MRSA).  The study objectives were met, with all evaluated doses of brilacidin demonstrating similar clinical response rates to those of the active control, daptomycin.  The study was conducted in accordance with FDA’s most recent ABSSSI guidelines and is intended to support regulatory approval in the United States.  As expected, and consistent with previous clinical studies, patients receiving brilacidin commonly reported sensations of numbness and tingling that were generally characterized as mild and resolved following treatment. No patient stopped treatment as a result of these sensations. Other treatment-related adverse events included hypertension, injection site pain, nausea, vomiting, vertigo, and pyrexia. There was one treatment-related serious adverse event that was at least possibly drug-related reported in each brilacidin study arm. Treatment-related serious adverse events included an instance of hypertension in the medium and high dose regimens, which discontinued therapy, and an instance of increased platelets in the low dose regimen.

 

Oral Mucositis

 

In animal models of oral mucositis, an oral rinse containing brilacidin was shown to reduce the occurrence of severe ulcerative oral mucositis by more than 90% compared to placebo.  Brilacidin and related compounds have shown antibacterial, anti-biofilm and anti-inflammatory properties in various pre-clinical studies.  Polymedix believed that the combination of these attributes contribute to the efficacy of brilacidin in these animal models.

 

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Delparantag™

 

Delparantag (formerly PMX-60056) is a synthetic, small-molecule intended to reverse the effects of the commonly used anticoagulants unfractionated heparin (UFH), and its derivatives, low molecular weight heparins (LMWH), to help manage the balance of antithrombosis and anticoagulation and reduce the incidence of bleeding in certain interventional cardiology procedures, such as Percutaneous Coronary Intervention (PCI) and Coronary Arterial Bypass Grafting (CABG), and other situations where UFH and LMWH are used and bleeding may occur.

 

In May 2012, Polymedix announced that they had stopped enrollment in two clinical trials for delparantag: a Phase 2 clinical trial for reversing the anticoagulant activity of UFH in patients undergoing PCI procedures, and a Phase 1B/2 clinical trial for reversing the anticoagulant activity of the LMWH enoxaparin in healthy volunteers.  While delparantag showed activity in neutralizing both UFH and the LMWH enoxaparin in these clinical trials, Polymedix decided to stop enrollment in both trials due to observations of reductions in blood pressure in some patients.  

 

Other

 

Other product candidates acquired by Cellceutix, include; compounds active against Gram-negative bacteria, fungal infections, malaria, tuberculosis, biowarfare pathogens, and PolyCide® antimicrobial biomaterials.  

 

Cellceutix is now evaluating all these programs.  It is too soon in our acquisition process to develop a comprehensive plan or budget for the development costs of these newly acquired assets.

 

Intellectual Property Acquired from Polymedix

 

The intellectual property portfolio of the former Polymedix which we acquired consists of the following:

 

Patent Status Description
COMPOSITION AND USE PATENTS
Design, preparation and properties of antibacterial beta-peptides. (1) United States - Issued 01/13/04 This patent claims composition of matter for particular beta-peptides that have antibacterial properties.  It also claims pharmaceutical preparations containing particular antibacterial beta-peptides and methods for creating sanitizing surfaces by treatment with an antibacterial beta-peptide.
Amphiphilic Polymers as Anti-Infective Agents: 1 (1)

United States – filed

Patent Cooperation Treaty – filed

National Phase entered

United States - issued 02/06/2007

European Patent - issued 09/17/2008

Other issued patents include Australia, China, Japan, South Korea

These patents and application family claims composition of matter for facially amphiphilic polymers that are polyamides, polyesters, polyurea, polyurethane, polycarbonate, or polyphenylene, compounds.  Also claimed are material articles made from the amphiphilic polymers that have antimicrobial properties.
Amphiphilic Polymers as Anti-Infective Agents: 2 (Phenylalkynes) (1)

United States – filed

 

Patent Cooperation Treaty – filed

 

National Phase entered

 

European Patent - issued 05/25/2011

 

Other issued patents: Australia, South Korea

 

European Divisional filed

 

Other divisional filings: Japan, China

These patents are similar to “Amphiphilic Polymers as Anti-Infective Agents: 1” above, but further claims facially amphiphilic polymers that are polyphenylene and heteroarylene compounds.
Facially amphiphilic polymers and oligomers and uses thereof: 1 (1)

United States – filed

Patent Cooperation Treaty - filed

National Phase entered

 

Other issued patents: Australia

 

United Stated Divisional – issued 08/07/2012

 

European Divisionals – four filed

 

Other Divisional filings: Australia, China, Japan

This application claims pharmaceutical compositions and uses for facially amphiphilic polymers, oligomers and small molecules that are polyamides, polyesters, polyurea, polyurethane, polycarbonate, or polyphenylene, compounds.  Uses include method of treatment (systemic and topical) as antimicrobial agents against bacteria, fungi and viruses and as an antidote to heparin and LMWH.  Also, composition of matter claims are expanded.

 

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Patent Status Description
Facially amphiphilic polymers and oligomers and uses thereof: 2   (Phenylalkynes) (1)

United States – filed

Patent Cooperation Treaty - filed

National Phase entered

 

United States patent issued 07/17/2012

 

Other issued patents: Australia

 

United States Divisional – filed

 

European Divisional - filed

 

Other Divisional filings: China, South Korea

These patents are similar to “Amphiphilic Polymers as Anti-Infective Agents: 1” above, except that the small molecules to which it claims use are polyphenylene and heteroarylene compounds.

 

Polycationic Compounds and Uses thereof

United States – filed

 

Patent Cooperation Treaty – filed

 

National Phase entered

 

United States patent issued 06/30/2009

 

European Patent issued 08/07/13

 

Australia Patent issued 05/17/12

 

China Patent Issued 08/22/12

 

South Korea Patent issued 08/03/12

 

United States Continuations – five filed: four issued 06/29/10; 03/06/12; 07/31/12; 08/13/13; one pending

 

Other Divisional filings: Japan, China

 

South Korea Divisional issued 06/26/12

This application claims method of use for modulating angiogenesis with polycationic compounds, compositions of anti-heparin compounds and methods of inhibiting heparin activity.
Composition and Use of Polymethacrylate Co-Polymers (1)

United States – filed

Patent Cooperation Treaty - filed

National Phase entered

Australian Patent issued

European Divisionals - three filed

This application claims amphiphilic co-polymers that exhibit antimicrobial activity and uses in a number of pharmaceutical and material applications.

 

 

Ophthalmic and Otic Compositions of Facially Amphiphilic Polymers and Oligomers and Use Thereof

United States – filed

Patent Cooperation Treaty - filed

National Phase entered

 

Other patents issued: China

 

Other divisional filings: China

This application relates to antimicrobial compositions of facially amphiphilic antimicrobial polymers and oligomers useful for the treatment or prevention of ophthalmic and otic infections.  The application also relates to methods of using the compositions for treating and/or preventing ophthalmic and otic infections.
Combination of Synthetic Antimicrobial Polymers and Sesquiterpenoid Compounds

United States – filed

 

This application relates to the combination of facially amphiphilic antimicrobial polymers and oligomers with sesquiterpenoids to enhance antimicrobial activities.
Anti-Malarial  Compounds

United States – filed

Patent Cooperation Treaty - filed

National Phase entered

This application relates in to arylamide and other classes of compounds and their use in treating malaria.

 

Synthetic Mimetics of Host Defense and Uses Thereof

United States – issued 10/02/12

United States Continuation filed

Patent Cooperation Treaty - filed

National Phase entered

This application relates to arylamide compounds, their antimicrobial uses and methods of synthesis.
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Antimicrobial Molecules for Treating Multi-Drug Resistant and Extensively-Drug Resistant Strains of Mycobacterium

United States - filed

Patent Cooperation Treaty - filed

National Phase entered

This application relates to treating multi-drug resistant and extremely drug resistant strains of mycobacterium with antimicrobial compounds and compositions.
Processes for Preparing a Polymeric Compound

United States – issued 01/15/13

United States Continuation filed

Mexican Patent issued 06/06/13

Patent Cooperation Treaty - filed

This application relates to preferred methods for synthesizing and preparing pharmaceutical compositions of representative compounds in the salicylamide class of compounds
Anti-Heparin Compounds

United States – filed

Patent Cooperation Treaty – filed

National Phase entered

This application relates to methods of antagonizing anticoagulant agents, such as unfractionated heparin, low molecular weight heparin, and/or a derivatives and compositions of the antagonists.

Methods of Immune Modulation

 

United States - filed

Patent Cooperation Treaty – filed

National Phase entered

The present invention is directed, in part, to methods of modulating an immune response in an animal with facially amphiphilic compounds.

Facially Amphiphilic Compounds, Compositions, and Uses Thereof

in Treating Cancer

United States - filed

Patent Cooperation Treaty – filed

This entire family was abandoned

The present invention relates to compositions of facially amphiphilic compounds and their use in methods for treating cancers in animals, such as humans.
Compounds For Use in Treatment of Mucositis

United States – filed

Patent Cooperation Treaty – filed

National Phase due 11/13

The application relates to methods of treating and/or preventing mucositis.
Hybrid Compounds and Methods of Making and Using the Same United States provisional filed The application relates to compositions and use of anti-microbial compounds.
Polycyclic Compounds and Methods of Making and Using the Same United States provisional filed The application relates to compositions and use of anti-microbial compounds.
Antagonizing Heparin with Salicylamide Compounds and Histamine Blocking Agents United States provisional filed The application relates to use of anti-heparin salicylamide compounds with histamine blocking agents to treat cardiovascular disorders.
Compounds and Methods for Treating Candidiasis and Aspergillus Infections

United States – filed

Patent Cooperation Treaty – filed

National Phase due 07/14

The application relates to compositions and use of anti-fungal compounds.
Compounds and Methods for Treating Malaria

Patent Cooperation Treaty – filed

National Phase due 08/14

The application relates to compositions and use of anti-malarial compounds.
Compositions of Arylamide Compounds and Antimicrobial Agents United States provisional filed The application relates to compositions and use of arylamide compounds and anti-microbial agents.
COMPUTATIONAL PATENTS
Methods, systems and computer program products for computational analysis and design of amphiphilic polymers (1)

United States - issued 09/15/2009

 

This application is directed to the creation and use of novel force field packages for modeling the structure and behavior of complex molecules in complex environments.  Specific utilities are the prediction of oligomer structures in polar and apolar medias.

 

Computer simulation of biomembranes using a Coarse Grain Model (1)

 

United States - filed

 

This application is directed to the creation and use of a novel coarse grain model for studying complex biological structures, such as membranes.  Specifically a computational approach is described that accurately predicts the structural and dynamic properties of membranes that are far less demanding of CPU time than comparable methods.
Computational design of a water-soluble analog of a protein, such as phospholamban and potassium channel Kcsa (1)

United States - filed

 

This application claims methods and computer programs for the computational design of water-soluble analogs of membrane proteins that retain biological function.

 

 

  (1) Patent rights obtained pursuant to a license agreement with the University of Pennsylvania.

 

In addition, we have trademark protection for the marks PolyMedix, ®  PolyCide ® , and PolyDentix ® .

 

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The agreement with, and patent rights obtained pursuant to a license agreement with the University of Pennsylvania (“Penn”) are included herewith as an Exhibit to this 10-K filing.

A summary of the royalties to be paid for the exclusive license is as follows:

 

(a) 3.0% on Gross Sales for Penn licensed Products that are sold as pharmaceuticals under an approved NDA or other similar regulatory filing;
(b) 1.5% on Gross Sales for Penn licensed Products that are sold as coatings for use in medical devices under an approved PMA, 510(k) application or other similar regulatory filing; and
(c) 0.5% on all other Gross Sales for Penn licensed Products

 

INTELLECTUAL PROPERTY 

 

We rely on a combination of patents and trade secrets, as well as confidentiality and non-use agreements to protect our intellectual property.  Our patent strategy is designed to facilitate commercialization of our current and future product candidates, and create barriers to entry.

 

The Company has been assigned all right title and interest to the following eight pharmaceutical compounds: Kevetrin, KM 277, KM 278, KM 133, KM 362, KM 3174, KM 732, and KM-391 by their inventors. The Company agreed to pay the inventors 5% of net sales of the compounds in countries where composition of matter patents have been issued and 3% of net sales in other countries. Kevetrin, KM 277, KM 278 and KM 362 were acquired by the Company from Dr. Krishna Menon, the Company’s Director, President, and principal shareholder.    With respect to KM 732, the Company has agreed to pay an individual a fixed payment if the compound is approved for sale in the U.S.

 

On May 20, 2009, the Company filed a U.S. patent application covering pharmaceutical formulations of Kevetrin and many novel compounds having similar structures to Kevetrin that may have potential as drug development candidates. The application also covers the use of Kevetrin and the other related compounds in various areas, including cancers. In May, 2010 the Company filed foreign patent applications and a further United States application covering similar subject matter. The foreign applications cover Patent Cooperation Treaty (PCT) countries as well as key non-PCT countries. 

 

In January 2012, Cellceutix filed a U.S. patent application covering the pharmaceutical formulation of Prurisol , also known as  KM-133, a compound to treat psoriasis. 

 

The Company intends to file additional patent applications for other compounds as funds and resources become available. 

 

See above information regarding the Polymedix Asset Acquisition on September 4, 2013 for our other intellectual property that we just acquired.

 

DESCRIPTION OF INTELLECTUAL PROPERTY

 

Kevetrin

 

We are a clinical stage company. On June 21, 2012, the U.S. Food and Drug Administration ("FDA") approved the Investigational New Drug (IND) application for Kevetrin, Cellceutix's novel anti-cancer compound. The Phase 1 trials are being conducted at Harvard Cancer Center's Dana-Farber Cancer Institute and partner Beth Israel Deaconess Medical Center.  The clinical trial will test Kevetrin against a variety of different solid tumor cancer types in patients with advanced-stage cancers. Primary endpoints for the study will be safety, tolerable dosing levels and establishing the dose for a future Phase II clinical trial. Presently, we are at the mid stage of the trial. The Company has received no notice of events outside of the parameters of the protocol and the trial is progressing. The trial is registered on www.clinicaltrials.gov. http://clinicaltrials.gov/ct2/show/NCT01664000?term=Kevetrin&rank=1

 

Kevetrin has demonstrated the potential for a major breakthrough in cancer research by exhibiting an activation of p53 in both wild and mutant types of p53. p53, often referred to as the “Guardian Angel Gene” or the “Guardian Angel of the Human Genome” due its crucial role in controlling cell mutations, is a tumor suppressor protein that is encoded by the TP53 gene in humans and has been widely regarded as possibly holding a key to the future of cancer therapies. Additional studies have shown that Kevetrin has potent anticancer activity in a wide range of tumor types by targeting histonedeacetylase (HDAC).

 

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In March 2012, we entered into an agreement with Beth Israel Deaconess Medical Center (BIDMC), a teaching hospital of Harvard Medical School, on an innovative research project with Kevetrin. The Medical Center wishes to exploit the nuclear and/or mitochondrial pro-apoptotic function of p53 in melanoma and renal cell carcinoma, two types of cancer that are particularly resistant to therapy. BIDMC initiated combination studies with multikinase inhibitors which activate pro-apoptotic activity by translocation of p53 in mitochondria thereby inducing apoptosis. Apoptosis is enhanced by MDM2 inhibitors by stabilizing p53. As presented at the American Association for Cancer Research (AACR) meeting in April, Kevetrin phosphorylates MDM2 which activates and stabilizes p53 by monoubiquitination inducing apoptosis. Prior data from the BIDMC laboratory showed that agents of this class can augment the pro-apoptotic and antitumor effects of MDM2 antagonists and is expected to have a synergistic effect with Kevetrin. BIDMC tested the effects of Kevetrin alone and in combination with FDA-approved VEGFR antagonists in the renal cell carcinoma and melanoma studies. In vitro study endpoints include apoptosis by measuring caspase activation and PARP cleavage. In vivo endpoints include efficacy in a xenograft model, tumor vascularity, p53 levels, p21 expression and apoptosis. This study provided vital insight to exploit the nuclear and/or mitochondrial pro-apoptotic function by Kevetrin in combination with other multikinase inhibitors in treatment of these difficult to treat malignancies. The results received from BIDMC in April 2013, showed apoptosis induction (TUNEL) in renal cancer (786). Results of these preclinical tests provided to date to the Company are encouraging and BIDMC and Cellceutix wish to move the study further. Cellceutix has provided the requested information from BIDMC that will be used to investigate a Specialized Programs of Research Excellence (SPORE) grant for a phase 2 clinical study of renal cancer upon completion of the successful phase 1 clinical study presently in progress.

 

The University of Bologna in Italy (the “University”) and The Italian Cooperative Study Group on Chronic Myeloid Leukemia (ICSG on CML) and Acute Leukemia (GIMEMA Group) plan on testing Kevetrin against Acute Myelogenous Leukemia (AML). We have been advised that the study, a phase 1b trial, will be titled “A Multi-Center, Open-Label, Phase 1B Study of Escalating Doses of Kevetrin (Thioureidobutyronitrile) Administered Intravenously, with Cytarabine Administered A) Subcutaneously, or B) Intravenously, in Patients with Acute Myelogenous Leukemia (AML).” The trial’s principal investigator wants this phase 1b trial to begin once a higher patient dosing is achieved at the Dana Farber trial. The University will source the funding for this trial.

 

Prurisol

 

Prurisol is our anti-psoriasis drug candidate. It is a small molecule with a molecular weight of less than 500 MW. It is synthesized through a multi-step process using commercially available starting materials. Prurisol acts through immune modulation and PRINS reduction.

 

In June 2012, we participated in a pre IND meeting with the U.S. Food and Drug Administration ("FDA") pertaining to Prurisol our compound targeting psoriasis. Cellceutix had requested the meeting for guidance on its initiatives to seek a section 505(b)(2) designation for Prurisol, which would allow the us to forgo early-stage trials and advance Prurisol into latter-stage clinical trials.  Cellceutix was advised by the FDA that a 505(b)(2) application would be an acceptable approach for Prurisol. Our Prurisol manufacturer, Dr. Reddy’s Laboratories Ltd., has advised us that the manufacturing of Prurisol has been completed and is ready for shipment. We are now preparing the 505(b)(2) application for submission to the FDA to begin a Phase II/III clinical trial.

 

KEY DEVELOPMENTS DURING THE FISCAL YEAR ENDED JUNE 30, 2013 AND SUBSEQUENT EVENTS

 

On September 4, 2013, the Company purchased substantially all of the assets of Polymedix Inc, and Polymedix Pharmaceuticals, Inc. (“Seller”) from the U.S. Bankruptcy Court (see above).  The Bankruptcy Cases were pending before the Bankruptcy Court for the District of Delaware and were being jointly administered under Case No. 13-10690 (BLS).

 

We are in a phase 1 clinical study for our anti-cancer drug Kevetrin. As of September 2013 we have completed four cohorts and are in the fifth cohort of the study which is receiving a dose of 75mg/m 2 , 7.5-times the amount of Kevetrin received by the first patients in the trial. No dose limiting toxicity has been demonstrated to date.

 

In June 2012, we participated in a pre IND meeting with the U.S. Food and Drug Administration ("FDA") pertaining to Prurisol our compound targeting psoriasis. Cellceutix had requested the meeting for guidance on its initiatives to seek a section 505(b)(2) designation for Prurisol, which would allow us to forgo early-stage trials and advance Prurisol into latter-stage clinical trials.  Cellceutix was advised by the FDA that a 505(b)(2) application would be an acceptable approach for Prurisol. Our Prurisol manufacturer, Dr. Reddy’s Laboratories Ltd., has advised us that the manufacturing of Prurisol has been completed. We are now preparing the 505(b)(2) application for submission to the FDA to begin a Phase II/III clinical trial.

 

On December 25, 2012 the United States Patent and Trademark Office (USPTO) awarded the Company U.S. Patent No. 8,338,454 B2, titled "Nitrile Derivatives and their Pharmaceutical Use and Compositions." The patent covers pharmaceutical compositions comprising Kevetrin, and related compounds and compositions.

 

The University of Bologna in Italy (the “University”) and The Italian Cooperative Study Group on Chronic Myeloid Leukemia (ICSG on CML) and Acute Leukemia (GIMEMA Group) plan on testing Kevetrin against Acute Myelogenous Leukemia (AML). We have been advised that the study, a phase 1b trial, will be titled “A Multi-Center, Open-Label, Phase 1B Study of Escalating Doses of Kevetrin (Thioureidobutyronitrile) Administered Intravenously, with Cytarabine Adminstered A) Subcutaneously, or B) Intravenously, in Patients with Acute Myelogenous Leukemia (AML).” The trial’s principal investigator wants this phase 1b trial to begin once a higher patient dosing is achieved at the Dana Farber trial. The University will source the funding for this trial.

 

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In June 2013, we signed a Material Transfer Agreement with the University of Texas, MDAnderson Cancer Center. MDAnderson intends to utilize in vivo and in vitro methods to research specific pathways, gene expression, mechanism of action and apoptotic activity of our cancer drugs in a range of concentrations and time points in both mutant and wild-type p53 Myeloma and Lymphoma cell lines. They also wish to study our cancer compounds against a broad array of Multiple Myeloma cell lines that are resistant to today’s FDA-approved chemotherapies. MDAnderson is covering the expenses of the research, with Cellceutix only supplying the drugs.

 

 

OUR COMPOUNDS PIPELINE AND CURRENT STATUS

 

Glossary of Terms  -definitions of certain technical terms used in this report that are commonly used in the pharmaceutical and biotechnology industries  

  

Adenocarcinoma: A cancer that originates in glandular tissue 

 

AKT:  Also known as AKT1 or protein kinase B (PKB) is an important molecule in mammalian cellular signaling. 

 

Angiogenesis: is a physiological process involving the growth of new blood vessels from pre-existing vessels. 

 

Cytotoxicity: is the quality of being toxic to cells.  

 

Folate:  A B-complex vitamin that is being studied as a cancer prevention agent. 

 

In-vitro: refers to the technique of performing a given experiment in a test tube, or, generally, in a controlled environment outside a living organism. 

 

In-vivo: refers that which takes place inside an organism. In science, in vivo refers to experimentation done in or on the living tissue of a whole, living organism as opposed to a partial or dead one. Animal testing and clinical trials are forms of in-vivo research. 

 

P53, also known as protein 53:  A tumor suppressor gene that is mutated in many human cancers and results in the loss of a cell’s ability to check for DNA damage. 

 

Small Molecule Drug:  A medicinal drug compound having a molecular weight of less than 1,000 Daltons, and typically between 300 and 700 Daltons. 

 

Xenograft: The cells of one species transplanted to another species. 

 

 

OUR COMPOUND PIPELINE

 

The Company’s Pipeline (excluding the Polymedix Assets recently acquired and disclosed above) consists of the following compounds:

 

Compound   Disease   Development Stage 
Kevetrin   Cancer   Phase 1
KM 133   Psoriasis   Preclinical   
KM 391   Autism   Preclinical 
KM 277   Arthritis   Preclinical  
KM 278   Arthritis/Asthma   Preclinical 
KM 362   MS/ALS/Parkinsons   Early R&D 
KM-3174    Cancer   Early R&D 
KM-732   Hypertensive emergency   Early R&D 

 

 

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CURRENT STATUS OF OUR COMPOUNDS

 

Time Schedules, Milestones and Development Costs  

 

In the event that sufficient funding can be obtained, we shall endeavor to achieve completion of the following event within the next twelve months:   

 

Project   Drug Development of Kevetrin™ for Cancer 
     
Current status  

Information on the status of the Kevetrin study at Harvard Cancer Centers is available at http://clinicaltrials.gov/ct2/show/nct01664000?term=kevetrin+rank=1

The phase 1 study is titled, “A Safety, Pharmacokinetic and Pharmacodynamic Study of Kevetrin in Patients With Advanced Solid Tumors.”

     
Nature, timing and estimated costs   The Company has budgeted $1,500,000 for the Phase 1 clinical study to be incurred over the next 12 months. 
   

 

 

 

Risks and uncertainties associated with completing development on schedule, and the consequences to operations, financial position and liquidity if not completed timely    The outcome of clinical testing cannot be known at this time, and this poses substantial risk and uncertainty as to whether or when if ever, Kevetrin will become marketable.

 

  Project   Drug Development of Prurisol™ for Psoriasis 
     
Current status  

Cellceutix is preparing an FDA 505(b)(2) application for Prurisol™, which would allow Prurisol™ to start phase 2 / 3 clinical trials.  Dr. Reddy's Laboratories, our contract manufacturer of Prurisol, has completed the manufacturing of this drug for use in the clinical trial.

 

     
Nature, timing and estimated costs   We plan on applying for regulatory approvals to conduct phase 2\3 clinical studies in Europe and the U.S. The Company has budgeted $2,500,000 for the clinical studies to be incurred over the next 12 months. 
     
Risks and uncertainties associated with completing development on schedule, and the consequences to operations, financial position and liquidity if not completed timely    The outcome of our application or clinical testing cannot be known at this time, and this poses substantial risk and uncertainty as to whether or when if ever, Prurisol will become marketable.

 

 

The Company intends to commit limited resources towards the development of compounds other than Kevetrin, Prurisol and the newly acquired Polymedix compounds during the next twelve (12) months. 

 

The Company has limited experience with pharmaceutical drug development. As such, these budget estimates may not be accurate. In addition, the actual work to be performed is not known at this time, other than a broad outline, as is normal with any scientific work. As further work is performed, additional work may become necessary or change in plans or workload may occur. Such changes may have an adverse impact on our estimated budget. Such changes may also have an adverse impact on our projected timeline of drug development.   

 

The Company believes it can contract the manufacturing of all its compounds at sites certified by the FDA to produce experimental materials that can be sent to outside scientists for pharmaco-kinetic, pharmaco-dynamic and toxicology studies. These three sets of studies must be completed prior to the Company filing an IND with the FDA to begin the human safety and efficacy trials of its other compounds (Phase I, II and III).

  

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The work-plan we have developed for the next twelve (12) months is expected to support our Phase 1 clinical trial for Kevetrin and the start of a Phase 2 clinical trial for Prurisol.  If we find that we have underestimated the time duration of our studies, or we have to undertake additional studies, due to various reasons within or outside of our control, this may significantly impact our development timelines and/or our financing needs.   

 

 

Compound: Kevetrin 

 

Disease: Cancer  

 

The Company acquired exclusive rights to Kevetrin in August 2007 from Dr. Krishna Menon, a Company founder.  (See Item 13. Certain Relationships and Related Transactions) 

 

There is a potential for use of Kevetrin in multiple tumor types. The Company has conducted pre-clinical studies in lung cancer, head and neck cancer, colon cancer, breast cancer, prostate cancer, pancreatic cancer and in leukemia models.  Several of these studies have involved cell lines that are resistant to standard drugs. Information about these cancers is available at http://www.cancer.gov 

 

Kevetrin is being developed as an intravenous (IV) infusion therapy (the giving of the drug directly into the vein). 

 

Phase 1 Clinical Trial at Dana-Farber Cancer Institute and Beth Israel Deaconess Medical Center

 

On June 21, 2012, the U.S. Food and Drug Administration ("FDA") approved the Investigational New Drug (IND) application for Kevetrin™, Cellceutix's novel anti-cancer compound. The Phase 1 trials are being conducted at Harvard Cancer Center's Dana-Farber Cancer Institute and partner Beth Israel Deaconess Medical Center.  The clinical trial will test Kevetrin against a variety of different solid tumor cancer types in patients with advanced-stage cancers. Primary endpoints for the study will be safety, tolerable dosing levels and establishing the dose for a future Phase II clinical trial.

 

The trial is registered on www.clinicaltrials.gov (http://clinicaltrials.gov/ct2/show/NCT01664000?term=Kevetrin&rank=1)

 

Kevetrin mechanism involves p53 and p21

 

In laboratory mechanism of action studies, it showed that Kevetrin strongly induced apoptosis in a human lung adenocarcinoma cell line (A549). Treatment of A549 cells with Kevetrin for 48 hours resulted in apoptosis induction that was characterized by activation of Caspase 3 and cleavage of PARP.

 

Reactivation of p53 in tumor cells has been recognized as a promising strategy for cancer treatment. The p53 tumor suppressor is a well characterized transcription factor controlling cell growth and apoptosis during times of cellular stress. Kevetrin activates both transcription-dependent and transcription-independent pathways to promote apoptosis through p53 activation in tumor cells.

 

Western blotting revealed a concentration dependent increase in phosphorylation of p53 at serine15 (Ser15). The phosphorylation of p53 at Ser15 leads to a reduced interaction between p53 and its negative regulator, the oncoprotein MDM2, an ubiquitin ligase for p53 that plays a central role in p53 stability. Also, phosphorylation of p53 induced apoptosis by inducing the expression of p53 upregulated modulator of apoptosis (PUMA).  In addition, Kevetrin increased expression of p53 target genes such as p21 (Waf1). The tumor suppressor protein p21 (Waf1) acts as an inhibitor of cell cycle progression.

 

Kevetrin activates both transcription-dependent and transcription-independent pathways to promote apoptosis. Kevetrin showed potent efficacy in various mutant and wild type tumor xenograft models, thus Kevetrin demonstrated effectiveness in a wide range of tumor types. Kevetrin enhanced the phosphorylation of MDM2 in a dose dependent manner. Phosphorylation of MDM2 alters the E3 ligase processivity. Stable monoubiquitinated form of p53 was induced by Kevetrin. MDM2 mediated monoubiquitination of p53 greatly promotes its mitochondrial translocation and thus its mitochondrial apoptosis. The induction of transcription-independent p53 induced apoptosis by Kevetrin has far reaching significance with tumor with mutant p53.

 

Inactivation of p53 by mutation occurs in ~50% of human cancers.  Transcription mediated response of activated mutant p53 does not necessarily lead to apoptosis. Mutant p53 can act in the cytosol and mitochondria to promote apoptosis through a transcription-independent mechanism. Kevetrin can stabilize the transactivation-deficient mutant p53 and induce apoptosis.

 

Stable monoubiquitinated mutant p53 was induced by Kevetrin. This stable form of p53 accumulates in the cytoplasm and mitochondria and retains the ability to interact with BAK or BAX proteins in mitochondria to induce apoptosis.

 

Since Kevetrin activates both transcription-dependent and transcription-independent pathways to promote p53 activation, Kevetrin can function as a major inducer of apoptosis in many types of tumors independent of p53 mutation status. Activation of both modes of apoptosis by Kevetrin may not be mutually exclusive. Most likely, both modes of apoptosis induction cooperate and complement each other.

 

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Genotoxicity

 

Most currently available chemotherapeutic drugs are genotoxic in nature and damage DNA. A DNA damaging drug results in rapid phosphorylation of H2A.X at Ser 139 by PI3K-like kinases. Kevetrin did not induce this phosphorylation at a concentration that caused cell cycle arrest and apoptosis; whereas, Doxorubicin did induce the phosphorylation of H2A.X, as shown by Western blot assay. These results suggest that Kevetrin, in a non-genotoxic way, induces p53 activation.

Biomarker

 

We identified the increased expression of p21 as a potential biomarker in our clinical trial for Kevetrin. Preliminary data on the p21 biomarker suggests that Kevetrin slightly affected p21 in some low-dose patients, but these tests require being redone and reanalyzed at higher doses to confirm that Kevetrin is indeed activating p21.

 

Study at Beth Israel Deaconess Medical Center

 

In March 2012, we entered into an agreement with Beth Israel Deaconess Medical Center (BIDMC), a teaching hospital of Harvard Medical School, on an innovative research project with Kevetrin. The Medical Center wishes to exploit the nuclear and/or mitochondrial pro-apoptotic function of p53 in melanoma and renal cell carcinoma, two types of cancer that are particularly resistant to therapy. BIDMC initiated combination studies with multikinase inhibitors which activate pro-apoptotic activity by translocation of p53 in mitochondria thereby inducing apoptosis. Apoptosis is enhanced by MDM2 inhibitors by stabilizing p53. As presented at the American Association for Cancer Research (AACR) meeting in April, Kevetrin phosphorylates MDM2 which activates and stabilizes p53 by monoubiquitination inducing apoptosis. Prior data from the BIDMC laboratory showed that agents of this class can augment the pro-apoptotic and antitumor effects of MDM2 antagonists and is expected to have a synergistic effect with Kevetrin. BIDMC tested the effects of Kevetrin alone and in combination with FDA-approved VEGFR antagonists in the renal cell carcinoma and melanoma studies. In vitro study endpoints include apoptosis by measuring caspase activation and PARP cleavage. In vivo endpoints include efficacy in a xenograft model, tumor vascularity, p53 levels, p21 expression and apoptosis. This study provided vital insight to exploit the nuclear and/or mitochondrial pro-apoptotic function by Kevetrin in combination with other multikinase inhibitors in treatment of these difficult to treat malignancies. The results received from BIDMC in April 2013, showed apoptosis induction (TUNEL) in renal cancer (786). Results of these preclinical tests provided to date to the Company are encouraging and BIDMC and Cellceutix wish to move the study further. Cellceutix has provided the requested information from BIDMC that will be used to investigate a Specialized Programs of Research Excellence (SPORE) grant for a phase 2 clinical study of renal cancer upon completion of the successful phase 1 clinical study presently in progress.

 

MDAnderson Cancer Center

 

In June 2013, we signed a Material Transfer Agreement with the University of Texas, MDAnderson Cancer Center. MDAnderson intends to utilize in vivo and in vitro methods to research specific pathways, gene expression, mechanism of action and apoptotic activity of our cancer drugs in a range of concentrations and time points in both mutant and wild-type p53 Myeloma and Lymphoma cell lines. They also wish to study our cancer compounds against a broad array of Multiple Myeloma cell lines that are resistant to today’s FDA-approved chemotherapies. MDAnderson is covering the expenses of the research, with Cellceutix only supplying the drugs.

 

Compound: Prurisol (KM-133) 

 

Disease: Psoriasis 

 

KM-133, a small molecule compound, acting on the principles of folate mechanism, is in development for Psoriasis.  After a series of chemical optimization exercises, the Company has completed an animal study in a xenograft model of psoriasis.  The results of the study are described below:

 

KM-133 was studied in mice that were irradiated then engrafted with human psoriatic tissue.  Groups of ten mice were treated orally for 14 days with either 10 mg/kg KM-133 once/day, 10 mg/kg KM-133 twice/day, 7.5 mg/kg methotrexate once/day or acted as controls.  The mice were followed for 180 days.  Endpoints were skin appearance, histological observations, and blood levels of PRINS, IL-20 and 12-R lipoxygenase. For these parameters, KM-133 was compared to controls and methotrexate.  CD4+ and CD8+ lymphocyte counts were also measured and compared to efalizumab.

 

KM-133 significantly reduced all psoriatic endpoints measured relative to controls (p<0.01).  The higher dose of KM-133 reduced psoriatic endpoints more than methotrexate (p<0.01).  In addition, there was no recurrence of psoriasis in animals treated with KM-133, whereas psoriasis recurred after an average of 61 days in animals treated with methotrexate.  Immunosuppression in animals treated with KM-133 was less severe than in those treated with efalizumab. 

 

Regulatory

 

In June 2012 Cellceutix participated in a pre IND meeting with the U.S. Food and Drug Administration ("FDA") pertaining to Prurisol™. The Company had requested the meeting for guidance on its initiatives to seek a section 505(b)(2) designation for Prurisol™, which would allow the Company to forgo early-stage trials and advance Prurisol™ into latter-stage clinical trials.  Cellceutix was advised by the FDA that a 505(b)(2) application would be an acceptable approach for Prurisol. In September 2012, Cellceutix selected Dr. Reddy's Laboratories as its vendor to manufacture and formulate Prurisol for planned clinical trials. The Company plans on filing a 505(b)(2) application in 2013.

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Compound: KM 391

 

Disease: Autism 

KM-391 is a small molecule being developed for autism.  The Company acquired the rights to KM-391 in December 2009.  The Company has completed three animal studies with KM -391.

 

 

Study #1

 

Neonatal serotonin depletion and reduced plasticity of the brain are salient features observed in Autism.  To experimentally induce these changes, 5,7-dihydroxytyptamine (5,7-DHT) was injected into the forebrain bundle on the day of birth of Wistar rat pups.  Litter mates were injected with saline with progeny matched mice serving as controls.

 

5,7-DHT treated control rats significantly reduced their exploration in response to spatial rearrangement and object novelty, suggesting increased anxiety in response to change. A decrease in brain plasticity was observed, as well as a significant decrease in serotonergic (5-HT) innervation in the cortex and hippocampus; however, not in the subcortical forebrain. These changes and abnormalities are similar to our understanding of brain disorders presenting with cortical morphogenetic abnormalities and altered serotonin neurotransmission, as in Autism.

 

For the study, 100 µl of 5,7-DHT were injected 4 hours after birth.  The animals were observed hourly for a few days until survival was established. Pair matching was done taking into consideration litter mating. Each group consisted of 10 male and 10 female rats with pair matching.  KM-391 was given orally at 2.5 or 5 mg/kg; for comparison, fluoxetine was given at 5 mg/kg; and the 4th group served as 5,7-DHT-treated controls. The compounds were administered orally up to 90 days. The animals were scored for behavioral patterns, plasticity and serotonin levels.  Behavioral scoring was done by standard behavioral test scoring, plasticity was calculated by surgical scoring, and serotonin levels were obtained by immunohistochemistry. 

 

Conclusions

 

Treatment with KM-391 for 90 days resulted in:

Correction of abnormal behavior (p<0.05 vs. controls and fluoxetine)

Increased plasticity of brain ~ 85% by Day 100

Increase in brain serotonin levels to normal levels of paired twins (p<0.05 vs. controls and fluoxetine)

 

Study #2

 

Neonatal serotonin depletion and reduced plasticity of the brain are salient features observed in Autism.  It has been shown that injection of  5,7-dihydroxytyptamine (5,7-DHT) into the forebrain bundle  of Wistar rat pups on the day of birth will induce these changes.  It has also been shown that oxytocin / vasopressin has a beneficial impact on repetitive behavior symptoms of autism, such as, touching, self-injury ( Hollander 2003 Neuropharm 28:193 ), social behavior ( Andari 2010 PNAS 107:4389 ), and emotion recognition ( Guastella 2010 Biol Psychiatry 67:692 ).  In this experiment, 5,7-DHT was injected into test animals, that induces  certain conditions of autistic behavior, and an oxytocin antagonist was given to exacerbate these behavioral changes often observed in patients.

 

For the study, 5,7-DHT were injected 4 hours after birth.  The animals were observed hourly for a few days until survival was established. Pair matching was done taking into consideration litter mating. Each group consisted of 5 male and 5 female rats with pair matching.  To exacerbate behavioral changes, atosiban, an oxytocin antagonist, was administered to the pups by slow intravenous push.  Then, KM-391 was given orally at 10 mg/kg. Two groups were given placebo in place of atosiban. Behavior was monitored for up to 8 hours after dosing. Standard behavioral test scoring was performed for: repetitive behavior, self-induced injury, sensitivity to touch, positioning correction, group dynamics, and curiosity.  This procedure was repeated with the same animals on days 5 and 10.

 

Conclusions

 

The administration of an oxytocin antagonist alone consistently and significantly enhanced the autism-related behaviors. When KM-391 was given along with the oxytocin antagonist, there was a significant reduction in all 6 autism-related behaviors: repetitive behavior, self-induced injury, sensitivity to touch, positioning correction, group dynamics, and curiosity, within 1 to 2 hours. These results support the testing of KM-391 as a possible therapeutic agent in the treatment of autistic behavior in patients.

 

Study #3

 

Neonatal serotonin depletion in the brain is an established observation observed in Autism.  It has been shown that injection of 5,7-dihydroxytyptamine (5,7-DHT) into the forebrain bundle of Wistar rat pups on the day of birth will induce this depletion. In this experiment, serotonin levels were measured in three different regions of the brain in rats: cerebral cortex, hippocampus, or caudate nucleus, following either 5,7-DHT injection alone (induced autism), 5,7-DHT injection followed by 10 mg/kg KM-391 BID, or placebo treated controls.

 

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For the study, two groups of rats were injected with 5,7-DHT 4 hours after birth. The animals were observed hourly for a few days until survival was established. Pair matching was done taking into consideration litter mating. Each group consisted of 5 male and 5 female rats with pair matching. A third group consisted of pups without 5,7-DHT injection.  In one group KM-391 was given orally at 10 mg/kg BID for 40 days after 5,7-DHT injection. Two other groups were given placebo in place of KM-391. 48 days later, rats were sacrificed and brains were removed. Brains were sectioned, homogenized, and assayed for serotonin by ELISA.

 

Conclusions: The administration of KM-391 significantly (p<0.01) increased serotonin levels in all 3 regions of the brain: cerebral cortex, hippocampus, and caudate nucleus, from very low levels as observed with 5,7-DHT-induced autism to normal levels as observed in placebo treated control without the 5,7-DHT. These results further support the testing of KM-391 as a possible therapeutic agent in the treatment of autism in patients.

 

Further experiments are planned but are presently delayed due to our focus on Kevetrin and Prurisol.

 

Compound: KM 277 

 

Disease: Arthritis 

 

In-vivo studies on over 1,000 animal subjects have been conducted to check for potential efficacy of KM 277 in rheumatoid arthritis. These studies, as well as related in vitro assays, have led the Company’s management to believe that the compound has developmental potential for the treatment of the disease. 

 

Further experiments are planned but are presently delayed due to our focus on Kevetrin and Prurisol.

 

Compound: KM 278 

 

Disease: Arthritis/Asthma 

 

KM 278 showed potential efficacy in both Osteoarthritis animal models and Asthma animal models. KM 278 was tested against standard treatment for asthma and Osteoarthritis. These studies have led the Company’s management to believe that the compound has developmental potential for the treatment of asthma and Osteoarthritis. 

 

Further experiments are planned but are presently delayed due to our focus on Kevetrin and Prurisol.

  

Compound: KM-362

 

Disease: MS/ALS/Parkinsons 

 

Amyelination (absence of the myelin sheath on a nerve), is a characteristic in most neurological diseases such as Lou Gherig Disease, Parkinson’s Disease and Multiple Sclerosis. Initial studies suggest that this compound aids in demyelination (the loss of nerve fiber "insulation" due to trauma or disease, which reduces the ability of nerves to conduct impulses) along with strengthening the functions of the nerves, spinal chord and the brain tissue. These studies led the Company’s management to believe that the compound has developmental potential for the treatment of these diseases. 

 

Further experiments are planned but are presently delayed due to our focus on Kevetrin and Prurisol.

 

Compound: KM-3174 

 

Disease: Cancer 

 

This is a very early stage developmental compound in the treatment of cancer. After additional in vitro and in vivo studies the Company will determine whether to advance this compound for further development. 

 

Further experiments are planned but are presently delayed due to our focus on Kevetrin and Prurisol.

 

 

Compound: KM-732

 

Disease: Hypertensive Emergency

 

This is a very early-stage developmental compound with potential for the treatment of hypertensive emergency.  After additional in vitro and in vivo studies, the Company will determine whether to advance this compound for further development.

 

Further experiments are planned but are presently delayed due to our focus on Kevetrin and Prurisol.

 

 

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MANUFACTURING   

 

The Company does not intend to establish manufacturing capabilities or facilities to produce its product candidates (compounds) in the near or mid-term. The Company intends on using outside sources for its manufacturing needs.

 

 

GOVERNMENT REGULATION 

 

Our operations and activities are subject to extensive regulation by numerous government authorities in the United States and other countries. In the United States, drugs are subject to rigorous regulation by the United States Food and Drug Administration (“FDA”). The Federal Food, Drug and Cosmetic Act, and other federal and state statutes and regulations, govern the testing, manufacture, safety, effectiveness, labeling, storage, record keeping, approval, advertising and promotion of our products. As a result of these regulations, product development and the product approval process is a very expensive and time consuming process. The FDA must approve a drug before it can be sold in the United States. The general process for FDA approval of a drug is as follows:  

 

Preclinical Testing  

 

Before we can test a drug candidate in humans, we must study the drug in laboratory experiments and in animals to generate data to support the drug's potential safety and benefits. We submit this data to the FDA in an investigational new drug application (IND) seeking their approval to test the compound in humans.  Presently we have a number of compounds that would be classified in the category of preclinical testing.

 

Clinical Trials  

 

If the FDA accepts the IND, we study the drug in human clinical trials to determine if the drug is safe and effective. These clinical trials involve three separate phases that often overlap, can take many years to compile, and are very expensive. These three phases, which are themselves subject to considerable regulation, are as follows:   

 

Phase 1. The drug is given to a small number of human subjects (patients) to test for safety, dose tolerance, pharmacokinetics, metabolism, distribution and excretion.  In most disease states phase 1 studies are performed in healthy volunteers.  In cancer, Phase 1 studies are performed in cancer patients.

  

Phase 2. The drug is given to a limited patient population to determine the effect of the drug in treating the disease, the best dose of the drug, and the possible side effects and safety risks of the drug. 

 

Phase 3. If a compound appears to be effective and safe in Phase 2 clinical trials, Phase 3 clinical trials are commenced to confirm those results. Phase 3 clinical trials are long-term, involve a significantly larger population of patients, are conducted at numerous sites in different geographic regions, and are carefully designed to provide reliable and conclusive data regarding the safety and benefits of a drug.  It is not uncommon for a drug that appears promising in Phase 2 clinical trials to fail in the more rigorous and reliable Phase 3 clinical trials. 

FDA Approval Process

 

If we believe that the data from the Phase 3 clinical trials show an adequate level of safety and effectiveness, we will file a new drug application (NDA) with the FDA seeking approval to sell the drug for a particular use. The FDA will review the NDA and often will hold a public hearing where an independent advisory committee of expert advisors asks additional questions regarding the drug. This committee makes a recommendation to the FDA, which is not binding on the FDA, but is generally followed. If the FDA agrees that the compound has met the required level of safety and effectiveness for a particular use, it will allow the Company to sell the drug in the United States for that use. It is not unusual, however, for the FDA to reject an application because it believes that the drug is not safe enough, or effective enough, or because it does not believe that the data submitted is reliable or conclusive. 

 

At any point in this process, the development of a drug could be stopped for a number of reasons including safety concerns and lack of treatment benefit. We cannot be certain that any clinical trials that we are currently conducting or any that we conduct in the future, will be completed successfully or within any specified time period. We may choose, or the FDA may require us, to delay or suspend our clinical trials at any time if it appears that the patients are being exposed to an unacceptable health risk or if the drug candidate does not appear to have sufficient treatment benefit.   

  

The FDA may also require us to: (i) complete additional testing; (ii) provide additional data or information; (iii), improve our manufacturing processes, procedures or facilities; and (iv) require extensive post-marketing testing and surveillance to monitor the safety or benefits of our product candidates if it determines that our new drug application does not contain adequate evidence of the safety and benefits of the drug. In addition, even if the FDA approves a drug, it could limit the uses of the drug. The FDA can withdraw approvals if it does not believe that a company is complying with regulatory standards or if problems are uncovered or occur after approval. 

 

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In addition to obtaining FDA approval for each drug, we must obtain FDA approval of the manufacturing facilities for any drug we sell, including those of companies who manufacture our drugs for us. The FDA must also approve foreign establishments that manufacture products to be sold in the United States and these facilities are subject to periodic regulatory inspection. 

 

Should our products be approved for marketing, we would also be subject to various other State and Federal laws concerning the marketing and cost reimbursement of our products. 

 

Other major countries or groups of countries, such as the European Union, Japan and Canada, have similarly rigorous regulatory processes.  They may also require studies not required by the FDA, which can add to the cost and risk of development.  Products approved by the FDA might not be approved by these countries.  After review by the health authorities, pricing and cost reimbursement are also subject to separate approvals in many of these countries.  

 

 

COMPETITION

 

Competition in the pharmaceutical and biotechnology industries is intense. The drugs that we are developing will have to compete with existing therapies. In addition, a large number of companies are pursuing the development of pharmaceuticals that target the same diseases and conditions that we are targeting. Many pharmaceutical or biotechnology companies have products on the market and are actively engaged in the research and development of products that are competitive with our potential products. Many of these companies and institutions, either alone or together with their collaborative partners, have substantially greater financial, manufacturing, sales, distribution and technical resources and more experience in research and development, clinical trials and regulatory matters, than we do. In addition, our competitors may succeed in developing technologies and drugs that are more effective, better tolerated or less costly than any which are being developed by us or which would render our technology or potential drugs obsolete or noncompetitive.

 

With respect to Kevetrin, our lead compound for cancer, there are many drugs approved to treat various cancers and many more in the publicly disclosed development pipeline.  The same is true for our psoriasis compound, Prurisol, as there are many drugs approved to treat various forms of psoriasis and many more in the publicly disclosed development pipeline. Our success depends on our ability to identify tumor or psoriasis types where these drugs have an advantage over existing therapies and those in the publicly disclosed development pipeline.

 

 

 

EMPLOYEES

 

As of September 15, 2013, the Company had nine employees, six of which were hired after June 1, 2013. Its officers, Krishna Menon and Leo Ehrlich executed employment agreements with the Company on December 29, 2010. The Company also conducts its operations using contractors and consultants.

 

CORPORATE INFORMATION  

 

The Company's corporate headquarters are located at 100 Cummings Center, Suite 151-B, Beverly, MA, 01915. The Company's telephone number is (978) 236-8717.

 

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ITEM 1A. RISK FACTORS

 

Investing in the Company's common stock involves a high degree of risk. Prospective investors should carefully consider the risks described below, together with all of the other information included or referred to in this Annual Report on Form 10-K, before purchasing shares of the Company's common stock. There are numerous and varied risks, known and unknown, that may prevent the Company from achieving its goals. The risks described below are not the only ones the Company will face. If any of these risks actually occur, the Company's business, financial condition or results of operation may be materially adversely affected. In such case, the trading price of the Company's common stock could decline and investors in the Company's common stock could lose all or part of their investment.

 

Risks Specific to Us

 

We will need to raise substantial additional capital in the future to fund our operations and we may be unable to raise such funds when needed and on acceptable terms. 

 

We currently do not have resources to complete the development and commercialization of any of our proposed products. We expect to incur costs of approximately $8.0 million in the upcoming twelve (12) months to operate our business in accordance with our business plans and budgets. This budget may change significantly due to the recent acquisition of Polymedix assets and we have not determined a budget for these assets.We may not be able to secure this amount of financing on terms and conditions acceptable to the Company. In the event that we cannot obtain acceptable financing, we would be unable to complete preclinical development projects, a regulatory filing for Prurisol, and our Phase 1 trial for our anti-cancer drug Kevetrin. This will delay:  

 

· research and development programs; 

 

· preclinical studies and clinical trials; material characterization studies, regulatory processes;  

 

· establishment of our own laboratory or a search for third party marketing partners to market our products for us. 

 

The amount of capital we may require will depend on many factors, including the:

 

· progress, timing and scope of our research and development programs; 

 

· progress, timing and scope of our preclinical studies and clinical trials; 

 

· time and cost necessary to obtain regulatory approvals; 

 

· time and cost necessary to establish our own marketing capabilities or to seek marketing partners;  

 

· time and cost necessary to respond to technological and market developments; 

 

· changes made or new developments in our existing collaborative, licensing and 

 

· other commercial relationships; and

 

· new collaborative, licensing and other commercial relationships that we may establish.

 

Our fixed expenses, such as rent and other contractual commitments, may increase in the future, as we may:

 

· enter into leases for new facilities and capital equipment; 

 

· enter into additional licenses and collaborative agreements; and 

 

· incur additional expenses associated with being a public company. 

 

 

The value of our common stock is partially related to the value of the Polymedix, Inc. assets acquired and we can not be certain of the value of these assets

 

The value of our common stock may relate directly and/or indirectly to the value of the Polymedix Inc. These assets were acquired on September 4, 2013 through the U.S. Bankruptcy Court. We can not be certain of the value of these assets acquired. This acquisition may have a material adverse effect on the value of any investment in our common stock.

 

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All of our Polymedix drug product candidates are licensed from or based upon licenses from the University of Pennsylvania upon our purchase of these assets at the bankruptcy court we assumed all contractual rights and obligations of the license. If any of these license agreements are properly terminated, our ability to advance our polymedix product candidates or develop new product candidates will be materially adversely affected.

 

We now depend, and will continue to depend, on these arrangements, and potentially on other licensing arrangements and/or strategic relationships with third parties for the research, development, manufacturing and commercialization of our Polymedix product candidates.  If any of our licenses or relationships are terminated or breached, we may:

 

· lose our rights to develop and market our product candidates;
· lose patent and/or trade secret protection for our product candidates;
· experience significant delays in the development or commercialization of our product candidates;
· not be able to obtain any other licenses on acceptable terms, if at all; and/or
· incur liability for damages.

 

Our company is a development stage company that has no products approved for commercial sale, has never generated any revenues, and may never achieve revenues or profitability. 

 We are a development stage biopharmaceutical company. Currently, we have no products approved for commercial sale and, to date, we have not generated any revenues. Our ability to generate revenue depends heavily on:

 

· successful demonstration in clinical trials that our  leading drug candidates, Kevetrin and/or  Prurisol are safe and effective;
· our ability to seek and obtain regulatory approvals, including with respect to the indications we are seeking;
· the successful commercialization of our product candidates; and
· market acceptance of our products.

 

Our leading product candidate Kevetrin is at an early stage of its clinical trial, while our other products are categorized as pre-clinical. If we do not successfully develop and commercialize these products, we will not achieve revenues or profitability in the foreseeable future, if at all. If we are unable to generate revenues or achieve profitability, we may be unable to continue our operations. 

 

 

We are a development stage company with a limited operating history, making it difficult for you to evaluate our business and your investment

 

We are in the development stage and our operations and the development of our proposed products are subject to all of the risks inherent in the establishment of a new business enterprise, including but not limited to: 

 

· the absence of an operating history;

 

· the lack of commercialized products;

 

· insufficient capital;

 

· expected substantial and continual losses for the foreseeable future;

 

· limited experience in dealing with regulatory issues;

 

· the lack of manufacturing experience and limited marketing experience;

 

· possible reliance on third parties for the development and commercialization of our proposed products;

 

· a competitive environment characterized by numerous, well-established and well capitalized competitors; and

 

· reliance on key personnel.

 

Because we are subject to these risks, you may have a difficult time evaluating our business and your investment in our company.

 

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Our ability to become profitable depends primarily on the following factors:

 

· our ability to develop drugs, obtain approval for such drugs, and if approved, to successfully commercialize our drugs;

 

· our R&D efforts, including the timing and cost of clinical trials; and

 

· our ability to enter into favorable alliances with third-parties who can provide substantial capabilities in clinical development, regulatory affairs, sales, marketing and distribution. 

 

Even if we successfully develop and market our drug candidates, we may not generate sufficient or sustainable revenue to achieve or sustain profitability. 

 

The report of our independent registered public accounting firm includes a going concern opinion, and we may not be profitable in the future, if ever. 

 

As of June 30, 2013 we had $2,955,317 of cash available to support operations or our business plan.  Our operating cash needs, cash consumption, and doubt as to whether we will ever become profitable, are factors which raise substantial doubt as to our ability to continue as a going concern. Consequently, our independent registered public accounting firm has included a going concern paragraph  in its audit report which is included elsewhere in this Form 10-K. It is uncertain at this time how the going concern language by our independent registered public accounting firm will affect our ability to raise capital. If we are unable to achieve revenues or obtain financing on terms and conditions acceptable to the Company, then we may not be able to commence revenue-generating operations or continue as an on-going concern. 

 

We have limited experience in drug development and may not be able to successfully develop any drugs. 

 

We have limited experience in drug development and may not be able to successfully develop any drugs. Our ability to achieve revenues and profitability in our business will depend, among other things, on our ability to:  

 

· develop products internally or obtain rights to them from others on favorable terms; 

 

· complete laboratory testing and human studies; 

 

· obtain and maintain necessary intellectual property rights to our products; 

 

· successfully complete regulatory review to obtain requisite governmental agency approvals 

 

· enter into arrangements with third parties to manufacture our products on our behalf; and 

 

· enter into arrangements with third parties to provide sales and marketing functions. 

 

 

Development of pharmaceutical products is a time-consuming process, subject to a number of factors, many of which are outside of our control. Consequently, we can provide no assurance of the successful and timely development of new drugs. 

 

Our drug candidates are in early developmental and clinical stages. Further development and extensive testing will be required to determine their technical feasibility and commercial viability. Our success will depend on our ability to achieve scientific and technological advances and to translate such advances into reliable, commercially competitive drugs on a timely basis. Drugs that we may develop are not likely to be commercially available for several years, if ever. The proposed development schedules for our drug candidates may be affected by a variety of factors, including technological difficulties, proprietary technology of others, and changes in government regulation, many of which will not be within our control. Any delay in the development, introduction or marketing of our drug candidates could result either in such drugs being marketed at a time when their cost and performance characteristics would not be competitive in the marketplace or in the shortening of their commercial lives. In light of the long-term nature of our projects, the unproven technology involved and the other factors described elsewhere in “Risk Factors”, we may not be able to complete successfully the development or marketing of any of our drug candidates. 

 

We may fail to successfully develop and commercialize our drug candidates because they:   

 

· are found to be unsafe or ineffective in clinical trials; 

 

· do not receive necessary approval from the FDA or foreign regulatory agencies; 

 

· fail to conform to a changing standard of care for the diseases they seek to treat; or 

 

· are less effective or more expensive than current or alternative treatment methods.

 

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Drug development failure can occur at any stage of clinical trials and as a result of many factors and there can be no assurance that we or our collaborators will reach our anticipated clinical targets. Even if we or our collaborators complete our clinical trials, we do not know what the long-term effects of exposure to our drug candidates will be. Furthermore, our drug candidates may be used in combination with other treatments and there can be no assurance that such use will not lead to unique safety issues. Failure to complete clinical trials or to prove that our drug candidates are safe and effective would have a material adverse effect on our ability to generate revenue and could require us to reduce the scope of or discontinue our operations.   

 

We must comply with significant and complex government regulations, compliance with which may delay or prevent the commercialization of our drug candidates. 

 

The R&D, manufacture and marketing of drug candidates are subject to regulation, primarily by the FDA in the United States, and by comparable authorities in other countries. These national agencies and other federal, state, local and foreign entities regulate, among other things, R&D activities (including testing in animals and in humans) and the testing, manufacturing, handling, labeling, storage, record keeping, approval, advertising and promotion of the products that we are developing. Noncompliance with applicable requirements can result in various adverse consequences, including approval delays or refusals to approve drug licenses or other applications, suspension or termination of clinical investigations, revocation of approvals previously granted, fines, criminal prosecution, recalls or seizures of products, injunctions against shipping drugs and total or partial suspension of production and/or refusal to allow a company to enter into governmental supply contracts. 

 

The process of obtaining FDA approval for a drug has historically been costly and time consuming. Current FDA requirements for a new human drug or biological product to be marketed in the United States include: (i) the successful conclusion of pre-clinical laboratory and animal tests, if appropriate, to gain preliminary information on the product's safety; (ii) filing with the FDA of an IND application to conduct human clinical trials for drugs or biologics; (iii) the successful completion of adequate and well-controlled human clinical investigations to establish the safety and efficacy of the product for its recommended use; and (iv) filing by a company and acceptance and approval by the FDA of a New Drug Application (“NDA”), for a drug product or a biological license application (“BLA”), for a biological product to allow commercial distribution of the drug or biologic. A delay in one or more of the procedural steps outlined above could be harmful to the Company in terms of getting our drug candidates through clinical testing and to market. 

 

The FDA reviews the results of the clinical trials and may order the temporary or permanent discontinuation of clinical trials at any time if it believes the drug candidate exposes clinical subjects to an unacceptable health risk. Investigational drugs used in clinical studies must be produced in compliance with current good manufacturing practice (“cGMP”) rules pursuant to FDA regulations. 

 

Sales outside the United States of products that we develop will also be subject to additional regulatory requirements governing human clinical trials and marketing for drugs and biological products and devices. The requirements vary widely from country to country, but typically the registration and approval process takes several years and requires significant resources.

 

We also are subject to the following risks and obligations, related to the approval of our products:   

 

· The FDA or foreign regulators may interpret data from pre-clinical testing and clinical trials in different ways than we interpret them. 

 

· If regulatory approval of a product is granted, the approval may be limited to specific indications or limited with respect to its distribution. In addition, many foreign countries control pricing and coverage under their respective national social security systems. 

 

· The FDA or foreign regulators may not approve our manufacturing processes or manufacturing facilities.  

 

· The FDA or foreign regulators may change their approval policies or adopt new regulations. 

 

· Even if regulatory approval for any of our product is obtained, the corresponding marketing license will be subject to continual review, and newly discovered or developed safety or effectiveness data may result in suspension or revocation of the marketing license.  

 

· If regulatory approval of the product candidate is granted, the marketing of that product would be subject to adverse event reporting requirements and a general prohibition against promoting products for unapproved uses. 

 

· In some foreign countries, we may be subject to official release requirements that require each batch of the product we produce to be officially released by regulatory authorities prior to its distribution by us. 

 

· We will be subject to continual regulatory review and periodic inspection and approval of manufacturing modifications, including compliance with cGMP regulations.   

 

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We can provide no assurance that our drug candidates will obtain regulatory approval or that the results of clinical studies will be favorable. 

 

Presently, we are at the early stage of  a Phase 1 clinical trial for Kevetrin, our anti-cancer drug . The work-plan we have developed for the next twelve (12) months should enable us to advance Kevetrin’s Phase 1 trial and  file an IND application with the FDA to begin Prurisol’s (anti-psoriasis) clinical trials. If approved, it would  allow us to commence Prurisol’s Phase 2 trial. 

 

The testing, marketing and manufacturing of any product for use in the United States will require approval from the FDA. We cannot predict with any certainty the amount of time necessary to obtain such FDA approval and whether any such approval will ultimately be granted. Preclinical and clinical trials may reveal that one or more products are ineffective or unsafe, in which event further development of such products could be seriously delayed or terminated. Moreover, obtaining approval for certain products may require testing on human subjects of substances whose effects on humans are not fully understood or documented. Delays in obtaining FDA or any other necessary regulatory approvals of any proposed drugs, and failure to receive such approvals, would have an adverse effect on the drug's potential commercial success and on our business, prospects, financial condition and results of operations. In addition, it is possible that a proposed drug may be found to be ineffective or unsafe due to conditions or facts that arise after development has been completed and regulatory approvals have been obtained. In this event, we may be required to withdraw such proposed drug from the market. To the extent that our success will depend on any regulatory approvals from government authorities outside of the United States that perform roles similar to that of the FDA, uncertainties similar to those stated above will also exist. 

 

 

Even if our product candidate Prurisol receives regulatory approval, commercialization may be adversely affected by regulatory actions requiring a boxed warning.

 

Even if we receive regulatory approval for our psoriasis product candidate Prurisol, we expect an approval to include a boxed warning regarding possible severe health risks and side effects.  Products with boxed warnings are subject to more restrictive regulations than products without such warnings. Boxed restrictions would make it more difficult to market Prurisol.

 

Even if we obtain regulatory approvals, our marketed drug candidates will be subject to ongoing regulatory review. If we fail to comply with continuing U.S. and foreign regulations, we could lose our approvals to market these drugs and our business would be seriously harmed.   

 

Following any initial regulatory approval of any drugs we may develop, we will also be subject to continuing regulatory review, including the review of adverse experiences and clinical results that are reported after our drug candidates are made commercially available. This would include results from any post-marketing tests or vigilance required as a condition of approval. The manufacturer and manufacturing facilities we use to make any of our drug candidates will also be subject to periodic review and inspection by the FDA. The discovery of any previously unknown problems with the drug, manufacturer or facility may result in restrictions on the drug or manufacturer or facility, including withdrawal of the drug from the market. If we are required to withdraw all or more of our drugs from the market, we may be unable to continue revenue generating operations. We do not have, and currently do not intend to develop, the ability to manufacture material for our clinical trials or on a commercial scale. Reliance on third-party manufacturers entails risks to which we would not be subject if we manufactured drugs ourselves, including reliance on the third-party manufacturer for regulatory compliance. Our drug promotion and advertising is also subject to regulatory requirements and continuing FDA review.

 

We have no experience in conducting or supervising clinical trials and must outsource all clinical trials.   

 

We have no experience in conducting or supervising clinical trials that must be performed to obtain data to submit in concert with applications for approval by the FDA. The regulatory process to obtain approval for drugs for commercial sale involves numerous steps. Drugs are subjected to clinical trials that allow development of case studies to examine safety, efficacy, and other issues to ensure that sale of drugs meets the requirements set forth by various governmental agencies, including the FDA. In the event that our protocols do not meet standards set forth by the FDA, or that our data is not sufficient to allow such trials to validate our drugs in the face of such examination, we might not be able to meet the requirements that allow our drugs to be approved for sale. 

 

Because we have no experience in conducting or supervising clinical trials, we must outsource our clinical trials to third parties. We have no control over their compliance with procedures and protocols used to complete clinical trials in accordance with standards required by the agencies that approve drugs for sale. If these subcontractors fail to meet these standards, the validation of our drugs would be adversely affected, causing a delay in our ability to engage in revenue-generating operations.    

 

24
 

We are subject to risks inherent in conducting clinical trials. The risk of non compliance with FDA-approved good clinical practices by clinical investigators, clinical sites, or data management services could delay or prevent us from developing or ever commercializing our drug candidates. 

 

Agreements with clinical investigators and medical institutions for clinical testing and with other third parties for data management services place substantial responsibilities on these parties, which could result in delays in, or termination of, our clinical trials if these parties fail to perform as expected. For example, if any of our clinical trial sites fail to comply with FDA-approved good clinical practices, we may be unable to use the data gathered at those sites. If these clinical investigators, medical institutions or other third parties do not carry out their contractual duties or obligations or fail to meet expected deadlines, or if the quality or accuracy of the clinical data they obtain is compromised due to their failure to adhere to our clinical protocols or for other reasons, our clinical trials may be extended, delayed or terminated, and we may be unable to obtain regulatory approval for or successfully commercialize our drug candidates. 

 

We or regulators may suspend or terminate our clinical trials for a number of reasons. We may voluntarily suspend or terminate our clinical trials if at any time we believe that they present an unacceptable risk to the patients enrolled in our clinical trials. In addition, regulatory agencies may order the temporary or permanent discontinuation of our clinical trials at any time if they believe that the clinical trials are not being conducted in accordance with applicable regulatory requirements or that they present an unacceptable safety risk to the patients enrolled in our clinical trials.  In addition, clinical trials may have independent monitoring boards composed of experts in the field.  These boards may also have the authority to suspend or terminate clinical trials. 

 

 

Our clinical trial operations will be subject to regulatory inspections at any time. If regulatory inspectors conclude that we or our clinical trial sites are not in compliance with applicable regulatory requirements for conducting clinical trials, we may receive reports of observations or warning letters detailing deficiencies, and we will be required to implement corrective actions. If regulatory agencies deem our responses to be inadequate, or are dissatisfied with the corrective actions that we or our clinical trial sites have implemented, our clinical trials may be temporarily or permanently discontinued, we may be fined, we or our investigators may be precluded from conducting any ongoing or any future clinical trials, the government may refuse to approve our marketing applications or allow us to manufacture or market our drug candidates or we may be criminally prosecuted. If we are unable to complete clinical trials and have our products approved due to our failure to comply with regulatory requirements, we will be unable to commence revenue generating operations.

 

The Company is exposed to product liability, clinical and preclinical liability risks which could place a substantial financial burden upon the Company should it be sued. 

 

The Company could be exposed to potential product liability and other liability risks that are inherent in the testing, manufacturing and marketing of pharmaceutical products. In addition, the use in the Company's clinical trials of pharmaceutical products that it may develop and the subsequent sale of these products by the Company or its potential collaborators may cause the Company to bear a portion of or all product liability risks. A successful liability claim or series of claims brought against the Company could have a material adverse effect on its business, financial condition and results of operations.   

 

The Company does have a $5,000,000 liability insurance for the Kevetrin clinical trials. The Company cannot assure that such insurance will provide adequate coverage against the Company's potential liabilities.  Claims or losses in excess of any product liability insurance coverage that may be obtained by the Company could have a material adverse effect on our  business, financial condition and results of operations.  

 

Confidentiality agreements with employees and others may not adequately prevent disclosure of trade secrets and other proprietary information. Disclosure of our trade secrets or proprietary information could compromise any competitive advantage that we have. 

 

We depend upon confidentiality agreements with our officers, employees, consultants, and subcontractors to maintain the proprietary nature of the technology. These measures may not afford us sufficient or complete protection, and may not afford an adequate remedy in the event of an unauthorized disclosure of confidential information. In addition, others may independently develop technology similar to ours, otherwise avoiding the confidentiality agreements, or produce patents that would materially and adversely affect our business, prospects, financial condition, and results of operations.   

 

25
 

We may be unable to obtain or protect intellectual property rights relating to our products, and we may be liable for infringing upon the intellectual property rights of others. 

 

Our ability to compete effectively will depend on our ability to maintain the proprietary nature of our compounds and the proprietary compounds  of others with which we have entered into licensing agreements. We have filed two patent applications and expect to file a number of additional patent applications in the coming years.  There can be no assurance that any of these patent applications will ultimately result in the issuance of a patent with respect to the proprietary compounds owned by us or licensed to us. The patent position of pharmaceutical or biotechnology companies, including ours, is generally uncertain and involves complex legal and factual considerations. The standards that the United States Patent and Trademark Office use to grant patents are not always applied predictably or uniformly and can change. There is also no uniform, worldwide policy regarding the subject matter and scope of claims granted or allowable in pharmaceutical or biotechnology patents. Accordingly, we do not know the degree of future protection for our proprietary rights or the breadth of claims that will be allowed in any patents issued to us or to others. Further, we rely on a combination of trade secrets, know-how, technology and nondisclosure, and other contractual agreements and technical measures to protect our rights in the proprietary compounds. If any trade secret, know-how or other proprietary information and/or compounds not protected by a patent were to be disclosed to or independently developed by a competitor, our business and financial condition could be materially adversely affected.

 

We do not believe that any of the drug candidates we are currently developing infringe upon the rights of any third parties nor are they infringed upon by third parties; however, there can be no assurance that our proprietary compounds will not be found in the future to infringe upon the rights of others or be infringed upon by others. In such a case, others may assert infringement claims against us, and should we be found to infringe upon their patents, or otherwise impermissibly utilize their intellectual property, we might be forced to pay damages, potentially including treble damages, if we are found to have willfully infringed on such parties' patent rights. In addition to any damages we might have to pay, we may be required to obtain licenses from the holders of this intellectual property, enter into royalty agreements, or redesign our drug candidates so as not to utilize this intellectual property, each of which may prove to be uneconomical or otherwise impossible. Conversely, we may not always be able to successfully pursue our claims against others that infringe upon our proprietary compounds.    Thus, the proprietary nature of our technology or technology licensed by us may not provide adequate protection against competitors. 

 

 

Moreover, the cost to us of any litigation or other proceeding relating to our patents and other intellectual property rights, even if resolved in our favor, could be substantial, and the litigation would divert our management's efforts. Uncertainties resulting from the initiation and continuation of any litigation could limit our ability to continue our operations.   

 

We have limited manufacturing experience  

 

The Company has never manufactured products in the highly regulated environment of pharmaceutical manufacturing. There are numerous regulations and requirements that must be maintained to obtain licensure and permitting required to commence manufacturing, as well as additional requirements to continue manufacturing pharmaceutical products. We do not own or lease facilities currently that could be used to manufacture any products that might be developed by the Company, nor do we have the resources at this time to acquire or lease suitable facilities. 

 

We have no sales and marketing personnel. 

 

We do not currently have any products available for sale, so have not secured a sales and marketing staff.  If we successfully receive regulatory approval  to market a drug, we cannot generate sales without sales or marketing staff and must rely on our officers to provide any sales or marketing services until such staff are secured, if ever. 

 

 

Even if we were to successfully develop approvable drugs, we will not be able to sell these drugs if we or our third party manufacturers fail to comply with manufacturing regulations .

 

If we were to successfully develop approvable drugs, before we can begin selling these drugs, we must obtain regulatory approval of our cGMP manufacturing facility and process or the cGMP manufacturing facility and process of the third party or parties with whom we may outsource our manufacturing activities. The cGMP regulations govern quality control and documentation policies and procedures. Our manufacturing facilities, if any in the future, and the manufacturing facilities of our third party manufacturers will be continually subject to inspection by the FDA and other state, local and foreign regulatory authorities, before and after product approval. We cannot guarantee that we, or any potential third party manufacturer of our products, will be able to comply with the cGMP regulations or other applicable manufacturing regulations. 

 

26
 

Our potential collaborative relationships with third parties could cause us to expend significant resources and incur substantial business risk with no assurance of financial return. 

 

We may have to rely substantially upon strategic collaborations for marketing and the commercialization of our drug candidates, and we may rely even more on strategic collaborations for R&D of our other drug candidates. Our business will depend on our ability to sell drugs to both government agencies and to the general pharmaceutical market. We may have to sell our drugs through strategic partnerships with pharmaceutical companies. If we are unable to establish or manage such strategic collaborations on terms favorable to us in the future, our revenue and drug development may be limited. To date, we have not entered into any strategic collaborations with third parties capable of providing these services. In addition, we have not yet marketed or sold any of our drug candidates or entered into successful collaborations for these services in order to ultimately commercialize our drug candidates. 

 

If we determine to enter into R&D collaborations during the early phases of drug development, our success will in part depend on the performance of our research collaborators. We will not directly control the amount or timing of resources devoted by our research collaborators to activities related to our drug candidates. Our research collaborators may not commit sufficient resources to our programs. If any research collaborator fails to commit sufficient resources, our preclinical or clinical development programs related to this collaboration could be delayed or terminated. Also, our collaborators may pursue existing or other development-stage products or alternative technologies in preference to those being developed in collaboration with us. Finally, if we fail to make required milestone or royalty payments to our collaborators, or to observe other obligations in our agreements with them, our collaborators may have the right to terminate those agreements. 

 

Establishing strategic collaborations is difficult and time-consuming. Our discussion with potential collaborators may not lead to the establishment of collaborations on favorable terms, if at all. Potential collaborators may reject collaborations based upon their assessment of our financial, regulatory or intellectual property position. Even if we successfully establish new collaborations, these relationships may never result in the successful development or commercialization of our drug candidates or the generation of sales revenue. To the extent that we enter into collaborative arrangements, our drug revenues are likely to be lower than if we directly marketed and sold any drugs that we may develop. 

 

Management of our relationships with our collaborators will require:  

 

· significant time and effort from our management team; 

 

· coordination of our marketing and R&D programs with the marketing and R&D priorities of our collaborators; and 

 

· effective allocation of our resources to multiple projects. 

 

We may not be able to attract and retain highly skilled personnel or consultants. 

 

Our ability to attract and retain highly skilled personnel or consultants is critical to our operations and expansion. We face competition for these types of personnel from other pharmaceutical companies and more established organizations, many of which have significantly larger operations and greater financial, technical, human and other resources than us. We may not be successful in attracting and retaining qualified personnel or consultants on a timely basis, on competitive terms, or at all. If we are not successful in attracting and retaining these personnel or consultants, our business, prospects, financial condition and results of operations will be materially adversely affected.  

 

We depend upon our senior management and their loss or unavailability could put us at a competitive disadvantage. 

 

We currently depend upon the efforts and abilities of our management team. The loss or unavailability of the services of any of these individuals for any significant period of time could have a material adverse effect on our business, prospects, financial condition and results of operations. We have not obtained, do not own, nor are we the beneficiary of key-person life insurance. 

  

The Company believes the following persons are critical to the success of the Company.  The terms of their employment agreements between them and the Company are as follows: 

 

On December 29, 2010, the Company entered into employment agreements with its two executive officers, Leo Ehrlich, the Company’s Chief Executive and Financial Officer, and Krishna Menon, Chief Scientific Officer. Both agreements provide for a three year term with each executive receiving an annual base salary for $350,000 per year commencing January 1, 2011, with an annual increase of 10% for each year commencing January 2012. In addition, the Company’s Board awarded stock options exercisable at $0.11 per share pursuant to the Company’s 2010 Equity Incentive Plan to each executive officer as follows:   Option Group A, a total of 18 million options with 6 million options vesting on December 29, 2010, 6 million options vesting on June 30, 2011 and 6 million options vesting on January 3, 2012.    The Board, at its discretion, may increase the base salary based upon relevant circumstances.

 

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There are conflicts of interest among our officers, directors and stockholders. 

 

Certain of our executive officers and directors and their affiliates are engaged in other activities and have interests in other entities on their own behalf or on behalf of other persons. Neither we nor any of our stockholders will have any rights in these ventures or their income or profits. In particular:  

 

· Our executive officers or directors or their affiliates may have an economic interest in, or other business relationship with, partner companies that invest in us or are engaged in competing drug development. 

 

· Previously, Kard Scientific, a company controlled by Dr. Krishna Menon, President and Director, provided preclinical and manufacturing services to the Company and leased space to the Company. 

 

In any of these cases:   

 

· Our executive officers or directors may have a conflict between our current interests and their personal financial and other interests in another business venture. 

 

· Our executive officers or directors may have conflicting fiduciary duties to us and the other entity. 

 

While the Company is not aware of any conflict that has arisen to date, the Company does not have any policy in place to deal with such should such a conflict arise. 

 

 

The biotechnology and biopharmaceutical industries are characterized by rapid technological developments and a high degree of competition. We may be unable to compete with enterprises equipped with more substantial resources than us. 

 

The biotechnology and biopharmaceutical industries are characterized by rapid technological developments and a high degree of competition based primarily on scientific and technological factors. These factors include the availability of patent and other protection for technology and products, the ability to commercialize technological developments and the ability to obtain government approval for testing, manufacturing and marketing.   

 

We compete with biopharmaceutical firms in the United States, Europe and elsewhere, as well as a growing number of large pharmaceutical companies that are applying biotechnology to their operations. Many biopharmaceutical companies have focused their development efforts in the human therapeutics area, including cancer. Many major pharmaceutical companies have developed or acquired internal biotechnology capabilities or made commercial arrangements with other biopharmaceutical companies. These companies, as well as academic institutions, government agencies and private research organizations, also compete with us in recruiting and retaining highly qualified scientific personnel and consultants. Our ability to compete successfully with other companies in the pharmaceutical field will also depend to a considerable degree on the continuing availability of capital on terms and conditions acceptable to us. 

We are aware of numerous products under development or manufactured by competitors that are used for the prevention or treatment of certain diseases we have targeted for drug development. Various companies are developing biopharmaceutical products that potentially directly compete with our drug candidates even though their approach to such treatment is different.   

 

For example, with respect to Kevetrin, our lead compound for cancer, there are many drugs approved to treat various cancers and many more in the publicly disclosed pipeline.  Our success depends on our ability to identify tumor types where Kevetrin has an advantage over existing therapies and those in the publicly disclosed pipeline. 

 

Our competition will be determined in part by the potential indications for which drugs are developed and ultimately approved by regulatory authorities. Additionally, the timing of the market introduction of some of our potential drugs or of competitors' products may be an important competitive factor. Accordingly, the relative speed with which we can develop drugs, complete pre-clinical testing, clinical trials, approval processes and supply commercial quantities to market are important competitive factors. We expect that competition among drugs approved for sale will be based on various factors, including product efficacy, safety, reliability, availability, price and patent protection. 

 

The successful development of biopharmaceuticals is highly uncertain. A variety of factors including, pre-clinical study results or regulatory approvals, could cause us to abandon development of our drug candidates. 

 

Successful development of biopharmaceuticals is highly uncertain and is dependent on numerous factors, many of which are beyond our control. Products that appear promising in the early phases of development may fail to reach the market for several reasons including:  

 

· pre-clinical study results that may show the product to be less effective than desired (e.g., the study failed to meet its primary objectives) or to have harmful or problematic side effects;   

 

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· failure to receive the necessary regulatory approvals or a delay in receiving such approvals. Among other things, such delays may be caused by slow enrollment in clinical studies, length of time to achieve study endpoints, additional time requirements for data analysis or a IND and later NDA, preparation, discussions with the FDA, an FDA request for additional pre-clinical or clinical data or unexpected safety or manufacturing issues; 

 

· manufacturing costs, pricing or reimbursement issues, or other factors that make the product not economical; and 

 

· the proprietary rights of others and their competing products and technologies that may prevent the product from being commercialized. 

 

Success in pre-clinical and early clinical studies does not ensure that large-scale clinical studies will be successful. Clinical results are frequently susceptible to varying interpretations that may delay, limit or prevent regulatory approvals. The length of time necessary to complete clinical studies and to submit an application for marketing approval for a final decision by a regulatory authority varies significantly from one product to the next, and may be difficult to predict. 

 

Risks Related to the Securities Markets and Investments in Our Common Stock  

 

Because our common stock is quoted on the OTC Bulletin Board“OTCBB”," your ability to sell your shares in the secondary trading market may be limited. 

 

Our common stock is currently quoted on the over-the-counter “OTCBB” market. Consequently, the liquidity of our common stock is impaired, not only in the number of shares that are bought and sold, but also through delays in the timing of transactions, and coverage by security analysts and the news media, if any, of our company. As a result, prices for shares of our common stock may be lower than might otherwise prevail if our common stock was quoted and traded on NASDAQ or a national securities exchange. 

 

Because our shares are "penny stocks," you may have difficulty selling them in the secondary trading market. 

 

Federal regulations under the Securities Exchange Act of 1934 regulate the trading of so-called "penny stocks," which are generally defined as any security not listed on a national securities exchange or NASDAQ, priced at less than $5.00 per share and offered by an issuer with limited net tangible assets and revenues. Since our common stock currently is quoted on the “OTCBB” at less than $5.00 per share, our shares are "penny stocks" and may not be traded unless a disclosure schedule explaining the penny stock market and the risks associated therewith is delivered to a potential purchaser prior to any trade. 

 

In addition, because our common stock is not listed on NASDAQ or any national securities exchange and currently is quoted at and trades at less than $5.00 per share, trading in our common stock is subject to Rule 15g-9 under the Securities Exchange Act. Under this rule, broker-dealers must take certain steps prior to selling a "penny stock," which steps include:   

 

· obtaining financial and investment information from the investor;

 

· obtaining a written suitability questionnaire and purchase agreement signed by the investor; and 

 

· providing the investor a written identification of the shares being offered and the quantity of the shares. 

 

If these penny stock rules are not followed by the broker-dealer, the investor has no obligation to purchase the shares. The application of these comprehensive rules will make it more difficult for broker-dealers to sell our common stock and our shareholders, therefore, may have difficulty in selling their shares in the secondary trading market. 

 

Our stock price may be volatile and your investment in our common stock could suffer a decline in value.   

 

As of June 30, 2013, the last trade price of our common stock, as quoted on the OTC Markets Group, Inc.'s OTCBB, was $1.77.  The price may fluctuate significantly in response to a number of factors, many of which are beyond our control. These factors include:

 

· progress of our products through the regulatory process; 

 

· results of preclinical studies and clinical trials;

 

· announcements of technological innovations or new products by us or our competitors; 

 

· government regulatory action affecting our products or our competitors' products in both the United States and foreign countries; 

 

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· developments or disputes concerning patent or proprietary rights; 

 

· general market conditions for emerging growth and pharmaceutical companies; 

 

· economic conditions in the United States or abroad; 

 

· actual or anticipated fluctuations in our operating results; 

 

· broad market fluctuations; and 

 

· changes in financial estimates by securities analysts. 

 

A registration of a significant amount of our outstanding restricted stock may have a negative effect on the trading price of our stock. 

 

At June 30, 2013, shareholders of the Company owned approximately 49.1 million shares of restricted stock, or 51.7% of the outstanding common stock. If we were to file a registration statement including all of these shares, and the registration is allowed by the SEC, these shares would be freely tradable upon the effectiveness of the planned registration statement. If investors holding a significant number of freely tradable shares decide to sell them in a short period of time following the effectiveness of a registration statement, such sales could contribute to significant downward pressure on the price of our stock. 

 

Our directors and executive officers own or control a sufficient number of shares of our common stock to control our company, which could discourage or prevent a takeover, even if an acquisition would be beneficial to our shareholders .   

 

At June 30, 2013, our directors and executive officers own or control approximately 43% of our outstanding voting power. Accordingly, these shareholders, individually and as a group, may be able to influence the outcome of shareholder votes, involving votes concerning the election of directors, the adoption or amendment of provisions in our articles of incorporation and bylaws and the approval of certain mergers or other similar transactions, such as sales of substantially all of our assets. Such control by existing shareholders could have the effect of delaying, deferring or preventing a change in control of our company.

 

The dual class structure of our common stock can have the effect of concentrating voting control with Menon and/ or Ehrlich, which will limit or preclude your ability to influence corporate matters.

 

Our Class B common stock has ten votes per share on all matters submitted to a vote of our stockholders and our Class A common stock has one vote per share on all matters submitted to a vote of our stockholders. Menon and Ehrlich each have vested options that they can exercise and convert to 18,000,000 shares of Class B common stock.  That alone could result in the equivalent of 360,000,000 votes of Class A shares.  As of June 30, 2013 we had 99,073,984 shares of Class A common stock outstanding and no shares of Class B common stock outstanding.  Because of the ten-to-one voting ratio between our Class B and Class A common stock, upon issuances of Class B common stock, the Class B holders can collectively control a majority of the combined voting power of our common stock and therefore be able to control all matters submitted to our stockholders for approval. This concentrated control will limit or preclude your ability to influence corporate matters for the foreseeable future.

   

We do not intend to pay any cash dividends in the foreseeable future and, therefore, any return on your investment in our capital stock must come from increases in the fair market value and trading price of the capital stock. 

  

We have not paid any cash dividends on our common stock and do not intend to pay cash dividends on our common stock in the foreseeable future. We intend to retain future earnings, if any, for reinvestment in the development and expansion of our business. Any credit agreements, which we may enter into with institutional lenders, may restrict our ability to pay dividends. Whether we pay cash dividends in the future will be at the discretion of our board of directors and will be dependent upon our financial condition, results of operations, capital requirements and any other factors that the board of directors decides is relevant. Therefore, any return on your investment in our capital stock must come from increases in the fair market value and trading price of the capital stock. 

 

We may issue additional equity shares to fund the Company's operational requirements which would dilute your share ownership. 

 

The Company's continued viability depends on its ability to raise capital. Changes in economic, regulatory or competitive conditions may lead to cost increases. Management may also determine that it is in the best interest of the Company to develop new services or products. In any such case additional financing is required for the Company to meet its operational requirements. There can be no assurances that the Company will be able to obtain such financing on terms acceptable to the Company and at times required by the Company, if at all. In such event, the Company may be required to materially alter its business plan or curtail all or a part of its operational plans as detailed further in Management's Discussion and Analysis in this Form 10-K.

 

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Because our common stock is quoted only on the OTCBB, your ability to sell your shares in the secondary trading market may be limited. 

 

Our common stock is quoted only on the OTCBB. Consequently, the liquidity of our common stock is impaired, not only in the number of shares that are bought and sold, but also through delays in the timing of transactions, and coverage by security analysts and the news media, if any, of our company. As a result, prices for shares of our common stock may be different than might otherwise prevail if our common stock was quoted or traded on a national securities exchange such as the New York Stock Exchange.   

 

Large amounts of our common stock will be eligible for resale under Rule 144.   

 

As of June 30, 2013, approximately 49.1 million of the approximate 100.5 million issued shares of the Company's common stock are restricted securities as defined under Rule 144 of the Securities Act of 1933, as amended (the “Act”) and under certain circumstances may be resold without registration pursuant to Rule 144.   

 

Approximately 6.6 million shares of our restricted shares of common stock are held by non-affiliates who may avail themselves of the public information requirements and sell their shares in accordance with Rule 144. As a result, some or all of these shares may be sold in accordance with Rule 144 potentially causing the price of the Company's shares to decline.   

 

In general, under Rule 144, a person (or persons whose shares are aggregated) who has satisfied a six month holding period may, under certain circumstances, sell within any three-month period a number of securities which does not exceed the greater of 1% of the then outstanding shares of common stock or the average weekly trading volume of the class during the four calendar weeks prior to such sale. Rule 144 also permits, under certain circumstances, the sale of securities, without any limitation, by a person who is not an Affiliate, as such term is defined in Rule 144(a)(1), of the Company and who has satisfied a one-year holding period. Any substantial sale of the Company's common stock pursuant to Rule 144 may have an adverse effect on the market price of the Company's shares. This filing will satisfy certain public information requirements necessary for such shares to be sold under Rule 144.   

 

We have identified material weaknesses in our internal control over financial reporting. If we fail to remediate these material weaknesses and maintain proper and effective internal controls, our ability to produce accurate and timely financial statements could be impaired, which could adversely affect our operating results, our ability to operate our business and investors and customers views of us.

As previously disclosed in our Annual Report on Form 10-K for the year ended June 30, 2012, filed with the SEC on Ocotober 12, 2012, we identified a material weakness in our internal control over financial reporting. In connection with our fiscal 2012audit, we concluded that we did not have sufficient personnel in place for an adequate amount of time or effective operating internal control procedures to ensure timely and accurate reviews necessary to provide reasonable assurance that financial statements and related disclosures could be prepared in accordance with generally accepted accounting principles. In connection with our fiscal 2013 audit, we concluded that we had not fully remediated the weakness previously identified. For a discussion of the material weakness and our remediation efforts during 2012 as well as ongoing remediation efforts, see Item 9A, Controls and Procedures, of this Annual Report on Form 10-K. We cannot assure you that our efforts to fully remediate these internal control weaknesses will be successful or that similar material weaknesses will not recur.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

None

ITEM 2. DESCRIPTION OF PROPERTY

 

Our principal offices are located at 100 Cummings Center, Suite 151-B, Beverly, MA 01915.  Dr. Menon, the Company’s principal shareholder, President and Director also serves as the COO and Director of Kard Scientific. From June 20, 2007 (inception) to September 30, 2013, Cellceutix was renting 200 square feet of office space from Kard Scientific on a month to month basis for $900 per month. 

Cellceutix Corporation signed a lease extension agreement with Cummings Properties which begins as of October 1, 2013 . The lease is for a term of five years ending on September 30, 2018, and requires monthly payments of $15,538. Cellceutix will take over the Kard Scientific space , and pay the full monthly rent of $15,538. Innovative Medical Research Inc., a company owned by Leo Ehrlich and Dr. Krishna Mennon, officers of Cellceutix, have co-signed the lease and will sublease 200 square feet of space previously used by Cellceutix and pay Cellceutix $900 per month.

We had subcontracted the laboratory research and development work to Kard Scientific which occupied this space. As of September 1, 2013 we no longer using Kard Scientific and research is being conducted by Cellceutix employees. To date we have incurred charges from Kard Scientific of approximately $2.6 million. 

 

Management believes that the property arrangement satisfies the Company’s current needs and is sufficient for the Company to monitor the developmental progress at its subcontractors.

 

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ITEM 3. LEGAL PROCEEDINGS

 

Formatech is a former vendor of ours which had had received 184,375 shares of Cellceutix Class A Common Stock (“Cellceutix Stock”) for services that were not completed. Formatech had gone bankrupt while still in possession of the Cellceutix Stock. In July 2012, the US Bankruptcy Court allowed the trustee of the Formatech estate to sell the Cellceutix Stock. We have been advised that the stock has been sold in 2013 and the funds released to the secured creditors of Formatech. Cellceutix presently is in the unsecured creditors class and does not expect to receive any proceeds.

 

From time to time, the Company may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm its business. The Company is not currently aware of any   other legal proceedings or claims that they believe will have, individually or in the aggregate, a material adverse affect on its business, financial condition or operating results.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

None

 

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

 

The Company’s Common Stock symbol is "CTIX". It was quoted on the OTC Markets Group, Inc.'s (OTCQB), through June 30, 2013.  Thereafter and currently the Company's stock quotation coverage is on the FINRA operated OTC Bulletin Board (OTCBB).

 

The table below sets forth the high and low daily closing price for the Company’s Common Stock. Quotations reflect inter-dealer prices, without retail mark-up, mark-down commission, and may not represent actual transactions. Since the Company's common stock trades sporadically, there is not an established active public market for its common stock. No assurance can be given that an active market will exist for the Company's common stock and the Company does not expect to declare dividends in the foreseeable future since the Company intends to utilize its earnings, if any, to finance its future growth, including possible acquisitions.

 

Quarter ended      Low price   / High price
June 30, 2013   $ 1.56   $   2.20
March 31, 2013   $ 1.51   $ 2.15
December 31, 2012   $ 0.86   $ 2.42
September 30, 2012   $ 0.58   $ 1.15
June 30, 2012     $ 0.46   $ 0.74
March 31, 2012    $ 0.45   $ 0.62
December 31, 2011   $ 0.32   $ 0.74
September 30, 2011   $ 0.33   $ 0.74

 

Number of Shareholders

 

As of June 30, 2013, a total of approximately 99 million shares of the Company’s common stock are outstanding and held by approximately 1700 shareholders.   Of this amount, approximately 50 million shares are unrestricted, approximately 6.6 million shares are restricted securities held by non-affiliates, and the remaining approximately 42.4 million shares are restricted securities held by affiliates. These shares may only be sold in accordance with Rule 144. As of June 30, 2013, there were 5,571,084 warrants and 39,142,500 stock options to purchase the Company’s Common Stock outstanding

 

Dividends

 

The Company has not paid any cash dividends since its inception. The Company currently intends to retain any earnings for use in its business, and therefore does not anticipate paying dividends in the foreseeable future. 

 

Long-Term Incentive Plan Awards In Last Fiscal Year

 

None

 

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Recent Cancellation of Unregistered Securities

 

In February 2013, the Company cancelled 1,380,000 shares of common stock that were previously included in Treasury Stock, related to Mr. Evans’ settlement agreement. On September 3, 2013, the parties amended the Settlement Agreement and Release dated January 26, 2011. The amended agreement provides for total payments of $892,500, to be paid in three separate installments as follows: (i) two payments of $300,000 each to Mr. Evans payable on the first and second anniversary of the execution of this agreement; and (ii) a full and final installment payment of $292,500 on or before September 15, 2013 (paid September 5, 2013). On September 16, 2013, the Company cancelled the remaining 1,380,000 shares of common stock resulting in all common shares previously held by Mr. Evans being cancelled by the Company and his shares are no longer outstanding.

 

Recent Sales of Unregistered Securities

 

On June 30, 2013, the Company issued 5,000 Class A common shares to a consultant for service, valued at $8,900 based on the closing bid price as quoted on the OTC Bulletin Board on June 30, 2013 at $1.78 per share.

 

ITEM 6. SELECTED FINANCIAL DATA

 

Not applicable for smaller reporting companies.

 

ITEM 7. MANAGEMENT'S DISCUSSION AND FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and plan of operations should read in conjunction with the financial statements and the notes to those statements included in this Form 10-K. This discussion includes forward-looking statements that involve risk and uncertainties. As a result of many factors, such as those set forth under “Risk Factors,” actual results may differ materially from those anticipated in these forward-looking statements.  

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that in addition to the description of historical facts contained herein, this report contains certain forward-looking statements that involve risks and uncertainties as detailed herein and from time to time in the Company’s other filings with the Securities and Exchange Commission and elsewhere. Such statements are based on management’s current expectations and are subject to a number of factors and uncertainties, which could cause actual results to differ materially from those, described in the forward-looking statements. These factors include, among others: (a) the Company’s fluctuations in sales and operating results; (b) risks associated with international operations; (c) regulatory, competitive and contractual risks; (d) product development risks; (e) the ability to achieve strategic initiatives, including but not limited to the ability to achieve sales growth across the business segments through a combination of enhanced sales force, new products, and customer service; and (f) pending litigation.

 

Management’s Plan of Operation

 

Polymedix Asset Acquisition

 

On September 4, 2013, the Company purchased substantially all of the assets of Polymedix Inc, and Polymedix Pharmaceuticals, Inc. from the U.S. Bankruptcy Court.  The aggregate purchase price for the sale and transfer of the Purchased Assets was $2.1 million in cash, plus 1.4 million shares of the Company’s Class A common stock, total aggregate purchase price of approximately $4.8 million. See Part 1, Item 1 for more information regarding this asset acquisition.

 

Research and Development Activities

 

We acquired exclusive rights to a total of eight (8) pharmaceutical compound candidates that are designed for treatment of diseases which may be either existing or diseases identified in the future. The Company has spent most of its efforts and resources on its anti-cancer compound, Kevetrin, for the treatment of certain cancers, and on Prurisol, for the treatment of psoriasis. Based on the studies to date, the Company has decided to advance these drugs along the regulatory and clinical pathway. We anticipate using our expertise to manage and perform what we believe are the most critical aspects of the product development process which include: (i) the design and oversight of clinical trials; (ii) the development and execution of strategies for the protection and maintenance of intellectual property rights; and (iii) the interaction with regulatory authorities internationally. We expect to concentrate on product development and engage in a limited way in product discovery, avoiding the significant investment of time and financial resources that is generally required before a compound is identified and brought into clinical trials. At this time the Company is focusing its research and development efforts exclusively on Kevetrin and Prurisol.

 

Kevetrin

 

We are a clinical stage company. On June 21, 2012, the U.S. Food and Drug Administration ("FDA") approved the Investigational New Drug (IND) application for Kevetrin, Cellceutix's novel anti-cancer compound. The Phase 1 trials are being conducted at Harvard Cancer Center's Dana-Farber Cancer Institute and partner Beth Israel Deaconess Medical Center.  The clinical trial will test Kevetrin against a variety of different solid tumor cancer types in patients with advanced-stage cancers. Primary endpoints for the study will be safety, tolerable dosing levels and establishing the dose for a future Phase II clinical trial. Presently, we are at the mid stage of the trial. The Company has received no notice of events outside of the parameters of the protocol and the trial is progressing. The trial is registered on www.clinicaltrials.gov. http://clinicaltrials.gov/ct2/show/NCT01664000?term=Kevetrin&rank=1

 

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In March 2012, we entered into an agreement with Beth Israel Deaconess Medical Center (BIDMC), a teaching hospital of Harvard Medical School, on an innovative research project with Kevetrin. The Medical Center wishes to exploit the nuclear and/or mitochondrial pro-apoptotic function of p53 in melanoma and renal cell carcinoma, two types of cancer that are particularly resistant to therapy. BIDMC initiated combination studies with multikinase inhibitors which activate pro-apoptotic activity by translocation of p53 in mitochondria thereby inducing apoptosis. Apoptosis is enhanced by MDM2 inhibitors by stabilizing p53. As presented at the American Association for Cancer Research (AACR) meeting in April, Kevetrin phosphorylates MDM2 which activates and stabilizes p53 by monoubiquitination inducing apoptosis. Prior data from the BIDMC laboratory showed that agents of this class can augment the pro-apoptotic and antitumor effects of MDM2 antagonists and is expected to have a synergistic effect with Kevetrin. BIDMC tested the effects of Kevetrin alone and in combination with FDA-approved VEGFR antagonists in the renal cell carcinoma and melanoma studies. In vitro study endpoints include apoptosis by measuring caspase activation and PARP cleavage. In vivo endpoints include efficacy in a xenograft model, tumor vascularity, p53 levels, p21 expression and apoptosis. This study provided vital insight to exploit the nuclear and/or mitochondrial pro-apoptotic function by Kevetrin in combination with other multikinase inhibitors in treatment of these difficult to treat malignancies. The results received from BIDMC in April 2013, showed apoptosis induction (TUNEL) in renal cancer (786). Results of these preclinical tests provided to date to the Company are encouraging and BIDMC and Cellceutix wish to move the study further. Cellceutix has provided the requested information from BIDMC that will be used to investigate a Specialized Programs of Research Excellence (SPORE) grant for a phase 2 clinical study of renal cancer upon completion of the successful phase 1 clinical study presently in progress.

 

The University of Bologna in Italy (the “University”) and The Italian Cooperative Study Group on Chronic Myeloid Leukemia (ICSG on CML) and Acute Leukemia (GIMEMA Group) plan on testing Kevetrin against Acute Myelogenous Leukemia (AML). We have been advised that the study, a phase 1b trial, will be titled “A Multi-Center, Open-Label, Phase 1B Study of Escalating Doses of Kevetrin (Thioureidobutyronitrile) Administered Intravenously, with Cytarabine Adminstered A) Subcutaneously, or B) Intravenously, in Patients with Acute Myelogenous Leukemia (AML).” The trial’s principal investigator wants this phase 1b trial to begin once a higher patient dosing is achieved at the Dana Farber trial. The University will source the funding for this trial.

 

 On December 25, 2012 the United States Patent and Trademark Office (USPTO) awarded the Company U.S. Patent No. 8,338,454 B2, titled "Nitrile Derivatives and their Pharmaceutical Use and Compositions." The patent covers pharmaceutical compositions comprising Kevetrin, and related compounds and compositions.

 

Prurisol

 

Prurisol is our anti-psoriasis drug candidate. It is a small molecule with a molecular weight of less than 500 MW. It is synthesized through a multi-step process using commercially available starting materials. Prurisol acts through immune modulation and PRINS reduction.

 

In June 2012 Cellceutix participated in a pre IND meeting with the U.S. Food and Drug Administration ("FDA") pertaining to Prurisol™. The Company had requested the meeting for guidance on its initiatives to seek a section 505(b)(2) designation for Prurisol™, which would allow the Company to forgo early-stage trials and advance Prurisol™ into latter-stage clinical trials.  Cellceutix was advised by the FDA that a 505(b)(2) application would be an acceptable approach for Prurisol. In September 2012, Cellceutix selected Dr. Reddy's Laboratories as its vendor to manufacture and formulate Prurisol for planned clinical trials. The Company plans on filing a 505(b)(2) application in 2013.

General

 

The Company is presently in discussions with other institutions for collaborations in conducting clinical trials and acquiring a new drug. There are now two material transfer agreements pending with major hospitals.

 

We have no product sales to date and we will not receive any product revenue until we receive approval from the FDA or equivalent foreign regulatory bodies to begin selling our pharmaceutical candidates. Developing pharmaceutical products, however, is a lengthy and very expensive process. Assuming we do not encounter any unforeseen safety issues during the course of developing our product candidates, we do not expect to complete the development of a product candidate for several years, if ever.

 

Liquidity and Capital Resources

 

As of June 30, 2013 the Company had a cash balance of approximately $3.0 million.  The Company has entered into a financing agreement with Aspire Capital Fund (Aspire Capital) for $10,000,000 which allows the Company to sell Cellceutix common stock shares to Aspire Capital. As of June 30, 2013, the Company had completed sales to Aspire totaling 2,712,208 shares of common stock generating gross proceeds of approximately $4.4 million. Subsequent to June 30, 2013, the Company has generated additional proceeds of approximately $3.2 million under the Common Stock Purchase Agreement with Aspire on the sale of 1,800,000 shares of its common stock to them. As of the date of this filing, the Company has approximately $2.4 million available under its financing arrangement with Aspire for future sales of the Company’s common stock. From July 1, 2013 to September 9, 2013, the Company issued 825,000 Class A common shares par value $.0001 to a warrant holder upon exercise of Common Stock Purchase Warrants exercisable at $1.00 per share. The Company received an aggregate of $825,000.

 

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The Polymedix asset acquisition (see above) on September 4, 2013 is a recent asset acquisition so therefore at this present time we are uncertain on how this asset acquisition will affect our future liquidity and capital resource requirements for additional capital.

 

We expect to incur losses from operations for the near future. We expect to incur increasing research and development expenses, including expenses related to additional clinical trials. We expect that our general and administrative expenses will increase in the future as we expand our business development, add infrastructure and incur additional costs related to being a public company, including incremental audit fees for compliance with the provisions of the Sarbanes-Oxley Act, investor relations programs and increased professional services. Based upon our expected rate of expenditures, we currently do not have sufficient cash reserves to meet all of our anticipated obligations through our fiscal year end of June 30, 2014. 

 

Requirement for Additional Capital

Research and Development Costs.  We have used and intend to continue to use the net proceeds from the above Aspire transaction to fund our product development programs and for general corporate purposes, and therefore anticipate having sufficient funds to meet our planned drug development for the next twelve (12) months. We plan to incur the following expenses over the next twelve (12) months: 

 1. Research and Development- $1,500,000 in preclinical development costs including testing Kevetrin on additional tumors, and costs to manufacture Prurisol.

 

2. Clinical trials - $4,000,000.  We have budgeted $1,500,000 for our Phase 1 Kevetrin trials and $2,500,000 for the Prurisol phase 2/3 trials.

 

3. Corporate overhead of $2,250,000: Budgeted office salaries, legal, accounting and other costs expected to be incurred.

 

4. Capital costs of $200,000: Estimated cost for equipment and laboratory improvements.

 

5. Polymedix – This budget may change significantly due to the recent acquisition of Polymedix assets and we have not determined a budget for these assets.

 

The Company will be unable to proceed with its full planned drug development programs, meet its administrative expense requirements, capital costs, or staffing costs without obtaining additional financing of approximately  $5.0 million (as per current management’s budgets). This does not include any budgeted amounts for further development of the Polymedix assets.

 

Management intends to use capital and debt financing, as required, to fund the Company's operations. There can be no assurance that the Company will be able to obtain the additional capital resources on terms and conditions acceptable to the Company to fund its anticipated obligations for the next twelve (12) months. 

 

 

Off Balance Sheet Arrangements  

 

There were no off-balance sheet arrangements as of June 30, 2013. 

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates. 

 

We believe that there are several accounting policies that are critical to understanding our historical and future performance, as these policies affect the reported amounts of revenue and the more significant areas involving management’s judgments and estimates. These significant accounting policies relate to research and development costs, valuation of inventory, valuation of long-lived assets and income taxes. These policies, and the related procedures, are described in detail below.

 

Research and Development

 

Expenditures for research, development, and engineering of products are expensed as incurred.   

 

 

35
 

Income Taxes

 

Deferred income tax assets and liabilities arise from temporary differences associated with differences between the financial statements and tax basis of assets and liabilities, as measured by the enacted tax rates, which are expected to be in effect when these differences reverse.  Deferred tax assets and liabilities are classified as current or non-current, depending upon the classification of the asset or liabilities to which they relate.  Deferred tax assets and liabilities not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

 

The Company has generated net losses since inception and accordingly has not recorded a provision for income taxes. The deferred tax assets were primarily comprised of federal and state tax net operating loss, or NOL, carryforwards. Due to uncertainties surrounding the Company’s ability to generate future taxable income to realize these tax assets, a full valuation allowance has been established to offset the deferred tax assets. Additionally, the future utilization of the NOL carryforwards to offset future taxable income may be subject to an annual limitation as a result of ownership changes that could occur in the future.  If necessary, the deferred tax assets will be reduced by any carryforwards that expire prior to utilization as a result of such limitations, with a corresponding reduction of the valuation allowance.

 

The Company adopted the provisions of FASB ASC 740-10 “ Uncertainty in Income Taxes ” (ASC 740-10), on January 1, 2007. The Company has not recognized a liability as a result of the implementation of ASC 740-10. A reconciliation of the beginning and ending amount of unrecognized tax benefits has not been provided since there is no unrecognized benefit since the date of adoption. The Company has not recognized interest expense or penalties as a result of the implementation of ASC 740-10. If there were an unrecognized tax benefit, the Company would recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses.

 

Accounting for Stock Based Compensation

 

The Company accounts for all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. The Company is required to measure the cost of employee services received in exchange for stock options and similar awards based on the grant-date fair value of the award and recognize this cost in the income statement over the period during which an employee is required to provide service in exchange for the award.

 

The Company will use the Black-Scholes valuation model and has elected to use the ratable method to amortize compensation expense over the vesting period of the grant.

 

The Company accounts for equity instruments issued to nonemployees by valuing them using the Black-Scholes valuation model. The measurement of stock-based compensation is subject to periodic adjustments as the underlying equity instruments vest.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable to smaller reporting companies.

36
 

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

 

Report of Independent Registered Public Accounting Firm

 

 

To the Stockholders and Board of Directors

Cellceutix Corporation

Beverly , Massachusetts

 

We have audited the accompanying consolidated balance sheets of Cellceutix Corporation (a development stage enterprise) (the "Company") as of June 30, 2013 and 2012, and the related consolidated statements of operations, changes in stockholders' deficit, and cash flows for the years then ended and the cumulative period from June 20, 2007 (date of inception) through June 30, 2013. These consolidated financial statements are the responsibility of the Company's management. 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 financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe 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 consolidated financial position of Cellceutix Corporation at June 30, 2013 and 2012, and the consolidated results of their operations and their cash flows for the years then ended and the cumulative period from June 20, 2007 (date of inception) through June 30, 2013, in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has no revenues and has a history of recurring losses from operations and an accumulated deficit that raise substantial doubt about the company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Cellceutix Corporation internal control over financial reporting as of June 30, 2013, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated September 30, 2013 expressed an adverse opinion.

 

 

 

/s/ Baker Tilly Virchow Krause, LLP

New York, New York

September 30, 2013

37
 

 

Cellceutix Corporation

(A Development Stage Enterprise)

Balance Sheets

 

    June 30,   June 30,
    2013   2012
         
ASSETS        
Current Assets:        
Cash $ 2,955,317 $ 27,703
Prepaid expenses   4,796   325
Total Current Assets   2,960,113   28,028
         
Other Assets:        
Patent costs - net   10,400   -
         
Total Assets $ 2,970,513 $ 28,028
         
LIABILITIES AND STOCKHOLDERS' DEFICIT        
         
Current Liabilities:        
Accounts payable - (including related party payables of $1,703,916 and $1,695,820, respectively) $ 1,849,077 $ 1,966,026
Accrued expenses - (including related party accruals of $353,797and $316,130, respectively)   553,797   330,880
Accrued salaries and payroll taxes - (including related party accrued salaries of $3,427,294 and $2,789,571, respectively)   3,431,018   2,789,571
Accrued settlement costs   284,519   270,055
Note payable - related party   2,022,264   2,022,264
Total Current Liabilities   8,140,675   7,378,796
         
Long Term Liabilities:        
Accrued settlement costs - net of current settlement costs   -   275,229
         
Total Liabilities   8,140,675   7,654,025
         
Commitments and contingencies        
         
Stockholders' Deficiency        
Preferred stock, $0.001 par value, 500,000 designated shares, no shares issued and outstanding   -   -
Common Stock - Class A, $.0001 par value, 300,000,000 shares authorized, 100,456,068 issued and  99,073,984 outstanding as of June 30, 2013 and 94,968,905 issued and 92,206,821 outstanding as of June 30, 2012   10,046   9,497
Common Stock - Class B, (10 votes per share); $.0001 par value, 100,000,000 shares authorized, no shares issued and outstanding as of June 30, 2013 and June 30, 2012   -   -
Additional paid-in capital   14,868,223   9,229,157
Deficit accumulated during the development stage   (19,773,202)   (16,336,918)
Treasury stock - 1,382,084 and 2,762,084 shares at cost - as of June 30, 2013 and 2012, respectively   (275,229)   (527,733)
Total Stockholders' Deficit   (5,170,162)   (7,625,997)
         
Total Liabilities and Stockholders' Deficit $ 2,970,513 $ 28,028

 

The accompanying notes are an integral part of these financial statements.

 

38
 

 

Cellceutix Corporation

(A Development Stage Enterprise)

Statements of Operations

 

          For the
          cumulative
          period from
          June 20, 2007
          (Date of
  For the Years Ended Ended Inception)
  June 30, through June
  2013 2012 30, 2013
             
Revenues $ - $ - $ -
             
Operating expenses:            
Research and development, gross   1,509,881   632,805   6,606,893
Grants   -   -   (733 438)
Research and development, net of grants   1,509,881   632,805   5,873,455
General and administrative expenses   369,862   205,787   904,632
Officers' payroll and payroll tax expense   458,877   2,413,036   8,052,562
Professional fees   614,969   846,858   3,193,880
Patent expense   29,431   98,610   197,724
             
Total operating expenses   2,983,020   4,197,096   18,222,253
             
Loss from operations   (2,983,020)   (4,197,096)   (18,222,253)
             
Interest expense - net   (241,462)   (257,414)   (824,490)
Gain (loss) on financial instruments   -   (439,892)   (439,892)
Total other expenses   (241,462)   (697,306)   (1,264,382)
             
Net loss before provision for income taxes   (3,224,482)   (4,894,402)   (19,486,635)
Provision for income taxes   -   -   -
             
Net loss $ (3,224,482) $ (4,894,402) $ (19,486,635)
             
Deemed dividends   (211,802)   (65,686)   (277,488)
Net loss attributable to common stockholders $ (3,436,284) $ (4,960,088) $ (19,764,123)
             
Basic and diluted loss per share attributable to common stockholders $ (0.04) $ (0.06) $  
             
             
Weighted average number of common shares   94,980,552   90,159,045    

 

The accompanying notes are an integral part of these financial statements.

39
 

Cellceutix Corporation

(A Development Stage Enterprise)

Statement of Changes in Stockholders' Deficit

 

For the cumulative

Period June 20, 2007 (Date of Inception)

through June 30, 2013

 

                            Deficit                
                            Accumulated                
  Preferred Stock   Common Stock   Additional   During the   Treasury Stock      
        Par Value         Par Value   Paid-in   Development                
  Shares   $ 0,001   Shares   $ 0,0001   Capital   Stage   Shares     Amount     Total
                                               
Shares issued June 20, 2007 (Inception) -   $ -   1,000,000   $ 100   $ -   $ -   -   $ -   $ 100
                                               
Net loss -     -   -     -     -     (530)   -     -     (530)
Balance, June 30, 2007 -     -   1,000,000     100     -     (530)   -     -     (430)
                                               
Share exchange with Cellceutix Pharma, Inc. December 6, 2007 -     -   (1,000,000)     (100)     -     100   -     -     -
                                               
Share exchange in reverse merger with Cellceutix Pharma, Inc. December 6, 2007 -     -   82,000,000     8,200     -      (8,200)   -     -     -
                                               
Shares exchanged in a reverse acquisition of Cellceutix Pharma, December 6, 2007 -     -   9,791,000     979     -     (979)   -     -     -
                                               
Issuance of stock options -     -   -     -     43,533     -   -     -     43,533
                                               
Forgiveness of debt from a stockholder -     -   -     -     50     -   -     -     50
                                               
Capital contribution from a stockholder -     -   -     -     50     -   -     -     50
                                               
Shares issued for services, April 28, 2008 at $1.05 -     -   100,000     10     104,990     -   -     -     105,000
                                               
Net loss -     -   -     -     -     (510,193)   -     -     (510,193)
Balance June 30, 2008 -     -   91,891,000     9,189     148,623     (519,802)   -     -     (361,990)
                                               
Cancellation of shares issued for services, December 31, 2008 -     -   (100,000)     (10)     (104,990)     -   -     -     (105,000)
                                               
Issuance of stock options -     -   -     -     142,162     -   -     -     142,162
                                               
Shares issued for services, June 11, 2009 at $0.38 -     -   20,000     2     7,598     -   -     -     7,600
                                               
Shares issued for services, June 30, 2009 at $0.38 -     -   25,000     3     9,497     -   -     -     9,500
                                               
Net loss -     -   -     -     -     (1,485,331)   -     -     (1,485,331)
Balance, June 30, 2009 -     -   91,836,000     9,184     202,890     (2,005,133)   -     -     (1,793,059)
                                               
Shares issued for services, July 6, 2009 at $0.43 -     -   25,000     2     10,748     -   -     -     10,750
                                               
Shares issued for services, February 5, 2010 at $0.30 -     -   3,500     -     1,050     -   -     -     1,050
                                               
Issuance of stock options -     -   -     -     383,291     -   -     -     383,291
                                               
Shares issued for services June 1, 2010 at $0.45 -     -   75,000     8     33,742     -   -     -     33,750
                                               
Net loss -     -   -     -     -     (3,433,400)   -     -     (3,433,400)
Balance, June 30, 2010 -     -   91,939,500     9,194     631,721     (5,438,533)   -     -     (4,797,618)
                                               
Shares issued for services, July 6, 2010 at $0.55 -     -   50,000     5     27,495     -   -     -     27,500
                                               
Cancellation of shares issued -     -   (75,000)     (8)     (33,742)     -   -     -     (33,750)
                                               
Issuance of stock options -     -   -     -     3,060,691     -   -     -     3,060,691
                                               
Modification of stock options -     -   -     -     237,098     -   -     -     237,098
                                               
Forgiveness of liability in connection with settlement with stockholder -     -   -     -     932,966     -   -     -     932,966
                                               
Repurchase of common stock  in connection with settlement -     -   -     -     -     -   4,602,313     (859,388)     (859,388)
                                               
Shares issued for services, March 1, 2011 at $0.32 -     -   184,375,     18     58,982     -   -     -     59,000
                                               
Shares issued for services, February 8, 2011 at $0.20 -     -   70,000,     7     13,993     -   -     -     14,000
                                               
Cancellation of treasury stock -     -   (460,229)     (45)     (99,955)     -   (460,229)     100,000     -
                                               
Shares issued for services, May 26, 2011 at $0.81 -     -   12,000,     1     9,719     -   -     -     9,720
                                               
Net loss -     -   -     -     -     (5 938 297)   -     -     (5,938,297)
Balance, June 30, 2011 -     -   91,720,646     9,172     4,838,968     (11,376,830)   4,142,084     (759,388)     (7,288,078)
                                               
Issuance of stock options -     -   -     -     2,114,386     -   -     -     2,114,386
                                               
Convertible debentures converted to common stock -     -   707,277     71     353,564     -   -     -     353,635
                                               
Shares issued for services, August 29, 2011 at $0.38 -     -   100,000     10     37,990     -   -     -     38,000
                                               
Shares issued for services, November 8, 2011 at $0.41 -     -   125,000     13     51,236     -   -     -     51,249
                                               
Shares issued for services, January 11, 2012 at $0.45 -     -   200,000     20     89,980     -   -     -     90,000
                                               
Shares issued for charitable contributions, March 7, 2012 at $0.52 -     -   265,228     26     137,894     -   -     -     137,920
                                               
Shares issued for services, April 26, 2012 at $0.46 -     -   300,000     30     137,970     -   -     -     138,000
                                               
Shares issued for services, May 3, 2012 at $0.49 -     -   100,000     10     48,990     -   -     -     49,000
                                               
Shares issued for services, May 29, 2012 at $0.53 -     -   25,000     2     13,248     -   -     -     13,250
                                               
Shares issued for services, June 29, 2012 at $0.62 -     -   50,000     5     31,145     -   -     -     31,150
                                               
Issuance of capital stock -     -   2,500,000     250     582,143     -   -     -     582,393
                                               
Reclassification of warrants into equity -     -   -     -     857,500     -   -     -     857,500
                                               
Cancellation of treasury stock -     -   (1,380,000)     (138)     (231,517)     -   (1,380,000)     231,655     -
                                               
Issuance of preferred stock 10,000     10   -     -     99,990     -   -     -     100,000
                                               
Deemed dividend's -     -   -     -     65,686     (65,686)   -     -     -
                                               
Conversion of preferred stock to common stock (10,000)     (10)   255,754     26     (16)     -   -     -     -
                                               
Net loss -     -   -     -     -     (4,894,402)   -     -     (4,894,402)
Balance June 30, 2012 -   $ -   94,968,905   $ 9,497   $ 9,229,157   $ (16,336,918)   2,762,084   $ (527,733)   $ (7,625,997)
                                               
Issuance of stock options -     -   -     -     217,047     -   -     -     217,047.0
                                               
Shares issued for services, July 25, 2012 at $0.59 -     -   25,000     3     14,747     -   -     -     14,750.0
                                               
Shares issued for services, August 26, 2012 at $0.60 -     -   50,000     5     29,995     -   -     -     30,000.0
                                               
Shares issued for services, October 24, 2012 at $0.87 -     -   50,000     5     43,495     -   -     -     43,500.0
                                               
Shares issued as commitment fee, December 6, 2012 at $0.89 -     -   336,625     34     299,967     -   -     -     300,001.0
                                               
Offering cost -     -   -     -     (168,528)     -   -     -     (168,528.0)
                                               
Shares sold, December 6, 2012 at $0.89, net of offering costs of $3,000 -     -   112,208     11     96,989     -   -     -     97,000.0
                                               
Shares sold in March 2013 at $1.45-$1.54, net of offering costs of $45,490 -     -   1,000,000     100     1,470,730     -   -     -     1,470 830.0
                                               
Shares sold in May and June 2013 at $1.58-$1.97, net of offering costs of $82,983 -     -   1,600,000     160     2,682,957     -   -     -     2,683 117.0
                                               
Shares issued for charity donation, May 31, 2013 at $2.2 -     -   100,000     10     219,990     -   -     -     220,000.0
                                               
Exercise of stock options -     -   2,255,000     225     278,225     -   -     -     278,450.0
                                               
Exercise of warrants -     -   741,000     74     185,176     -   -     -     185,250.0
                                               
Issuance of preferred stock 30 ,000     30   -     -     299,970     -   -     -     300,000.0
                                               
Cancellation of treasury stock -     -   (1,380,000)     (138)     (252,366)     -   (1,380,000)     252,504     -   
                                               
Deemed dividends -     -   -     -     211,802     (211,802)   -     -     -   
                                               
Conversion of preferred stock to common stock (30,000)     (30)   592,330     59     (29)     -   -     -     -   
                                               
Shares issued for services, June 30, 2013 at $1.78 -     -   5,000     1     8,899     -   -     -     8,900.0
                                               
Net loss -     -   -     -     -     (3,224,482)   -     -     (3,224,482.0)
Balance June 30, 2013 -   $ -   100,456,068   $ 10,046   $ 14,868,223   $ (19,773,202)   1,382,084   $ (275,229)   $ (5,170 162)

 

 The accompanying notes are an integral part of these financial statements.

40
 

 

Cellceutix Corporation

(A Development Stage Enterprise)

Statements of Cash Flows  

 

            For the
            cumulative
            period from
            June 20, 2007
            (Date of
  For the years ended   Inception)
  June 30,   through June
    2013   2012   30, 2013
             
CASH FLOWS FROM OPERATING ACTIVITIES:            
Net loss $ (3,224,482) $ (4,894,402) $ (19,486,635)
Adjustments to reconcile net loss to net cash used in operating activities:            
Common stock and stock options issued as payment for services compensation, services rendered, and charitable contributions   519,447   2,703,933   7,208,565
Cancellation of stock issued for services   -   -   (28,750)
Amortization of accrued settlement costs   39,235   60,268   125,131
Amortization of patent costs   616   -   616
Gain (loss) on financial instruments   -   439,892   439,892
Changes in operating assets and liabilities:   -   -   -
  Other receivables   -   204,144   -
  Prepaid expenses   (4,471)   (1,010)   3,689
  Accounts payable   (116,949)   (173,502)   1,849,126
  Accrued expenses   237,667   207,869   785,958
  Accrued officers' salaries and payroll taxes   641,447   758,949   4,363,983
             
Net cash used in operating activities   (1,907,490)   (693,859)   (4,738,425)
             
CASH FLOWS FROM INVESTING ACTIVITIES:            
Patent Costs   (11,016)   -   (11,016)
             
Net cash used in investing activities   (11,016)   -   (11,016)
             
CASH FLOWS FROM FINANCING ACTIVITIES:            
Capital contribution from stockholder   -   -   50
Sale of common stock and preferred stock   4,382,420   100,000   4,382,520
Sale of preferred stock   300,000   -   400,000
Payment of settlement liabilities   (300,000)   (300,000)   (700,000)
Loan from officer   -   20,000   1,925,587,
Proceeds from convertible debentures   -   -   (167,099)
Redemption of convertible debentures   -   (167,099)   400,000,
Proceeds from subscription   -   1,000,000   1,000,000,
Exercise of stock options and warrants   463,700   -   463,700,
Net cash provided by financing activities   4,846,120   652,901   7,704,758,
             
NET INCREASE (DECREASE)  IN CASH AND CASH EQUIVALENTS   2,927,614   (40,958)   2,955,317
             
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD   27,703   68 661   -
             
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,955,317 $ 27,703 $ 2,955,317
             
             
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION            
Cash paid for interest $ 222,857 $ 83,172 $ 306,029
             
SUPPLEMENTAL DISCLOSURE OF NON-CASH FLOW FINANCING ACTIVITIES            
Common stock issued for acquisition $ - $ - $ 9,079
Forgiveness of debt $ - $ - $ 50
Reclassification of accrued interest to note payable and            
convertible debentures $ - $ - $ 197,964
Cancellation of common stock for services $ - $ - $ (138,750)
Settlement of accrued payroll and payroll taxes $ - $ - $ 932,966
Cancellation of common stock as a result of settlement $ - $ - $ 859,388
Debt converted to common stock $ - $ 353,635 $ 353,635
Cancellation of treasury stock $ (252,504) $ (231,655) $ (484,159)
Reclassification of warrants to equity $ - $ 857,500 $ 857,500
Deemed dividend from beneficial conversion            
feature on preferred stock $ 53,032 $ (17,646)   35,386
Deemed dividend - warrants $ 158,770 $ 48,040 $ 206,810
Conversion of preferred stock into common stock $ (30) $ (16) $ (46)
Shares issued as deferred offering costs $ 300,001 $ - $ 300,001

 

The accompanying notes are an integral part of these financial statements.

 

41
 

Cellceutix Corporation

(A Development Stage Enterprise)

Notes to Financial Statements

June 30, 2013

 

1.     Basis of Presentation and Nature of Operations

 

Basis of Presentation

 

Cellceutix Corporation, formerly known as EconoShare, Inc., (“Cellceutix” or the “Company”) was incorporated on August 1, 2005. On December 6, 2007, the Company acquired Cellceutix Pharma, Inc. which was incorporated in the State of Delaware on June 20, 2007, in exchange for newly issued shares of the Company’s common stock. As a result of the exchange, Cellceutix Pharma, Inc. became a wholly-owned subsidiary of the Company. The Company is a clinical stage biopharmaceutical company and has no customers, products or revenues to date. The Company also follows the accounting guidelines for accounting for and reporting in Development Stage Enterprises in preparing its financial statements.

 

The Company’s Common Stock is quoted on the Over the Counter Bulletin Board (OTCBB), symbol “CTIX”. All amounts, where it is designated in these notes to the financial statements as an approximate amount, are rounded to the nearest thousand dollars.

 

Nature of Operations

 

Overview

We are in the business of developing innovative small molecule therapies to treat diseases with significant medical need, particularly in the areas of cancer and inflammatory disease. Our strategy is to use our business and scientific expertise to maximize the value of our pipeline. We will do this by focusing initially on our lead compounds, Kevetrin and Prurisol and advancing them as quickly as possible along the regulatory pathway. We will develop the highest quality data and broadest intellectual property to support our compounds.

 

We currently own all development and marketing rights to our products. In order to successfully develop and market our products, we may have to partner with other companies. Prospective partners may require that we grant them significant development and/or commercialization rights in return for agreeing to share the risk of development and/or commercialization.

 

Pharmaceutical Compounds – Kevetrin and Prurisol

 

On August 2, 2007, the Company was assigned all right, title, and interest to three pharmaceutical compounds; Kevetrin, KM 277, and KM 278, by their inventors. The Company was assigned all right, title, and interest to an additional three pharmaceutical compounds on October 17, 2007, KM 133 (Prurisol), KM 362, and KM 3174. In July 2009, the Company was assigned all right, title, and interest to KM 732.  In exchange for these compounds, the Company agreed to pay the inventors 5% of net sales of the compounds in countries where composition of matter patents have been issued and 3% of net sales in other countries. Kevetrin, KM 277, KM 278 and KM 362 were acquired from our President and director, Dr. Krishna Menon.  In December 2012, the Company was issued a US patent for Kevetrin.  In January 2012 the Company filed a patent application for KM 133. The Company intends to file patent applications for each of the other six compounds as studies advance and funds become available for these projects.     

 

In December 2009, the Company was assigned all right, title and interest to a new compound, KM-391, which it intends to develop for the treatment of autism.  In exchange for this compound, the Company agreed to pay the inventors $10,000 plus 4.5% of net sales of the compound in countries where a composition of matter patent has been issued and 3% of net sales in other countries.

 

In March 2012, we entered into an agreement with Beth Israel Deaconess Medical Center (BIDMC), a teaching hospital of Harvard Medical School, on an innovative research project with Kevetrin. The Medical Center wishes to exploit the nuclear and/or mitochondrial pro-apoptotic function of p53 in melanoma and renal cell carcinoma, two types of cancer that are particularly resistant to therapy. BIDMC hopes to improve therapy for melanoma and renal cell carcinoma, cancers that are particularly resistant to therapy. BIDMC initiated combination studies with multikinase inhibitors which activate pro-apoptotic activity by translocation of p53 in mitochondria thereby inducing apoptosis. Apoptosis is enhanced by MDM2 inhibitors by stabilizing p53. As presented at the American Association for Cancer Research (AACR) meeting in April, Kevetrin phosphorylates MDM2 which activates and stabilizes p53 by monoubiquitination inducing apoptosis. Prior data from the BIDMC laboratory showed that agents of this class can augment the pro-apoptotic and antitumor effects of MDM2 antagonists and is expected to have a synergistic effect with Kevetrin. BIDMC will test the effects of Kevetrin alone and in combination with FDA-approved VEGFR antagonists in the renal cell carcinoma and melanoma studies. In vitro study endpoints include apoptosis by measuring caspase activation and PARP cleavage. In vivo endpoints include efficacy in a xenograft model, tumor vascularity, p53 levels, p21 expression and apoptosis. This study will provide vital insight to exploit the nuclear and/or mitochondrial pro-apoptotic function by Kevetrin in combination with other multikinase inhibitors in treatment of these difficult to treat malignancies. At this time the study is in progress. The most recent results were received from BIDMC in April 2013, which sh owed apoptosis induction (TUNEL) in renal cancer (786). Results of these preclinical tests provided to date to the Company are encouraging and BIDMC and Cellceutix wish to move the study further. Cellceutix has provided the requested information from BIDMC that will be used to investigate a Specialized Programs of Research Excellence (SPORE) grant for a phase 2 clinical study of renal cancer upon completion of a successful phase 1 clinical study presently in progress.

 

42
 

On June 21, 2012, the U.S. Food and Drug Administration ("FDA") approved the Investigational New Drug (“IND”) application for Kevetrin, Cellceutix's novel anti-cancer compound. The Phase 1 trials are being conducted at Harvard Cancer Center's Dana-Farber Cancer Institute and partner Beth Israel Deaconess Medical Center.  The clinical trial will test Kevetrin against a variety of different solid tumor cancer types in patients with advanced-stage cancers. Primary endpoints for the study will be safety, tolerable dosing levels and establishing the dose for a future Phase II clinical trial.

 

The trial is registered on www.clinical trials.gov. http://clinicaltrials.gov/ct2/show/NCT01664000?term=Kevetrin&rank=1

 

On December 25, 2012, the United States Patent and Trademark Office (USPTO) awarded the Company U.S. Patent No. 8,338,454 B2, titled "Nitrile Derivatives and their Pharmaceutical Use and Compositions." The patent covers pharmaceutical compositions comprising Kevetrin, and related compounds and compositions.

 

The University of Bologna in Italy (the “University”) and The Italian Cooperative Study Group on Chronic Myeloid Leukemia (ICSG on CML) and Acute Leukemia (GIMEMA Group) plan on testing Kevetrin against Acute Myelogenous Leukemia (AML). We have been advised that the study, a phase 1b trial, will be titled “A Multi-Center, Open-Label, Phase 1B Study of Escalating Doses of Kevetrin (Thioureidobutyronitrile) Administered Intravenously, with Cytarabine Administered A) Subcutaneously, or B) Intravenously, in Patients with Acute Myelogenous Leukemia (AML).” The trial’s principal investigator wants this phase 1b trial to begin once a higher patient dosing is achieved at the Dana Farber trial. The University will source the funding for this trial.

 

The Company is presently in discussions with other institutions for collaborations in conducting clinical trials and acquiring a new drug. There are now two material transfer agreements pending with major hospitals.

 

In June 2012 Cellceutix participated in a pre IND meeting with the U.S. Food and Drug Administration ("FDA") pertaining to Prurisol™. The Company had requested the meeting for guidance on its initiatives to seek a section 505(b)(2) designation for Prurisol™, which would allow the Company to forgo early-stage trials and advance Prurisol™ into latter-stage clinical trials.  Cellceutix was advised by the FDA that a 505(b)(2) application would be an acceptable approach for Prurisol. In September 2012, Cellceutix selected Dr. Reddy's Laboratories as its vendor to manufacture and formulate Prurisol for planned clinical trials. The Company plans on filing a 505(b)(2) application in 2013.

2.         Going Concern

 

The accompanying financial statements have been prepared assuming the Company will continue as a going concern. For the period since June 20, 2007 (date of inception) through June 30, 2013, the Company has had a deficit accumulated during the development stage of approximately $19.8 million and a working capital deficit of approximately $5.2 million at June 30, 2013.  As of June 30, 2013, the Company has not emerged from the development stage. In view of these matters, the ability of the Company to continue as a going concern is dependent upon the Company’s ability to generate additional financing. Since inception, the Company has financed its activities principally from the use of equity securities, debt issuance and loans from an officer to pay for its operations. The Company intends on financing its future development activities and its working capital needs largely from the issuance of debt and the sale of equity securities, until such time that funds provided by operations are sufficient to fund working capital requirements. The Company has entered into a financing agreement with Aspire Capital Fund for $10,000,000 (See Note 10). As of June 30, 2013, the Company had completed sales to Aspire totaling 2,712,208 shares of common stock generating gross proceeds of approximately $4,382,000. As of June 30, 2013, approximately $5,618,000 is available under the financing arrangement with Aspire on the sale of the Company’s common stock. See Note 13 for subsequent common stock sales to Aspire and the conversion of warrants to common stock made after June 30, 2013.

 

Failure to secure the necessary financing in a timely manner and on favorable terms could have a material adverse effect on the Company’s growth strategy, financial performance and stock price and could require the delay of new product development and clinical trial plans.

 

These factors raise substantial doubt about the Company's ability to continue as a going concern. The accompanying financial statements do not include any adjustments relating to the recoverability of the recorded assets or the classification of liabilities that may be necessary should the Company be unable to continue as a going concern. 

43
 

 

3.         Significant Accounting Policies and Recent Accounting Pronouncements

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All material intercompany balances and transactions have been eliminated in consolidation.

 

Cash and Cash Equivalents

 

Cash and cash equivalents consist of cash and short-term highly liquid investments purchased with original maturities of three months or less. There were no cash equivalents at June 30, 2013 and 2012.

 

Intangible Assets – Patents

 

Costs incurred to file patent applications are capitalized when the Company believes that there is a high likelihood that the patent will issue and there will be future economic benefit associated with the patent.  These costs will be amortized on a straight-line basis over a 17 year life from the date of patent filing.  All costs associated with abandoned patent applications are expensed.  In addition, the Company will review the carrying value of patents for indicators of impairment on a periodic basis and if it determines that the carrying value is impaired, it values the patent at fair value. As of June 30, 2013, carrying value of patent was $10,400 and for the fiscal years ended June 30, 2013 and 2012 and from inception to June 30, 2013, the Company has amortized the patent costs of $616, $0, and 616, respectively.

 

As of June 30, 2013, the Company has expensed the costs associated with obtaining patents that have not yet developed products which have gained market acceptance.  For the fiscal years ended June 30, 2013 and 2012 and from inception to June 30, 2013, the Company has charged to operations $28,815, $98,610, and $197,108, respectively.

 

Financial Instruments

 

The Company’s financial instruments include cash, accounts payable and accrued liabilities.  The carrying amounts of these financial instruments approximate their fair value, due to the short-term nature of these items.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

 

Significant Estimates

 

These accompanying consolidated financial statements include some amounts that are based on management’s best estimates and judgments. The most significant estimates relate to valuation of stock grants and stock options and the valuation allowance on deferred tax assets. It is reasonably possible that these above-mentioned estimates and others may be adjusted as more current information becomes available, and any adjustment could be significant in future reporting periods.

 

Certain Risks and Uncertainties

 

Product Development

 

We devote significant resources to research and development programs in an effort to discover and develop potential future product candidates. For the fiscal years ended June 30, 2013 and 2012, and the period from inception to June 30, 2013, the Company incurred approximately $1,510,000, $633,000, and $5,873,000 of research and development costs net of grants respectively. The product candidates in our pipeline are at various stages of preclinical and clinical development. The path to regulatory approval includes three phases of clinical trials in which we collect data to support an application to regulatory authorities to allow us to market a product for treatment of a specified disease. There are many difficulties and uncertainties inherent in research and development of new products, resulting in a high rate of failure. To bring a drug from the discovery phase to regulatory approval, and ultimately to market, takes many years and significant cost. Failure can occur at any point in the process, including after the product is approved, based on post-market factors. New product candidates that appear promising in development may fail to reach the market or may have only limited commercial success because of efficacy or safety concerns, inability to obtain necessary regulatory approvals, limited scope of approved uses, reimbursement challenges, difficulty or excessive costs of manufacture, alternative therapies or infringement of the patents or intellectual property rights of others. Uncertainties in the FDA approval process and the approval processes in other countries can result in delays in product launches and lost market opportunities. Consequently, it is very difficult to predict which products will ultimately be submitted for approval, which have the highest likelihood of obtaining approval and which will be commercially viable and generate profits. Successful results in preclinical or clinical studies may not be an accurate predictor of the ultimate safety or effectiveness of a drug or product candidate.

 

44
 

Expenditures for research, development, and engineering of products are expensed as incurred.   In November 2010, the Company was awarded three separate U.S. government grants under the Qualifying Therapeutic Discovery Project (QTDP) program.   For the period from inception to June 30, 213, the Company has reflected $733,438 of grants as a one time reduction of research and development expenses. For the fiscal years ended June 30, 2013 and 2012, and the period from inception to June 30, 2013, the Company incurred approximately $1,510,000, $633,000, and $5,873,000 of research and development costs net of grants respectively.

 

Concentrations of Credit Risk

 

All cash is maintained with a major financial institution in the United States.  Deposits with this bank may exceed the amount of insurance provided on such deposits.  Generally, these deposits may be redeemed upon demand and, therefore, bear minimal risk.

 

Income Taxes

 

Deferred income tax assets and liabilities arise from temporary differences associated with differences between the financial statements and tax basis of assets and liabilities, as measured by the enacted tax rates, which are expected to be in effect when these differences reverse.  Deferred tax assets and liabilities are classified as current or non-current, depending upon the classification of the asset or liabilities to which they relate.  Deferred tax assets and liabilities not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse.  Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

 

The Company has generated net losses since inception and accordingly has not recorded a provision for income taxes. The deferred tax assets were primarily comprised of federal and state tax net operating loss, or NOL, carryforwards. Due to uncertainties surrounding the Company’s ability to generate future taxable income to realize these tax assets, a full valuation allowance has been established to offset the deferred tax assets. Additionally, the future utilization of the NOL carryforwards to offset future taxable income may be subject to an annual limitation as a result of ownership changes that could occur in the future.  If necessary, the deferred tax assets will be reduced by any carryforwards that expire prior to utilization as a result of such limitations, with a corresponding reduction of the valuation allowance.

 

The Company adopted the provisions of FASB ASC 740-10 “ Uncertainty in Income Taxes ” (ASC 740-10), on July 1, 2007. The Company has not recognized a liability as a result of the implementation of ASC 740-10. A reconciliation of the beginning and ending amount of unrecognized tax benefits has not been provided since there is no unrecognized benefit since the date of adoption. The Company has not recognized interest expense or penalties as a result of the implementation of ASC 740-10. If there were an unrecognized tax benefit, the Company would recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses.

 

The Company has identified its U.S. Federal income tax return and its State return in Massachusetts as its major tax jurisdictions. The fiscal 2011 and forward years are still open for examination.

 

Basic Earnings (Loss) per Share

 

Basic and diluted earnings per share are computed based on the weighted-average common shares and common share equivalents outstanding during the period. Common share equivalents consist of stock options, warrants and convertible notes payable. Common share equivalents of 49,345,106 and 51,001,781 were excluded from the computation of diluted earnings per share for the years ended June 30, 2013 and 2012, respectively, because their effect is anti-dilutive.

 

Accounting for Stock Based Compensation

 

The stock-based compensation expense incurred by Cellceutix for employees and directors in connection with its stock option plan is based on the employee model of ASC 718, and the fair market value of the options is measured at the grant date. Under ASC 718 employee is defined as “An individual over whom the grantor of a share-based compensation award exercises or has the right to exercise sufficient control to establish an employer-employee relationship based on common law as illustrated in case law and currently under U.S.“tax regulations”. Our consultants do not meet the employer-employee relationship as defined by the IRS and therefore are accounted for under ASC 505-50.

 

ASC 505-50-30-11 (previously EITF 96-18) further provides that an issuer shall measure the fair value of the equity instruments in these transactions using the stock price and other measurement assumptions as of the earlier of the following dates, referred to as the measurement date:

 

  i. The date at which a commitment for performance by the counterparty to earn the equity instruments is reached (a performance commitment); and
  ii.

The date at which the counterparty’s performance is complete.

 

 

45
 

We have elected to use the Black-Scholes-Merton pricing model to determine the fair value of stock options on the dates of grant. Restricted stock units are measured based on the fair market values of the underlying stock on the dates of grant. We recognize stock-based compensation using the straight-line method.

 

The components of stock based compensation related to stock options recognized in the Company’s Statement of Operations for the fiscal years ended June 30, 2013 and 2012 and since inception are as follows(rounded to nearest thousand):

 

    June 30, 2013     June 30, 2012    

For the

cumulative period

from June 20,

2007 (Date of

Inception)

through June 30,2013

                 
Officers’ stock compensation $ -   $ 1,995,000     4,850,000
Consulting   299,000     159,000     1,467,000
Patent expense   -         19,000
Total $ 299,000   $ 2,154,000     6,336,000

 

Recent Accounting Pronouncements

 

In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. ASU No. 2013-02 requires entities to present by component significant amounts reclassified out of accumulated other comprehensive income either on the face of the statement where net income is presented or in the notes to the financial statements. ASU No. 2013-02 is effective for annual and interim periods beginning after December 31, 2012 and should be applied prospectively. We adopted ASU No. 2013-02 during fiscal 2013. The adoption of ASU No. 2013-02 did not have a material effect on our financial position, results of operations or cash flows.

 

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. ASU No. 2011-05 eliminates the option of presenting components of other comprehensive income as a part of the statement of changes in stockholders' equity. ASU No. 2011-05 requires entities to present all non-owner changes in stockholders' equity either on the face of the financial statements or in the notes. The non-owner changes in stockholders' equity are required to be presented on the face of the financial statements either as a single statement of comprehensive income or as two separate consecutive statements. ASU No. 2011-05 is effective for public entities for annual periods, and interim periods within those years, beginning after December 15, 2011 and should be applied retrospectively. We adopted ASU No. 2011-05 during fiscal 2013. The adoption of ASU No. 2011-05 did not have a material effect on our financial position, results of operations or cash flows.

 

Other recent accounting pronouncements issued by FASB (including EITF), the AICPA and the SEC did not or are not believed by management to have a material impact on the Company’s present or future financial statements.

 

4.      Accrued Expenses

 

Accrued expenses consisted of the following (rounded to nearest thousand):

 

    June 30, 2013     June 30, 2012  
             
Accrued research and development consulting fee  $ 200,000   $ 14,000  
Accrued rent (Note 7) – related parties   60,000     50,000  
Accrued interest – related parties   294,000     267,000  
          -  
Total $ 554,000   $ 331,000  

 

5.      Accrued Salaries and Payroll Taxes – Related Parties

 

Accrued salaries and payroll taxes consisted of the following (rounded to nearest thousand):

 

    June 30, 2013     June 30, 2012  
             
Accrued salaries – related parties  $ 3,244,000   $ 2,648,000  
Accrued payroll taxes – related parties   152,000     142,000  
Withholding tax – related parties   31,000     -  
Withholding tax employee   4,000     -  
Total $ 3,431,000   $ 2,790,000  

 

46
 

On December 29, 2010, the Company entered into employment agreements with its two executive officers, Leo Ehrlich, the Company’s Chief Executive Officer, and Krishna Menon, Chief Scientific Officer. Both agreements provide for a three year term with each executive receiving an annual base salary for $350,000 per year commencing January 1, 2011, with an annual increase of 10% for each year commencing January 2012. The Board, at its discretion, may increase the base salary based upon relevant circumstances. Beginning in April, 2013, the Company started making current cash payments to the two executive officers for salaries.

 

6.        Commitments and Contingencies

Settlement Agreement

 

On February 14, 2011, the Company announced it reached a settlement agreement on all outstanding claims and issues between the Company and our former CEO, Mr. Evans. Each party dropped their respective claims and as a result all of Mr. Evans accrued salaries and options were cancelled.  The terms of the agreement provide that the Company purchase 4,602,312 common shares held by Mr. Evans and/or Mr. Evans’ sons over a period of three years for a total sum of one million dollars.   Payment by the Company in the amount of $100,000 was made upon signing of the agreement, which resulted in reducing the liability owed to Mr. Evans; cancelling 460,229 shares of common stock.  On February 4, 2012 and January 29, 2013, the Company made the second and third payment of $300,000 each to Mr. Evans and cancelled 1,380,000 shares of its common stock in each of the two years.  The remaining 1,382,084 shares of common stock held in escrow until additional payments are made under the agreement are shown as Treasury Stock on the Company’s Balance Sheet.

 

The Company had initially recorded this settlement at December 31, 2010 as a liability of the present value of the future payments and treasury stock. The Company had also recorded the forgiveness of Mr. Evans’ accrued payroll and related payroll taxes as a capital contribution of approximately $932,000.  As of June 30, 2013, the settlement liability of approximately $285,000 is due in February 2014 and recorded as current liability. Subsequent to balance sheet date, the Company signed an amendment to the settlement agreement for a final installment payment of $292,500 (See Note 13).

 

Legal

 

Formatech is a former vendor of ours which had had received 184,375 shares of Cellceutix Class A Common Stock (“Cellceutix Stock”) for services that were not completed. Formatech had gone bankrupt while still in possession of the Cellceutix Stock. In July 2012, the US Bankruptcy Court allowed the trustee of the Formatech estate to sell the Cellceutix Stock. We have been advised that the stock has been sold in 2013 and the funds released to the secured creditors of Formatech. Cellceutix presently is in the unsecured creditors class and does not expect to receive any proceeds.  

 

7.         Related Party Transactions

 

Office Lease

 

Dr. Menon, the Company’s principal shareholder, President, and Director, also serves as the Chief Operating Officer and Director of Kard Scientific (“KARD”). On December 7, 2007, the Company began renting office space from KARD, on a month to month basis for $900 per month.  At June 30, 2013 and June 30, 2012, payables of approximately $60,000 and $50,000 to KARD were included in accrued expenses, respectively. For the fiscal years ended June 30, 2013 and 2012 and the period June 20, 2007 (date of inception) through June 30, 2013, the Company has included $10,800, $10,800 and $60,300 in general and administrative expenses, respectively. See Note 13 regarding the subsequent amendment to this lease arrangement.

 

Clinical Studies

 

As of September 28, 2007 the Company engaged KARD to conduct specified pre-clinical studies necessary for the Company to prepare an IND submission to the FDA. The Company does not have an exclusive arrangement with KARD. All work performed by KARD must have prior approval by the executive officers of the Company, and the Company retains all intellectual property resulting from the services by KARD. For the fiscal years ended June 30, 2013 and 2012 and the period June 20, 2007 (date of inception) through June 30, 2013, the Company incurred $0, $10,000, and $2,601,000 of research and development expenses conducted by KARD, respectively.   At June 30, 2013 and 2012 the Company has included a total of approximately $1,686,000 and $1,686,000 in accounts payable to Kard, respectively.

   

8.       Note Payable – Related Party

 

During the year ended June 30, 2010, Mr. Ehrlich, loaned the Company a total of $972,907.  A condition for this note was that the Ehrlich Promissory Note A and Ehrlich Promissory Note B be replaced with a new note , Ehrlich Promissory Note C.  The Ehrlich Promissory Note C is an unsecured demand note that bears 9% simple interest per annum and is convertible into the Company’s common stock at $0.50 per share.  The note requires that the interest rate on the amounts due on Ehrlich Promissory Notes A and B be changed retroactively, beginning October 1, 2009, to 9%. On April 1, 2011, the Company amended the Ehrlich Promissory Note C  and agreed to retroactively convert accrued interest of $96,677 through December 31, 2010 into additional principal.During the year ended June 30, 2011, Mr. Ehrlich loaned the Company an additional $997,047 which brought the balance of the demand note to $2,002,264.   

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On May 8, 2012, the Company did not have the ability to repay the Ehrlich Promissory Note C loan and agreed to change the interest rate on the outstanding balance of principle and interest of $2,248,037, as of March 31, 2012, from 9% simple interest to 10% simple interest, and the Company issued 2,000,000 Equity Incentive Options exercisable at $0.51 per share equal to 110% of the closing bid price of $0.46 per share on May 7, 2012. Options are valid for ten (10) years from the date of issuance.

 

At June 30, 2013 and 2012, accrued interest on this note were approximately $294,000 and $267,000, respectively, and the Company started to repay accrued interest totalling approximately $175,000 for the year ended June 30, 2013. As of June 30, 2013 and 2012, balances of the demand note were approximately $2,022,000 and $2,022,000, respectively.

 

9.     Stock Options and Warrants

 

Consulting Agreement

 

On April 1, 2009, the Company entered into an agreement, subsequently amended, with a Consultant to assist the Company’s Chief Scientific Officer to organize, manage and display data from animal studies as well as information relating to Active Pharmaceutical Ingredients and formulations of the Company’s products through November 2010. The Consultant was compensated at the rate of $4,000 per month payable on the last day of each month. In addition, at the end of each month of services provided, the Consultant is granted options to purchase 10,000 shares of Company’s common stock.  Effective September 1, 2010, the Company has extended the current agreement and beginning in August 2010, the monthly fee was increased to $5,000.  The monthly fee was increased to $6,000 beginning in November 2012. The remainder of the agreement remains unchanged.  Through June 30, 2013, the Consultant had been awarded a total of 480,000 options to purchase common stock valued at approximately $284,000 to be vested over one year from date of issuance.  Effective April 1, 2013, the consulting agreement was terminated and the consultant was employed as an employee. For the year ended June 30, 2013, the Company has expensed approximately $104,000, and $97,000 to professional fees expense, related to these options and re-measurement up to June 30, 2013, respectively.

 

Stock Options

 

The fair value of each option for the years ended June 30, 2013 and 2012 was estimated on the date of grant using the Black Scholes model that uses assumptions noted in the following table.

 

 

Year Ended

June 30, 2013

 

Year Ended

June 30, 2012

Expected term (in years) 5-10   3-10
Expected stock price volatility 133.51% - 137.33%   138.64% - 148.15%
Risk-free interest rate 0.55% – 1.98%   0.43% – 3.0%
Expected dividend yield 0   0

 

On April 5, 2009 the Board of Directors of the Registrant adopted the 2009 Stock Option Plan (“the Plan”). The Plan permits the grant of 2,000,000 shares of both Incentive Stock Options (“ISOs”), intended to qualify under section 422 of the Code, and Non-Qualified Stock Options.

 

Under the 2010 Equity Incentive Plan the total number of shares of Common Stock reserved and available for issuance under the Plan shall be 45,000,000 shares. Shares of Common Stock under the Plan (“Shares”) may consist, in whole or in part, of authorized and unissued shares or treasury shares. The term of each Stock Option shall be fixed by the Committee; provided, however, that an Incentive Stock Option may be granted only within the ten-year period commencing from the Effective Date and may only be exercised within ten years of the date of grant (or five years in the case of an Incentive Stock Option granted to an optionee who, at the time of grant, owns Common Stock possessing more than 10% of the total combined voting power of all classes of voting stock of the Company (“10%Shareholder”).

  

The following table summarizes all stock option activity under the plans:

 

   Number of
Options
   Weighted Average
Exercise Price
   Weighted Average
Remaining Contractual Life (Years)
   Aggregate Intrinsic Value
               
Outstanding at June 30, 2012 41,277,500 $ 0.14   8.46 $ 21,186,000
Granted 120,000   1.08   8.11   -
Exercised (2,255,000)   0.12   -   -
Forfeited/expired -   -   -   -
Outstanding at June 30, 2013 39,142,500 $ 0.14   7.47 $ 64,170,000
Exercisable at June 30, 2013 39,105,000 $ 0.14   7.47 $ 64,157,000

 

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The Company recognized approximately $299,000 and $2,154,000 of stock based compensation costs related to stock and stock options awards for the year ended June 30, 2013 and 2012; and approximately $6,336,000 for the period from inception to June 30, 2013, respectively, and there is approximately $54,000 of unamortized compensation cost expected to be recognized through June 30, 2014.  

Stock Warrants

 

On March 5, 2013 the Company issued 370,500 Class A common shares par value $.0001 to each of two warrant holders upon exercise of Common Stock Purchase Warrants exercisable at $0.25 per share. The Company received an aggregate of $185,250. The issuance was exempt from registration under Section 4(2) of the Securities Act.

 

As of June 30, 2013 and 2012, there were 5,571,084 and 5,719,754 warrants issued and outstanding with a weighted average exercise price of $0.92 and $0.87, respectively. As of June 30, 2013 and 2012 , the average remaining contractual life of the outstanding warrants was1.43 years and 2.02 years, respectively and the aggregate intrinsic value was $4,794,000 and $474,000, respectively.

 

 

10.     Equity Transactions

 

Aspire Agreement

 

On December 6, 2012, the Company entered into a Class A Common Stock Purchase Agreement with Aspire Capital Fund, LLC, which provides that upon meeting the terms of the agreement, Aspire Capital is committed to purchase up to an aggregate of $10,000,000 of our shares of Class A Common Stock over the approximately 36-month term of the Purchase Agreement. In consideration for entering into the Purchase Agreement, the Company issued to Aspire Capital 336,625 shares of our Class A Common Stock as a commitment fee and sold to Aspire Capital 112,208 shares of Class A Common Stock for $100,000.The deferred offering costs were fully amortized during the year ended June 30, 2013 as a significant amount of funding was received and the remaining funding is reasonably assured.

 

Concurrently with entering into the Purchase Agreement, the Company agreed to file one or more registration statements as permissible and necessary under the Securities Act of 1933, as amended, or the Securities Act, for the sale of shares of our Class A Common Stock that have been and may be issued to Aspire Capital under the Purchase Agreement. On January 22, 2012, the Company filed a Form S-3 registration statement and the registration statement was declared effective by the SEC on February 14, 2013. Thereafter, on every and any business day selected by the Company, the Company shall have the right to direct Aspire Capital Fund to purchase (each such purchase, a “Regular Purchase”), up to 100,000 shares on each and any business day chosen by the Company; however, in any event, the amount of a Regular Purchase will not exceed $500,000 per business day. The purchase price for Regular Purchases (the “Regular Purchase Price”), shall be equal to the lesser of: (i) the lowest sale price of the shares on the purchase date, or (ii) the average of the three (3) lowest closing sale prices of the shares during the twelve (12) business days prior to the purchase date. The Regular Purchase Price will be known at the time of notice and before any shares are sold to Aspire Capital Fund.

 

In addition to the Regular Purchases, with one day’s prior written notice, the Company shall also have the right to require the ACF Investor to purchase up to an additional 20% of the trading volume of the shares for the next business day at a purchase price (the “VWAP Purchase Price”), equal to the lesser of: (i) the closing sale price of the shares on the purchase date, or (ii) ninety-five percent (95%) of the next business day’s volume weighted average price (each such purchase, a “VWAP Purchase”). The Company shall have the right, in its sole discretion, to determine a maximum number of shares and set a minimum market price threshold for each VWAP Purchase. The Company can only require a VWAP Purchase if (a) the closing sale price for the Company Class A common shares on the notice day for the VWAP Purchase is higher than $0.50, and (b) the Company has also submitted a Regular Purchase on the notice date for the VWAP Purchase. There are no limits on the number of VWAP Purchases that the Company may require.

 

Aspire Capital Fund has no right to require any sales by the Company, but is obligated to make purchases from the Company as the Company directs it in accordance with the Purchase Agreement. The Company can also accelerate the amount of Class A Common Stock to be purchased under certain circumstances. There are no limitations on use of proceeds, financial or business covenants, restrictions on future funding, rights of first refusal, participation rights, penalties or liquidated damages in the Purchase Agreement.

 

The Company is never under any obligation to sell shares to Aspire Capital Fund. Aspire Capital Fund has no rights to require the Company to sell shares.

As of June 30, 2013, the Company had completed sales to Aspire totaling 2,712,208 shares of common stock generating gross proceeds of approximately $4,382,000. As of June 30, 2013, approximately $5,618,000 is available under the financing arrangement with Aspire on the sale of the Company’s common stock. See Note 13 for sales made to Aspire subsequent to June 30, 2013.

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Series A Convertible Preferred Shares Subscription Agreement

 

On May 8, 2012, the Company entered into a subscription agreement for Series A Convertible Preferred shares with an accredited investor for an aggregate of $1,000,000.  The subscription agreement provides for installment funding Amounts, at Cellceutix’s discretion, to take place every thirty days after initial closing date  for an amount of the lesser of  (i) $75,000 or  (ii) twenty five  (25%) per cent of the dollar value of the total volume traded during the preceding 22 trading days.   The Series A Preferred Shares are convertible into common stock at the lesser of 85% of the closing bid price on the date of prior to each closing, or 85% of the lowest bid price for the fifteen (15) days prior to conversion.  At no time may a holder of shares of Series A Preferred Stock convert shares of the Series A Preferred Stock if the number of shares of Common Stock to be issued pursuant to such conversion would exceed, when aggregated with all other shares of Common Stock owned by such holder at such time, the number of shares of Common Stock which would result in such holder beneficially owning more than 9.99% of all of the Common Stock outstanding. Additionally, for each common share issued upon conversion of Series A preferred share, a five year common stock purchase warrant is issued to the Subscriber.  The warrant is exercisable at the conversion price of the common shares issued.  The fair value of the common stock into which the Series A Preferred Stock is convertible will exceed the price at which the common stock will be issued on the date of issuance of the preferred stock.  The amount by which the fair value of the common stock exceeds the issue price of the common stock is a beneficial conversion feature.  The Company will recognize the beneficial conversion feature as a one-time, non-cash deemed dividend to the holders of the Series A Preferred Stock on the date of issuance, which is the date the preferred stock first became convertible.   The Series A Convertible Preferred shares do not pay dividends.   The Common shares underlying the Series A Preferred Shares and the common stock purchase warrants are subject to piggy back registration rights and were registered by the Company. To date an aggregate of $400,000 was funded, and the Company issued an aggregate of 848,084 common shares and 848,084 common stock purchase warrants. The subscription for the remaining $600,000 subscription agreement was mutually terminated between the parties on January 8, 2013.

 

On June 25, 2012 the subscriber converted 10,000 Preferred Shares equal to $100,000 face value at $0.39 per share based on 85% of the closing bid price on May 7, 2012 of $0.46.  The company issued to the subscriber 255,754 shares of Cellceutix common stock.  In connection thereto the Company issued 255,754 warrants to purchase common shares of Cellceutix Corporation at $0.39 per share valid for five years.

 

On July 3, 2012 a tranche funding was made to purchase Series A Convertible Preferred shares in the amount of seventy five thousand dollars ($75,000) for the purchase 7,500 Series A Convertible Preferred Shares. 

 

On July 30, 2012, a tranche funding was made to purchase Series A Convertible Preferred shares in the amount of seventy five thousand dollars ($75,000) for the purchase 7,500 Series A Convertible Preferred Shares.

 

On August 1, 2012 the Series A Convertible Preferred subscriber converted 7,500 Preferred Shares equal to $75,000 face value at $0.49 per share based on 85% of the closing bid price on July 25, 2012 of $0.59. The company issued to the subscriber 153,061 shares of Cellceutix Class A common stock.  In connection thereto the Company issued 153,061 warrants to purchase Class A common shares of Cellceutix Corporation at $0.49 per share and is valid for five years. The shares and the warrants were subject to piggy back registration rights and were registered in the Company’s Form S-3 filed January 18, 2013.

 

On August 23, 2012 the Series A Convertible Preferred subscriber converted 7,500 Preferred Shares equal to $75,000 face value at $0.485 per share based on 85% of the closing bid price on August 14, 2012 of $0.571. The company issued to the subscriber 154,639 shares of Cellceutix Class A common stock.  In connection thereto the Company issued 154,639 warrants to purchase Class A common shares of Cellceutix Corporation at $0.485 per share and is valid for five years.

 

On August 31, 2012 a tranche funding was made to purchase Series A Convertible Preferred shares in the amount of $75,000 USD for the purchase of 7,500 Series A Convertible Preferred Shares.  

 

On September 19, 2012 the Series A Convertible Preferred subscriber converted 7,500 Preferred Shares equal to $75,000 face value at $0.527 per share based on 85% of the closing bid price on August 31, 2012 at $0.62.   The company issued to the subscriber 142,315 shares of Cellceutix Class A common stock.  In connection thereto the Company issued 142,315 warrants to purchase common shares of Cellceutix Corporation at $0.527 per share and is valid for five years.   The shares and the warrants were subject to piggy back registration rights and were registered in the Company’s Form S-3 filed January 18, 2013. 

On September 20, 2012 a tranche funding was made to purchase Series A Convertible Preferred shares in the amount of $75,000 USD for the purchase of 7,500 Series A Convertible Preferred Shares.

 

On September 24, 2012 the subscriber converted 7,500 Preferred Shares equal to $75,000 face value at $0.527 per share based on 85% of the closing bid price on August 31, 2012 of $0.62.  The company issued to the subscriber 142,315 shares of Cellceutix Class A common stock.  In connection thereto the Company issued 142,315 warrants to purchase Class A common shares of Cellceutix Corporation at $0.527 per share and is valid for five years.   The shares and the warrants were subject to piggy back registration rights and were registered in the Company’s Form S-3 filed January 18, 2013.

 

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Other Equity Transactions during the fiscal years ended June 30, 2013 and 2012

 

During the months of October, November and December 2011, warrants to purchase 2,500,000 shares of the Company’s Class A common stock were issued to an investor pursuant to his purchase of 2,500,000 shares of the Company’s Class A common stock at $0.40 per share. Under ASC 815-40-25, the fair value of these warrants should be reported as a liability, Pursuant to the Warrant Agreement, because there is currently no effective registration statement covering the shares of common stock underlying these warrants, these warrants are currently subject to a cashless exercise whereby the warrant holders may surrender their warrants to the company in exchange for shares of common stock. The number of shares of common stock into which a warrant would be exchangeable in such a cashless exercise depends on both the exercise price of the warrants and the market price of the common stock, each at or near the time of exercise. Because both of these factors are variable, it is possible that the company could have insufficient authorized shares to satisfy a cashless exercise. In this scenario, if the company were unable to obtain shareholder approval to increase the number of authorized shares, the company could be obligated to settle such a cashless exercise with cash rather than by issuing shares of common stock. Further, ASC 815-40-25 requires that we record the potential settlement obligation at each reporting date using the current estimated fair value of the warrants, with any changes being recorded through our statement of operations. The warrants were valued at $417,608 at the time of issuance and recorded as a liability. At December 31, 2011, the warrants were valued at $1,327,500 and the warrant liability was increased by $909,892. On January 12, 2012, the subscription agreement was modified to remove the cashless exercise provision, and provide for “piggy-back” registration rights. The warrants were valued as of January 12, 2012 and the value reduced by $470,000.  The remaining $857,000 of warrant value was reclassified from a liability to equity. 

 

On August 29, 2011, the Company issued 100,000 shares of Class A common stock to consultants for services rendered in the first quarter of fiscal year 2012.The 100,000 shares of common stock are valued at a total of $38,000.

 

On September 9, 2011, the company issued 471,518 common shares of the company stock to White Star LLC and 235,759 common shares to Dahlia Nordlicht upon conversion of convertible debentures. (See Note 11)

 

On November 8, 2011, the Company issued a total of 125,000 shares of Class A common stock to two consultants and a member of its scientific advisory board valued at $51,249.

 

On January 11, 2012, the Company issued a total of 200,000 shares of Class A common stock to a consultant valued at $90,000.

 

On February 2, 2012 the Company paid $300,000 to Mr. Evans and cancelled 1,380,000 shares of common stock related to Mr. Evans settlement agreement.

 

On March 7, 2012, the Company issued a total of 265,228 shares of Class A common stock as charitable contributions valued at $137,920.

 

On April 26, 2012, the Company issued 300,000 shares of Class A common stock to a consultant valued at $138,000.

 

On May 3, 2012, the Company issued a total of 100,000 shares of Class A common stock to two consultants valued at $49,000.

 

On May 29, 2012, the Company issued 25,000 shares of Class A common stock to a consultant valued at $13,250.

 

On July 25, 2012, the Company issued a total of 25,000 Class A common shares to consultants for services, valued at $14,750 based on the closing bid price as quoted on the OTC Bulletin Board on July 24, 2012 at $.59 per share.

 

On August 26, 2012, the Company issued a total of 50,000 Class A common shares to consultants for services, valued at $30,000 based on the closing bid price as quoted on the OTC Bulletin Board on August 25, 2012 at $.60 per share.

 

On September 7, 2012 a consultant exercised their option to purchase 250,000 shares of Class A common shares at $0.20, resulting in a payment to the Company of $50,000 and the issuance of 250,000 shares of Class A common stock.

 

On October 24, 2012 the Company issued a total of 50,000 Class A common shares to consultants for services through December 31, 2012, valued at $43,500 based on the closing bid price as quoted on the OTC Bulletin Board on October 23, 2012 at $.87 per share. 

 

On December 19, 2012 the Company issued 320,000 Class A common shares par value $.0001 to a consultant upon exercise of stock options granted to him pursuant to the Company’s 2009 and 2010 Equity Incentive Plans of which 80,000 were granted on March 2, 2009, exercisable at $0.14 per share; 200,000 were granted on February 8, 2011, exercisable at $0.20 per share; and 40,000 were granted on February 17, 2011 exercisable at $.20 per share. The Company received $59,200.  

 

On December 21, 2012 the Company issued 1,680,000 Class A common shares to a consultant upon exercise of Stock Options granted on December 29, 2010 under the Company’s 2010 Equity Incentive Plan and exercisable at $0.10 per share. The Company received $168,000.  

 

51
 

On May 31, 2013, the Company issued 100,000 Class A common shares to a charity donation, valued at $220,000 based on the closing bid price as quoted on the OTC Bulletin Board on May 31, 2013 at $2.20 per share.

 

On June 16, 2013, a consultant exercised his option to purchase 5,000 shares of Class A common shares at $0.25, resulting in a payment to the Company of $1,250 and the issuance of 5,000 shares of Class A common stock.

 

On June 30, 2013, the Company issued 5,000 Class A common shares to a consultant for service, valued at $8,900 based on the closing bid price as quoted on the OTC Bulletin Board on June 30, 2013 at $1.78 per share.

 

During the year ended June 30, 2013, the Company issued 10,000 shares of stock options at the end of each month, totaled 90,000 shares to a Consultant as compensation for service to assist the Company’s Chief Scientific Officer (Note 9). As of June 30, 2013, 2013, a total of 480,000 options have been awarded to the Consultant.

 

 

12.       Income Taxes

 

Deferred income tax assets and liabilities are recognized for the expected future tax consequences of events that have been reflected in the financial statements. Deferred tax assets and liabilities are determined based on the differences between the book values and the tax bases of particular assets and liabilities and the tax effects of net operating loss and capital loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in the tax rate is recognized as income or expense in the period that included the enactment date.

 

The Company has incurred operating losses since its inception and, therefore, no tax liabilities have been incurred for the periods presented. The amount of unused tax losses available to carry forward and apply against taxable income in future years totaled approximately $8,187,000 at June 30, 2013. The loss carryforwards expire beginning in 2028. Internal Revenue Code Sec. 382 places limitations on the utilization of net operating losses.  Due to the potential limitation and the Company’s historical losses, the Company has placed a full valuation allowance.  The valuation allowance increased by $1,359,200 at June 30, 2013 and $1,278,300 at June 30, 2012.

  

The income tax provision benefit differs from the amount of tax determined by applying the Federal statutory rate as follows:

 

    June 30, 2013     June 30, 2012  
Book income at federal statutory rate   34.00%     34.00%  
State income tax,  net of federal tax  benefit   5.51%     4.72%  
Change in valuation allowance   (42.15%)     (25.86%)  
Research and development credit   4.68%     1.28%  
Permanent difference   (1.59%)     (6.22%)  
Others - net   (0.45%)     (7.92%)  
Total   0.00%     0.00%  

 

There was no current or deferred provision or benefit for income taxes for the years ended June 30, 2013 and 2012 and for the period from June 20, 2007 (Date of Inception) through June 30, 2013.  The components of deferred tax assets as of June 30, 2013 and 2012 are as follows:  

 

    June 30, 2013     June 30, 2012  
Deferred tax (liability) asset:            
Accrued payroll   1,351,000     1,109,600  
Stock compensation   1,964,000     1,916,300  
Other   212,000     108,700  
Research and development credit   370,000     263,000  
Net operating loss carry forwards   3,256,000     2,396,200  
    7,153,000     5,793,800  
Valuation allowance   (7,153,000)     (5,793,800)  
Total deferred taxes $ -   $ -  

 

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13.     Subsequent Events

 

Amendment to Evans Settlement Agreement

 

On September 3, 2013, the parties amended the Settlement Agreement and Release dated January 26, 2011. The amended agreement provides for total payment of $892,500, to be paid in three separate installments as follows: (i) two payments of $300,000 each to Mr. Evans payable on the first and second anniversary of the execution of this agreement; and (ii) a full and final installment payment of $292,500 on or before September 15, 2013.

 

The Company made the two payments of $300,000 each to Mr. Evans on February 4, 2012 and January 29, 2013, respectively as disclosed at note 5. As a result, the Company was required to pay the full and final installment payment of $292,500 which was paid on September 3, 2013 and all common shares previously held by Mr. Evans were cancelled by the Company and are no longer outstanding.

 

Acquisition of Assets

 

On September 4, 2013, the Company purchased substantially all of the assets (“Purchased Assets”) of Polymedix Inc, and Polymedix Pharmaceuticals, Inc. (“Seller”) from the U.S. Bankruptcy Court.  The Bankruptcy Cases were pending before the Bankruptcy Court for the District of Delaware and were being jointly administered under Case No. 13-10690 (BLS).

 

The aggregate purchase price for the sale and transfer of the Purchased Assets was $2.1 million in cash, plus 1.4 million shares of the Company’s Class A common stock (the “Registrable Securities”), total aggregate purchase price of approximately $4.8 million. These common shares were valued at $1.93 per share, based on the September 4, 2013 opening stock price as quoted on the OTB Bulletin Board, resulting in approximately $2.7 million of stock issued to acquire the Purchased Assets. The Company shall, not later than sixty days from the date of acquisition prepare and deliver to the Seller for their consent a schedule allocating the Purchase Price among the Purchased Assets acquired by the Company.

 

The Company is required to file a Registration with the Securities and Exchange Commission to register the common stock within 60 days.   At any time between one day after the Closing and three hundred and sixty-five (365) days after the Closing, the Seller or any holder of the Registrable Securities may make written demand upon the Purchaser for the Purchaser to repurchase the Registrable Securities for $1 per share. 

 

Equity Transactions

 

From July 1, 2013 to September 9, 2013, the Company issued 825,000 Class A common shares par value $.0001 to a warrant holder upon exercise of Common Stock Purchase Warrants exercisable at $1.00 per share. The Company received an aggregate of $825,000. The shares have been registered in the S-3 registration statement rendered effective February 14, 2013 by the SEC.

 

From July 1, 2013 to September 6, 2013, the Company has generated additional proceeds of approximately $3.2 million under the Common Stock Purchase Agreement with Aspire on the sale 1,800,000 shares of its common stock.

Office Lease

 

Effective from October 1, 2013, Cellceutix Corporation signed a lease extension agreement with Cummings Properties for the company’s offices and laboratories at 100 Cummings Center, Suite 151-B Beverly, MA 01915. The lease is extended for an additional term of five years ending on September 30, 2018 and requires monthly payments of $15,538. Cellceutix has taken over the space occupied by KARD . In addition, Innovative Medical Research Inc., a company owned by Leo Ehrlich and Dr. Krishna Mennon, officers of Cellecutix has co-signed the lease and will rent approximately 200 square feet of office space previously used by Cellceutix and pay Cellceutix $900 per month, the same amount Cellceutix previously paid KARD.

 

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

There have been no changes in or disagreements with the Company's accountants on accounting and financial disclosure.

 

ITEM 9A. CONTROLS AND PROCEDURES

 

Evaluation of disclosure controls and procedures.

 

The Company’s Chief Executive Officer and Chief Financial Officer has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the fiscal period ending June 30, 2013 covered by this Annual Report on Form 10-K.  Based upon such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were not effective as required under Rules 13a-15(e) and 15d-15(e) under the Exchange Act. This conclusion by the Company’s Chief Executive Officer and Chief Financial Officer does not relate to reporting periods after June 30, 2013.

 

Management’s Report on Internal Control Over Financial Reporting

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) of the Company.  Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

 

The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

 

Management, under the supervision of the Company’s Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control—Integrated Framework  issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on this evaluation, management concluded that the Company’s internal control over financial reporting was not effective as of June 30, 2013 under the criteria set forth in the   Internal Control—Integrated Framework  .

 

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.  Management has determined that material weaknesses exist due to:

 

• The Company lacks the necessary corporate accounting resources to maintain adequate segregation of duties. Reliance on these limited resources impairs Company’s ability to provide for proper segregation of duties and the ability to ensure consistently complete and accurate financial reporting, as well as disclosure controls and procedures.

 

• Lack of sufficient accounting expertise to appropriately apply GAAP for complex or non-recurring equity transactions.

 

The Company believes that the two deficiencies set forth above did not have an effect on the financial statements.

 

Management’s Remediation Initiatives

 

In an effort to remediate the identified material weaknesses and other deficiencies and enhance our internal controls, we plan to initiate the following series of measures when we have the financial resources to do so:

 

We will create a position to segregate duties consistent with control objectives and will increase our personnel resources and technical accounting expertise within the accounting function.

 

Management believes that the appointment of one or more outside Directors, who shall be appointed to a fully functioning audit committee, would remedy the lack of a functioning audit committee and a lack of a majority of outside directors on our Board.

 

54
 

Attestation Report

 

This Annual Report on Form 10-K does include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting as such report is required for accelerated filers.

 

Changes in Internal Control Over Financial Reporting

 

No change in the Company’s internal control over financial reporting occurred during the year ended June 30, 2013, that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

Baker Tilly Virchow Krause, LLP, Cellceutix’s independent registered public accounting firm, issued the report below on the effectiveness of Cellceutix’s internal control over financial reporting.

 

    Cellceutix Corporation  
       
September 30, 2013 By: /s/ Leo Ehrlich  
    Leo Ehrlich, Chief Executive Officer, Chief Financial Officer, Principal Accounting Officer, and Secretary  
       
       
September 30, 2013 By: /s/ Krishna Menon  
    Krishna Menon, President and Director  
       
55
 

Report of Independent Registered Public Accounting Firm

 

 

To the Stockholders and Board of Directors

Cellceutix Corporation

Beverly , Massachusetts

 

We have audited Cellceutix Corporation's (the “Company”) internal control over financial reporting of as of June 30, 2013, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards of internal control over financial reporting require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel 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 (GAAP). A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness have been identified and included in management’s assessment:

 

 

The Company lacks the necessary corporate accounting resources to maintain adequate segregation of duties. Reliance on these limited resources impairs the Company’s ability to provide for proper segregation of duties and the ability to ensure consistently complete and accurate financial reporting, as well as disclosure controls and procedures.

 

 

Lack of sufficient accounting expertise to appropriately apply GAAP for complex or non-recurring equity transactions.

 

These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements as of and for the year ended June 30, 2013, of the Company, and this report does not affect our report dated September 30, 2013 on those consolidated financial statements.

 

In our opinion, because of the effect of the material weaknesses identified above on the achievement of the objectives of the control criteria, Cellceutix Corporation has not maintained effective internal control over financial reporting as of June 30, 2013, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of Cellceutix Corporation, and our report dated September 30, 2013 expressed an unqualified opinion on those consolidated financial statements.

 

 

/s/ Baker Tilly Virchow Krause, LLP

New York, New York

September 30, 2013

56
 

 

ITEM 9B. OTHER INFORMATION

 

None 

 

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

 

The following table sets forth information regarding the members of the Company’s board of directors and its executive officers. All of the Company’s executive officers and directors were appointed on December 6, 2007, the effective date of the Acquisition. All directors hold office until the first annual meeting of the stockholders of the Company and until the election and qualification of their successors or their earlier removal or retirement.  

 

Officers are elected annually by the board of directors and serve at the discretion of the board.   

 

Name   Age   Title   
         

Leo Ehrlich

 

55

 

Chief Executive and Financial Officer; Chairman of the Board of Directors 

         
Krishna Menon    66   President; Chief Scientific Officer, Director 

 

Leo Ehrlich, CPA,  On November 5, 2010, Leo Ehrlich, was appointed to serve as Chief Executive and Financial Officer, and Chairman of the Board of Directors. Previously he served as Chief Financial Officer (CFO) of Cellceutix Pharma since inception in June 2007.  Following the acquisition, he was appointed CFO and a director.  From October 8, 1999 to December 31, 2008, Mr. Ehrlich had been a director at StatSure Diagnostic Systems, Inc. and has held different executive officer positions at that company including CEO, President, and CFO. Mr. Ehrlich was also CFO and a director of NanoViricides, Inc. from June 1, 2005 until May 2007.  Mr. Ehrlich is a Certified Public Accountant and received his BBA from Bernard Baruch College of the City University of New York.    

 

Krishna Menon RCM, PhD, VMD served as President of Cellceutix Pharma since inception in June 2007.  Following the acquisition, he was appointed President and a director. Dr. Menon, simultaneously therewith, also serves as the Chief Operating Officer at Kard Scientific, Inc.  Dr. Menon is also the inventor of Kevetrin, our lead compound.  Dr. Menon has more than 35 years in drug development for academia and industry. Originally trained as a veterinary surgeon, Menon began his career as Chief Government Veterinarian for a major Parish in Jamaica. He segued to a three-year stint as Director of Agriculture for the Cayman Islands, in the British Caribbean and, in 1982, moved to the Dana Farber Cancer Research Institute, where he worked under the direction of  Chief Physician Dr. Emil Tom Frye. He earned his PhD in Pharmacology from Kerala University. Menon's PhD work focused on anti-folate therapy of various cancers. Menon was Research Scientist at Dana Farber from 1985 to 1990 and Senior Research Scientist, In Vivo Research (Cancer), at Bayer Pharmaceuticals (Miles Laboratories) from 1991 to 1993. After a year operating his own veterinary oncology and drug development consultancy practice, Menon was tapped to be Group Leader, Cancer In Vivo Research and Clinical Development, for Eli Lilly (1995-2001), where he played a key role in lead selection and pre-clinical development of the eventual blockbuster drugs Gemzar and Alimta.  In 1999, Eli Lilly honored Menon with the “President's Recognition Award”. (See Item 13. Certain Relationships and Related Transactions; and Director Independence)  

    

AUDIT COMMITTEE. The Company intends to establish an audit committee, which will consist of independent directors. The audit committee's duties would be to recommend to the Company's board of directors the engagement of independent auditors to audit the Company's financial statements and to review its accounting and auditing principles. The audit committee would review the scope, timing and fees for the annual audit and the results of audit examinations performed by the internal auditors and independent public accountants, including their recommendations to improve the system of accounting and internal controls. The audit committee would at all times be composed exclusively of directors who are, in the opinion of the Company's board of  directors, free from any relationship which would interfere with the exercise of independent judgment as a committee member and who possess an understanding of financial statements and generally accepted accounting principles.  

 

COMPENSATION COMMITTEE. Our board of directors does not have a standing compensation committee responsible for determining executive and director compensation.  Instead, the entire board of directors fulfills this function, and each member of the Board participates in the determination.  Given the small size of the Company and its Board and the Company's limited resources, locating, obtaining and retaining additional independent directors is extremely difficult.  In the absence of independent directors, the Board does not believe that creating a separate compensation committee would result in any improvement in the compensation determination process.  Accordingly, the board of directors has concluded that the Company and its stockholders would be best served by having the entire Board of Directors act in place of a compensation committee.  When acting in this capacity, the Board does not have a charter.

   

57
 

In considering and determining executive and director compensation, our Board of Directors reviews compensation that is paid by other similar public companies to its officers and takes that into consideration in determining the compensation to be paid to the Company’s officers.  The Board of Directors also determines and approves any non-cash compensation to any employee. The Company does not engage any compensation consultants to assist in determining or recommending the compensation to the Company’s officers or employees.    

 

CODE OF ETHICS 

 

We have adopted a code of ethics meeting the requirements of Section 406 of the Sarbanes-Oxley Act of 2002. We believe our code of ethics is reasonably designed to deter wrongdoing and promote honest and ethical conduct; provide full, fair, accurate, timely and understandable disclosure in public reports; comply with applicable laws; ensure prompt internal reporting of violations; and provide accountability for adherence to the provisions of the code of ethic. Our code of ethics is filed as an exhibit to this Form 10-K.

 

  COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT   

 

Our executive officers and directors, and persons who own beneficially more than ten percent of our equity securities, are required under Section 16(a) of the Securities Exchange Act of 1934 to file reports of ownership and changes in their ownership of our securities with the Securities and Exchange Commission. They must also furnish copies of these reports to us. Based solely on a review of the copies of reports furnished to us and written representations that no other reports were required, we believe that for fiscal year 2011 our executive officers, directors and 10% beneficial owners complied with all applicable Section 16(a) filing requirements.

 

ITEM 11. EXECUTIVE COMPENSATION

 

Summary Compensation Table   

 

The following table sets forth all of the compensation awarded to, earned by or paid to (i) each individual serving as our principal executive officer during our last completed fiscal year; and (ii) each other individual that served as an executive officer at the conclusion of the fiscal year ended June 30, 2013 and who received in excess of $100,000 in the form of salary and bonus during such fiscal year (collectively, the Named Executives).   

 

Name  and Principal Position Year   Salary   Bonus   Option
Awards
Non-Equity
Incentive Plan
Compensation
  All Other
Compensation
  Total
                                       
Dr. Krishna 2013   $ 404,250   $ -   $ -               $ 404,250
Menon (1)(2) 2012   $ 367,500   $ -   $ 548,708   $     $     $ 916208
President, Chief Scientific                                    
Officer, Director                                      
                                       
Leo Ehrlich, (3)(4) 2013   $ 404,250   $ -   $ -               $ 404,250
Chief Executive 2012   $ 367,500   $ -   $ 1,446,708   $     $     $ 1,814,208
and Financial Officer,                                      
Chairman of the Board                                    

 

  (1) Dr. Menon has served as President, Chief Scientific Officer and a Director of the Company from June 2007 until present.

  

  (2) Represents the amount of Dr. Menon’s base salary paid by the Company.  Dr. Menon’s total base salary for 2008 was $200,000 for the period of December 7, 2007 through December 7, 2008, and $300,000 for the period of December 7, 2008 through December 7, 2009 and $400,000 for the period December 7, 2009 through June 30, 2010,  $ 375,000 for the period July 1, 2010 through June 30, 2011, $367,500 for the period July 1, 2011 through June 30, 2012, and $404,250 for the period July 1, 2012 through June 30, 2013. Of these amounts, $1,740,875 was deemed earned by Dr. Menon through June 30, 2013 and has been deferred and remains unpaid as of June 30, 2013

   

  (3) From June 2007, Mr. Ehrlich served as Chief Financial Officer and a Director of the Company. On November 5, 2010, Leo Ehrlich, was appointed to serve as Chief Executive and Financial Officer, and Chairman of the Board of Directors.

   

58
 

 

  (4) Represents the amount of Mr. Ehrlich’s base salary paid by the Company.  Mr. Ehrlich’s total base salary for 2008 was $150,000 for the period of December 7, 2007 through December 7, 2008, and $250,000 for the period of December 7, 2008 through December 7, 2009 and $250,000 for the period December 7, 2009 through June 30, 2010, $ 300,000 for the period from July 1, 2010 through June 30, 2011, $367,500 for the period July 1, 2011 through June 30, 2012 and $404,250 for the period July 1, 2012 through June 30, 2013.  Of these amounts, $1,503,375 was deemed earned by Mr. Ehrlich through June 30, 2013 and has been deferred and remains unpaid as of June 30, 2013.

 

 

COMPENSATION POLICY

 

Our Company’s executive compensation plan is based on attracting and retaining qualified professionals who possess the skills and leadership necessary to enable our Company to achieve earnings and profitability growth to satisfy our stockholders. We must, therefore, create incentives for these executives to achieve both Company and individual performance objectives through the use of performance-based compensation programs. No single component is considered by itself, rather all components of the compensation package are considered in aggregate. Wherever possible, objective measurements will be utilized to quantify performance, however, many subjective factors still come into play when determining performance.  

 

Compensation Components. As an early-stage development company, the main elements of our compensation package consist of base salary, stock options and bonus.  

 

Base Salary. As we continue to grow and financial conditions improve, these base salaries, bonuses and incentive compensation will be reviewed for possible adjustments. Base salary adjustments will be based on both individual and Company performance and will include both objective and subjective criteria specific to each executive’s role and responsibility with the Company.  

 

COMPENSATION OF DIRECTORS   

 

At this time, Directors receive no remuneration for their services as directors of the Company, nor does the Company reimburse its directors for expenses incurred in their service to the Board of Directors. The Company does not expect to pay any fees to its directors for the 2013 fiscal year.  

 

EMPLOYMENT AGREEMENTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS 

 

On December 29, 2010, the Company entered into employment agreements with its two executive officers, Leo Ehrlich, the Company’s Chief Executive and Financial Officer, and Krishna Menon, Chief Scientific Officer. Both agreements provide for a three year term with each executive receiving an annual base salary for $350,000 per year commencing January 1, 2011, with an annual increase of 10% for each year commencing January 2012. In addition, the Company’s Board awarded stock options exercisable at $0.11 per share pursuant to the Company’s 2010 Equity Incentive Plan to each executive officer as follows: Option Group A, a total of 18 million options with 6 million options vesting on December 29, 2010, 6 million options vesting on June 30, 2011 and 6 million options vesting on January 3, 2012. The Board, at its discretion, may increase the base salary based upon relevant circumstances.

 

On November 5, 2010, George Evans, our former CEO resigned his position as a Director and Chief Executive Officer of Cellceutix Corporation.  On February 14, 2011, the Company announced that it reached a settlement agreement on all outstanding claims between the Company and Mr. Evans. The terms of the agreement provided that the Company purchase 4,602,312 common shares held by Mr. Evans and/or Mr. Evans’ sons over a period of three years for a total sum of one million dollars. A payment by the Company in the amount of $100,000 was made upon the signing of the agreement which resulted in the cancellation of 460,229 common shares.  On February 4, 2012 and January 29, 2013, the Company made the second and third payment of $300,000 each to Mr. Evans and cancelled 1,380,000 shares of its common stock in each of the two years. Subsequent to balance sheet date, the Company signed an amendment to the settlement agreement for a final installment payment of $292,500 for the remaining common shares held by Mr. Evans. All options granted to Mr. Evans were cancelled.  These purchased shares were retired by the Company in September 2013.

 

 

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

 

The following table summarizes certain information regarding the beneficial ownership (as such term is defined in Rule 13d-3 under the Securities Exchange Act of 1934) of outstanding Celllceutix Common Stock as of June 30, 2013 (after giving effect to the Exchange) by (i) each person known by us to be the beneficial owner of more than 5% of the outstanding Cellceutix Common Stock, (ii) each of our directors, (iii) each of our named executive officers (as defined in Item 402(a)(3) of Regulation S-B under the Securities Act), and (iv) all executive officers and directors as a group. Except as indicated in the footnotes below, the security and stockholders listed below possess sole voting and investment power with respect to their shares. 

 

59
 

 

  Name and Address of Beneficial Owner

  Amount and Nature of 
Beneficial Owner (1)
    Percent of 
Class (2)
 

Dr. Krishna Menon C/O Cellceutix(3)

100 Cumming Ctr., Suite 151-B

Beverley, MA 01915 

    49,048,286     41.4 %
               

Leo Ehrlich (4) C/O Cellceutix

100 Cumming Ctr., Suite 151-B

Beverley, MA 01915 

    35,431,839     28.8 %
               

All Directors and Executive

Officers as a Group (2 persons) (5) 

    84,480,125     59.9%

   

  1. "Beneficial Owner" means having or sharing, directly or indirectly (i) voting power, which includes the power to vote or to direct the voting, or (ii) investment power, which includes the power to dispose or to direct the disposition, of shares of the common stock of an issuer. The definition of beneficial ownership includes shares, underlying options or warrants to purchase common stock, or other securities convertible into common stock, that currently are exercisable or convertible or that will become exercisable or convertible within 60 days. Unless otherwise indicated, the beneficial owner has sole voting and investment power.

   

  2. For each shareholder, the calculation of percentage of beneficial ownership is based upon 99,073,984 shares of Common Stock outstanding as of June 30, 2013, and shares of Common Stock subject to options, warrants and/or conversion rights, including the conversion right of $0.50 for one share on Mr. Ehrlich’s convertible debt, held by the shareholder that are currently exercisable or exercisable within 60 days, which are deemed to be outstanding and to be beneficially owned by the shareholder holding such options, warrants, or conversion rights. The percentage ownership of any shareholder is determined by assuming that the shareholder has exercised all options, warrants and conversion rights to obtain additional securities and that no other shareholder has exercised such rights.   

 

  3. Krishna Menon, Chief Scientific Officer.  Includes 18,000,000 vested options granted to him under the 2010 Equity Inventive Plan currently exercisable.

 

  4. Leo Ehrlich, CEO, Chief Financial Officer and Director.  (i) Includes 8,635,002 shares of Cellceutix common stock held by Mr. Ehrlich, (ii) includes 2,752,310 shares of Cellceutix’s common stock held by the wife of Leo Ehrlich, (iii) includes 4,044,527 shares of common stock into which the convertible loan in the amount of $2,022,527 would be convertible at $.50 per share deemed to be outstanding, (iv) includes 18,000,000 vested options granted to him under the 2010 Equity Incentive Plan currently exercisable and (v) includes 2,000,000 options issued to him on May 8, 2012.

 

  5. Includes 84,480,125 shares of Common Stock directly and indirectly owned by the Executive Officers and Directors as a group, family members (see 4.), convertible loans (see 4.), and vested options (see 3. and 4.).  

 

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

 

Dr. Krishna Menon  

 

On August 2, 2007 and October 17, 2007, Cellceutix Pharma entered into Compound Assignment Agreements, with Dr. Krishna Menon, our largest shareholder, covering Kevetrin, KM 277, KM 278 and KM 362.  On June 23, 2009, the Company entered into a Compound Assignment Agreement with Dr. Menon covering KM-732.  In each Agreement, the Company agreed to pay Dr. Menon 5% of net sales of the compounds in countries where a composition of matter patent is issued and 3% of net sales in other countries.  

 

These transactions have identical terms to transactions we entered into with other inventors who are unrelated third parties.  

 

KARD Scientific, Inc.  

 

Dr. Menon, the Company’s principal shareholder, President and Director also serves as the COO and Director of Kard Scientific. On December 7, 2007, Cellceutix Pharma began renting 200 square feet of office space from Kard Scientific, on a month to month basis for $900 per month.  In September of 2007, the Company engaged Kard Scientific to conduct specified pre-clinical studies necessary for the Company to prepare an IND submission to the FDA. We do not have an exclusive arrangement with KARD.  All work performed by Kard must have prior approval of the executive officers of the Company; and we retain all intellectual property resulting from the services by KARD. To date we have incurred charges from KARD of $2,601,110

 

60
 

Mr. Leo Ehrlich

 

During 2010, Mr. Ehrlich, an officer of the Company, converted previous amounts provided in cash to the Company of $32,310 into a loan (the “ Ehrlich Promissory Note A ”).   The Ehrlich Promissory Note A was an unsecured, 6% per annum simple interest bearing, demand note.  During the same period, Mr. Ehrlich provided an additional $85,000 in cash in the form of a loan to the Company (the “ Ehrlich Promissory Note B ”).  The Ehrlich Promissory Note B was an unsecured, 6% per annum simple interest bearing, demand note.

 

During the year ended June 30, 2010, Mr. Ehrlich, loaned the Company a total of $972,907.  A condition for this loan was that the Ehrlich Promissory Note A and Ehrlich Promissory Note B be replaced with a new note , Ehrlich Promissory Note C.  The Ehrlich Promissory Note C is an unsecured demand note that bears 9% simple interest per annum and is convertible into the Company’s common stock at $0.50 per share.  The note requires that the interest rate on the amounts due on Ehrlich Promissory Notes A and B be changed retroactively, beginning October 1, 2009, to 9%.   During the year ended June 30, 2011, Mr. Ehrlich loaned the Company an additional $997,047 which brought the balance of the demand note to $2,002,264.  On April 1, 2011, the Company amended the Ehrlich Promissory Note C  and agreed to retroactively convert accrued interest of $96,677 through December 31, 2010 into additional principal.

 

On May 8, 2012, the Company did not have the ability to repay the Ehrlich Promissory Note C loan and agreed to change the interest rate on  the outstanding balance of principle and interest of $2,248,037, as of March 31, 2012, from 9% simple interest to 10% simple interest, and the Company issued 2,000,000 Equity Incentive Options exercisable at $0.51 per share equal to 110% of the closing bid price of $0.46 per share on May 7, 2012. Options are valid for ten (10) years from the date of issuance.

 

At June 30, 2013 and 2012, approximately $294,000 and $267,000, respectively were accrued as interest expense on this note. As of June 30, 2013 and 2012, balances of the demand note were approximately $2,022,000 and $2,022,000, respectively.

 

Currently, we have no independent directors on our Board of Directors, and therefore have no formal procedures in effect for reviewing and pre-approving any transactions between us, our directors, officers and other affiliates. We will use our best efforts to insure that all transactions are on terms at least as favorable to the Company as we would negotiate with unrelated third parties. 

   

Director Independence 

 

Our common stock trades on the OTC Bulletin Board , OTCBB. As such, we are not currently subject to corporate governance standards of listed companies, which require, among other things, that the majority of the board of directors be independent.  

 

Since we are not currently subject to corporate governance standards relating to the independence of our directors, we choose to define an “independent” director in accordance with the NASDAQ Global Market's requirements for independent directors (NASDAQ Marketplace Rule 4200). We do not currently have an independent director under the above definition. We do not list that definition on our Internet website. 

 

ITEM 14. PRINCIPAL ACCOUNTANTS FEES AND SERVICES

 

The following table sets forth the aggregate fees for professional audit services rendered by Holtz Rubenstein Reminick LLP for the audit of the Company’s annual financial statements for the fiscal years 2013 and 2012 respectively, and fees billed for other services provided by Holtz Rubenstein Reminick LLP for fiscal years 2013 and 2012. On June 1, 2013, Holtz Rubenstein Reminick LLP combined its practice (the "Merger") with Baker Tilly Virchow Krause, LLP. The engagement of Baker Tilly was approved by the Board of Directors on June 1, 2013. The Board of Directors has approved all of the following fees.

 

 

  Fiscal Year Ended  
  2013   2012  
         
Audit Fees $ 100,600   $ 99,587  (1)
Audit related Fees $ -   $ -  
Tax Fees $ -   $ -  (2)
             
Total Fees $ 100,600   $ 99,587  

 

(1) Includes fees for services related to the performance of the audit or review of the Company’s financial statements and costs associated with the S-3 registration statement

 

(2) Includes fees for service related to tax compliance, tax advice, and tax planning

 

61
 

PART IV

 

ITEM 15. EXHIBITS

 

(a) Exhibit index

 

2.1         Agreement and Plan of Share Exchange, by and among EconoShare, Inc., Cellceutix Pharma, Inc., and the Shareholders of  Cellceutix Pharma, Inc. dated as of December 6, 2007 (1)

 

3.1         Articles of Incorporation of Cellceutix Pharma, Inc. (1)

 

3.2         By-laws of Cellceutix Pharma, Inc. (1)

 

3.4         State of Nevada,  Certificate Of Designations, Rights And Preferences Of The Series A Convertible Preferred Stock, May 9, 2012

10.1       Employment Agreement between EconoShare, Inc. and George W. Evans dated December 7, 2007 (1)

 

10.2       Employment Agreement between EconoShare, Inc. and Krishna Menon dated December 7, 2007 (1)

 

10.3       Assignment Agreement between Cellceutix Pharma, Inc. and. Krishna Menon dated August 2, 2007(1)

 

10.4       Assignment Agreement between Cellceutix Pharma, Inc. and Krishna Menon dated August 2, 2007(1)

 

10.5       Assignment Agreement between Cellceutix Pharma, Inc. and Krishna Menon dated August 2, 2007(1)

 

10.6       Assignment Agreement between Cellceutix Pharma, Inc. and Geetha Kamburath dated August 21, 2007(1)

 

10.7       Assignment Agreement between Cellceutix Pharma, Inc. and Krishna Menon dated October 17, 2007(1)

 

10.8       Assignment Agreement between Cellceutix Pharma, Inc. and Adam Harris dated October 17, 2007(1)

 

10.9       Confidential Disclosure Agreement between Kard Scientific, Inc. and Cellceutix Pharma, Inc. dated September 28, 2007. (1)

 

10.10     Laboratory Services Agreement Kard Scientific, Inc. and Cellceutix Pharma, Inc. dated September 28, 2007. (1)

 

10.11     Cellceutix Lease with Kard Scientific, Inc. dated December 7, 2007(1)

 

10.12     Assignment Agreement between Cellceutix Pharma, Inc. and Krishna Menon dated June 23, 2009

 

10.1.1    Security Agreement, dated as of May 7, 2008, between Cellceutix Corp. and Putnam Partners, White Star  LLC, and Dahlia Nordlicht, filed with the Company’s Form 10-KSB with the Securities Commission on September 24, 2008

 

10.2.2    Convertible  Promissory Note dated as of May 7, 2008, between Cellceutix Corp. and Putnam Partners,  White Star LLC, and Dahlia Nordlicht, filed with the Company’s Form 10-KSB with the Securities Commission on September 24, 2008.

 

10.3.4    Guaranty in favor of Putnam Partners, White Star LLC, and Dahlia Nordlicht dated as of May 7, 2008, filed with the Company’s Form 10-KSB with the Securities Commission on September 24, 2008

 

10.13     Agreement with Paul Ginsburg, Attorney filed on Form 8-K with the Securities Commission on April 6, 2009

 

10.14     Consulting Agreement with Sylvia Holden, Consultant filed on Form 8-K with the Securities Commission on April 6, 2009

 

10.15     Cellceutix Corporation 2009 Stock Option Plan filed on Form 8-K with the Securities Commission on April 6, 2009

 

10.16     Consulting Agreement with James DeAngelis filed on Form 8-K with the Securities Commission on May 21, 2009

 

10.17     Agreement between Cellceutix Pharma, Inc. and Girindus America dated June 22, 2009

 

10.18     Agreement between Cellceutix Corporation and Toxikon Corporation dated October 22, 2009

 

10.19     Completion of Acquisition of substantially all of the assets of Polymedix Inc, and Polymedix Pharmaceuticals, Inc. from the U.S. Bankruptcy Court. Filed on Form 8-K with the Securities Commission on September 4, 2013

 

10.20     Patent License Agreement, dated January 3, 2003, between PolyMedix Pharmaceuticals, Inc. (formerly known as PolyMedix, Inc.) and the University of Pennsylvania *

 

62
 

10.21     Letter Agreement, dated December 23, 2003, amending the Patent License Agreement, dated January 3, 2003, between PolyMedix Pharmaceuticals, Inc. (formerly known as PolyMedix, Inc.) and the University of Pennsylvania *

 

10.22     Software License Agreement, dated May 30, 2003, between PolyMedix Pharmaceuticals, Inc. (formerly known as PolyMedix, Inc.) and the University of Pennsylvania *

 

10.24     Agreement between Cellceutix Corporation and Formatech Corporation dated March 22, 2010

 

10.25     Demand Unsecured Note between Cellceutix Corporation and Leo Ehrlich dated November 03, 2009

 

10.26     Demand Unsecured Note between Cellceutix Corporation and Leo Ehrlich dated May 07, 2009

 

10.27     Demand Unsecured Note between Cellceutix Corporation and Leo Ehrlich dated August 25, 2010

 

10.28     Putnam Partners, Amended and Security Agreement, Amended Convertible  Promissory Note and Guaranty as of  January 1, 2010.

 

10.29     White Star LLC Amended  and Security Agreement, Amended Convertible  Promissory Note and Guaranty as of  January 1, 2010.

 

10.30     Dahlia NordlichtAmended and Security Agreement, Amended Convertible  Promissory Note and Guaranty as of  January 1, 2010.

 

10.31     Employment Agreement between Cellceutix Corporation and Krishna Menon  filed on Form 8-K with the Securities Commission on February 22, 2011

 

10.32     Employment Agreement between Cellceutix Corporation and Leo Ehrlich filed on Form 8-K with the Securities Commission on February 22, 2011

 

10.33     Cellceutix Corporation  2010 Equity Incentive Plan filed on Menon  filed on Form 8-K with the Securities Commission on February 22, 2011

 

10.34     Settlement Agreement between Cellceutix Corporation and George W. Evans filed on Form 10-Q with the Securities Commission on February 22, 2011

 

10.35     Form of Subscription Agreement. Offering by the Company of a maximum of up to 2,500,000  shares at $0.40   per share of the Company's Class A common stock with one Stock Purchase Warrant exercisable at $1.00 for each share of Common Stock, dated  October 11, 2011. 

 

  10.36     Subscription agreement for Series A Convertible Preferred shares with an accredited investor for an aggregate of $1,000,000, dated May 8, 2012.

 

14.15      Code of Ethics

 

31.1 Certification of Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended.*

 

31.2 Certification of Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended.*

 

32.         Certifications required under Section 906 of the Sarbanes Oxley Act of 2002*

 

63
 

 

101.INS   XBRL Instance Document.*

 

101.SCH   XBRL Taxonomy Extension Schema Document*

 

101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document*

 

101.DEF   XBRL Taxonomy Extension Definition Linkbase Document*

 

101.LAB   XBRL Taxonomy Extension Label Linkbase Document*

 

101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document*

 

*  An asterisk (*) indicates the exhibit is identified in this report.*

 

 (1)        Incorporated by reference to the Company’s registration statement on Form 8-K, filed with the Securities Commission on December 11, 2007

 

(b) Reports on Form 8-K

 

(1) The Company filed a Form 8-K on June 5, 2013 related to Item 4.01 Changes in Registrant’s Certifying Accountant. On June 1, 2013, the Company’s Audit Committee approved the engagement of Baker Tilly Virchow Krause, LLP as the Company’s independent registered public accounting firm, effective as of June 1, 2013.

 

64
 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Dated: September 30, 2013

 

/s/  Leo Ehrlich, Chief Executive Officer, Chief Financial Officer, Principal Accounting Officer, and Secretary.

Dated:  September 30, 2013

 

/s/ Krishna Menon, President and Director

Dated:  September 30, 2013

 

65

 

 

Execution Copy

PATENT LICENSE AGREEMENT

BETWEEN

POLYMEDIX, INC.

AND

THE TRUSTEES OF THE UNIVERSITY OF PENNSYLVANIA

 

 

 

PATENT LICENSE AGREEMENT

      This Patent License Agreement (this “Agreement”) is made on January 3, 2003 (the “Effective Date”), by and between The Trustees of the University of Pennsylvania, a Pennsylvania nonprofit corporation, with offices located at 3160 Chestnut Street, Suite 200, Philadelphia, Pennsylvania 19104-3147 (“Penn”), and Polymedix, Inc., a Delaware corporation (“Licensee”), with its principal offices at 5 Radnor Corporate Center, 100 Matsonford Road, Suite 520, Radnor, PA 19087.

BACKGROUND

      A.      Penn owns certain intellectual property developed by Drs. William Degrado and Michael Klein of Penn’s Schools of Medicine and of Arts and Sciences relating to antimicrobial materials, as described more fully in  Attachment 1  to this Agreement;

      B.      Licensee desires to obtain the exclusive right and license to use, develop, manufacture, market and exploit the intellectual property described in  Attachment 1 , and a first option to negotiate with Penn to obtain a license to certain intellectual property directly related thereto; and

      C.      The exploitation of the intellectual property developed by Drs. Degrado and Klein is in the best interest of Penn and is consistent with its educational and research mission and goals.

NOW, THEREFORE, in consideration of the promises and covenants contained in this Agreement and intending to be legally bound, the parties agree as follows:

1.       DEFINITIONS
 
        1.1     “ Affiliate ” means any legal entity directly or indirectly controlling, controlled by or under common control with Licensee that has executed (a) this Agreement or (b) a written joinder agreement, in a form satisfactory to Penn, agreeing to be bound by all of the terms and conditions of this Agreement as if such Affiliate were an original party to this Agreement. For purposes of this Agreement, “control” means the direct or indirect ownership of at least fifty percent (50%) of the outstanding voting securities of a legal entity, or the right to receive more than fifty percent (50%) of the profits or earnings of a legal entity, or the right to control the policy decisions of a legal entity, or the right to appoint a majority of its board of directors or the maximum percentage allowed by law in the country of the controlled entity.
 
        1.2     “ Agreement ” shall have the meaning given in the first paragraph hereof.
 
        1.3     “ Calendar Quarter ” means each three-month period, or any portion thereof, beginning on January 1, April 1, July 1 and October 1.

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      1.4     “ Change of Control ” means an assignment of the License, an exclusive sublicense of all of the intellectual property and any other rights granted to Licensee under this Agreement, a direct merger or other change in corporate structure where Licensee is not the surviving entity, a sale or transfer of the capital stock of Licensee representing more than fifty percent (50%) of the voting power of the stockholders of Licensee immediately prior to such sale, or an initial public offering of securities by Licensee. For clarity, a Change of Control shall not include a financing event in which Licensee may transfer more than fifty percent (50%) of the voting power of the stockholders to venture capital or other similar investors who do not exercise control over day-to-day operations of Licensee.
 
      1.5     “ Confidential Information ” means and includes all technical information, inventions, developments, discoveries, software, know-how, methods, techniques, formulae, data, processes and other proprietary ideas, whether or not patentable or copyrightable, regardless whether Penn identifies such information as confidential or proprietary at the time it is delivered or communicated to Licensee. Confidential Information shall include all disclosures hereunder in writing and identified as being “Confidential”, or if disclosed orally, which are reduced in writing within thirty (30) days of oral disclosure and clearly identified as being “Confidential.”
 
      1.6     “ Default ” shall have the meaning given in Section 5.3.
 
      1.7     “ Development Plan ” means a plan for the development and/or marketing of the Penn Patent Rights that demonstrates Licensee’s capability to bring the Penn Patent Rights to practical application. The initial Development Plan will be delivered within one hundred fifty (150) days of the Effective Date.
 
      1.8     “ Effective Date ” have the meaning given in the first paragraph of this Agreement.
 
      1.9     “ Fair Market Value ” means the cash consideration that Licensee, its Affiliates and/or Sublicensees would realize from an unaffiliated, unrelated buyer in an arm’s length sale of an identical item sold in the same quantity and at the same time and place of the transaction.
 
      1.10     “ Gross Sales ” means the consideration or Fair Market Value attributable to the Sale of any Penn Licensed Product(s), less the following:
 
             1.10.1     Discounts in amounts customary in the trade, for quantity purchases, for prompt payments and for wholesalers and distributors, to the extent separately stated on the invoice;
 
             1.10.2     Credits or refunds, not exceeding the original invoice amount, for claims or returns;
 
             1.10.3     Prepaid transportation expenses and transportation insurance premiums, to the extent separately stated on the invoice;
 
             1.10.4     Sales and use taxes and other fees imposed by a government agency, to the extent separately stated on the invoice; and
 
             1.10.5     Price reductions imposed by governmental agencies.

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      1.11     “ Indemnified Party ” shall have the meaning given in Section 8.5.
 
      1.12     “ Liability ” and “ Liabilities ” shall have the meaning given in Section 8.5.
 
      1.13     “ License ” shall mean the license granted by Penn to Licensee pursuant to Section 2.1.
 
      1.14     “ Licensee ” shall have the meaning given in the first paragraph of this Agreement.
 
      1.15     “ Penn Licensed Product(s) ” means products that are made, made for, used or sold by Licensee, its Affiliates and/or Sublicensees and that: (a) in the absence of this Agreement would infringe at least one Valid Claim of the Penn Patent Rights; or (b) are made using a process or machine covered by a Valid Claim of the Penn Patent Rights.
 
      1.16     “ Penn Patent Rights ” means all patent rights represented by or issuing from the United States or foreign patents listed in  Attachment 1  or the patents issuing from the United States or foreign patent or provisional applications listed in  Attachment 1 , and their foreign counterparts and extensions, including continuations, divisionals, renewals, reissues, substitutions or additions of such patents. To the extent, if any, that Penn does not solely own the Penn Patent Rights referenced as Penn Ref # N2428 on Attachment 1, Penn Patent Rights shall include only Penn’s undivided interest in such patent rights. Penn Patent Rights also include continuations-in-part to the extent that the continuation-in-part relates to existing patents or patent applications and not to any new subject matter.
 
      1.17     “ Sale ” means any bona fide transaction for which consideration is received or expected for the sale, use, lease, transfer or other disposition of Penn Licensed Product(s). A Sale of Penn Licensed Product(s) shall be deemed completed at the time Licensee, an Affiliate and/or Sublicensee invoices, ships or receives payment for such Penn Licensed Product(s), whichever occurs first. Sale excludes transfers of Penn Licensed Products for use in clinical trials or as free samples, and transfers of Penn Licensed Product(s) between or among Licensee, its Affiliates and any Sublicensees where such Penn Licensed Product(s) are intended for further resale, whether alone or in the form of combination products containing one or more other components.
 
      1.18     “ Sell-Off Right ” shall have the meaning given in Section 5.9.
 
      1.19     “ Software License Agreement ” means the Software License Agreement entered into by and between Penn and Licensee as of the date hereof.
 
      1.20     “ Sublicense ” shall have the meaning given in Section 2.4.1.
 
      1.21     “ Sublicense Assignment ” shall have the meaning given in Section 2.4.2.
 
      1.22     “ Sublicensee ” shall have the meaning given in Section 2.4.1.
 
      1.23     “ Stock Purchase Agreement ” shall have the meaning given in Section 3.1.1.

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      1.24     “ Transaction Documents ” means this Agreement, the Software License Agreement, the Stock Purchase Agreement and any stockholders agreement entered into by the parties thereunder.
 
      1.25     “ Trigger Event ” means any of the following:
 
             1.25.1     If Licensee: becomes insolvent, bankrupt or generally fails to pay its debts as such debts become due; is adjudicated insolvent or bankrupt; admits in writing its inability to pay its debts; or shall suffer a custodian, receiver or trustee for it or substantially all of its property to be appointed and, if appointed without its consent, not be discharged within sixty (60) days; makes an assignment of all or substantially all of its assets for the benefit of creditors; or suffers proceedings under any law related to bankruptcy, insolvency, liquidation or the reorganization, readjustment or the release of debtors to be instituted against it and, if contested by it, not dismissed or stayed within thirty (30) days;
 
             1.25.2     If proceedings under any law related to bankruptcy, insolvency, liquidation, or the reorganization, readjustment or the release of debtors are instituted or commenced by Licensee; or
 
             1.25.3     If any order for relief is entered relating to any of the proceedings described in Sections 1.25.1 or 1.25.2; or
 
             1.25.4     If Licensee shall call a meeting of its creditors with a view to arranging a composition or adjustment of its debts; or
 
             1.25.5     If Licensee shall by any act or failure to act indicate its consent to, approval of or acquiescence in any of the proceedings described in Sections 1.25.1, 1.25.2, 1.25.3 or 1.25.4.
 
      1.26     “ Valid Claim ” means a claim (a) of any issued, unexpired patent which has not been revoked or held unenforceable or invalid by a decision of a court or governmental agency of competent jurisdiction from which no appeal can be taken, or with respect to which an appeal is not taken within the time allowed for appeal, and which has not been disclaimed, denied or admitted to be invalid or unenforceable through reissue, disclaimer or otherwise; or (b) of any patent application that has been neither cancelled, withdrawn or abandoned, nor pending for more than five (5) years.
 
2.       LICENSE GRANT
 
        2.1      License Grant . Penn hereby grants to Licensee and its Affiliates for the term of this Agreement a world-wide right and license to use and practice under the Penn Patent Rights to make, have made, use, import, sell and offer for sale Penn Licensed Product(s), with the qualified right to sublicense in the United States and throughout the world to the extent permitted under Section 2.4. To the extent that any Affiliate exercises any rights granted by Penn hereunder, Licensee remains primarily liable to Penn for the duties and obligations of any Affiliate hereunder, and any act or omission of an Affiliate would be deemed to be a breach by Licensee of this Agreement. No other rights or licenses are granted except as expressly set forth herein. Penn shall cooperate with Licensee and use its reasonable efforts to obtain sole ownership of, or the exclusive right to grant licenses in, any Penn Patent Rights in which, as of the Effective Date, Penn only maintains a joint ownership interest.

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      2.2      Exclusivity . The License is exclusive, except that as to any Penn Patent Rights covering the Penn Software (as such term is defined in the Software License Agreement), the License is non-exclusive but Penn shall not grant any additional licenses to such Penn Patent Rights to any other persons or entities. Notwithstanding the foregoing, Penn may use and permit other nonprofit organizations to use and practice under the Penn Patent Rights solely for educational and non-commercial research purposes.
 
      2.3      U.S. Government Rights . Licensee or its Affiliates acknowledge that pursuant to Public Laws 96-517, 97-256 and 98-620, codified at 35 U.S.C. 200-212, the United States government retains certain rights in intellectual property funded in whole or part under any contract, grant or similar agreement with a Federal agency. Pursuant to these laws, the government may impose certain requirements regarding such intellectual property, including but not limited to the requirement that products resulting from such intellectual property sold in the United States must be substantially manufactured in the United States. The License is expressly subject to all applicable United States government rights as provided in the above-mentioned laws and any regulations issued under those laws, as those laws or regulations may be amended from time to time.
 
      2.4      Sublicense Conditions . The right to sublicense granted to Licensee under Section 2.1 is subject to the following conditions:
 
             2.4.1     Licensee may sublicense the rights granted in this Agreement by written sublicense agreement which form shall (a) prohibit the sublicensee (“Sublicensee”) from further sublicensing, and (b) require that the Sublicensee be subject to the applicable terms and conditions of the license granted to Licensee under this Agreement (each, a “Sublicense”).
 
             2.4.2     Within thirty (30) days after Licensee enters into any Sublicense: (a) Licensee must deliver to Penn a complete copy of the Sublicense (after redacting any confidential information that is not reasonably relevant to Penn’s administration of this Agreement) written in the English language (Penn’s receipt of the Sublicense shall not constitute an approval of the Sublicense or a waiver of any of Penn’s rights or Licensee’s obligations under this Agreement); (b) an executed assignment and security agreement in form acceptable to Penn (each, a “Sublicense Royalty Assignment”) granting Penn, as security for the payment of Licensee’s obligations hereunder, an assignment of and security interest in any royalties, fees or other proceeds generated by such Sublicense, exercisable upon occurrence and during the continuance of a Default under Section 5.3; and (c) such executed forms of UCC-1 and UCC-3 or other documents as may be necessary to perfect Penn’s interest in such Sublicense Royalty Assignment. In addition to any rights or remedies provided for under this Agreement, Penn shall have all of the rights and remedies of a secured party under the Uniform Commercial Code. Upon request, Licensee shall execute all such documents as are reasonably necessary to evidence and perfect in any jurisdiction Penn’s interest in and to such Sublicense Royalty Assignment. If Licensee fails to execute such documents in a timely manner, Licensee hereby grants Penn, effective during the period during which this Agreement or any Sublicense is in effect, an irrevocable power of attorney to execute in the name of Licensee all such documents as are reasonably necessary to evidence and perfect in any jurisdiction Penn’s interest in and to such Sublicensee Royalty Assignment. Penn hereby agrees that its assignment of and security interest in such royalties, fees and other proceeds shall be subordinated to any security interest and/or assignment that Licensee may grant to any lender to Licensee, and Penn shall execute and deliver any such documents as may be reasonably requested by Licensee to confirm and document the foregoing. Upon satisfaction of Licensee’s payment obligations hereunder, Penn shall execute such UCC termination statements with respect to the Sublicensee Royalty Assignment as Licensee shall reasonably request.

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           2.4.3     In the event of the continuance of a Default under Section 5.3 hereunder, all payments then or thereafter due to Licensee or its Affiliates from each Sublicensee shall, upon notice from Penn to any such Sublicensee, become owed directly to Penn for the account of Licensee or its Affiliate; provided that Penn shall remit to Licensee or its Affiliate the amount by which such payments in the aggregate exceed the total amount owed by Licensee to Penn.
 
           2.4.4     Even if Licensee enters into Sublicenses, Licensee remains primarily liable to Penn for all of Licensee’s duties and obligations contained in this Agreement, and any act or omission of an Affiliate or Sublicensee that would be a breach of this Agreement if performed by Licensee shall be deemed to be a breach by Licensee of this Agreement.
 
      2.5      Patents on New Technology and Software .
 
             2.5.1     In the event that technology is developed in the Penn labs of Drs. Klein or Degrado that, if patented, would require a license under the dominant Penn Patent Rights already licensed to Licensee under this Agreement in order to practice such technology to the extent of the license granted in Section 2.1 hereof, or should any patentable software be developed in the Penn labs of Drs. Klein or Degrado that is useful in connection with practicing under the Penn Patent Rights or such technology, Penn shall notify Licensee within 45 days after becoming aware of such development. Licensee shall within 30 days notify Penn that Licensee desires that Penn file patent applications with respect to the technology or software. If Licensee so elects, then Penn and Licensee shall promptly thereafter negotiate in good faith for Licensee to take a license to such patent applications and any resulting issued patents under terms substantially the same as those set forth herein, it being understood that the financial terms of such license shall be the payment of royalties at the rates set forth herein but for the extended term(s) of any additional patents covering such technology or software that are licensed to Licensee. Notwithstanding the foregoing sentence, Penn reserves the right to renegotiate in good faith such royalties as they pertain to such additional patents as may be required to protect Penn’s tax exempt status under the provisions of the Tax Reform Act of 1986.
 
             2.5.2     Penn shall not be obligated to license any patents or patent applications to Licensee under this Section 2.5 to the extent it is obligated to license such patents or patent applications to another party by reason of a sponsored research agreement entered into with such other party; provided, however, that Penn shall in good faith negotiate with Licensee for Licensee to sponsor any research that is specifically directed towards the development of any technology or software covered by this Section 2.5 for a period of at least 150 days prior to entering into any such sponsored research agreement with another party. Any such sponsored research agreement with Penn that is specifically directed towards the development of software covered by this Section 2.5 shall require the payment of no more than “nominal” consideration to Penn.

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           2.5.3     If the parties are unable to agree on the terms of a license and Penn subsequently licenses any such patents or patent applications to a third party, Penn shall promptly reimburse Licensee for all costs and expenses that Licensee has paid to Penn in connection with the filing and prosecution of such patents or patent applications.
 
           2.5.4     The rights described in this Section will expire as to any patents or patent applications respecting technology or software developed (as determined based on invention disclosure submissions to Penn) after the fifth anniversary of the Effective Date, or the date of a Change of Control, whichever occurs sooner.
 
3.       FEES AND ROYALTIES
 
        3.1      Shares, Sublicense Fees and Royalties .
 
              3.1.1     In partial consideration of the License, Licensee shall issue to Penn 500,000 shares of Licensee’s Series A-1 Non-Voting Convertible Preferred Stock, par value $0.001 per share, on the terms and conditions as set forth in the stock purchase agreement between Licensee and Penn (the “Stock Purchase Agreement”), a copy of which is attached to this Agreement as Attachment 2 .
 
              3.1.2     In further consideration of the exclusive license granted to Licensee hereunder, Licensee shall pay to Penn a royalty on the Gross Sales by Licensee, its Affiliates and/or Sublicensees as follows:
   
           (a)      3.0% on Gross Sales for Penn Licensed Products that are sold as pharmaceuticals under an approved NDA or other similar regulatory filing;
   
           (b)      1.5% on Gross Sales for Penn Licensed Products that are sold as coatings for use in medical devices under an approved PMA, 510(k) application or other similar regulatory filing; and
   
           (c)      0.5% on all other Gross Sales for Penn Licensed Products.

Royalties shall be payable on a country-by-country basis for so long as such Penn Licensed Products (a) in the absence of this Agreement would infringe at least one Valid Claim of the Penn Patent Rights in the country in which such products are used or sold; or (b) are made using a process or machine covered by a Valid Claim of the Penn Patent Rights in the country in which such products are used or sold; provided, however, that if no such Penn Patent Rights exist as of the date of first commercial sale of such Penn Licensed Products in such country, said royalties shall be payable until the twentieth (20th) anniversary of the Effective Date, or the end of the term of this Agreement, whichever occurs sooner.

Notwithstanding anything to the contrary herein, the obligation to pay royalties under this Section shall not commence, and no royalties shall be due on any Gross Sales accruing, prior to the date on which a Change of Control occurs. Penn, in its sole discretion may at any time reduce and/or terminate any of the foregoing royalty obligations.

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           3.1.3     Licensee shall pay to Penn a percent of any consideration (other than royalties based on sales of Penn Licensed Products) received by Licensee from each Sublicensee for the Sublicense granted to such Sublicensee according to the schedule below:
           
Sublicenses executed in the 1st year after the Effective Date     50%;    
Sublicenses executed in the 2nd year after the Effective Date     40%;    
Sublicenses executed in the 3rd year after the Effective Date     30%;    
Sublicenses executed in the 4th year after the Effective Date     25%;    
Sublicenses executed in the 5th year after the Effective Date     15%; and    
Sublicenses executed thereafter     10%.    

Notwithstanding the foregoing, Licensee shall have no obligation to pay to Penn any amounts received from any Sublicensee in consideration for equity investments, research grants, consulting or similar services, supply of products or materials, or expense reimbursement; provided, however, that the amounts allocated for the grant of the Sublicense shall be fair and reasonable in light of the overall value of the rights and/or assets being exchanged by Licensee and the Sublicensee. Licensee will pay to Penn the applicable percentage, if any, within 30 days after the end of the calendar quarter during which the relevant initiation fee or other consideration is received. The obligation to pay any amounts under this Section shall be waived for Sublicenses executed within the first four years of the Agreement provided that the value received from the relevant Sublicensee is not distributed in the form of cash or stock to Licensee’s shareholders.

           3.1.4     Gross Sales of any Penn Licensed Product shall not be subject to more than one assessment of the scheduled royalty regardless of the number of Penn Patent Rights covering such Penn License Product; such assessment shall be the highest applicable royalty.
 
           3.1.5     In the event that a Penn Licensed Product is sold in the form of a combination product containing one or more components which are themselves not Penn Licensed Products, the Gross Sales shall be calculated by multiplying the sales price of such combination product by the fraction A/(A+B), where A is the invoice price or Fair Market Value (whichever is greater) of the Penn Licensed Product and B is the total invoice price or Fair Market Value (whichever is greater) of the other components.
 
      3.2      Commercial Diligence .
 
             3.2.1     Licensee shall use reasonable commercial efforts to develop for commercial use and to market Penn Licensed Products as soon as practical, consistent with the Development Plan. “Reasonable commercial efforts” shall include a reasonable commercial level of product marketing and promotion to increase sales of Penn Licensed Products, including without limitation, advertising, public relations, trade shows/conferences and direct marketing.
 
             3.2.2     Licensee shall use reasonable commercial efforts to achieve the first commercial sale of a Penn Licensed Product within seven (7) years of the Effective Date, and shall use reasonable commercial efforts to sign a strategic partnership within four (4) years of the Effective Date.

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           3.2.3     Licensee shall provide to Penn, on the first anniversary of the Effective Date and on each anniversary thereafter, written progress reports, setting forth in such detail as Penn may reasonably request: (a) the progress of the development, evaluation, testing and commercialization of each Penn Licensed Product; and (b) the Licensee’s strategic alliances with industry counterparts that, in the best judgment of the Licensee, represent effective and beneficial business relationships. Licensee shall also notify Penn in writing within thirty (30) days after the first commercial sale of a Penn Licensed Product.
 
           3.2.4     Licensee shall provide to Penn, at least as frequently as they are distributed to the Board of Directors and/or management of Licensee copies of: (a) all Board and management reports that relate to the Penn Patent Rights and Penn Licensed Products; and (b) all business plans and financial statements that are distributed to the Board of Directors and/or management. The obligations of Licensee shall cease under this Section 3.2.4(b) from and after the time that any of Licensee’s securities are traded publicly.
 
           3.2.5     Licensee shall provide Penn within one hundred fifty (150) days of the Effective Date and on each anniversary of the Effective Date, a written, current Development Plan with sufficient detail as Penn shall reasonably request.
 
           3.2.6     Licensee shall, within twenty four (24) month(s) of the Effective Date, raise two million dollars ($2,000,000) in equity investment capital.
 
      3.3      Royalty Reports and Records .
 
             3.3.1     Licensee shall deliver to Penn within sixty (60) days after the end of each Calendar Quarter a written report, certified by the chief financial officer (or other senior executive) of Licensee, setting forth the calculation of the royalties due to Penn for such Calendar Quarter (if any), including, without limitation:
 
                   3.3.1.1.     Number of Penn Licensed Products involved in Sales, listed by country and category (pharmaceutical product, coating for use in medical device or other);
 
                   3.3.1.2.     Gross consideration for Sales of Penn Licensed Products, including all amounts invoiced, billed, or received, listed by country and category;
 
                   3.3.1.3.     Gross Sales of Penn Licensed Products listed by country and category, including a breakdown of all deductions under Section 1.10 listed by category; and
 
                   3.3.1.4.     Royalties owed to Penn, listed by country and category, including without limitation Licensee and/or Affiliate earned and Sublicensee derived royalties.
 
             3.3.2     Licensee shall pay the royalties due under Sections 3.1.2 to Penn within sixty (60) days following the last day of the Calendar Quarter in which the royalties accrue. Licensee shall send Penn with such royalties the report described in Section 3.3.1.

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           3.3.3     Licensee shall maintain and require its Affiliates and Sublicensees to maintain, complete and accurate books and records that enable the royalties payable under this Agreement to be verified. The records for each Calendar Quarter shall be maintained for three (3) years after the submission of each report under Article 3. Upon reasonable prior notice to Licensee, Licensee shall provide an independent certified public accountant selected by Penn and reasonably acceptable to Licensee or the Affiliate or Sublicensee being audited with access to all books and records relating to the Sales of Penn Licensed Products by Licensee and its Affiliates and Sublicensees to conduct a review or audit of those books and records solely to determined the royalties due and owing to Penn hereunder. Access to Licensee’s books and records shall be made available at least once each calendar year, during normal business hours, and during each of three (3) years after the expiration or termination of this Agreement. If the independent accountant determines that Licensee has underpaid any royalty due by five percent (5%) or more, then Licensee shall pay to Penn promptly the reasonable costs and expenses of Penn and its accountants in connection with their review or audit, in addition to such underpayment.
 
      3.4      Currency, Place of Payment, Interest, Payment of Expenses .
 
             3.4.1     All dollar amounts referred to in this Agreement are expressed in United States dollars. All payments to Penn under this Agreement shall be made in United States dollars by check payable to “The Trustees of the University of Pennsylvania.” If Licensee receives revenues from Sales of Penn Licensed Products in currency other than United States dollars, then revenues shall be converted into United States dollars at the conversion rate for the foreign currency as published in the eastern edition of The Wall Street Journal as of the last business day of the applicable Calendar Quarter, or, in the case of Sublicensees, using such other reasonable and customary conversion method as the applicable Sublicensee generally utilizes.
 
             3.4.2     Amounts that are not paid when due shall accrue interest from the due date until paid, at a rate equal to one and one-half percent (1.5%) per month or part thereof (or the maximum allowed by law, if less).
 
             3.4.3     At least once every 2 years after Gross Sales exceed $2,000,000, Licensee will provide at its expense a written report audited by Licensee’s outside auditor (or another 3rd party auditor of Licensee’s choosing) of the amounts due to Penn under the Agreement.
 
             3.4.4     Licensee shall pay all reasonable out-of-pocket expenses of Penn, as well as legal fees and expenses, in connection with this Agreement and the other Transaction Documents. Licensee shall pay such documented expenses directly, within 30 days of presentment of invoices (with appropriate supporting documentation) by Penn. Licensee’s reimbursement obligation under this Section shall not exceed $10,000.
 
4.       CONFIDENTIALITY
 
        4.1      Non-Disclosure by Licensee . Licensee shall maintain in confidence and not disclose to any third party any Confidential Information of Penn; provided, however, that Licensee may disclose Confidential Information to its Sublicensees (including prospective Sublicensees) and Affiliates to use in a manner consistent with the manner in which Licensee may use such Confidential Information hereunder. Licensee shall ensure that its employees, and shall require that its Sublicensees and Affiliates ensure that their employees, have access to Confidential Information only on a need-to-know basis and are obligated in writing to abide by Licensee’s obligations under this Agreement. Licensee’s, Sublicensee’s and Affiliate’s obligations of confidentiality as recipients under this Agreement shall be limited to a period of ten (10) years from receipt of Confidential Information, provided that for each item of Confidential Information received, such ten (10) year period shall run only once, from the date such Confidential Information is first received by Licensee. The foregoing obligation shall not apply to:

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           4.1.1     Information that is known to Licensee or any Sublicensee or Affiliate, or independently developed by Licensee or any Sublicensee or Affiliate, prior to the time of disclosure, in each case, to the extent evidenced by written records promptly disclosed to Penn upon receipt of the Confidential Information;
 
           4.1.2     Information disclosed to Licensee or any Sublicensee or Affiliate, by a third party that has a right to make such disclosure;
 
           4.1.3     Information that becomes patented, published or otherwise part of the public domain as a result of acts by Penn, acts of Licensee or any Sublicensee or Affiliate that have been approved by Penn, such approval not to be unreasonably withheld, or acts of a third person obtaining such information as a matter of right;
 
           4.1.4     Information reasonably required to be disclosed in order to obtain or maintain regulatory or other approvals for Penn Licensed Products;
 
           4.1.5     Information that is required to be disclosed by law, rule, regulation or order of a United States governmental authority or agency (including the SEC), or a court of competent jurisdiction; provided that Licensee shall use reasonable efforts to obtain confidential treatment of such information by such authority, agency or court;
 
           4.1.6     Information that is disclosed to accountants, banks or other financing sources (or their advisors) or in connection with a merger, acquisition, strategic alliance or securities offering, subject to a nondisclosure and confidentiality agreement.
 
      4.2      Use by Licensee . Penn acknowledges that Licensee shall have the non-exclusive right to use, and to permit its Affiliates and Sublicensees to use, any Confidential Information of Penn relating to the Penn Patent Rights or Penn Licensed Product(s) that Licensee may receive from Penn to the extent reasonably necessary for Licensee or its Affiliates or Sublicensees to develop, make, have made, sell, offer for sale use and import Penn Licensed Products as permitted hereunder; provided, however, that nothing in this Section 4.2 shall grant Licensee any rights under any patent rights of Penn other than the Penn Patent Rights.
 
      4.3      Limited Non-Disclosure by Penn . Penn shall not be obligated to accept any confidential information from Licensee except for the reports required in Sections 3.2 and 3.3. Penn shall use reasonable efforts not to disclose those reports to any third party other than Penn’s outside advisors (subject to exceptions similar to these applicable to Licensee under Section 4.1), which efforts shall be no less diligent than those that Penn employs to protect its own confidential information of a similar nature. Penn bears no institutional responsibility for maintaining the confidentiality of any other information of Licensee.

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5.       TERM AND TERMINATION
 
        5.1      Term . This Agreement, unless sooner terminated as provided in this Agreement, shall expire upon the expiration of the last to expire or become abandoned of any issued Penn Patent Rights.
 
        5.2      Termination by Licensee . Licensee may, upon sixty (60) days written notice to Penn, terminate this Agreement by doing all of the following:
 
              5.2.1     Ceasing to make, have made, use, import, sell and offer for sale all Penn Licensed Products;
 
              5.2.2     Terminating all Sublicenses, and requiring all Sublicensees and Affiliates to cease making, having made, using, importing, selling and offering for sale all Penn Licensed Products; and
 
              5.2.3     Paying all monies owed to Penn under this Agreement through the date of termination.
 
        5.3      Termination by Penn . Penn may terminate this Agreement on written notice to Licensee if any of the following events of default (“Default”) occur:
 
              5.3.1     Licensee is more than sixty (60) days late in paying to Penn royalties, expenses, or any other undisputed amounts due under this Agreement and Licensee does not pay Penn in full within thirty (30) days of written notice thereof;
 
              5.3.2     Licensee experiences a Trigger Event; or
 
              5.3.3     Licensee materially breaches this Agreement (other than a breach solely under Section 5.3.1) or the Stock Purchase Agreement and does not cure such breach within sixty (60) days after written notice of the breach;
 
        5.4      Effect of Termination . In the event of a termination under Section 5.3 hereof, the License shall immediately terminate without the necessity of any action being taken either by Penn, and Licensee and any Affiliate and/or Sublicensee shall refrain from further manufacture, sale, marketing, importation and/or distribution of Penn Licensed Product(s); provided, however, that Penn shall, upon the request of any Sublicensee not then in material breach of any provisions of this Agreement applicable to such Sublicensee, promptly enter into a direct license agreement with such Sublicensee on terms substantially the same as the terms of this Agreement, excluding those terms respecting the issuance of equity in such Sublicensee.
 
        5.5      Security Interest in Inventories . To secure the complete and timely payment and satisfaction of all royalty obligations of Licensee under this Agreement, Licensee hereby grant to Penn a security interest, effective immediately, in all inventories of Penn Licensed Products now or hereafter owned by Licensee or its Affiliates.In addition to any rights or remedies provided for under this Agreement, Penn shall have all of the rights and remedies of a secured party under the Uniform Commercial Code. Upon request, Licensee and its Affiliates shall execute and deliver to Penn such UCC-1 and UCC-3 or other documents as may be necessary to perfect Penn’s interest in such inventories. If Licensee fails to execute such documents in a timely manner, Licensee and its Affiliates hereby grant to Penn an irrevocable power of attorney to execute in Licensee’s or its Affiliates’ name all such documents as Penn deems reasonably necessary to evidence and perfect such security interest in any jurisdiction. Penn hereby agrees that its security interest in all inventories of Penn Licensed Products now or hereafter owned by Licensee or its Affiliates shall be subordinated to any security interest therein that Licensee or any of its Affiliates may grant to any lender to Licensee or such Affiliate, and Penn shall execute and deliver any such documents as may be reasonably requested by Licensee to confirm and document the foregoing. Upon satisfaction of Licensee’s payment obligations hereunder, Penn shall execute such UCC termination statements with respect to such inventories as Licensee shall reasonably request.

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      5.6      Return of Confidential Information . Upon termination of this Agreement, Licensee and any Affiliate and/or Sublicensee shall, at Penn’s request, return to Penn or destroy all Confidential Information in their possession or control, except as may be necessary for Licensee and any Affiliate and/or Sublicensee to exercise any of its retained rights under this Article 5. Licensee and any Affiliate and/or Sublicensee may retain one copy of Confidential Information in their files for reference purposes only.
 
      5.7      Inventories . Upon termination of this Agreement, Licensee shall cause physical inventories to be taken immediately of: (a) all completed Penn Licensed Product(s) on hand under the control of Licensee or any Affiliate or Sublicensee; and (b) such Penn Licensed Product(s) as are in the process of manufacture and component parts thereof as of the date of termination of this Agreement, which inventories shall be reduced to writing. Licensee shall deliver copies of such written inventories, verified by an officer of Licensee forthwith to Penn. Penn shall have 45 days after receipt of such verified inventories within which to challenge the inventory and request an audit thereof. Upon five (5) business days written notice to Licensee, an independent third party selected by Penn and reasonably acceptable to Licensee or the applicable Affiliate or Sublicensee shall be given access during business hours to the premises of Licensee, its Affiliates and/or Sublicensees for the purpose of conducting an audit solely to verify such inventory accounting of Licensee.
 
      5.8      Advertising Materials . Upon the termination of this Agreement, Licensee shall, at its own expense forthwith remove, efface or destroy all references to Penn from all advertising or other materials used in the promotion of Licensee’s business or the business of any Affiliate or Sublicensee and Licensee and any Affiliate and/or Sublicensee shall not thereafter represent in any manner that it has rights in or to the Penn Patent Rights or Penn Licensed Product(s), except as may be necessary for Licensee and any Affiliate and/or Sublicensee to exercise any of its retained rights under this Article 5.
 
      5.9      Sell-Off Rights . Notwithstanding the foregoing, if this Agreement terminates for any reason, Licensee, its Affiliates and all Sublicensees shall have a period of six (6) months to sell off their inventories of Penn Licensed Product(s) existing or in the process of being manufactured on the date of termination of this Agreement, and Licensee shall pay to Penn any royalties due hereunder with respect to such Penn Licensed Product(s) within thirty (30) days following the expiration of such six-month period (“Sell Off Right”).

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      5.10      Delivery of Data . Upon the termination of this Agreement and at Penn’s request, Licensee shall, to the extent it has the right to do so, deliver to Penn or its designee copies of all data and other information generated by Licensee that relates directly to the Penn Licensed Products, which data and other information Penn or its designee shall have the right to use and disclose to third parties solely in connection with their development, making, having made, selling, offering for sale, using and importing such Penn Licensed Products; provided, however, that Penn or its designee shall first be required to reimburse Licensee for the reasonable value of such data and other information.
 
      5.11      Survival . Licensee’s obligation to pay all monies owed accruing under this Agreement prior to the date of expiration or termination of this Agreement (or thereafter in accordance with the provisions of this Article 5) shall survive such expiration or termination. In addition, the provisions of Article 4 – CONFIDENTIALITY, Article 5 – TERM AND TERMINATION, Article 8 – DISCLAIMER OF WARRANTIES; INDEMNIFICATION, Article 9 – USE OF PENN’S NAME, and Article 10 – ADDITIONAL PROVISIONS shall survive such expiration or termination.
 
6.       PATENT PROSECUTION AND MAINTENANCE; REIMBURSEMENT
 
        6.1      Patent Prosecution and Maintenance . Penn controls the preparation, prosecution and maintenance of the Penn Patent Rights and the selection of patent counsel, with input from Licensee. If, however, Licensee desires to manage the preparation, prosecution and maintenance of the Penn Patent Rights with input from Penn, then Licensee and Penn will enter into with patent counsel a Client and Billing Agreement in substantially the form attached to this Agreement as  Attachment 3 .
 
        6.2      Reimbursement of Patent Expenses . Licensee shall reimburse Penn for all documented attorneys fees, expenses, official fees and other charges incurred prior to the Effective Date and incident to the preparation, prosecution and maintenance of Penn Patent Rights. This reimbursement obligation shall be paid as follows:
 
              6.2.1     twenty five thousand dollars ($25,000) or the balance due, whichever is less, to be paid within ten (10) days of the date that Licensee first raises three hundred thousand dollars ($300,000) in equity investment after the Effective Date, but in any event not later than May 31, 2003.
 
              6.2.2     forty thousand dollars ($40,000) or the balance due, whichever is less, to be paid within ten (10) days after Licensee first raises a total of three million dollars ($3,000,000) in equity investment after the Effective Date, but in any event not later than May 31, 2003.
 
              6.2.3     forty thousand dollars ($40,000) or the balance due, whichever is less, ninety (90) days after the date on which the payment under Section 6.2.2 is due and payable.

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           6.2.4     The balance shall be paid within ninety (90) days after the date that the payment under Section 6.2.3 is due and payable.
 
      6.3      Patent Term Extensions . At Licensee’s expense, Penn shall apply for, or assist Licensee in applying for, such patent term extensions, supplemental protection certificates, or functional equivalents thereof as Licensee shall request in writing. Licensee shall provide Penn with all material, information and data in its possession reasonably necessary or reasonably useful to prepare such items.
 
7.       INFRINGEMENT AND LITIGATION
 
        7.1      Notification of Infringement . Penn and Licensee are responsible for notifying each other promptly of any infringement of Penn Patent Rights which may come to their attention. Penn and Licensee shall consult one another in a timely manner concerning any appropriate response to the infringement, including, without limitation, whether Penn needs to join any action taken against the infringing party.
 
        7.2      Prosecution by Licensee . Licensee may prosecute such infringement at its own expense and, if legally necessary, may join Penn as a party to such action. Licensee shall not settle or compromise any such suit in a manner that imposes any obligations or restrictions on Penn or grants any rights to the Penn Patent Rights without Penn’s prior written permission, not to be unreasonably withheld. Except as otherwise provided in Section 7.3, financial recoveries from any such litigation will first be applied to reimburse Licensee for its litigation expenditures with additional recoveries being paid to Licensee, subject to a royalty due Penn based on the provisions of Article 3.
 
        7.3      Intervention by Penn . Licensee’s rights under Section 7.2 are subject to the continuing right of Penn to intervene at Penn’s own expense and join Licensee in any claim or suit for infringement of the Penn Patent Rights. Any consideration received by Licensee in settlement of any claim or suit in which Penn has intervened shall first be applied to reimburse Licensee and Penn for their respective litigation expenditures, with additional recoveries being shared between Penn and Licensee in proportion with their share of the litigation expenses in such infringement action.
 
        7.4      Prosecution by Penn . If Licensee fails to prosecute any infringement, then Penn may prosecute such infringement at its own expense. In such event, financial recoveries will be entirely retained by Penn.
 
        7.5      Cooperation . In any action to enforce any of the Penn Patent Rights, either party, at the request and expense of the other party shall cooperate to the fullest extent reasonably possible. This provision shall not be construed to require either party to undertake any activities, including legal discovery, at the request of any third party except as may be required by lawful process of a court of competent jurisdiction.

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8.       WARRANTIES; DISCLAIMER OF WARRANTIES; INDEMNIFICATION
 
        8.1      NO ADDITIONAL WARRANTIES . THE PENN PATENT RIGHTS, PENN LICENSED PRODUCTS AND ALL OTHER TECHNOLOGY LICENSED UNDER THIS AGREEMENT ARE PROVIDED ON AN “AS IS” BASIS, AND PENN MAKES NO REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT THERETO, EXCEPT AS SET FORTH IN SECTION 8.3 AND 8.4. BY WAY OF EXAMPLE BUT NOT OF LIMITATION, PENN MAKES NO REPRESENTATIONS OR WARRANTIES: (a) OF COMMERCIAL UTILITY, ACCURACY OR COMPLETENESS; (b) OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE; OR (c) THAT THE USE OF THE PENN PATENT RIGHTS, PENN LICENSED PRODUCTS OR ANY TECHNOLOGY LICENSED UNDER THIS AGREEMENT WILL NOT INFRINGE ANY PATENT, COPYRIGHT, TRADE SECRET OR TRADEMARK OR OTHER PROPRIETARY OR PROPERTY RIGHTS OF OTHERS.
 
        8.2      LIMITATION OF LIABILITY . PENN SHALL NOT BE LIABLE TO LICENSEE, LICENSEE’S AFFILIATES OR SUBLICENSEES, OR THEIR RESPECTIVE SUCCESSORS OR ASSIGNS, OR ANY THIRD PARTY CLAIMING THROUGH THEM WITH RESPECT TO: ANY CLAIM ARISING FROM USE OF THE PENN PATENT RIGHTS, PENN LICENSED PRODUCTS OR ANY TECHNOLOGY LICENSED UNDER THIS AGREEMENT OR FROM THE MANUFACTURE, USE OR SALE OF PENN LICENSED PRODUCTS; OR ANY CLAIM FOR LOSS OF PROFITS, LOSS OR INTERRUPTION OF BUSINESS, OR FOR INDIRECT, SPECIAL OR CONSEQUENTIAL DAMAGES OF ANY KIND.
 
        8.3      Ownership; No Pending Action . Penn represents and warrants that, except as expressly provided elsewhere herein, it owns the United States letters patent and/or applications therefor listed in  Attachment 1  to this Agreement, and foreign counterparts relating thereto. Penn represents and warrants that there are no pending actions, nor to the best of its knowledge, threatened or other claims, whether or not embodied in an action past or present, of infringement of any patent, copyright, trademark, or other intellectual property right that has been made or is pending against Penn or any entity from which Penn has obtained such rights relative to the Penn Patent Rights.
 
        8.4      Authority . Penn represents and warrants that: (i) it has full authority to execute and deliver this Agreement and to carry out the transactions contemplated hereby; (ii) this Agreement has been duly authorized, executed and validly delivered by Penn and is binding and enforceable upon Penn in accordance with its terms; (iii) the execution and delivery of this Agreement by Penn will not violate any law, regulation or court order, or breach or cause a default under any agreement to which Penn is a party; and (iv) Penn has the right to grant the licenses granted to Licensee hereunder.
 
        8.5      Indemnification . Licensee shall indemnify, defend and hold harmless Penn, its trustees, officers, agents and employees (individually, an “Indemnified Party”, and collectively, the “Indemnified Parties”), from and against any and all claims, suits, actions or proceedings brought against the Indemnified Parties by any third party, and for any and all liability, loss, damage, or expense suffered or incurred by the Indemnified Parties in connection therewith (including reasonable attorneys’ fees and expenses) (individually, a “Liability”, and collectively, the “Liabilities”), that results from or arises out of: (a) the development, use, manufacture, promotion, sale or other disposition of any Penn Patent Rights or Penn Licensed Products by Licensee, its Affiliates, its assignees, Sublicensees, its vendors or other third parties acting under their authority; (b) any breach by Licensee or its Affiliates or Sublicensees of this Agreement; and (c) the enforcement by an Indemnified Party of this Section 8.5. Without limiting the foregoing, Licensee shall defend, indemnify and hold harmless the Indemnified Parties from and against any Liabilities resulting from:

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           8.5.1     Any product liability or other claim of any kind related to the use by a third party of a Penn Licensed Product that was manufactured, sold or otherwise disposed by Licensee, its Affiliates, its assignees, its Sublicensees, its vendors or other third parties acting under their authority;
 
           8.5.2     A claim by a third party that the Penn Patent Rights or the design, composition, manufacture, use, sale or other disposition of any Penn Licensed Product infringes or violates any patent, copyright, trade secret, trademark or other intellectual property rights of such third party (except to the extent such claim arises from a breach by Penn of any of its warranties under Section 8.3 and 8.4 above); and
 
           8.5.3     Clinical trials or studies conducted by or on behalf of Licensee, its Affiliates, its assignees, its Sublicensees or their agents relating to the Penn Patent Rights or Penn Licensed Products, including, without limitation, any claim by or on behalf of a human subject of any such clinical trial or study, any claim arising from the procedures specified in any protocol used in any such clinical trial or study, any claim of deviation, authorized or unauthorized, from the protocols of any such clinical trial or study, and any claim resulting from or arising out of the manufacture or quality control by a third party of any substance administered in any such clinical trial or study.
 
      8.6      Rights of Penn in Liability Action . Licensee is not permitted to settle or compromise any claim or action giving rise to Liabilities in a manner that imposes any restrictions or obligations on Penn or grants any rights to the Penn Patent Rights or Penn Licensed Products that are inconsistent with the rights granted to Licensee hereunder without Penn’s prior written consent. If Licensee fails or declines to assume the defense of any such claim or action within thirty (30) days after notice thereof, then Penn may assume the defense of such claim or action for the account and at the risk of Licensee. The indemnification rights of Penn or other Indemnified Party contained herein are in addition to all other rights that such Indemnified Party may have at law or in equity or otherwise.
 
      8.7      Procedures for Indemnification . Penn shall (a) provide Licensee with prompt written notice of each claim for which any Indemnified Party seeks indemnification under Section 8.5, (b) grant Licensee sole authority to defend and/or settle each such claim using attorneys selected by it and reasonably acceptable to Penn, and (c) cooperate in all reasonable respects with Licensee in connection with its performance of such activities.
 
      8.8      Insurance .
 
             8.8.1     Licensee and any Affiliate shall procure and maintain a policy or policies of comprehensive general liability insurance, including broad form and contractual liability, in a minimum amount of $2,000,000 combined single limit per occurrence and in the aggregate as respects personal injury, bodily injury and property damage arising out of such party’s performance of this Agreement.

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           8.8.2     Licensee and any Affiliate shall, prior to commencement of clinical trials involving Penn Licensed Products, procure and maintain a policy or policies of product liability insurance in a minimum amount of $3,000,000 combined single limit per occurrence and in the aggregate as respects bodily injury and property damage arising out of such party’s performance of this Agreement.
 
           8.8.3     The policy or policies of insurance described in this Section 8.8 shall be issued by an insurance carrier with an A.M. Best rating of “A” or better and shall name Penn as an additional insured with respect to Licensee’s performance of this Agreement. Licensee and any Affiliate shall provide Penn with certificates evidencing the insurance coverage required herein and all subsequent renewals thereof. Such certificates shall provide that the insurance carrier(s) notify Penn in writing at least 30 days prior to cancellation or material change in coverage.
 
           8.8.4     Penn may periodically review the adequacy of the minimum limits of liability insurance specified in this Section, and Penn reserves the right to require Licensee and any Affiliate to adjust the liability insurance coverages within commercially reasonable levels. Any such determination shall be made reasonably by Penn in good faith. The specified minimum insurance amounts do not constitute a limitation on the obligation of Licensee and any Affiliate to indemnify Penn under this Agreement.
 
9.       USE OF PENN’S NAME

      Licensee and its Affiliates and agents shall not use, and Licensee shall require its Affiliates and Sublicensees not to use, Penn’s name or any adaptation thereof, or any Penn seal, logotype, trademark, or service mark, or the name, mark, or logotype of any Penn representative or organization in any way without the prior written consent of Penn in its sole discretion. Notwithstanding the foregoing, Licensee and its Affiliates, Sublicensees and agents may refer to the fact that the Penn Licensed Products were based on technology developed by Drs. Klein and Degrado of the University of Pennsylvania. Licensee and its Affiliates, Sublicensees and agents may also refer to the existence of this Agreement and may describe its material terms in filings under the securities laws and in securities offering materials prepared in accordance with applicable securities laws and in its Sublicense Agreements and other materials provided to Sublicensees and prospective Sublicensees. In addition, Licensee and its Affiliates, Sublicensees and agents may refer to Penn’s name in biographical information of their officers, directors and employees, so long as Penn has had the opportunity to review the references to Penn prior to the use thereof.

10.       ADDITIONAL PROVISIONS
 
        10.1      No Agency . Nothing in this Agreement shall be deemed to establish a relationship of principal and agent between Penn and Licensee or its Affiliates or Sublicensees, nor any of their agents or employees for any purpose whatsoever, nor shall this Agreement be construed as creating any other form of legal association or arrangement which would impose liability upon one party for the act or failure to act of the other party.

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      10.2      No Assignment . Licensee is not permitted to assign this Agreement or any part of it, either directly or by merger or other operation of law, without the prior written consent of Penn in its sole discretion. Prior consent for assignment by Licensee shall not be necessary in the event that (i) Licensee is sold or merged in its entirety, or Licensee sells all or substantially all of its assets provided that the assignee or purchaser agrees to abide by the terms of this Agreement in its entirety and (ii) Licensee provides written notice to Penn within ten (10) business days following the date on which the sale or merger is publicly announced. Any prohibited assignment of this Agreement or the rights hereunder shall be null and void. No assignment relieves Licensee, its Affiliates and/or Sublicensees of responsibility for the performance of any accrued obligations that Licensee, its Affiliates and/or Sublicensees has prior to such assignment.
 
      10.3      No Waiver . No waiver of any breach or condition of this Agreement shall be deemed to be a waiver of any other subsequent breach or condition, whether of like or different nature.
 
      10.4      Notices . All notices, requests, consents and other communications hereunder shall be in writing and shall be delivered in person, sent via overnight delivery by a nationally-recognized overnight courier, or sent by certified or registered mail, return receipt requested, and shall be deemed to have been given when hand delivered, one (1) business day after mailing by overnight courier, or five (5) business days after mailing by registered or certified mail, as follows (provided that notice of change of address shall be deemed given only when received):
   
  If to Penn:
     
    University of Pennsylvania
    Center for Technology Transfer
    3160 Chestnut Street, Suite 200
    Philadelphia, PA 19104-3147
    Attention: Managing Director
     
  With a required copy to:
     
    Office of General Counsel
    University of Pennsylvania
    133 South 36th St, Suite 300
    Philadelphia, PA 19104-6303
    Attention: General Counsel

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  If to Licensee:
     
    Polymedix, Inc.
    P.O. Box 130
    Bryn Mawr, PA 19010-0130
    Attention: Chief Executive Officer
     
  With a copy to:
     
    Morgan, Lewis & Bockius, LLP
    1701 Market Street
    Philadelphia, PA 19103
    Attention: Stephen A. Jannetta, Esq.

or to such other names or addresses as Licensee or Penn, as the case may be, shall designate by notice to each other person entitled to receive notices in the manner specified in this Section 10.4.

      10.5      Governing Law and Jurisdiction . This Agreement shall be construed and governed in accordance with the laws of the Commonwealth of Pennsylvania, without giving effect to conflict of law provisions of any jurisdiction. In the event that a party to this Agreement perceives the existence of a dispute with the other party concerning any right or duty provided for herein, the parties will, as soon as practicable, confer in an attempt to resolve the dispute. If the parties are unable to resolve such dispute amicably, then the parties hereby submit to the exclusive jurisdiction of and venue in the state and federal courts located in the Eastern District of the Commonwealth of Pennsylvania with respect to any and all disputes concerning the subject of, or arising out of, this Agreement.
 
      10.6      No Discrimination . Penn and Licensee, its Affiliates and Sublicensees shall not discriminate against any employee or applicant for employment because of race, color, sex, sexual or affectional preference, age, religion, national or ethnic origin, handicap, or because he or she is a disabled veteran or a veteran of the Vietnam Era.
 
      10.7      Compliance with Laws . Licensee, its Affiliates and Sublicensees shall comply with all prevailing laws, rules and regulations that apply to its activities or obligations under this Agreement. Without limiting the foregoing, it is understood that this Agreement may be subject to United States laws and regulations controlling the export of technical data, computer software, laboratory prototypes and other commodities, articles and information, including the Arms Export Control Act as amended in the Export Administration Act of 1979, and that the parties’ obligations are contingent upon compliance with applicable United States export laws and regulations. The transfer of certain technical data and commodities may require a license from the cognizant agency of the United States Government and/or written assurances by Licensee, its Affiliates and/or Sublicensees that Licensee shall not export data or commodities to certain foreign countries without prior approval of such agency. Penn neither represents that a license is not required nor that, if required, it will issue.

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      10.8      Binding Nature of Agreement . This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns, except that any assignment by Licensee must comply with Section 10.2 to be effective.
 
      10.9      Counterparts, Headings and Exhibits . This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. The headings used in this Agreement are for convenience only and are not to be considered in construing or interpreting any term or provision of this Agreement. All Schedules and Exhibits hereto are hereby incorporated in this Agreement and made a part hereof.
 
      10.10      Integration and Amendment . This Agreement and the other Transaction Documents embody the entire agreement and understanding among the parties hereto and thereto and supersede all prior agreements and understandings relating to the subject matter hereof or thereof. This Agreement may not be changed, modified, extended or terminated except by written amendment executed by an authorized representative of each party.
 
      10.11      Severability . If any provision of this Agreement shall be held to be illegal, invalid or unenforceable, then such illegality, invalidity or unenforceability shall attach only to such provision and shall not in any manner affect or render illegal, invalid or unenforceable any other provision of this Agreement, and this Agreement shall be carried out as if any such illegal, invalid or unenforceable provision were not contained herein.
 
      10.12      Number of Days . In computing the number of days for purposes of this Agreement, all days shall be counted, including Saturdays, Sundays and holidays; provided that if the final day of any time period falls on a Saturday, Sunday or holiday on which Federal banks are or may elect to be closed, then the final day shall be deemed to be the next day which is not a Saturday, Sunday or such holiday.
 
      10.13      Force Majeure . If the performance of any part of this Agreement by either party (other than the payment of monies due and owing hereunder) is prevented, restricted, interfered with or delayed by reason of any cause beyond the reasonable control of such party that could not, with the exercise of reasonable due diligence, have been avoided (a “Force Majeure Event”), the party so affected shall be excused from such performance to the extent of and for so long as such Force Majeure Event continues, provided that the affected party shall use all reasonable efforts to avoid or remove the causes of such Force Majeure Event with the utmost dispatch and to continue its performance under this Agreement whenever such causes are removed. When such circumstances arise, the affected party shall provide the other party with prompt notice thereof and shall regularly update the other party as to its efforts to remove the causes of such Force Majeure Event until full performance under this Agreement has resumed.

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IN WITNESS WHEREOF, the parties, intending to be legally bound, have caused this Agreement to be executed by their duly authorized representatives.

THE TRUSTEES OF THE 
UNIVERSITY OF PENNSYLVANIA
LICENSEE:
POLYMEDIX, INC.
         
         
By: /s/ Louis P. Berneman   By: /s/ Nicholas Landekic
 
 
   
 
         
Name: Louis P. Berneman   Name: Nicholas Landekic
 
 
   
 
         
  Managing Director      
Title: Center for Technology Transfer   Title: President and CEO
 
 
   
 
         
Date:     Date:  
 
 
   
 

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Attachment 1

Inventions and Patent Rights

 
Penn 
Ref #
    Inventors     Title     Law Firm
Ref #
    Country     App. #     Details  
 
                                       
 
N2428     William DeGrado, Michael Klein and Greg Tew     Facially Amphiphilic Polymers as Anti-infective Agents     4730-102 P US     US     60/274,145     Provisional application; filed March 8, 2001  
 
                  4730-102 WO     PCT     PCT/US02/22043     PCT application, designating all members; filed March 7, 2002  
 
                  4730-105 WO     PCT     PCT/US02/06899     Second PCT application, designating all members; filed March 7, 2002  
 
N2485     William DeGrado, Yashitomo Hamuro, Dahui Liu     Design, Preparation, and Properties of Antibacterial β-Peptides     19522.0003     US     09/732,911     US non-provisional application; filed December 11, 2000  
 
N2516     William DeGrado     Design of Polymers with Amphiphilic Conformations     N/A     N/A     N/A     See PCT/US02/22043  
 
N2609     Michael Klein     New Force Field Program     N/A     US     60/383,884     Provisional application; filed by PENN on May 28, 2002  
 
O2728     William DeGrado, Michael Klein     Biomimetic Antimicrobial Polymers     N/A     N/A     N/A     See PCT/US02/22043  
 
O2772     William DeGrado, Michael Klein, Dahui Liu, Jing Yuan, Greg Tew     Enablement Data     N/A     N/A     N/A     See PCT/US02/22043 and PCT/US02/06899  
 

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ATTACHMENT 1   (continued)

 
Penn 
Ref #
    Inventors     Title     Law Firm
Ref #
    Country     App. #     Details  
 
                                       
 
O2855     William DeGrado, Michael Klein, Dahui Liu, Jing Yuan, Greg Tew     Novel Block Polymers     N/A     N/A     N/A     See PCT/US02/22043  
 
O2880     Michael Klein, Carlos Lopez, Preston Moore     Computer Simulation of Biomembranes Using a Coarse Grain Model     N/A     US     60/388,527     Provisional application; filed by PENN on June 13, 2002  
 
P2997     William DeGrado, Avram Slovic     Water Solubilization of Membrane Proteins by Structure Based Design     N/A     N/A     N/A     Currently under evaluation  
 

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Center for Technology Transfer

Louis P. Berneman
Managing Director
Direct Line (215) 573-3446
berneman@pobox.upenn.edu

December 23, 2003

Nicholas Landekic
President & C.E.O.
PolyMedix, Inc.
P.O. Box 130
Bryn Mawr, PA 19010

   
Re: Patent License Agreement Between PolyMedix, Inc., and the Trustees of the
University of Pennsylvania

Dear Nicholas:

Reference is made to the Patent License Agreement Between