As filed with the Securities and Exchange Commission on April 30, 2008July 22, 2015
Registration No. 333-148942333-198800
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1/A
(Amendment No. 2 to Registration Statement on Form SB-2)1
to
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
COMMONWEALTH BIOTECHNOLOGIES, INC.HedgePath Pharmaceuticals, Inc.
(NameExact name of Small Business Issuerregistrant as specified in its Charter)
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601 Biotech Drive
Richmond, Virginia 23235
(804) 648-3820
(Address and Telephone Number of Principal Executive Offices)charter)
Delaware | 2834 | 30-0793665 | ||
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324 S. Hyde Park Avenue, Ste. 350
Tampa, Florida 33606
(813) 864-2559
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Mr. Nicholas J. Virca
President and Chief Executive Officer
324 S. Hyde Park Avenue, Ste. 350
Tampa, Florida 33606
Phone: (813) 864-2559
Fax: (813) 258-6912
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
Barry I. Grossman, Esq.
Lawrence A. Rosenbloom, Esq.
Ellenoff Grossman & Schole LLP
1345 Avenue of the Americas
New York, New York 10105
Phone: (212) 370-1300
Fax: (212) 370-7889
Approximate Datedate of Proposed Salecommencement of proposed sale to the Public:From time to timepublic: As soon as practicable after the effective date of this Registration Statementregistration statement.
If any of the securities being registered on this formForm are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. x
If this formForm is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this formForm is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this formForm is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If delivery of the Prospectus is expected to be made pursuant to Rule 434, check the following box. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smallsmaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,”filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||||
Non-accelerated filer | ¨ | (Do not check if a smaller reporting company) | Smaller reporting company | x |
(Do not check if a smaller reporting company)
CALCULATION OF REGISTRATION FEE
Title of Each Class of Securities To Be Registered | Maximum Amount To Be Registered(1) | Proposed Maximum Aggregate Price Per Share(2) | Proposed Maximum Aggregate Offering Price(3) | Amount of Registration Fee | ||||
Common Stock, without par value per share | 1,001,208 | 2.41 | $2,412,912 | $96(4) | ||||
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Title of Each Class of Securities to Be Registered | Amount to Be | Proposed Maximum Offering Price per Share | Proposed Offering Price | Amount of Registration Fee | ||||
Shares of common stock, par value $0.0001 per share(1) | 30,600,000 | $0.085(2) | $2,601,000 | $302.24(3) | ||||
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(2) | Estimated solely for the purpose of calculating the registration fee pursuant to Rule |
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The Registrant hereby amends this registration statementRegistration Statement on such date or dates as may be necessary to delay its effective date until the registrantRegistrant shall file a further amendment which specifically states that this registration statementRegistration Statement shall hereafterthereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statementthis Registration Statement shall become effective on such date as the Commission acting pursuant to said Section 8(a), may determine.
The information in this preliminary prospectus is not complete and may be changed. WeThese securities may not sell these securitiesbe sold until the registration statement filed with the Securities and Exchange Commission becomesis effective. This preliminary prospectus is not an offer to sell these securities and we areis not soliciting offersan offer to buy these securities in any state where the offer or sale is not permitted.
PRELIMINARY PROSPECTUS
Subject to Completion, Dated April 30, 2008
1,001,208 SHARESdated July 22, 2015
COMMONWEALTH BIOTECHNOLOGIES, INC.Preliminary Prospectus
COMMON STOCK
We are registering 1,001,208 shares
30,600,000 Shares
Common Stock
This prospectus relates to the offer for sale of our common stock on behalfup to a potential aggregate of the selling stockholders identified under the heading “Selling Stockholders” in this prospectus. The selling stockholders are entitled to receive the shares upon the conversion of Convertible Notes and the exercise of Class A and Class B Warrants that we issued in a private placement completed on December 31, 2007. See “Private Placement of Convertible Notes and Warrants” on page 27 of this prospectus for further information regarding the private placement and the securities issued in this transaction.
We are not selling any30,600,000 shares of common stock, par value $0.0001 per share, of HedgePath Pharmaceuticals, Inc. by the selling stockholders named herein. We are not offering any securities pursuant to this prospectus. The shares of common stock offered by the selling stockholders consist of the following: (i) 20,000,000 shares of common stock issued in this offeringconnection with our June 24, 2014 private placement with Hedgepath, LLC, a Florida limited liability company and thereforea principal stockholder of our company which is controlled by Black Robe Capital LLC, of which Frank E. O’Donnell, Jr., M.D. (our Executive Chairman) is the manager, (ii) 10,000,000 of the shares issued to Hedgepath LLC in August 2014 upon its conversion of its Series A Convertible Preferred Stock, par value $0.0001 per share, and (ii) 600,000 shares of common stock issued to our outside law firm for services rendered to us by such firm.
This registration does not mean that the selling stockholders named herein will actually offer or sell any of these shares. We will not receive any proceeds from the resalesales of the above shares of our common stock. We have received proceeds from the sale of our securities in a private placement as described in this prospectus. We may also receive proceeds from the exercise of Class A and Class B Warrants heldstock by some of the selling stockholders, of which the underlying shares are also being registered hereby, if the selling stockholders exercise those Class A and Class B Warrants through a cash exercise.shareholders.
Our common stock is listed for quotation on the NASDAQ CapitalOTCQB Market operated by OTC Markets Group, Inc. (or OTCQB) under the ticker symbol “CBTE.“HPPI.” On April 29, 2008, theJuly 21, 2015, closing price of one share of our common stock was $0.085.
Following the effectiveness of the registration statement of which this prospectus forms a part, the sale and distribution of securities offered hereby may be effected in one or more transactions that may take place on the NASDAQ Capital Market was $2.44.OTCQB, including ordinary brokers’ transactions, privately negotiated transactions or through sales to one or more dealers for resale of such securities as principals, at market prices prevailing at the time of sale, at prices related to such prevailing market prices or at negotiated prices. Usual and customary or specifically negotiated brokerage fees or commissions may be paid by the selling stockholders. The selling stockholders and intermediaries through whom such securities are sold may be deemed “underwriters” within the meaning of the Securities Act of 1933, as amended, or the Securities Act, with respect to the securities offered hereby, and any profits realized or commissions received may be deemed underwriting compensation.
Our principal executive offices are located at 601 Biotech Drive, Richmond, Virginia 23235. Our telephone number is (804) 648-3820.
Investment
Investing in our common stock is highly speculative and involves a highsignificant degree of risk. You should carefully consider the factors described under the caption “Risk Factors”See “Risk Factors” beginning on page 7 of this prospectus.prospectus for a discussion of information that should be considered before making a decision to purchase our common stock.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The Datedate of this Prospectus is:prospectus is ,
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F-1 |
Please read this prospectus carefully. It describes our business, our financial condition and our results of operations. We have prepared this prospectus so that you will have the information necessary to make an informed investment decision.
You should rely only on the information contained in this prospectus. We have not authorized any other person to provide you with different information. This prospectus is not an offer to sell, nor is it seeking an offer to buy, these securities in any state where the offer or sale is not permitted. The information in this prospectus is complete and accurate as of the date on the front cover, but the information may have changed since that date.
This prospectus is part of a registration statement we filed with the U.S. Securities and Exchange Commission (the “SEC”). You should rely on the information provided in this prospectus. Neither we nor the Selling Stockholders listed in this prospectus under the heading entitled “Selling Stockholders” beginning on page 42 have authorized anyone to provide you with any information different fromor to make any representations about us, the securities being offered pursuant to this prospectus or any other matter discussed in this prospectus, other than the information provided or incorporated by referenceand representations contained in this prospectus. The Selling Stockholders are offering to sell and seeking offers to buy the Shares only in jurisdictions in which offers and sales are permitted. If any other information or representation is given or made, such information or representation may not be relied upon as having been authorized by us.
The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock. Neither the Shares. We maydelivery of this prospectus nor any distribution of securities in accordance with this prospectus shall, under any circumstances, imply that there has been no change in our affairs since the date of this prospectus. This prospectus will be updated and made available for delivery to the extent required by applicable rulesthe federal securities laws.
This prospectus includes estimates, statistics and other industry data that we obtained from industry publications, research, surveys and studies conducted by third parties and publicly available information. Such data involves a number of assumptions and limitations and contains projections and estimates of the Commissionfuture performance of the industries in which we operate that are subject to updatea high degree of uncertainty. This prospectus also includes data based on our own internal estimates. We caution you not to give undue weight to such projections, assumptions and estimates.
For investors outside the United States: Neither we nor the placement agent have done anything that would permit this offering or possession or distribution of this prospectus or any free writing prospectus we may provide to you in connection with this offering in any jurisdiction where action for that purpose is required, other than in the future.United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus and any such free writing prospectus outside of the United States.
Except where
This summary highlights selected information contained elsewhere in this prospectus. To understand this offering fully, you should read the entire prospectus carefully, including the “Risk Factors” section, the financial statements and the notes to the financial statements. Unless the context otherwise requires, and for purposes ofreferences contained in this prospectus only:
to the terms“Company,” “we,” “us,” “our company,” andor “our” referrefers to Commonwealth Biotechnologies,HedgePath Pharmaceuticals, Inc., CBI Services, Mimotopes Pty Ltd, Exelgen Limiteda Delaware corporation.
Overview
We are a clinical stage biopharmaceutical company that is seeking to discover, develop and Fairfax Identity Laboratories. Wherecommercialize innovative therapeutics for patients with certain cancers. Our preliminary focus is on the context so requires, Commonwealth Biotechnologies, Inc. is sometimes referred to as “CBI”; Mimotopes Pty Ltd is sometimes referred to as “Mimotopes”; Exelgen Limited is sometimes referred to as “Exelgen”development of therapies for skin, lung and Fairfax Identity Laboratories is sometimes referred to as “FIL”;
the term “common stock” refers to our common stock, without par value per share;
the term “Shares” refers to those shares of common stock underlying the Convertible Notes and Warrants issued in that private placement (the “Private Placement”) described in more detail below under the captions “Prospectus Summary” and “Private Placement of Convertible Notes and Warrants” at pages 4 and 27, respectively, of this prospectus;
the term “Convertible Notes” refers to those senior convertible notesprostate cancers in the aggregate initial amountU.S. market. Our proposed therapy is based upon the use of $1,950,000 issued by our company in the Private Placement;
the term “Warrants” refers to those Class A Warrants and Class B Warrants issued by our company in the Private Placement and described more fully below in the section captioned “Private Placement of Convertible Notes and Warrants” at page 27 of this prospectus;
You should read the following summary together with the more detailed information included at other sections of this prospectus. In addition, you should carefully consider the factors described under “Risk Factors” at page 7 of this prospectus.
On December 31, 2007, we closed a subscription agreement (the “Subscription Agreement”) with six institutional investors (the “Selling Stockholders”), pursuant to which we issued and sold Convertible Notes with an initial aggregate price of $1,950,000 and Class A Warrants and Class B Warrants to purchase additional Shares on terms referenced therein.
The Convertible Notes are due July 31, 2009 and are initially convertible into 975,000 Shares (the “Initial Number”) at the rate of $2.00 per Share, as described in more detail in the section titled “Private Placement of Convertible Notes and Warrants” beginning on page 27. The maximum number of Shares into which the Convertible Notes may be convertible is 1,104,108 Shares (the “Maximum Number”) (at the rate of approximately $1.766 per Share), which is one Share less than 20%patented formulation of the number of Shares outstanding immediately prior to the closingcurrently marketed anti-fungal drug itraconazole known as SUBATM-Itraconazole.
Following a meeting between our management and representatives of the Private Placement.
The Class A Warrants are exercisableUnited States Food and Drug Administration (or FDA) in August 2014, we submitted an Investigational New Drug (or IND) application in November 2014 for an aggregatethe use of 975,000 Shares, at an initial priceour product candidate to treat basal cell carcinoma in patients with Gorlin Syndrome, a genetic disease also known as Basal Cell Carcinoma Nevus Syndrome, which, among other conditions, causes the chronic formation of $2.85 per Share, subjectbasal cell tumors. Our IND application was cleared by the FDA in December 2014, and as such, we expect to adjustment as describedcommence patient recruiting during the third quarter of 2015 for a Phase II(b) clinical trial studying the safety and efficacy of the SUBA-Itraconazole formulation to determine how well it reduces basal cell carcinoma tumor burden in more detailpatents with Gorlin Syndrome. We expect to report preliminary results during the fourth quarter of 2015 and first quarter of 2016 in patients who continue treatment under our open-label protocol. Thereafter, we intend going forward to file individualized clinical trial protocols to expand the section titled “Private Placementstudy of Convertible Notes and Warrants” beginning on page 27.
The Class B Warrants are exercisableSUBA-Itraconazole for an aggregate of 243,750 Shares, at an initial price of $5.00 per Share, subject to adjustment as described in more detail in the section titled “Private Placement of Convertible Notes and Warrants” beginning on page 27.additional target cancer indications.
We have agreeddeveloped, licensed and are seeking to registeracquire and/or license, intellectual property and know-how related to the treatment of cancer patients using itraconazole and have applied for public resale 1,170,000 Sharespatents to cover our inventions. We have exclusive rights in connectionthe U.S. to develop and to commercialize SUBA-Itraconazole Capsules for the treatment of human cancer via oral administration. SUBA-Itraconazole was developed and is licensed to us by our manufacturing partner and significant shareholder Mayne Pharma Ventures Pty Ltd. and its affiliates (which we refer to herein as Mayne Pharma) under a Supply and License Agreement, originally dated September 3, 2013 and most recently amended and restated on May 15, 2015. We refer to this agreement herein as the Supply and License Agreement. Mayne Pharma is an Australian specialty pharmaceutical company that develops and manufactures branded and generic products, which it distributes directly or through distribution partners and also provides contract development and manufacturing services. In addition to being our licensor and supply partner, under the Supply and License Agreement and related agreements, Mayne Pharma holds a significant minority equity stake in our company and holds important rights with respect to our company, such as the Convertible Notes (120%right to appoint a member to our Board of Directors. In addition, we expect to obtain a sublicense from Mayne Pharma to rights for certain patents regarding the use of itraconazole as a cancer treatment We have filed additional patent applications regarding the use of SUBA-Itraconazole for treatment of skin, lung and prostate cancers based upon specific dosing regimens that affect the Hedgehog pathway signaling. We believe these applications may lead to additional IP protections for our use of SUBA-Itraconazole as an anti-cancer therapy.
“SUBATM technology” (which stands for “super bioavailability”) is designed to improve the bioavailability of orally administered drugs that are poorly soluble. In studies conducted by Mayne Pharma relating to the anti-fungal use of SUBA-Itraconazole, SUBA-Itraconazole demonstrated improved absorption and significantly reduced variability within and between patients compared to the branded and generic forms of itraconazole in human studies. We believe this technology is well-suited for the exploration of the numberpotential anti-cancer effects of Shares initially underlyingitraconazole.
Based on existing scientific (including in vitro, animal and human studies) data, we believe that itraconazole affects the Convertible Shares) (the “Registered Number”)Hedgehog signaling pathway in cells, a major regulator of many fundamental cellular processes, which will in turn impact the development and growth of certain cancers. Itraconazole appears to have notable anti-cancer effects by one or more independent or synergistic mechanisms, some of which are not clearly understood and continue to be the subject of on-going research. These anti-cancer effects have been demonstrated in various animal models and subsequently in human studies conducted by clinicians and investigators at leading research institutions over the last several years, all of which are the basis of our interest in the clinical development of itraconazole for treatment of human cancers.
Our regulatory strategy is driven by the so called 505(b)(2) regulatory pathway, under which a drug (in our case, itraconazole) that has already been approved for use in humans in the United States by the FDA is developed for one or more new medical indications (in our case, as an anti-cancer agent). NotwithstandingDue to the foregoing,history of safe and efficacious use of itraconazole in humans for anti-fungal applications, we believe the Selling Stockholders505(b)(2) pathway will be available to us, which may not convert their prorated sharecreate the potential for significantly reducing the risk and time to achieve FDA approval of Convertible Notesour cancer therapy.
We believe we have the opportunity to clinically progress and, if regulatory approvals are secured, commercialize SUBA-Itraconazole oral capsules as an anti-cancer therapy in excessthe United States based on the following:
Our Potential Market
The following table depicts our current estimate of the outstanding number of Shares prior to the closingtotal available market opportunity for our proposed anti-cancer therapies based upon independent market research, scientific and industry publications and management’s knowledge of the Subscription Agreement.
WeU.S. oncology market. Our estimates (including estimated product pricing) are based on current assumptions and the Selling Stockholders have agreed that we will initially register 1,001,208 shares to meet our obligations in the Private Placement. We will, in the future, be obligated to register additional shares,are subject to compliance with applicable laws and regulations, to permit the Selling Stockholders to convert the Convertible Notes and to exercise the Class A and Class B warrants.change.
This prospectus has been prepared, and the registration statement of which this prospectus is a part has been filed with the Securities and Exchange Commission, to satisfy our obligations to the recipients of the Shares in the Private Placement. Accordingly, this prospectus covers the resale by the Selling Stockholders of Shares issued in the Private Placement.
We will not receive any of the proceeds of the sale of the Shares by the Selling Stockholders named in the section captioned “Selling Stockholders” located on page 42 of this prospectus; however, we could receive up to $3,997,500 from the exercise by the Selling Stockholders of all of the Class A and Class B Warrants at their current prices of $2.85 and $5.00, respectively.
Although we will not receive any proceeds from the sale of any Shares underlying the Convertible Notes, we have estimated the value of the maximum number of Shares underlying the Convertible Notes. As noted above, we have registered for public resale 1,001,208 Shares underlying the Convertible Notes. The average of the high and low prices of our Shares on April 29, 2008 was $2.47 per Share, so the value of the Shares underlying the Convertible Notes on the same day was $2,472,984.
We are registering an aggregate of 1,001,208 Shares for resale. On December 31, 2007, the date we completed the private placement, the market price per share was $2.48. The aggregate dollar value of the shares on that date was $2,482,996. If all of the Warrants are exercised and the Convertible Notes are converted, we could receive gross proceeds of $5,947,500, but we will not receive any proceeds from the sale of the Shares underlying the Convertible Notes or Warrants. Further, the Selling Stockholders will be limited in their ability to sell the shares underlying the Convertible Notes and Warrants other than in compliance with Rule 144 unless and until we register the remainder of such Shares.
OFFERING SUMMARYHedgePath Pharmaceuticals, Inc. – Summary U.S. Market Opportunity
Cancer | Therapy Indication | Potential for SUBA-Itraconazole | Target Patient Population | U.S. Total Available Market | ||||
Skin(1) | Patients with BCC (basal cell carcinoma) lesions First indication: BCC tumors in Gorlin Syndrome Patients requiring surgery Follow-on Indication: Patients with BCC facial lesions pending MOHs or other surgical procedures | Less toxic therapy than vismodegib for Gorlin Patients to delay surgeries; low toxicity therapy to delay or minimize surgical intervention for facial BCC tumors | 10,000 Gorlin patients needing chronic BCC therapy; 65,000 BCC patients pending surgical treatment for facial tumors that require excision and potential plastic surgery | $300M for Gorlin patients and $600M for patients with BCC facial lesions requiring surgery based upon HedgePath estimates of |
Cancer | Therapy Indication | Potential for SUBA-Itraconazole | Target Patient Population | U.S. Total Available Market | ||||
Lung(2) | Patients with advanced non-squamous cell, non-small cell lung cancer (NSCLC) who will be placed on Cisplatin/Pemetrexed IV Therapy | Improve the | 56,000 men and women with late-stage disease on chemotherapy treatment | $1.7 B based on HedgePath estimates of | ||||
Prostate(3) | Patients with non metastatic castrate resistant prostate cancer (NMCRPC) and rising PSA levels on “off-label” androgen deprivation therapy (ADT) | Delay the progression to metastatic disease while preventing or reducing the use of ADT and its associated side-effects | 45,000 high-risk men with prostate cancer which may lead to metastases of the bone | $1.5B based on HedgePath estimates of ~ $4K-$5K monthly cost of therapy |
References:
(1) | J Am Academy Dermatology, 2006; Skin Cancer Foundation, 2009; International Medicine News, 2011; Seeking Alpha, 2012; BCCNS Support Organization 2014 |
(2) | STATS MGU, 2009; Global Industry Analysts, 2010; BMC Health Services, 2011; World Health Organization, 2011; Cost of Treating Lung Cancer, 2012; National Center for Biotechnology Information, 2012 |
(3) | J. Urology, 2003; Oncology, 2004; J. Clinical Oncology, 2011; Medscape, 2012; Landes Bioscience, 2012 |
Our Strategy
Our goal is to be a leader in the development and commercialization of SUBA-Itraconazole-based therapeutics for the treatment of cancer patients. We believe that we can accomplish this goal by implementing the following key elements of our business strategy:
• | Rapidly Advance the Clinical Development of Our Therapies. With the history of safe use of itraconazole in humans for anti-fungal indications, we bypassed each of the required pre-clinical animal studies for toxicity and Phase I human trials to establish safety, and therefore are able to move directly into Phase II human trials. We filed an IND to test SUBA-Itraconazole for the treatment of basal cell carcinoma in patients with Gorlin Syndrome, and the IND was cleared by FDA for human testing as of late December 2014. As a result, we will begin recruiting patients for a Phase II(b) trial during the third quarter of 2015. Thereafter we intend to file individualized clinical protocols to expand the study of SUBA-Itraconazole for additional target cancer indications. |
• | Seek FDA Programs to Expedite Drug Approvals. The FDA has various programs intended to facilitate and expedite development and review of new drugs to address unmet medical needs in the treatment of serious or life-threatening conditions. These expedited programs help ensure that therapies for serious conditions are available as soon as it can be concluded that the therapies’ benefits justify their risks, taking into account the seriousness of the condition and the availability of alternative treatments. These programs include breakthrough therapy designation, fast track designation, accelerated approval, and priority review. We believe that SUBA-Itraconazole for the treatment of cancer may qualify for one of these designations, which could help expedite the regulatory review process. |
• | Commercialize and Market with Exclusivity. We are currently opening clinical trial sites to prepare for the clinical testing of SUBA-Itraconazole for treatment of basal cell carcinoma in an initial Phase II(b) trial for patients with Gorlin Syndrome, in order to later seek FDA approval based upon its efficacy for this new indication. In addition, we are developing other specific clinical trial designs to address different forms of cancer in order to pursue New Drug Application (or NDA) approvals for multiple indications. Further, we believe SUBA-Itraconazole can be commercialized in a way that maximizes benefits for cancer patients, based on our specific therapy regimens, while eliminating generic substitution and providing us with market exclusivity protections through our intellectual property rights. |
We intend to finance our research and development, commercialization and distribution efforts and our working capital needs primarily through:
Risks Associated with Our Business
Our business is subject to many significant risks, as more fully described in the section entitled “Risk Factors” immediately following this prospectus summary. You should read and carefully consider these risks, together with the risks set forth under the section entitled “Risk Factors” and all of the other information in this prospectus, including the financial statements and the related notes included elsewhere in this prospectus, before deciding whether to invest in our common stock. If any of the risks discussed in this prospectus actually occur, our business, financial condition or operating results could be materially and adversely affected. In particular, our risks include, but are not limited to, the following:
Corporate History
We were founded under the name “Commonwealth Biotechnologies, Inc.” in Virginia in 1992, and completed an initial public offering in October 1997 (we refer to our company prior to our emergence from bankruptcy as CBI). CBI previously provided, on a contract basis, specialized life sciences services to the pharmaceutical and biotechnology sector. On January 20, 2011, CBI filed a voluntary petition for bankruptcy. We began our current business as HedgePath Pharmaceuticals, Inc. in August 2013 as a Delaware corporation following the emergence of CBI from its voluntary bankruptcy proceedings. See “Business-Corporate History.”
Principal Offices
We were reincorporated under the laws of the State of Delaware on August 12, 2013 upon consummation of our reincorporation merger. We maintain an address at 324 South Hyde Park Avenue, Suite 350, Tampa, Florida 33606 and our telephone number is (813) 864-2559 and 700 West Harbor Drive, Suite 1104, San Diego, California 92101 where our telephone number is (858) 722-3043.
The Offering
Common Stock Outstanding: | 245,353,270 shares as of the date of this prospectus. |
Common Stock Offered by Selling Stockholders: | 30,600,000 shares (1) |
Use of | Proceeds: | We will not receive any |
Quotation of Common Stock: | Our common stock is listed for quotation on the |
Risk Factors: | ||
Summary Financial Information
In the table below, we provide you with summary financial data for our company. This information is derived from our consolidated financial statements included elsewhere in this prospectus. Historical results are not necessarily indicative of the results that may be expected for any future period. When you read this historical selected financial data, it is important that you read it along with the historical financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.
Year Ended December 31, | ||||||||
2007 | 2006 | |||||||
Operational Data | ||||||||
Revenues | $ | 12,422,193 | $ | 6,532,482 | ||||
Net income (loss) before extraordinary gain | (3,540,934 | ) | (1,152,649 | ) | ||||
Extraordinary gain | 782,833 | — | ||||||
Net income (loss) after extraordinary gain | (2,758,101 | ) | (1,152,649 | ) | ||||
Net income (loss) per common share basic and diluted before extraordinary gain | (0.69 | ) | $ | (0.35 | ) | |||
Net income (loss) per common share basic and diluted after extraordinary gain | (0.54 | ) | $ | (0.35 | ) | |||
Weighted average common shares outstanding | 5,135,951 | 3,281,360 | ||||||
Balance Sheet Data: | ||||||||
Total Current Assets | $ | 8,240,285 | $ | 2,797,861 | ||||
Total Assets | 20,038,052 | $ | 9,501,958 | |||||
Total Current Liabilities | 6,861,578 | $ | 586,967 | |||||
Total Liabilities | $ | 10,105,103 | $ | 4,373,036 | ||||
Total Stockholders’ equity | $ | 9,932,949 | $ | 5,128,922 |
InvestmentAn investment in our securitiescommon stock involves a high degree of risk.substantial risks, including the risks described below. You should carefully consider the risks described below together with all of the other information included in this prospectus before making an investment decision.purchasing our common stock. The risks and uncertainties described belowhighlighted here are not the only ones that we face, but represent the material risks to our business. There may beface. For example, additional risks and uncertainties not currently knownpresently unknown to us or that we currently do not believe are material that may harmconsider immaterial or unlikely to occur could also impair our business and financial performance.operations. If any of the following risks or uncertainties described below or any such additional risks and uncertainties actually occurs,occur, our business, prospects, financial condition or results of operations could suffer. In that case,be negatively affected, and you maymight lose all or part of your investment. You
Risks Related to Our Business
We are a pre-revenue biopharmaceutical company and are thus subject to the risks associated with new businesses in that industry.
We emerged from bankruptcy in August 2013, and the business opportunity we acquired in connection with our reorganization (the development of itraconazole anti-cancer therapies) is a new business opportunity. As such, we are a clinical stage biopharmaceutical company with no history of revenue-generating operations, and our only assets consist of the intellectual property and related assets contributed to us by our stockholder Hedgepath, LLC on August 13, 2013, in connection with our emergence from bankruptcy. Therefore, we are, and expect for the foreseeable future to be, subject to all the risks and uncertainties inherent in a new business, in particular new businesses engaged in the development of pharmaceuticals. We still must establish and implement many important functions necessary to operate a business, including the clinical development of our product candidate, acquiring additional intellectual property rights related to itraconazole beyond our exclusive Supply and License Agreement with Mayne Pharma for SUBA-Itraconazole, establishing our managerial and administrative structure and implementing financial systems and controls.
Accordingly, you should not investconsider our prospects in this offering unless you can afford to lose your entire investment. Youlight of the costs, uncertainties, delays and difficulties frequently encountered by companies in their pre-revenue generating stages, particularly those in the pharmaceutical field. Potential investors should carefully consider thesethe risks and uncertainties that a new company with no operating history will face. In particular, potential investors should consider that there is a significant risk factors, togetherthat we will not be able to:
If we cannot execute any one of the foregoing, our business may fail, in which case you may lose the entire amount of your investment in our company.
In addition, as a pre-revenue biopharmaceutical company, we expect to encounter unforeseen expenses, difficulties, complications, delays and other information in this prospectusknown and unknown factors. We will need to transition at some point from a company with a research and development focus to a company capable of supporting commercial activities. We may not be able to reach such point of transaction or make such a transition, which would have a material adverse effect on our company.
Our limited operating history makes it difficult for you to evaluate our business to date and to assess our future viability.
Currently, our sole line of business is the documents we have incorporated by reference in the section “Where You Can Find Additional Information” located on page 46 of this prospectus before you decide to purchase anydevelopment and marketing of our Ordinary Shares, includingitraconazole anti-cancer therapies, and we acquired the Shares offered by the Selling Stockholders.
Risks Relatedassets related to our Business and Industry
Our operating results dependthis business opportunity on a number of factors that are outside our control.
Our revenues come from the provision of analytical services to the pharmaceutical, biotechnology and related industries. Our company has experienced and may continue to experience significant quarterly fluctuations in revenues due to variations in contract status with several large customers. In addition, manyAugust 13, 2013 as part of our other customer projects are individual orders for specific projects. Repeatemergence from bankruptcy. Our pre-bankruptcy historic business operations ceased contemporaneously with our becoming subject to bankruptcy proceedings in 2011, and all assets supporting our earlier lines of business have been disposed of. Accordingly, we only recommenced active operations on August 13, 2013, the date we emerged from customers depends heavily on customer satisfaction withbankruptcy.
Moreover, Hedgepath, LLC, from whom we acquired the services we provide, and upon factors beyond our control, suchitraconazole business opportunity as the timing of product development and our customers’ commercialization programs. We are unable to predict for more than a few months in advance the number and size of future projects in any given period. Thus, the timing of significant projects could significantly affect our financial results in any given period. The combined impact of several large contracts and the unpredictable project fluctuations from other customers can result in very large fluctuations in financial performance from quarter to quarter or year to year. In addition, manypart of our large competitorsplan of bankruptcy reorganization, was only formed in late 2011 and thus itself has a limited operating history. Our operations are presently limited to planning for clinical trials, arranging for the raising of capital, developing our technology and identifying potential commercial partners. We have not yet demonstrated our ability to complete any clinical trials, obtain regulatory approvals, manufacture a commercial scale product, or arrange for a third party to do so on our behalf, or conduct sales and marketing activities necessary for product commercialization. Consequently, any predictions you make about our future viability or ability to accomplish our business goals may internalize their biotechnology research services. If this occurs, our company’s future customers maynot be smaller companies without captive research capabilities. See “Management’s Discussion and Analysis of Financial Condition and Result of Operations.”as accurate as they could be if we had a longer operating history.
We are highly dependent on our key personnel.
We are highly dependent on our senior management and scientific staff,collaboration with Mayne Pharma, and the loss of this collaboration would materially impair our business plan and viability.
Under our Supply and License Agreement with Mayne Pharma, we have secured exclusive rights to commercialize SUBA-Itraconazole for the treatment of patients with cancer via oral administration in the United States. Mayne Pharma is our sole source supplier of SUBA-Itraconazole, and under such agreement, we must obtain all required supply of SUBA-Itraconazole capsules for our clinical trials and commercialization of the product from Mayne Pharma, except in the limited circumstance where Mayne Pharma has established a secondary supplier and is unable to supply the product. As such, this agreement and our collaboration with Mayne Pharma are critical to our business. In the event that the Mayne Pharma Supply and License Agreement is terminated or Mayne Pharma is unable to supply the product, we may lose the ability to commercialize SUBA-Itraconazole, and our business prospects would be materially damaged. Moreover, if we fail to achieve certain commercialization goals or funding goals or materially breach certain conditions under our agreements with Mayne Pharma, Mayne Pharma has the right to demand the resignation of Nicholas J. Virca, our Chief Executive Officer and President, and Frank E. O’Donnell, Jr., our Executive Chairman, from their servicespositions with our company. In the event that Mr. Virca or Dr. O’Donnell do not submit their resignations in a timely manner, Mayne can terminate the Supply and License Agreement, the loss of which would seriously impair our viability and could lead to the loss of your investment.
The right of Mayne Pharma to participate in future financings of ours could impair our ability to raise capital.
Pursuant to our Second Amended and Restated Equity Holders Agreement, or the Equity Holders Agreement (as described in further detail in the section entitled “Certain Relationships and Related Party Transactions”), Mayne Pharma and its affiliates have been granted a right of first refusal to purchase a pro rata share of any new securities issued by us, which pro rata share would be determined based upon the number of shares of our common stock held by Mayne Pharma and its affiliates on a fully diluted basis as compared to the number of shares of common stock outstanding immediately prior to the offering of the new securities on a fully diluted basis. The existence of such right of participation, or the exercise of such rights, may deter potential investors from providing us needed financing, or may deter investment banks from working with us, which would have a material adverse effect on our ability to finance our company.
The right of Mayne Pharma to introduce accredited investors to us to participate in a private offering of our securities could impair our ability to raise capital.
Under our Equity Holders Agreement, Mayne Pharma has been granted the right until June 24, 2016 to introduce accredited investors to us to participate in up to 50% of any private offering of our securities (subject to certain exceptions as described in the Equity Holders Agreement). The existence of such right, or the exercise of such rights, may deter potential private investors from providing us needed financing, or may deter investment banks or other placement agents from working with us, which would have a material adverse effect on our ability to finance our company.
Mayne Pharma may exert significant influence over our business and affairs and the corporate governance rights afforded to Mayne Pharma under the Equity Holders Agreement may adversely affect the management of our company.
Mayne Pharma currently beneficially owns approximately 57% of our outstanding common stock. Under the terms of our Equity Holders Agreement, Mayne Pharma has the right to purchase any shares of common stock being transferred or sold by the individual account of our current President and Chief Executive Officer and
Executive Chairman. In addition to Mayne Pharma’s current common stock ownership, Mayne Pharma also has the right to designate one director to our Board of Directors (and to designate a second director if the size of the Board of Directors is increased to seven directors) until the earlier to occur of: (i) the date that the Supply and License Agreement is terminated or expires, or (ii) the date on which Mayne Pharma along with its affiliates ceases to own ten percent (10%) or more of our issued and outstanding common stock on a fully diluted basis. During this time frame, Mayne Pharma, through its representative on the Board of Directors, holds a veto right in the event that we want to increase or decrease the size of the Board of Directors or replace or remove our President and Chief Executive Officer and Executive Chairman (such veto right being the result of each of the foregoing Board of Director actions requiring the unanimous consent of the Board of Directors). Mayne Pharma’s significant ownership of our common stock plus the existence of these additional rights will for the foreseeable future enable Mayne Pharma to exert influence over our company and matters requiring stockholder approval including the election of directors, financing activities or a merger or sale of our assets. Additionally, these rights may limit the ability of our Board of Directors and our management team to make necessary personnel decisions, including adding independent directors to our Board of Directors, which may adversely affect the management of our company, particularly if disputes arise between us and Mayne Pharma (which disputes in and of themselves could have a material adverse effect on our ability to conduct business).
We are dependent upon our officers and directors and their loss could adversely affect our company.ability to operate.
Our operations are dependent upon a relatively small group of individuals and, in particular, our current officers and directors, including most notably Nicholas J. Virca and Dr. Frank E. O’Donnell, Jr. We believe that our ability to implement our business plans depends on the continued service of these individuals and/or other officers and directors. In particular, Dr. O’Donnell is presently required to commit only 25% of his time to our affairs and, accordingly, he may have conflicts of interest in allocating management time among various business activities, and these conflicts of interest may not be resolved in our favor. We do presently have an executive chairman agreement and an employment agreements with Dr. O’Donnell and Mr. Virca, respectively. However, the agreements are terminable upon 60 days’ notice to us with or without good reason. The unexpected loss of the services of one or more of our directors or officers could have a detrimental effect on us.
The requirements of being a public company may strain our resources and divert management’s attention.
Prior to Hedgepath, LLC’s contribution of certain assets to us in August 2013, the business opportunity and assets we acquired had been operated privately. In addition, although our predecessor, CBI, was a company that filed public reports with the SEC, the business of CBI effectively ceased concurrently with its entry into federal bankruptcy proceedings in 2011. As a consequence, our current business, which began in August 2013, has no historical nexus to that of CBI’s.
As a public company, we must hireare subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (which we refer to herein as the Exchange Act), the Sarbanes-Oxley Act, the Dodd-Frank Act and retainother applicable securities rules and regulations. Compliance with these rules and regulations will increase our legal and financial compliance costs, make some activities (including activities previously undertaken in a number of additional highly qualifiedprivate company context) more difficult, time-consuming or costly and experiencedincrease demand on our systems and resources. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management and scientific personnel, consultants and advisors. Ouroversight may be required. As a result, management’s attention may be diverted from other business concerns, which could adversely affect our ability to attractimplement our business plans. We may need to hire more employees in the future or engage outside consultants to comply with these requirements, which will increase our costs and retain qualified personnelexpenses.
In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is criticalprovided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from business development activities to compliance activities. If our efforts to comply with new laws,
regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be adversely affected.
Our business and operations would suffer in the event of system failures
Despite the implementation of security measures, our internal computer systems and those of our current and any future partners, contractors, and consultants are vulnerable to damage from cyber-attacks, computer viruses, unauthorized access, natural disasters, terrorism, war, and telecommunication and electrical failures. System failures, accidents, or security breaches could cause interruptions in our operations, and could result in a material disruption of our commercialization activities, development programs and our business operations, in addition to possibly requiring substantial expenditures of resources to remedy. The loss of clinical trial data from future clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. To the extent that any disruption or security breach were to result in a loss of, or damage to, our continueddata or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability and the commercialization of any potential product candidate could be delayed.
Risks Related to Our Financial Position and Need For Additional Capital
Notwithstanding our recent private placement, we will require substantial additional funding to progress our business. If we are unable to raise additional capital, we could be forced to delay, reduce or eliminate our product development programs or commercialization efforts and our business could fail.
We expect that we will be required to incur significant expenses in connection with our ongoing activities, particularly as we engage in efforts to develop and ultimately commercialize our itraconazole anti-cancer therapies.
Accordingly, we will need to obtain long term additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we could be forced to delay, reduce or eliminate our research and development programs or any future commercialization efforts, and our business might fail.
In addition, our future capital requirements will be significant and will depend on many factors, including:
Developing pharmaceutical products, conducting preclinical testing and clinical trials and seeking regulatory approval of such products is a time-consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain regulatory approval and achieve product sales. In addition, our product candidate, if approved (of which no assurances may be given), may not achieve any level of commercial success. Our commercial revenues, if any, will be derived from sales of a product that we do not expect to be commercially available for several years, if at all. Accordingly, we will need to continue to rely on additional financing to achieve our business objectives. Adequate additional financing may not be available to us on acceptable terms, or at all.
We may have difficulty in raising capital and may consume resources faster than expected.
We currently do not generate any revenue from product sales or otherwise, and we therefore have a limited source of cash to meet our future capital requirements. We do not expect to generate revenues for the
foreseeable future, and we may not be able to raise funds in the future, which would leave us without resources to continue operations and force us to resort to stockholder investments or loans, which may not be available to us. We may have difficulty raising needed capital in the near or longer term as a result of, among other factors, the very early stage of our company, faces intense competitionthe rights of certain of our stockholders to participate in our future financings and our lack of revenues as well as the inherent business risks associated with our company and present and future market conditions. Also, we may consume available resources more rapidly than currently anticipated, resulting in the need for additional funding sooner than anticipated. Our inability to raise funds could lead to decreases in the price of our common stock and the failure of our business.
Raising additional capital may cause dilution to our stockholders, restrict our operations or require us to relinquish rights to our technologies or product candidates.
Since we will be unable to generate any revenue from numerous pharmaceuticalactual sales of products and biotechnology companies, universitiesexpect to be in the development stage for the foreseeable future, we will need to seek equity or debt financing to provide the capital required to execute our business plan. We will need significant funding for developing our intellectual property, conducting clinical trials and entering into collaborations with third party partners as well as for working capital requirements and other research institutions. operating and general corporate purposes.
There can be no assurance that we will be able to attractraise sufficient capital on acceptable terms, or at all. If such financing is not available on satisfactory terms, or is not available at all, we may be required to delay, scale back or eliminate the development of business opportunities and retainour operations and financial condition may be adversely affected to a significant extent.
If we raise additional capital by issuing equity securities, the percentage and/or economic ownership of our existing stockholders may be reduced, and accordingly these stockholders may experience substantial dilution. We may also issue equity securities that provide for rights, preferences and privileges senior to those of our common stock.
Debt financing, if obtained, may involve agreements that include liens on our assets, covenants limiting or restricting our ability to take specific actions, such individualsas incurring additional debt, increases in our expenses and requirements that our assets be provided as a security for such debt. Debt financing would also be required to be repaid regardless of our operating results.
If we raise additional funds through collaborations and licensing arrangements, we may be required to relinquish some rights to our technologies or product candidate, or to grant licenses on terms that are not favorable to us.
Funding from any source may be unavailable to us on acceptable terms, or at all. If we do not have sufficient capital to fund our operations and expenses, our business could fail.
As a result of our current lack of financial liquidity, our auditors have expressed substantial doubt regarding our ability to continue as a “going concern.”
As a result of our current lack of financial liquidity, our auditors’ report for our 2014 financial statements, which are included as part of this prospectus, contains a statement concerning our ability to continue as a going concern. Our lack of sufficient liquidity could make it more difficult for us to secure additional financing or enter into strategic relationships on terms acceptable to us, if at all, and may materially and adversely affect the terms of any financing that we may obtain and our public stock price generally.
Our continuation as a going concern is dependent upon, among other things, achieving positive cash flow from operations and, if necessary, augmenting such cash flow using external resources to satisfy our cash needs. Our plans to achieve positive cash flow include engaging in offerings of securities, negotiating up-front and milestone payments on pipeline products under development and royalties from sales of our products which secure regulatory approval and any milestone payments associated with such approved products. These cash sources could, potentially, be supplemented by financing or other strategic agreements. However, we may be unable to achieve these goals and therefore may be unable to continue as a going concern.
Risks Related to the Clinical Development of Our Product Candidate
We are very early in our development efforts and have only one product candidate. If we are unable to clinically develop and ultimately commercialize itraconazole as an anti-cancer therapy or experience significant delays in doing so, our business will be materially harmed.
We are very early in our development efforts and have only one product candidate, namely SUBA-Itraconazole for the treatment of cancer. While itraconazole has previously been approved by the FDA for use as an anti-fungal agent, the use of itraconazole to treat cancer has not been approved and has been subject to limited clinical testing by others. Moreover, we have not engaged in any such testing ourselves, and our operations as of our emergence from bankruptcy in August 2013 have been limited to developing our own intellectual property and know how, while acquiring the technology and rights of others in order to pursue the clinical development of the itraconazole formulation, SUBA-Itraconazole, as an anti-cancer therapy.
Therefore, our ability to generate product revenues, which we do not expect will occur for several years, if ever, will depend heavily on our ability to develop and eventually commercialize our product candidate. The positive development of our product candidate will depend on several factors, including the following:
If we do not achieve one or more of these factors in a timely manner or at all, we could experience significant delays or an inability to clinically develop and commercialize SUBA-Itraconazole as a cancer therapy, which would materially harm our business.
In addition, given our current limited financial resources, we are currently focusing our efforts on one key cancer indication, namely basal cell carcinoma in patients with Basal Cell Carcinoma Nevus Syndrome, also known as Gorlin Syndrome. We are thus faced with the risk that SUBA-Itraconazole could be ineffective in addressing this particular initial cancer indication, and if our efforts to demonstrate the efficacy of SUBA-Itraconazole in treating basal cell carcinoma in this target patient population are not positive, we may lack the resources to expand our efforts into other cancer indications.
If we are unable to convince physicians as to the benefits of SUBA-Itraconazole as an anti-cancer therapy, if and when it is approved, we may incur delays or additional expense in our attempt to establish market acceptance.
Use of SUBA-Itraconazole as an anti-cancer therapy will require physicians to be informed regarding the intended benefits of the product for a new indication. The time and cost of such an educational process may be substantial. Inability to carry out this physician education process may adversely affect market acceptance of SUBA-Itraconazole as a cancer therapy. We may be unable to timely educate physicians in sufficient numbers regarding our intended application of SUBA-Itraconazole to achieve our marketing plans or to achieve product acceptance. Any delay in physician education or acceptance may materially delay or reduce demand for our product candidate. In addition, we may expend significant funds toward physician education before any acceptance or demand for SUBA-Itraconazole as a cancer therapy is created, if at all.
Clinical drug development involves a lengthy and expensive process, with an uncertain outcome. We may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of our product candidate.
The risk of failure for product candidates in clinical development is high. It is impossible to predict when our sole product candidate, SUBA-Itraconazole for the treatment of cancer, will prove effective and safe in humans or will receive regulatory approval for any form of cancer or any other indication. Before obtaining marketing approval from regulatory authorities for the sale of SUBA-Itraconazole as a cancer therapy, we must conduct extensive clinical trials to demonstrate the safety and efficacy of our product candidate in humans. Clinical testing is expensive, difficult to design and implement, can take many years to complete and is uncertain as to outcome. A failure of one or more clinical trials can occur at any stage of testing. Moreover, the outcome of early clinical trials may not be predictive of the success of later clinical trials, and interim results of a clinical trial do not necessarily predict final results. In addition, preclinical and clinical data are often susceptible to varying interpretations and analyses, and many companies that have believed their product candidates performed satisfactorily in clinical trials have nonetheless failed to obtain marketing approval of their products.
We may experience numerous unforeseen events during, or as a result of, clinical trials that could delay or prevent our ability to receive marketing approval or commercialize our product candidate, including:
If we are required to conduct additional clinical trials or other testing of our product candidate beyond those that we currently contemplate, if we are unable to complete clinical trials of our product candidates or other testing, if the results of these trials or tests are not positive or are only modestly positive or if there are safety concerns, we may:
Our product development costs will also increase if we experience delays in testing or marketing approvals. We do not know whether any of our clinical trials will begin as planned, will need to be restructured or will be completed on schedule, or at all. Significant preclinical or clinical trial delays also could shorten any periods during which we may have the exclusive right to commercialize our product candidate or allow our competitors to bring products to market before we do and impair our ability to commercialize our product candidate and may harm our business and results of operations.
If we experience delays or difficulties in the enrollment of patients in clinical trials, our receipt of necessary regulatory approvals could be delayed or prevented.
We may not be able to initiate or continue clinical trials for our product candidate if we are unable to locate and enroll a sufficient number of eligible patients to participate in these trials as required by the FDA or similar regulatory authorities outside the United States. In addition, some of our competitors have ongoing clinical trials for product candidates that treat the same indications as our product candidate, and patients who would otherwise be eligible for our clinical trials may instead enroll in clinical trials of our competitors’ product candidates.
Patient enrollment is affected by other factors including:
Our inability to enroll a sufficient number of patients for our clinical trials would result in significant delays and could require us to abandon one or more clinical trials altogether. Enrollment delays in our clinical trials may result in increased development costs for our product candidate, which would cause the value of our company to decline and otherwise materially and adversely affect our company.
If serious adverse or unacceptable side effects are identified during the development of our product candidate, we may need to abandon or limit such development, which would adversely affect our company.
If clinical testing of SUBA-Itraconazole for the treatment of cancer results in undesirable side effects or demonstrates characteristics that are unexpected, we may need to abandon such development or limit such development to more narrow uses or subpopulations in which the undesirable side effects or other characteristics are less prevalent, less severe or more acceptable from a risk-benefit perspective. Many compounds that initially showed promise in early stage testing for treating cancer have later been found to cause side effects that prevented further development of the compound. If we are unable to develop SUBA-Itraconazole for the treatment of cancer due to reported adverse effects or characteristics, our business would be severely harmed.
For the foreseeable future, we expect to expend our limited resources to pursue a particular product candidate, leaving us unable to capitalize on other product candidates or indications that may be more profitable or for which there is a greater likelihood of clinical and commercial development.
Because we have limited financial and managerial resources, we will focus for the foreseeable future only on the clinical development of SUBA-Itraconazole for the treatment of cancer as a therapy for basal cell carcinoma in patients with Basal Cell Carcinoma Nevus Syndrome, also known as Gorlin Syndrome. As a result, we may forego or be unable to pursue opportunities with other product candidates or for indications other than those we intend to pursue that later prove to have greater commercial potential. Our resource allocation decisions may cause us to fail to capitalize on viable commercial products or profitable market opportunities. Our spending on research and development programs related to SUBA-Itraconazole for the treatment of cancer may not yield any commercially viable therapies. Because of this concentration of our efforts, our business will be particularly subject to significant risk of failure of our one current product candidate.
We expect to rely on collaborations with third parties for key aspects of our business. If we are unable to secure or maintain any of these collaborations, or if these collaborations do not achieve their goals, including most notably our collaboration with Mayne Pharma, our business would be adversely affected.
We presently have very limited capabilities for drug development and do not yet have any capability for manufacturing, sales, marketing or distribution. Accordingly, we expect to enter into collaborations with other companies that we believe can provide such capabilities. These collaborations may also provide us with important funding for our development programs. One such collaboration was entered into in September 2013 with Mayne Pharma for SUBA-Itraconazole under an exclusive Supply and License Agreement.
There is a risk that we may not be able to maintain our current collaboration or to enter into additional collaborations on acceptable terms or at all, which would leave us unable to progress our business plan. We will face significant competition in seeking appropriate collaborators. Our ability to reach a definitive agreement for a collaboration will depend, among other things, upon our assessment of the collaborator’s resources and expertise, the terms and conditions of the proposed collaboration and the failureproposed collaborator’s evaluation of a number of factors. If we are unable to maintain or reach agreements with suitable collaborators on a timely basis, on acceptable terms, or at all, we may have to curtail the development of our product candidate, reduce or delay its development program, delay its potential commercialization or reduce the scope of any sales or marketing activities, or increase our expenditures and undertake development or commercialization activities at our own expense.
Moreover, even if we are able to maintain and/or enter into such collaborations, such collaborations may pose a number of risks, including the following:
Our business would be materially or perhaps significantly harmed if any of the foregoing or similar risks comes to pass with respect to our key collaborations
We have contracted with Mayne Pharma and may contract with other third parties, for the manufacture of our product candidates for clinical testing and expect to continue to do so for commercialization. This reliance on third parties, and in particular Mayne Pharma, increases the risk that we will not have sufficient quantities of our product candidate(s) or such quantities at an acceptable cost, which could delay, prevent or impair our development or commercialization efforts.
We do not have any manufacturing capabilities, nor do we have the right to manufacture or have SUBA- Itraconazole manufactured except under agreement with Mayne Pharma. We will rely on Mayne Pharma for the manufacture of our product candidate, SUBA-Itraconazole, for clinical testing, as well as for commercial manufacture if our product candidate ultimately receives marketing approval. This reliance on Mayne Pharma leaves us exposed to the risk that we will not have sufficient quantities of our product candidate or such quantities at an acceptable cost or quality, which could delay, prevent or impair our development or commercialization efforts. In addition, the possibility of a business interruption event with Mayne Pharma or any other manufacturer may occur, such as bankruptcy, factory contamination or natural disaster, which may result in the inability to obtain product, which would cause our business prospects to be adversely impacted.
Moreover, we may be unable to maintain our agreement with Mayne Pharma or establish any agreements with other third party manufacturers or to do so on acceptable terms should we have the ability and the need to do so. Even though we have established an agreement with Mayne Pharma or if we are able to establish agreements with other third party manufacturers, reliance on third party manufacturers entails additional risks, including:
Third party manufacturers may not be able to comply with current good manufacturing practices, or cGMP, regulations or similar regulatory requirements outside the United States. Our failure, or the failure of our third party manufacturers, to comply with applicable regulations could result in sanctions being imposed on us, including clinical holds, fines, injunctions, civil penalties, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of product candidate or products, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect supplies of our product candidate or products.
In addition, our product candidate and any products that we may develop may compete with other product candidates and products for access to manufacturing facilities. There are a limited number of manufacturers that operate under cGMP regulations and that might be capable of manufacturing for us.
Also, any performance failure on the part of Mayne Pharma could delay clinical development or marketing approval. We do not currently have arrangements in place for redundant supply or a second source for bulk drug substance. If Mayne Pharma cannot perform as agreed, we may not be able to continue developing SUBA-Itraconazole.
Risks Related to the Commercialization of Our Product Candidate
Even if SUBA-Itraconazole for the treatment of cancer receives marketing approval, it may fail to achieve the degree of market acceptance by physicians, patients, third party payors and others in the medical community necessary for commercial success.
Even if SUBA-Itraconazole for the treatment of cancer receives marketing approval, it may nonetheless fail to gain sufficient market acceptance by physicians, patients, third party payors and others in the medical community. For example, current cancer treatments such as chemotherapy and radiation therapy are well established in the medical community, and doctors may continue to rely on these treatments. If our product candidate does not achieve an adequate level of acceptance, we may not generate significant product revenues and we may not become profitable. The degree of market acceptance of SUBA-Itraconazole for the treatment of cancer, if approved for commercial sale, will depend on a number of factors, including:
If we are unable to establish sales, marketing and distribution capabilities, we may not be able to commercialize our product candidate if and when it is approved.
We do not have a sales or marketing infrastructure. To achieve any level of commercial success for any product for which we have obtained marketing approval, we will need to establish a sales and marketing organization or outsource sales and marketing functions to third parties.
There are risks involved with establishing our own sales, marketing and distribution capabilities. For example, recruiting and training a sales force is expensive and time consuming and could delay any product launch. If the commercial launch of a product candidate for which we recruit a sales force and establish marketing capabilities is delayed or does not occur for any reason, we would have prematurely or unnecessarily incurred these commercialization expenses. This may be costly, and our investment would be lost if we cannot retain or reposition our sales and marketing personnel.
If approved, factors that may inhibit our efforts to commercialize our product on our own include:
If we are unable to establish our own sales, marketing and distribution capabilities and instead enter into arrangements with third parties to perform these services, our product revenues and our profitability, if any, are likely to be lower than if we were to market, sell and distribute any products that we develop ourselves. In addition, we may be unable to enter into arrangements with third parties to sell, market and distribute our product candidate or may be unable to do so on terms that are favorable to us. We likely will have little control over such third parties, and any of them may fail to devote the necessary resources and attention to sell and market our product effectively. If we do not establish sales, marketing and distribution capabilities, either on our own or in collaboration with third parties, we will not be able to commercialize our product candidate, which would have a material adverse effect on us. See “Our Business — Employees.”our company.
We face intensesubstantial competition, in our industry.
Our company encounters, and expects to continue to encounter, intense competition in the development and sale of our current and future services. Many of our competitors and potential competitors have substantially larger laboratory facilities, marketing capabilities and staff than we have. In order to remain competitive, our company will need to make new analytical technologies available to our customers as these technologies become available in our rapidly changing, technology driven business. We may need to expend substantial future capital to acquire these technologies. See “Our Business — Competition.”
Our use of hazardous materials could result in liability for our company.
Our operations involve the controlled use of hazardous materials, chemicals, recombinant biological molecules, biohazards (infectious agents) and various radioactive compounds. Although we believe that our safety procedures for handling and disposing of such materials comply with the standards prescribed by applicable
regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, our company could be held liable for any damages that result and any such liability could exceed our resources. See “Our Business—Government Regulation.”
Our company faces a number of risks related to our proprietary technologies.
Our company is conducting initial research into several new potential technologies which may result in others discovering, developing or commercializing products before or more successfully than we do.
The development and commercialization of new drug products is highly competitive. We face competition with respect to our current product candidate, and will face competition with respect to any product candidates that we may seek to develop or commercialize in the future, from major pharmaceutical companies, specialty pharmaceutical companies and biotechnology companies worldwide. There are a number of large pharmaceutical and biotechnology companies that currently market and sell products or are pursuing the intellectual property rightsdevelopment of products for the treatment of cancer. Potential competitors also include academic institutions, government agencies and other public and private research organizations that conduct research, seek patent protection and establish collaborative arrangements for research, development, manufacturing and commercialization.
Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, have fewer or less severe side effects, are more convenient or are less expensive than any products that we may develop. Our competitors also may obtain FDA or other regulatory approval for their products more rapidly than we may obtain approval for ours, which could result in our competitors establishing a strong market position before we are able to enter the market.
Many of the companies against which we would control. These technologies are competing, or against which we may compete in very early stages ofthe future, have significantly greater financial resources and expertise in research and development, manufacturing, conducting clinical trials, obtaining regulatory approvals and are highly speculative due tomarketing approved products than we do. Mergers and acquisitions in the substantial riskspharmaceutical and considerable uncertainties associated with their development, which include but are not limited to the following:
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We cannot assure that our proprietary research programs will result in any commercial products, and prospective investors considering an investment in our common stock are discouraged from attributing significant value to our proprietary research programs. See “Our Business—Intellectual Property” and “ – U.S. Government Regulation.”
We may need to raise additional capital to reach our goals.
If we are not able to generate sufficient cash for ongoing operations, we will need to raise additional funds through public or private saleeven more resources being concentrated among a smaller number of our equitycompetitors. Smaller and other early stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These third parties compete with us in recruiting and retaining qualified scientific and management personnel, establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or debt securities or from other sources to buildnecessary for, our core businessprograms, and to maintain compliance with NASDAQ listing requirements.
We cannot assure you that additional funds will be available if and when we need them, or that if funds are available, they will be on terms favorable to us and our stockholders.
If we are unable to obtain sufficient funds or if adequate funds are not available on terms acceptable to us, we may be unable to meet our business objectives. A lack of sufficient funds could also prevent us from taking advantage of important opportunitieseffectively compete with these companies for these or beingother reasons.
Even if we are able to respondcommercialize any product candidates, the products may become subject to competitive conditions. Any of these resultsunfavorable pricing regulations, third party reimbursement practices or healthcare reform initiatives, which would harm our business.
The regulations that govern marketing approvals, pricing, coverage and reimbursement for new drug products vary widely from country to country. Current and future legislation may significantly change the approval requirements in ways that could have a material adverse effectinvolve additional costs and cause delays in obtaining approvals.
Our ability to commercialize any product candidate also will depend in part on the extent to which coverage and adequate reimbursement for our business, financial conditionproduct candidate will be available from government health administration authorities, private health insurers and results of operations.
Our need to raise additional funds could also directlyother organizations. Government authorities and adversely affect your investment in our common stock in another way.
When a company raises funds by issuing shares of stock, the percentage ownership of the existing stockholders of that company is reduced or diluted. If we raise fundsthird party payors, such as private health insurers and health maintenance organizations, decide which medications they will pay for and establish reimbursement levels. A primary trend in the futureU.S. healthcare industry and elsewhere is cost containment. Government authorities and third party payors have attempted to control costs by issuing additional shareslimiting coverage and the amount of common stock or securities convertible or exchangeable into shares of common stock, you may experience significant dilution in the value of your shares.reimbursement for particular medications. Increasingly, third party payors are requiring that
We have incurred lossesdrug companies provide them with predetermined discounts from list prices and anticipate future losses.
We have incurred significant losses since our inception in 1997, including net losses of $367,549 in 2004, $1,152,649 in 2006are challenging the prices charged for medical products. Coverage and $3,540,934, before extraordinary gain of $782,833, in 2007. As of December 31, 2007, we had an accumulated deficit of $13,143,689 and stockholders’ equity of $9,932,949. While we expect to eliminate losses from operations in the upcoming fiscal quarters, we cannot assurereimbursement may not be available for any product that we will ever operate profitably on a consistent basis.
commercialize and, even if these are available, the level of reimbursement may not be satisfactory. Reimbursement may affect the demand for, or the price of, any product candidate for which we obtain marketing approval. Obtaining and maintaining adequate reimbursement for our products may be difficult. We mightmay be required to conduct expensive pharmacoeconomic studies to justify coverage and reimbursement or the level of reimbursement relative to other therapies. If coverage and adequate reimbursement are not available or reimbursement is available only to limited levels, we may not be able to use all of our net operating loss carryforwards.commercialize any product candidate for which we obtain marketing approval.
As of December 31, 2007, we had foreign net Operating loss carryforwards at December 31, 2007 relating to U.S. operations of approximately $13 million, whichIn addition, there may be used to offset future taxable incomesignificant delays in obtaining reimbursement for newly approved drugs, and which expire through 2025. In addition, the Company has foreign operating loss carryforwards of approximately $45.45 million to offset future taxable income whichcoverage may be carried forward indefinitely. The Companymore limited than the purposes for which the drug is approved by the FDA. Moreover, eligibility for reimbursement does not imply that a drug will be paid for in all cases or at a rate that covers our costs, including research, development, manufacture, sale and distribution. Interim reimbursement levels for new drugs, if applicable, may also has researchnot be sufficient to cover our costs and development credit carryforwards at December 31, 2007 of approximately $53,000 that expire through 2022. A valuation allowance has been established for deferred tax assets at December 31, 2007 as realization is dependent upon generating future taxable income.
We expect that our quarterly results of operations will continue to fluctuate, and this fluctuation could cause our stock price to decline, causing investor losses.
We make money by providing analytical servicesmay not be made permanent. Reimbursement rates may vary according to the pharmaceutical, biotechnology and related industries. Our revenues continue to change becauseuse of changes in the status of contracts with several large customers, including the federal government. In addition, many of our other customer projects are individual orders for specific projects. Obtaining additional work is highly dependent upon customer satisfaction with our services and upon other things beyond our control, such as the timing of product development and commercialization programs of our customers. As we cannot predict for more than a few months in advance the number and size of future projects, the timing of significant projects could have a major influence on financial results in any given period. The combined impact of several large contractsdrug and the unpredictable project fluctuationsclinical setting in which it is used, may be based on reimbursement levels already set for lower cost drugs and may be incorporated into existing payments for other services. Net prices for drugs may be reduced by mandatory discounts or rebates required by government healthcare programs or private payors. Third party payors often rely upon Medicare coverage policy and payment limitations in setting their own reimbursement policies. Our inability to promptly obtain coverage and adequate reimbursement rates from other customers can result in very large changes in financial performance from quarter to quarter or year to year.
Non-compliance with debt covenants could negatively impact our financial condition.
The mortgage includes certain restrictive covenants, which require the Company to maintain minimum levels of the current ratio, debt to net worthboth government-funded and cash flow ratios. At December 31, 2007, the Company was in violation of covenants related to cash flows; however, the Company was granted a waiver of the covenants by the bankprivate payors for a period of one year to December 31, 2008. However, there is no guaranteeany approved products that we will be able to maintain compliance in the future or, if we are not in compliance; that we will be able to obtain additional waivers from the bank.
We face risks associated with international operations.
We generate approximately half of our revenues by international operations. If we do not adequately anticipate and respond to risks associated with international operations, itdevelop could have a material adverse effect on our operating results, our ability to raise capital needed to commercialize products and stock price.our overall financial condition.
Our consolidated financial statements are prepared in U.S. Dollars, whileProduct liability lawsuits against us could cause us to incur substantial liabilities and to limit commercialization of any products that we may develop.
We face an inherent risk of product liability exposure related to the operationstesting of our foreign subsidiaries are conductedproduct candidate in their respective local currencies. Consequently, changes in exchange rates can unpredictablyhuman clinical trials and adversely affectwill face an even greater risk if we commercially sell any products that we may develop. If we cannot defend ourselves against claims that our consolidated operating results,product candidate or products caused injuries, we will incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:
We currently do not hedge against the risks associated with fluctuations in exchange rates. Even ifhave product liability insurance coverage, which leaves us exposed to any product-related liabilities that we weremay incur. We may be unable to use hedging techniques in the future, we mightobtain insurance on reasonable terms or at all. Insurance coverage is increasingly expensive. We may not be able to eliminatemaintain insurance coverage at a reasonable cost or reducein an amount adequate to satisfy any liability that may arise.
Risks Related to Our Intellectual Property
If we are unable to obtain and maintain patent protection for our technology and products (particularly itraconazole, and the effectsformulation of currency fluctuations. Thus, exchange rate fluctuationsSUBA-Itraconazole in particular, as an anti-cancer therapy), or if the scope of the patent protection obtained is not sufficiently broad, our competitors could have a material adverse impactdevelop and commercialize technology and products similar or identical to ours, and our ability to commercialize our technology and products may be impaired.
Our business plan depends in large part on our operating resultsability to obtain and stock price.maintain patent protection in the United States with respect to our proprietary technology and products, and in particular, the rights to develop SUBA-Itraconazole as an anti-cancer therapy. We seek to protect our proprietary position through our exclusive license for SUBA-Itraconazole with Mayne Pharma, and by filing patent applications in the United States related to our novel technologies and product candidate and also expect to license additional applicable patents from third parties.
Additionally,The patent prosecution process is expensive and time-consuming, and we may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. It is also possible that we will fail to identify patentable aspects of our financial resultsresearch and development output before it is too late to obtain patent protection. Moreover, in some circumstances (particularly in collaboration scenarios such as our agreement with Mayne Pharma), we may not have the right to control (in whole or in part) the preparation, filing and prosecution of patent applications, or to maintain the patents, covering technology that we license from third parties. Therefore, these patents and applications may not be adversely affected byprosecuted and enforced in a manner consistent with the best interests of our business.
The patent position of biotechnology and pharmaceutical companies generally is highly uncertain, involves complex legal and factual questions and has in recent years been the subject of much litigation. In addition, the laws of foreign countries may not protect our rights to the same extent as the laws of the United States. For example, European patent law restricts the patentability of methods of treatment of the human body more than United States law does. Publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the United States and other international risks,jurisdictions are typically not published until 18 months after filing, or in some cases not at all. Therefore, we cannot know with certainty whether we were the first to make the inventions claimed in our owned or licensed patents or pending patent applications, or that we were the first to file for patent protection of such as:
International politicalinventions. As a result, the issuance, scope, validity, enforceability and economic conditions;
commercial value of our patent rights are highly uncertain. Our pending and future patent applications may not result in patents being issued which protect our technology or products, in whole or in part, or which effectively prevent others from commercializing competitive technologies and products. Changes in government regulationeither the patent laws or interpretation of the patent laws in foreign countries;the United States and other countries may diminish the value of our patents or narrow the scope of our patent protection.
Trade barriers;
Difficulties in managing foreign operations;Patent reform legislation could further increase the uncertainties and
Costs costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents. On September 16, 2011, the Leahy-Smith America Invents Act, or the Leahy-Smith Act, was signed into law. The Leahy-Smith Act includes a number of significant changes to United States patent law. These include provisions that affect the way patent applications are prosecuted and may also affect patent litigation. The United States Patent Office has developed regulations and procedures to govern administration of the Leahy-Smith Act, and many of the substantive changes to patent law associated with expansion into new territories.
We expect that international revenues will continuethe Leahy-Smith Act, and in particular, the first to be a significant portion of total consolidated revenues. A lack of anticipationfile provisions, became effective on March 16, 2013. Accordingly, since we have patent applications pending and responseplan to risks associated with international operations could have a material adverse impact on our operating results and stock price.
Recently acquired subsidiaries may not perform as expected.
During 2007, we acquired two foreign subsidiaries. These subsidiaries currently accountfile for approximately half of our consolidated revenues. These subsidiaries may not provide the revenue growth or earnings anticipated by management, resulting in a material adverse effect on results of operations and financial conditions.
Acquisitions may have adverse consequences for our business.
During 2007, we acquired two foreign subsidiaries. These acquisitions and acquisitions that we may completeadditional patents in the future, it is not clear what, if any, impact the Leahy-Smith Act will have on the operation of our business. However, the Leahy-Smith Act and its implementation could result inincrease the following, anyuncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on results of operations or our stock price:business and financial condition.
Issuance of equity securities that would dilute the percentage ownership of current stockholders;
Large one-time write offs or a series of operational losses;
The incurrence of debt and contingent liabilities;
Difficulties in the assimilation and integration of the acquired companies;
Diversion of management’s attention from other business concerns;
Contractual disputes;
Risks of entering geographical and business markets in whichMoreover, we have no experience or only limited prior experience; and
Potential loss of key employees of acquired companies.
We may be subject to potential undisclosed liabilitiesa third party preissuance submission of prior art to the U.S. Patent and Trademark Office, or become involved in opposition, derivation, reexamination,inter partes review, post-grant review or interference proceedings challenging our patent rights or the patent rights of others. An adverse determination in any such submission, proceeding or litigation could reduce the scope of, or invalidate, our patent rights, allow third parties to commercialize our technology or products and compete directly with us, without payment to us, or result in our inability to manufacture or commercialize products without infringing third party patent rights. In addition, if the breadth or strength of protection provided by our patents and patent applications is threatened, it could dissuade companies from collaborating with us to license, develop or commercialize current or future product candidates.
Even if our owned and licensed patent applications issue as patents, they may not issue in a form that will provide us with any meaningful protection, prevent competitors from competing with us or otherwise provide us with any competitive advantage. Our competitors may be able to circumvent our owned or licensed patents by developing similar or alternative technologies or products in a non-infringing manner.
The issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, and our owned and licensed patents may be challenged in the courts or patent offices in the United States and abroad. Such
challenges may result in loss of exclusivity or freedom to operate or in patent claims being narrowed, invalidated or held unenforceable, in whole or in part, which could limit our ability to stop others from using or commercializing similar or identical technology and products, or limit the duration of the patent protection of our technology and products. Given the amount of time required for the development, testing and regulatory review of our product candidate, patents protecting such candidate might expire before or shortly after such candidates are commercialized. As a result, our owned and licensed patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours.
We may become involved in lawsuits to protect or enforce our patents or other liabilitiesintellectual property, which could be expensive, time consuming and unsuccessful.
Competitors may infringe our owned or licensed patents or other intellectual property. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time consuming. Furthermore, we do not have the right to sue infringers of the rights granted to us by Mayne Pharma under the Supply and License Agreement, so we will be reliant upon them to take any action necessary to protect these patents. Any claims we assert against perceived infringers could provoke these parties to assert counterclaims against us alleging that we infringe their patents. In addition, in a patent infringement proceeding, a court may decide that a patent of ours is invalid or unenforceable, in whole or in part, construe the patent’s claims narrowly or refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology in question. An adverse result in any litigation proceeding could put one or more of our patents at risk of being invalidated or interpreted narrowly.
We have licensed or expect to license certain intellectual property from third parties, and such licenses may not continue to be available or may not be available on commercially reasonable terms.
We have and/or expect to enter into licenses with third parties that hold intellectual property, including patent rights, that are important or necessary to the development of itraconazole, and SUBA-Itraconazole in particular, as an anti-cancer therapy, and it may be necessary for us to use the patented or proprietary technology of third parties, such as Mayne Pharma, to commercialize itraconazole as an anti-cancer therapy, in which case we have or would be required to obtain a license from these third parties on commercially reasonable terms, or else our business could be harmed, possibly materially. If we were not able to maintain or obtain such licenses, or were not able to maintain or obtain such licenses on commercially reasonable terms, our business could be harmed, possibly substantially.
Third parties may initiate legal proceedings alleging that we are infringing their intellectual property rights, the outcome of which would be uncertain and could have a material adverse effect on our business.
Our business will depend upon our ability, and the ability of our collaborators, to develop, manufacture, market and sell our product candidates and use our proprietary technologies without infringing the proprietary rights of third parties. There is considerable intellectual property litigation in the biotechnology and pharmaceutical industries. We may become party to, or threatened with, future adversarial proceedings or litigation regarding intellectual property rights with respect to our primary product candidate or other products and technology, including interference or derivation proceedings before the U.S. Patent and Trademark Office. Third parties may assert infringement claims against us based on existing patents or patents that may be granted in the future.
If we are found to infringe a third party’s intellectual property rights, we could be required to obtain a license from such third party to continue developing and marketing our products and technology. However, we may not be able to obtain any required license on commercially reasonable terms or at all. Even if we were able to obtain a license, it could be non-exclusive, thereby giving our competitors access to the same technologies licensed to us. We could be forced, including by court order, to cease commercializing the infringing technology or product. In addition, we could be found liable for monetary damages, including treble damages and attorneys’ fees if we are found to have willfully infringed a patent. A finding of infringement could prevent us from commercializing our product candidates or force us to cease some of our business operations, which could materially harm our business. Claims that we have misappropriated the confidential information or trade secrets of third parties could have a similar negative impact on our business.
If we fail to comply with our obligations in our intellectual property licenses with third parties, we could lose rights that are important to our business.
We are and expect to be party to one or more license or similar agreements that may impose due diligence, development and commercialization timelines, milestone payment, royalty, insurance and other obligations on us. If we fail to comply with our obligations under current or future licenses, our counterparties may have the right to terminate these agreements, in which case we might not be able to develop, manufacture or market any product that is covered by these agreements (particularly SUBA-Itraconazole as an anti-cancer therapy) or may face other penalties under the agreements. Such an occurrence could materially adversely affect the value of the product candidate being developed under any such agreement. Termination of these agreements or reduction or elimination of our rights under these agreements may result in our having to negotiate new or reinstated agreements with less favorable terms, or cause us to lose our rights under these agreements, including our rights to important intellectual property or technology.
Intellectual property litigation could cause us to spend substantial resources and distract our personnel from their normal responsibilities.
Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant expenses, and could distract our technical and management personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development activities or any future sales, marketing or distribution activities. We may not have sufficient financial or other resources to conduct such litigation or proceedings adequately. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could compromise our ability to compete in the marketplace.
Risks Related to Regulatory Approval of Our Product Candidates
and Other Legal and Compliance Matters
If we fail to obtain, or if there are delays in obtaining, required regulatory approvals, we will not be able to commercialize our product candidate, and our ability to generate revenue and the viability of our company will be materially impaired.
Our product candidate (SUBA-Itraconazole as an anti-cancer therapy) and the activities associated with acquisitions.its clinical development and commercialization, including matters relating to design, testing, manufacture, safety, efficacy, recordkeeping, labeling, storage, approval, advertising, promotion, sale and distribution, are subject to comprehensive regulation by the FDA (including under the Federal Food, Drug and Cosmetic Act) and other regulatory agencies in the United States and by the European Medicines Agency (known as the EMA) and similar regulatory authorities outside the United States. Failure to obtain marketing approval for our product candidate will prevent us from commercializing the product candidate. We have not received approval to market SUBA-Itraconazole as an anti-cancer therapy or any other product from regulatory authorities in any jurisdiction and it will likely be years before we are even eligible to receive such approval.
Securing marketing approval requires the submission of extensive preclinical and clinical data and supporting information to regulatory authorities for each therapeutic indication to establish the product candidate’s safety and efficacy. Securing marketing approval also requires the submission of information about the product manufacturing process to, and inspection of manufacturing facilities by, the regulatory authorities. Our product candidate may not be effective, may be only moderately effective or may prove to have undesirable or unintended side effects, toxicities or other characteristics that may preclude us from obtaining marketing approval or prevent or limit commercial use of our product. In particular, new cancer drugs frequently are indicated only for patient populations that have not responded to an existing therapy or have relapsed. Even if our product candidate receives marketing approval for one or more indications, of which no assurances may be given, the accompanying labels may limit the approved use of our drug, which could limit sales of the product.
The process of obtaining marketing approvals in the United States is very expensive, may take many years, if approval is obtained at all, and can vary substantially based upon a variety of factors, including the type, complexity and novelty of the product candidate involved. Changes in marketing approval policies during the development period, changes in or the enactment of additional statutes or regulations, or changes in regulatory review for each submitted product application, may cause delays in the approval or rejection of an application. Regulatory authorities have substantial discretion in the approval process and may refuse to accept any application or may decide that our data are insufficient for approval and require additional preclinical, clinical or other studies.
In addition, varying interpretations of the data obtained from preclinical and clinical testing could delay, limit or prevent marketing approval of our product candidate. Any marketing approval we ultimately obtain may be limited or subject to restrictions or post-approval commitments that render the approved product not commercially viable.
If we experience delays in obtaining approval or if we fail to obtain approval of our product candidate, the commercial prospects for our product candidate will be harmed and our ability to generate revenues, and the viability of our company generally, will be materially impaired.
We may also be subject to healthcare laws, regulation and enforcement; our failure to comply with those laws could have a material adverse effect on our results of operations and financial conditions.
Although we currently do not directly market or promote any products, we may also be subject to several healthcare regulations and enforcement by the federal government and the states and foreign governments in which we conduct our business. The laws that may affect our ability to operate include:
If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, the curtailment or restructuring of our operations, the exclusion from participation in federal and state healthcare programs and imprisonment, any of which could adversely affect our ability to operate our business and our financial results.
We will likely seek approval of SUBA-Itraconazole as an anti-cancer therapy under an expedited procedure, which may not be available to us.
It is our intention to seek to avail ourselves of the FDA’s 505(b)(2) approval procedure where it is appropriate to do so, particularly for SUBA-Itraconazole as an anti-cancer therapy since itraconazole has previously been approved for another indication. Section 505(b)(2) of the Federal Food, Drug, and Cosmetic Act permits an applicant to file a New Drug Application (or NDA) with the FDA where at least some of the information required for approval comes from studies not conducted by or for the applicant and for which the applicant has not obtained a right of reference. The applicant may rely upon published literature and the FDA’s findings of safety and effectiveness based on certain preclinical testing or clinical studies conducted for an approved product. The FDA may also require companies to perform additional studies or measurements to support the change from the approved product.
If this approval pathway is not available to us with respect to our product candidate, the time and cost associated with developing and commercializing such candidate may be prohibitive and our business strategy could be materially and adversely affected.
A fast track designation by the FDA may not actually lead to a faster development or regulatory review or approval process.
We may seek “fast track” designation for our product candidate for one or more indications. If a drug is intended for the treatment of a serious or life-threatening condition and the drug demonstrates the potential to address unmet medical needs for this condition, the drug sponsor may apply for FDA fast track designation. The FDA has broad discretion whether or not to grant this designation, so even if we believe that SUBA-Itraconazole as an anti-cancer therapy may be eligible for this designation, we cannot assure you that the FDA would decide to grant it should we apply for this designation. Even if we do receive fast track designation, we may not experience a faster development process, review or approval compared to conventional FDA procedures. The FDA may withdraw fast track designation if it believes that the designation is no longer supported by data from our clinical development program.
A breakthrough therapy designation by the FDA for our product candidate may not lead to a faster development or regulatory review or approval process, and it does not increase the likelihood that our product candidate will receive marketing approval.
We may seek a “breakthrough therapy” designation for our product candidate. A breakthrough therapy is defined as a drug that is intended, alone or in combination with one or more other drugs, to treat a serious or life-threatening disease or condition, and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development. For drugs and biologics that have been designated as breakthrough therapies, interaction and communication between the FDA and the sponsor of the trial can help to identify the most efficient path for clinical development while minimizing the number of patients placed in ineffective control regimens. Drugs designated as breakthrough therapies by the FDA are also eligible for accelerated approval.
Designation as a breakthrough therapy is within the discretion of the FDA. Accordingly, even if we believe that SUBA-Itraconazole as an anti-cancer therapy meets the criteria for designation as a breakthrough therapy for one or more indications, the FDA may disagree and instead determine not to make such designation. Even if such designation is granted, of which no assurances may be given, the receipt of a breakthrough therapy designation for our product candidate may not result in a faster development process, review or approval compared to drugs considered for approval under conventional FDA procedures and does not assure ultimate approval by the FDA. In addition, even if SUBA-Itraconazole as an anti-cancer therapy qualifies as a breakthrough therapy for one or more indications, the FDA may later decide that it no longer meets the conditions for qualification or decide that the time period for FDA review or approval will not be shortened, which would deny us the benefits of such designation.
We may seek but be unable to obtain orphan drug exclusivity for our product candidate. If our competitors are able to obtain orphan drug exclusivity for their products that are the same drug as our product candidate, we may not be able to have competing products approved by the applicable regulatory authority for a significant period of time.
Regulatory authorities may designate drugs for relatively small patient populations as orphan drugs. Generally, if a product with an orphan drug designation subsequently receives the first marketing approval for the indication for which it has such designation, the product is entitled to a period of market exclusivity, which, subject to certain exceptions, precludes the FDA from approving another marketing application for the same drug for the same indication for that time period. The applicable market exclusivity period is seven years in the United States.
Obtaining orphan drug exclusivity for SUBA-Itraconazole as an anti-cancer therapy may be important to our commercial strategy. If a competitor obtains orphan drug exclusivity for and approval of a product with the same indication as our itraconazole product before we do, and if the competitor’s product is the same drug or a similar medicinal product as ours, we could be excluded from the market. Even if we obtain orphan drug exclusivity for SUBA-Itraconazole as an anti-cancer therapy, we may not be able to maintain it. For example, if a competitive product that is the same drug or a similar medicinal product as our product candidate is shown to be clinically superior to our product candidate, any orphan drug exclusivity we have obtained will not block the approval of such competitive product. In addition, orphan drug exclusivity will not prevent the approval of a product that is the same drug as our product candidate if the FDA finds that we cannot assure the availability of sufficient quantities of the drug to meet the needs of the persons with the disease or condition for which the drug was designated. If one or more of these events occur, it could have a material adverse effect on our company.
Even if we obtain marketing approval for our product candidate, we could be subject to post-marketing restrictions or withdrawal from the market and we may be subject to penalties if we fail to comply with regulatory requirements or if we experience unanticipated problems.
Even if we obtain marketing approval for SUBA-Itraconazole as an anti-cancer therapy, along with the manufacturing processes, post-approval clinical data, labeling, advertising and promotional activities for such product, we will be subject to continual requirements of and review by the FDA and other regulatory authorities. These requirements include submissions of safety and other post-marketing information and reports, registration and listing requirements, cGMP requirements relating to manufacturing, quality control, quality assurance and corresponding maintenance of records and documents, requirements regarding the distribution of samples to physicians and recordkeeping. In addition, even if marketing approval of our product candidate is granted, the approval may be subject to limitations on the indicated uses for which the product may be marketed or to the conditions of approval, including the requirement to implement a risk evaluation and mitigation strategy. New cancer drugs frequently are indicated only for patient populations that have not responded to an existing therapy or have relapsed. If our product candidate receives marketing approval, the accompanying label may limit the approved use of our drug in this way, which could limit sales of the product.
The FDA may also impose requirements for costly post-marketing studies or clinical trials and surveillance to monitor the safety or efficacy of our product. The FDA closely regulates the post-approval marketing and promotion of drugs to ensure drugs are marketed only for the approved indications and in accordance with the provisions of the approved labeling. The FDA imposes stringent restrictions on manufacturers’ communications regarding off-label use and if we or any third party partners of ours do not market our products for their approved indications, we may be subject to enforcement action for off-label marketing. Violations of the Federal Food, Drug, and Cosmetic Act relating to the promotion of prescription drugs may lead to investigations alleging violations of federal and state health care fraud and abuse laws, as well as state consumer protection laws.
In addition, later discovery of previously unknown adverse events or other problems with our product, manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may yield various results, including:
We may face similar issues in connection with eachnon-compliance with non-U.S. regulatory requirements.
Risks Related to Ouran Investment inOur Common Stock
An active trading market for our common stock may not develop or be sustained.
As we only emerged from bankruptcy in August 2013 and are in the early stages of our acquisitions.business plan, an investment in our company will likely require a long-term commitment, with no certainty of return. Although
our common stock is listed for quotation on the Over-The-Counter Bulletin Board (or OTCBB) and the OTCQB marketplace operated by OTC Markets Group, Inc., trading has been very limited and we cannot predict whether an active market for our common stock will ever develop in the future. In connectionthe absence of an active trading market:
The OTCBB and OTCQB markets are relatively unorganized, inter-dealer, over-the-counter markets that provide significantly less liquidity than NASDAQ or the NYSE MKT (formerly known as the NYSE AMEX market). This illiquid trading market for our common stock and may make it difficult for you to dispose of your common stock at desirable prices or at all. Moreover, there is a risk that our common stock could be delisted from the OTCBB and OTCQB, in which case it might be listed on the so called “Pink Sheets”, which is even more illiquid than the OTCQB.
The lack of an active market impairs your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair market value of your shares. An inactive market may also impair our ability to raise capital to continue to fund operations by selling shares and may impair our ability to acquire additional intellectual property assets by using our shares as consideration.
We may not maintain qualification for OTC Bulletin Board or OTCQB inclusion, and therefore you may be unable to sell your shares.
Our common stock is eligible for quotation on the OTCBB and OTCQB. However, trading of our common stock could be suspended. If for any reason our common stock does not become eligible or maintain eligibility for quotation on the OTCBB or OTCQB or a public trading market does not develop, purchasers of shares of our common stock may have difficulty selling their shares should they desire to do so. If we are unable to satisfy the requirements for quotation on the OTCBB and OTCQB, any quotation in our common stock could be conducted in the “pink sheets” market. As a result, a purchaser of our common stock may find it more difficult to dispose of, or to obtain accurate quotations as to the price of their shares. This would materially and adversely affect the liquidity of our securities.
Even if a market for our common stock develops, the market price of our common stock may be significantly volatile, which could result in substantial losses for purchasers.
The market price for our common stock may be significantly volatile and subject to wide fluctuations in response to factors including the following:
In particular, the market prices for securities of biotechnology companies have historically been particularly volatile. Some of the factors that may cause the market price of our common stock to fluctuate include:
In addition, if we may fail to discoverreach an important research, development or improperly assess liabilitiescommercialization milestone or result by a publicly expected deadline, even if by only a small margin, there could be significant impact on the market price of our common stock. Additionally, as we approach the announcement of anticipated significant information and as we announce such information, we expect the price of our common stock to be particularly volatile, and negative results would have a substantial negative impact on the price of our common stock.
In some cases, following periods of volatility in the market price of a company’s securities, stockholders have often instituted class action securities litigation against those companies. Such litigation, if instituted, could result in substantial costs and diversion of management attention and resources, which could significantly harm our due diligence efforts. In particular, to the extent that prior ownersbusiness operations and reputation.
Our management and two significant stockholders collectively own a substantial majority of any acquired businessesour common stock and voting power.
Collectively, our officers, our directors and two significant stockholders (HPLLC and Mayne Pharma) own or properties failed to comply with or otherwise violated applicable laws or regulations, or failed to fulfill their contractual obligations to the U.S. federal government or other customers, we, as the successor owner,exercise voting and investment control of approximately 92.1% of our outstanding common stock. As a result, investors may be financially responsible for these violations and failures and may suffer reputational harm or otherwise be adversely affected. The discoveryprevented from affecting matters involving our company, including:
Risks Related to the Offering of Securities Pursuant to this Prospectus
Our company does not have any present intention to pay dividends.
We do not intend to pay any cash dividends in the foreseeable future and intend instead to retain our earnings, if any, for the operation of our business. See “Dividend Policy.”
Our corporate documents contain anti-takeover provisions.
Our Amended and Restated Articles of Incorporation (“Articles”) and Amended and Restated Bylaws (“Bylaws”) provide for a classified Board of Directors and, through it, any determination with respect to our business direction and policies, including the appointment and removal of Directors onlyofficers;
Furthermore, this concentration of our stockholders andvoting power could have the effect of delaying, deterring or preventing a requirement that affiliated transactions be approved by at least two-thirdschange of the outstanding shares of each voting group. Our company is subject to certain provisions of the Virginia Stock Corporation Act (the “Virginia Act”) which, in general, prevent an Interested stockholder (defined generally as a person owning more than 10% of any class of our company’s voting securities) from engaging in an “Affiliated Transaction” (as defined herein) with our company unless certain conditions are met.
Such provisions could impede any merger, consolidation, takeovercontrol or other business combination involvingthat might otherwise be beneficial to our company or discourage a potential acquirer from making a tender offer or otherwise attempting to obtain controlstockholders. This significant concentration of our company. In addition, certain provisions of our employee benefit plans, employment agreements and severance agreementsshare ownership may also render any such business combination more costly and therefore less probable. See “Descriptionadversely affect the trading price for our common stock because investors may perceive disadvantages in owning stock in a company that is controlled by a small number of Capital Stock — Certain Provisions of Our Articles of Incorporation and Bylaws,” “ — Certain Corporate Governance Provisions of the Virginia Act,” “ — Effect of Certain Provisions Upon an Attempt to Acquire Control of our company,” and “ — Change in Control Protections.”stockholders.
Virginia law may limit our officers’ and directors liabilities.
Pursuant to our Articles, as authorized under applicable Virginia law, our directors are not liable for monetary damages for breaches of fiduciary duty, except in connection with a breach of the duty of loyalty, for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, for dividend payments or stock repurchases illegal under Virginia law or for any transaction in which the director has derived an improper personal benefit. In addition, our Articles provide that we must indemnify our officers and directors to the fullest extent permitted by Virginia law for all expenses incurred in the settlement of any actions against such persons in connection with their having served as officers or directors of our company. See “Management — Indemnification of Directors and Executive Officers and Limitations of Liability.”
Future sales of our Shares may depress ourcommon stock price.
Thein the public market could lower the price of our Shares could decline as a resultcommon stock and impair our ability to raise funds in future securities offerings.
Significant blocks of our stock are held by HPLLC and Mayne Pharma, and these entities also hold warrants to purchase our common stock. Future sales of a substantial amountsnumber of shares of our Sharescommon stock in the public market, or the perception that thesesuch sales may occur, could occur. In addition, these factorsadversely affect the then prevailing market price of our common stock and could make it more difficult for us to raise funds through future offerings of Shares.
We have experienced dramatic shifts in the future through a public offering of our securities.
Our Board of Directors has the authority to declare a reverse split of our Common Stock which could adversely affect our capitalization and stock price.
On July 18, 2014, our Board of Directors acted unanimously to adopt an amendment to Article FOURTH of our Certificate of Incorporation to effect a reverse split of our issued and outstanding Common Stock (and, at the sole discretion of the Board of Directors, our authorized Common Stock) at a ratio of between one-for-five and one-for-twenty, with such ratio to be determined at the sole discretion of the Board of Directors and with such reverse split to be effected at such time and date, if at all, as determined by our board in its sole discretion. On September 30, 2014, our majority stockholders, acting by written consent, approved such amendment and the reverse split.
The principal purpose of the reverse split would be to help increase the per share market price of our Common Stock by up to a factor of twenty, which could help us with our fundraising efforts. We cannot assure you, however, that the reverse split, if implemented, will accomplish either of these objectives for any meaningful period of time or at all. While we expect that the reduction in the number of outstanding shares of Common Stock will increase the market price of our Common Stock, we cannot assure you that the reverse split will increase the market price of our Common Stock by an equivalent multiple, or result in any permanent increase in the market price of our Common Stock. The price of our Common Stock is dependent upon many factors, including our business and financial performance, general market conditions and prospects for future success. If the per share market price does not increase proportionately as a result of the reverse split, then the value of our company as measured by our stock capitalization will be reduced, perhaps significantly. Moreover, while it is believed that a higher stock price could assist in our ability to raise capital, there is a risk that these benefits will not be realized.
In addition, the number of shares held by each individual stockholder would be reduced if the reverse split is implemented. This will increase the number of stockholders who hold less than a “round lot,” or 100 shares. This would have the disadvantage that the transaction costs to stockholders selling “odd lots” are typically higher on a per share basis. Consequently, the reverse split could increase the transaction costs to existing stockholders in the event they wish to sell all or a portion of their position.
Also, although it is believed that the decrease in the number of shares of our Common Stock outstanding as a consequence of the reverse split and the anticipated increase in the market price of our Common Stock could encourage interest in our Common Stock and possibly promote greater liquidity for our stockholders, such liquidity could also be adversely affected by the reduced number of shares outstanding after the reverse split.
Our common stock may be considered a “penny stock,” and thereby be subject to additional sale and trading volumeregulations that may make it more difficult to sell.
Our common stock may be considered to be a “penny stock” if it does not qualify for one of the exemptions from the definition of “penny stock” under Section 3a51-1 of the Securities Exchange Act of 1934, as amended (or the Exchange Act). Our common stock may be a “penny stock” if it meets one or more of the following conditions: (i) the stock trades at a price less than $5 per share; (ii) it is not traded on a “recognized” national exchange; or (iii) is issued by a company (such as ours) that has been in business less than three years with net tangible assets less than $5 million.
The principal result or effect of being designated a “penny stock” is that securities broker-dealers participating in sales of our common stock will be subject to the “penny stock” regulations set forth in Rules 15g-2 through 15g-9 promulgated under the Exchange Act. For example, Rule 15g-2 requires broker-dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the document at least two business days before effecting any transaction in a penny stock for the investor’s account. Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve the account of any investor for transactions in such stocks before selling any penny stock to that investor. This procedure requires the broker-dealer to: (i) obtain from the investor information concerning his or her financial situation, investment experience and investment objectives; (ii) reasonably determine, based on that information, that transactions in penny stocks are suitable for the investor and that the investor has sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions; (iii) provide the investor with a written statement setting forth the basis on which the broker-dealer made the determination in (ii) above; and (iv) receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investor’s financial situation, investment experience and investment objectives. Compliance with these requirements may make it more difficult and time consuming for holders of our common stock to resell their shares to third parties or to otherwise dispose of them in the market or otherwise.
FINRA sales practice requirements may also limit your ability to buy and sell our common stock, which could depress the price of our shares.
FINRA rules require broker-dealers to have reasonable grounds for believing that an investment is suitable for a customer before recommending that investment to the customer. Prior to recommending speculative low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status and investment objectives, among other things. Under interpretations of these rules, FINRA believes that there is a high probability such speculative low-priced securities will not be suitable for at least some customers. Thus, FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our shares, have an adverse effect on the market for our shares, and thereby depress our share price.
You may face significant restrictions on the resale of your shares due to state “blue sky” laws.
Each state has its own securities laws, often called “blue sky” laws, which (1) limit sales of securities to a state’s residents unless the securities are registered in that state or qualify for an exemption from registration, and (2) govern the reporting requirements for broker-dealers doing business directly or indirectly in the state. Before a security is sold in a state, there must be a registration in place to cover the transaction, or it must be exempt from registration. The applicable broker-dealer must also be registered in that state.
We do not know whether our securities will be registered or exempt from registration under the laws of any state. A determination regarding registration will be made by those broker-dealers, if any, who agree to serve as market makers for our common stock. We have not yet applied to have our securities registered in any state and will not do so until we receive expressions of interest from investors resident in specific states after they have viewed this prospectus. There may be significant state blue sky law restrictions on the ability of investors to sell, and on purchasers to buy, our securities. You should therefore consider the resale market for our common stock to be limited, as you may be unable to resell your shares without the significant expense of state registration or qualification.
There may be limitations on the effectiveness of our internal controls, and a failure of our control systems to prevent error or fraud may materially harm our company.
Proper systems of internal controls over financial accounting and disclosure are critical to the operation of a public company. As we are a start-up company, we are at the very early stages of establishing, and we may be unable to effectively establish such systems. This would leave us without the ability to reliably assimilate and compile financial information about our company and significantly impair our ability to prevent error and detect fraud, all of which would have a negative impact on our company from many perspectives.
Moreover, we do not expect that disclosure controls or internal control over financial reporting, even if established, will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the
design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Failure of our control systems to prevent error or fraud could materially and adversely impact us.
We may be unable to complete our analysis of our internal controls over financial reporting in a timely manner, or these internal controls may not be determined to be effective, which may adversely affect investor confidence in our company and, as a result, the value of our common stock.
We are required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by our management on, among other things, the effectiveness of our internal control over financial reporting for our fiscal year ended December 31, 2015. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting, as well as a statement that our independent registered public accounting firm has issued an opinion on our internal control over financial reporting.
We are in the early stages of the costly and challenging process of compiling the system and processing documentation necessary to perform the evaluation needed to comply with Section 404. We may not be able to sellcomplete our evaluation, testing and any required remediation in a timely fashion. During the securities at allevaluation and testing process, if we identify one or when you wantmore material weaknesses in our internal control over financial reporting, we will be unable to do so.assert that our internal controls are effective.
Our common stockIf we are unable to assert that our internal control over financial reporting is currently quotedeffective, or if our independent registered public accounting firm is unable to express an opinion on the NASDAQ Capital Market. The trading volumeeffectiveness of our internal controls, we could lose investor confidence in the accuracy and completeness of our financial reports, which would cause the price of our common stock has shifted dramatically over short time periods duringto decline, and we may be subject to investigation or sanctions by the last few years. OverSEC.
Because we became public by means other than a traditional initial public offering, we may not be able to attract the past three years, the dailyattention of major brokerage firms.
Our business was created when our certain operating assets were contributed to our company in August 2013 as our company was a “shell company” emerging from bankruptcy. Since our current business became a public company by means other than a traditional initial public offering, investors and securities analysts may be reluctant to invest in our provide research coverage of us. This stigma could impair our fundraising opportunities and our reputation generally.
If securities or industry analysts do not publish research or reports about our business, or if they change their recommendations regarding our stock adversely, our stock price and trading volume for our common stock was as low as no shares per day and as high as 13,129,300 per day, as reported by NASDAQ. Because of the shifting trading volume, you may be unable to sell our common stock when you want to do so if thecould decline.
The trading market for our common stock is limited atwill be influenced by the timeresearch and reports that industry or securities analysts publish about us or our business. We do not currently have and may never obtain research coverage by industry or financial analysts. If no or few analysts commence coverage of your proposed sale.
Ourus, the trading price of our stock would likely decrease. Even if we do obtain analyst coverage, if one or more of the analysts who cover us downgrade our stock, our stock price might be volatilewould likely decline. If one or more of these analysts cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.
Anti-takeover provisions in our charter documents and you might not be able to resell your securities atDelaware law could discourage, delay or aboveprevent a change in control of our company and may affect the price you have paid.
If you purchase our common stock, you might not be able to resell the shares at or above the price you have paid. The markettrading price of our common stock.
We are a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law may discourage, delay or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change in control would be beneficial to our existing stockholders.
In addition, our certificate of incorporation and amended and restated bylaws may discourage, delay or prevent a change in our management or control over us that stockholders may consider favorable. In particular, our certificate of incorporation and amended and restated bylaws, among other matters:
The financial and operational projections that we may make from time to time are subject to inherent risks.
The projections that our management may provide from time to time (including, but not limited to, those relating to potential peak sales amounts, product approval, production and supply dates, commercial launch dates, and other financial or operational matters) reflect numerous assumptions made by management, including assumptions with respect to our specific as well as general business, economic, market and financial conditions and other matters, all of which are difficult to predict and many factors, some of which are beyond our control, includingcontrol. Accordingly, there is a risk that the following:assumptions made in preparing the projections, or the projections themselves, will prove inaccurate. There will be differences between actual and projected results, and actual results may be materially different from those contained in the projections. The inclusion of the projections in this prospectus should not be regarded as an indication that we or our management or representatives considered or consider the projections to be a reliable prediction of future events, and the projections should not be relied upon as such.
We do not intend to pay dividends on our common stock.
actualWe have never declared or anticipated fluctuationspaid any cash dividend on our capital stock. We currently intend to retain any future earnings and do not expect to pay any dividends for the foreseeable future. Therefore, you should not invest in our annual or quarterly results of operations;
variations in our operating results, which could cause us to fail to meet investors’ expectations;
announcements by our competitors of significant contracts, strategic partnerships, joint ventures or capital commitments;
conditions and trendscommon stock in the biotechnology industry;
general market, economic, industry and political conditions;
additions or departures of key personnel;
stock market price and volume fluctuations attributable to inconsistent trading levels; and
future sales of equity or debt securities, including salesexpectation that dilute existing investors.you will receive dividends.
In addition, the stock market has experienced extreme volatility that often has been unrelated to the performance of its listed companies. Moreover, on occasion, only a limited number of our shares are traded each day, which could increase the volatility of the price of our stock. These market fluctuations might cause our stock price to fall regardless of our performance. In the past, companies that have experienced volatility in the market price of their stock have been the objects of securities class action litigation. If we were involved in securities class action litigation, it could result in substantial costs and a diversion of our attention and have a material adverse effect on our business.
We are not providing any legal or tax advice with respect to the tax consequences regarding the securities.
An investment in the securities may involve certain material federal and state tax consequences. Prospective investors should not rely on this prospectus or any of the exhibits to this prospectus for legal, tax or business advice. Prospective investors should consult with their respective legal counsel, accountant or business adviser as to legal, tax and related matters concerning investment in the securities offered in this prospectus.
INFORMATIONCAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains a number of “forward-looking statements”. Specifically, all statements other than statements of historical facts included in this prospectus regarding our financial position, business strategy and plans and objectives of management for future operations are forward-looking statements. These forward-looking statements are based on the beliefs of management at the time these statements were made, as well as assumptions made by and information currently available to management. When used in this prospectus and the informationdocuments incorporated by reference herein, contain forward-looking statements regarding, among other things, our financial condition, results of operations, plans, objectives, future performance and business. All statements contained or incorporated by reference in this prospectus other than historical information are forward-looking statements. Forward-looking statements involve risks and uncertainties, such as statements about our plans, objectives, expectations, assumptions or future events. In some cases, you can identify forward-looking statements by terminology such asthe words “anticipate,” “believe,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “we believe,” “we intend,” “may,” “will,” “should,“continue” and “intend,” “could” and words or phrases of similar expressions.import, as they relate to our financial position, business strategy and plans, or objectives of management, are intended to identify forward-looking statements. These statements involve estimates, assumptions, knownreflect our current view with respect to future events and unknownare subject to risks, uncertainties and otherassumptions related to various factors.
You should understand that the following important factors, thatin addition to those discussed in our periodic reports to be filed with the SEC under the Exchange Act, could affect our future results and could cause actual results to differ materially from any future results, performances or achievements expressed or implied by the forward-looking statements.
Examples of forward-looking statements include:
the timing of the development of future software products;
projections of revenue, earnings, capital structure and other financial items;
statements of our plans and objectives;
statements regarding the capabilities and capacities of our business operations;
statements of expected future economic performance; and
assumptions underlying statements regarding us or our business.
The ultimate correctness of these forward-looking statements depends upon a number of known and unknown risks and events. We discuss many of these risks under the heading “Risk Factors” beginning on page 7 of this prospectus. Many factors could cause our actualthose results to differ materially from those expressed in such forward-looking statements:
A variety of factors, some of which are outside our control, may cause our operating results to fluctuate significantly. They include:
Although we believe that our expectations (including those on which our forward-looking statements are based) are reasonable, we cannot assure you that those expectations will prove to be correct. Should any one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results may vary materially from those described in our forward-looking statements. Consequently, you should not place undue reliance on these forward-looking statements.statements as anticipated, believed, estimated, expected or intended.
The forward-looking statements speak only as ofExcept for our ongoing obligations to disclose material information under the date on which they are made, and, except as required by law,federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statement to reflectstatements, whether as a result of new information, future events or circumstances afterany other reason. All subsequent forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the date on whichcautionary statements contained or referred to herein. In light of these risks, uncertainties and assumptions, the statement is made or to reflectforward-looking events discussed in this prospectus and the occurrence of unanticipated events.documents incorporated by reference herein might not occur.
In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
The Selling Stockholders are selling all of the Shares covered by this prospectus for their own accounts. We will not receive any proceeds from the sale of the Shares. We are registering the offer and sale of the Shares to satisfy registration rights we have granted in the private placement described above on page 4 under the caption “Prospectus Summary”. We may, however, receive up to $3,997,500 from the exercise, if any, of the Class A and Class B Warrantscommon stock by the Selling Stockholders at their current exercise prices of $2.85 and $5.00, respectively. This amount assumes exercise of the Class A and Class B Warrants notwithstanding the fact that we are not, in this offering, registering all of the Shares underlying the Convertible Notes and Class A and Class B Warrants.selling stockholders.
DETERMINATION OF OFFERING PRICE
Each Selling Stockholder may use this prospectus from time to time to sell its Shares at a price determined by such Selling Stockholder. The price at which the Shares are sold may be based on market prices prevailing at the time of sale, at prices relating to such prevailing market prices, or at negotiated prices.
We have notnever declared or paid any cash dividendsdividend on our common stock, and we currently intend to retain future earnings, if any, to finance the expansion of our business, and wecapital stock. We do not expect to payanticipate paying any cash dividends in the foreseeable future. The decision whetherfuture and we intend to pay cashretain all of our earnings, if any, to finance our growth and operations and to fund the expansion of our business. Payment of any dividends on our common stock will be made byin the discretion of our boardBoard of directors, in their discretion, and will depend onDirectors, after its taking into account various factors, including our financial condition, operating results, capital requirementscurrent and other factorsanticipated cash needs and plans for expansion. Any dividends that the board of directors considers significant. We currently intend to retainmay be declared or paid on our earnings for funding growth and, therefore, do not expect to pay any dividendscommon stock, must also be paid in the foreseeable future.same consideration or manner, as the case may be, on our shares of preferred stock, if any.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Holders of Common Stock
As of the date of this prospectus, we have approximately 51 holders of record of our common stock. The number of record holders does not include persons, if any, who hold our common stock in nominee or “street name” accounts through brokers.
Market for Common Stock
Our common stock is currently listed for tradingquoted on the NASDAQ Capital MarketOTCBB and OTCQB markets under the ticker symbol “CBTE.“HPPI.” As of April 30, 2008, we had approximately 36 registered stockholders.
The price of our common stock will likely fluctuate in the future. Many companies have experienced dramatic volatility in the market prices of their common stock. We believe that a number of factors, both within and outside our control, could cause the price of our common stock to fluctuate, perhaps substantially. Factors such as the following could have a significant adverse impact on the market price of our common stock:
Our ability to obtain additional financing and, if available, the terms and conditions of the financing;
Our financial position and results of operations;
Concern as to, or other evidence of, the reliability and efficiency of our proposed products and services or our competitors’ products and services;
Announcements of innovations or new products or services by us or our competitors;
U.S. federal and state governmental regulatory actions and the impact of such requirements on our business;
The development of litigation against us;
Period-to-period fluctuations in our operating results;
Changes in estimates of our performance by any securities analysts;
The issuance of new equity securities pursuant to a future offering or acquisition;
Changes in interest rates;
Competitive developments, including announcements by competitors of new products or services or significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;
Investor perceptions of our company; and
General economic and other national conditions.
The following table summarizessets forth, for the periods indicated, the high and low sales prices per share of our common stock as reported by the NASDAQ CapitalOTC Market forGroup:
Period Ended | High | Low | ||||||
March 31, 2015 | $ | 0.24 | $ | 0.11 | ||||
June 30, 2015 | $ | 0.24 | $ | 0.11 | ||||
March 31, 2014 | $ | 0.30 | $ | 0.08 | ||||
June 30, 2014 | $ | 0.23 | $ | 0.05 | ||||
September 30, 2014 | $ | 0.19 | $ | 0.05 | ||||
December 31, 2014 | $ | 0.17 | $ | 0.08 | ||||
March 31, 2013 | $ | 0.10 | $ | 0.01 | ||||
June 30, 2013 | $ | 0.12 | $ | 0.03 | ||||
September 30, 2013 | $ | 0.20 | $ | 0.03 | ||||
December 31, 2013 | $ | 0.18 | $ | 0.08 |
These sales prices were obtained from the periods noted below. The closingOTC Market Group, Inc. and do not necessarily reflect actual transactions, retail markups, mark downs or commissions. As of July 10, 2015, the last reported sales price of a share of our common stock on April 29, 2008the OTCBB and OTCQB was $2.44,$0.125. No assurance can be given that an established public market will develop in our common stock, or if any such market does develop, that it will continue or be sustained for any period of time.
Transfer Agent
Our stock transfer agent is American Stock Transfer & Trust Company, LLC, which is located at 6201 15th Avenue, Brooklyn, New York 11219, Telephone: (347) 977-3223.
Securities Authorized for Issuance under Equity Compensation Plans
The following table indicates as reported onof the NASDAQ Capital Market.date of this prospectus the shares of common stock authorized for issuance under our 2014 Equity Incentive Plan, subject to approval by our majority stockholders:
High | Low | |||||
First Quarter 2006 | $ | 5.23 | $ | 3.48 | ||
Second Quarter 2006 | $ | 3.65 | $ | 2.45 | ||
Third Quarter 2006 | $ | 3.26 | $ | 2.04 | ||
Fourth Quarter 2006 | $ | 5.00 | $ | 1.81 | ||
First Quarter 2007 | $ | 2.45 | $ | 1.81 | ||
Second Quarter 2007 | $ | 3.99 | $ | 1.90 | ||
Third Quarter 2007 | $ | 3.86 | $ | 2.35 | ||
Fourth Quarter 2007 | $ | 3.70 | $ | 2.11 | ||
January 2008 | $ | 3.15 | $ | 2.20 | ||
February 2008 | $ | 2.63 | $ | 1.83 | ||
March 2008 | $ | 2.26 | $ | 1.84 | ||
April 2008 (through April 29, 2008) | $ | 3.47 | $ | 2.00 |
We are a specialized life sciences outsourcing business that offers cutting-edge expertise and a complete array of discovery chemistry and biology products and services through our subsidiary companies: CBI Services, FIL, Mimotopes and Exelgen (formerly Tripos Discover Research Ltd).
The market for drug discovery outsourcing was $4.1 billion in 2005 and is expected to grow at 20% annually to reach $7.2 billion in 2009 (Kalorama, 2006). We believe we are well positioned to compete in this growing market with our experienced and business-focused management team, over 100 highly trained scientific staff located in three laboratories in Richmond, Melbourne (Australia) and Bude (UK) and our sales offices located in the USA, UK, and Asia/Pacific.
We aim to build a leading global contract drug-discovery solutions business by pursuing a number of strategic initiatives aimed at increasing revenues, increasing margins, managing costs and most importantly, increasing market awareness and market value. Specifically, we intend to achieve these objectives by:
nurturing a collaborative sales culture focusing on preferred supplier agreements and partnerships;
targeting large contracts;
building leading positions in selected growth markets;
providing centralized support to enable business unit pursuit of growth; and
acquiring additional cash-generating Biology and Chemistry Service businesses.
Business Units
Revenues from all four of our business units are derived principally from providing macromolecular synthetic and analytical services to researchers in the biotechnology industry or to researchers who are engaged in life sciences research in government or academic labs throughout the world. This arrangement distinguishes our company from many other biotechnology companies in that revenues are derived from services rather than from the successful commercialization of a new biotechnology product. Mimotopes, Exelgen, CBI Services and FIL have all developed a strong reputation as leading providers in their respective markets. Their operations, areas of expertise and value propositions are outlined below:
CBI Services (Richmond, Virginia)
CBI Services provides a wide array of life-science solutions in the areas of bio-defense, laboratory support and contract research. CBI Services has broad expertise in the most current analytical chemistries, microbiology applications and molecular biology technologies and has a reputation as a provider of novel and imaginative research and development solutions. CBI Services offers all services under the FDA’s Good Laboratory Practices (“GLP”) Guidelines as codified in 21 CFR 58. Selected Services are also offered under the FDA’s Good Manufacturing Practices (“GMP”) and Good Clinical Practices (“cCMP”) guidelines. The Quality Assurance office manages all regulated services.
FIL (Richmond, Virginia)
FIL has been at the forefront of DNA technology of profiling for identity since it opened its doors in 1990. FIL’s rigorous standards are designed to provide the sort of credible evidence that clients demand. Such evidence affects decisions regarding criminal trials, paternity, immigration, estate settlement, adoption, and other issues of identity. FIL provides Forensics, Paternity and CODlS services to government and private concerns. FIL is accredited by the American Association of Blood Banks, the National Forensic Science Technology Center, the State of New York and CLIA. Its Directors have extensive laboratory and courtroom experience.
Mimotopes (Melbourne, Australia)
Mimotopes is an industry leader with over 16 years experience in the development, synthesis and distribution of research grade peptides for the drug discovery industry. Mimotopes’ patented synthesis technologies, state-of-the-art facilities and highly educated and experienced staff make it one of the leading research grade peptide synthesis companies in the world. Mimotopes’ products and services are delivered to both commercial clients and to discovery and alliance partners. In 2006 and 2007, Mimotopes developed significant partnerships with peptide partner company PepScan and global key life science companies Genzyme Pharmaceuticals and Invitrogen. Mimotopes’ partnership with Genzyme Pharmaceuticals, a leading manufacturer of clinical-grade peptides, has created a brand that provides a total suite of peptide products and act as an integrated ‘one-stop-shop’ for peptide customers.
Exelgen (Bude, United Kingdom)
Exelgen (formerly Tripos Discovery Research Ltd), based in Bude, Cornwall, UK, is a leading, knowledge-driven, drug discovery services business that provides pharmaceutical and biotechnology companies with novel approaches to drug discovery. Applying proprietary computational design and therapeutic medicinal chemistry tools and expertise, Exelgen believes that it is able to reduce drug discovery timelines by up to 30%. Since 1997, Exelgen has been offering compound libraries under the LeadQuest® brand, screening libraries under the LeadScreen® brand and custom de novo compound libraries under the LeadSelect® brand.
Target Markets
Each of our subsidiary business units has its own distinct capabilities and market focus, although significant overlap exists between the customer bases. The markets served by each of the business units are shown below:
Plan category | Number of securities to be issued upon exercise of outstanding options (a) | Weighted-average exercise price of outstanding options (b) | Number of securities remaining available for future issuance (c) | |||||||||
Equity compensation plans approved by security holders | 23,541,738 | (1) | n/a | 9,041,737 | ||||||||
Equity compensation plans not approved by security holders | — | n/a | — |
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CBI Services, Exelgen and Mimotopes all cater to the outsourcing requirements of pharmaceutical and biotechnology companies for reagents (such as peptides, proteins and small molecules) as well as drug research and development. The adoption of outsourcing by the pharmaceutical and biotechnology industries is driven by three major factors:
(1)Speed. Faster discovery results accelerate the time to fail or advance a drug through the development pipeline. Eliminating bad leads early or shaving weeks or months from the time it takes to get a drug to market can mean millions of dollars in cost savings and added revenues.
(2)Quality. All the advantages of an accelerated drug discovery program can be jeopardized if the results do not meet the strict quality standards of the pharmaceutical industry. High quality results depend on quality control, quality equipment and quality people.
(3)Cost. Speed and Quality are necessary but insufficient conditions for success. The economic scarcity problem of unlimited wants and needs and limited resources applies to drug discovery outsourcing as well. The more suppliers can offer for less, the more successful they will be.
Market growth is spurring investment in Contract Research Organizations and attracting new providers to the market, many from low cost territories such as Asia. We believe our company is well positioned to compete in this growing market with over 100 highly trained staff located in three world-class laboratories based in Richmond (Virginia), Melbourne (Australia) and Bude (UK). The time difference between the sites means that we operate virtually around the clock across our three primary research sites. Strong links to preferred suppliers in Asia also means that our customers can access the best mix of fast, secure, high quality, and innovative research services at globally competitive prices.
Market Dynamics
Pharmaceutical companies have been struggling for some time to maintain the growth expected of them by the market. The primary reason for this is the increasing difficulty in discovering new drugs, in particular blockbusters (drugs with greater than $1 billion in sales). This led to a consolidation of the industry in the 1990s and the formation of the new “big Pharmas”. However, these mergers were largely unsuccessful because they failed to address the real problem, the falling rate at which candidate compounds were entering the development pipeline as commercial drugs. With a combination of increasing regulatory requirements and a more competitive marketplace, it takes an increasing number of high quality candidate compounds to produce the same number of successful drugs.
Pharmaceutical companies, and in particular big Pharmas, have realized that they cannot generate the large number of necessary candidate compounds in-house, and this has led to a trend for these companies to outsource large amounts of their drug discovery research. A market intelligence report by Kalorama Information (2006) indicates that outsourcing was worth $4.1 billion in 2005, and is projected to grow at a rate of 20% annually to reach $7.2 billion in 2009. The report also states that recent improvements in biology have made chemistry the major bottleneck in the product pipeline. Chemistry and optimization (key areas of expertise for Exelgen) now make up 44% and 19% of outsourcing respectively. It has been estimated that an additional 30,000 chemists will be required worldwide by 2010 and that medicinal and process chemists will be the specialties in highest demand.
Although the dollar value of the drug discovery outsourcing market is huge, it is comprised of a relatively small number of mature customers. The vast majority of this market lies in the U.S., Western Europe and Japan. It is a very sophisticated market consisting of large multinational pharmaceutical companies, small pharmaceutical companies, generic manufacturers and drug discovery companies.
The most attractive global customers are the big Pharmas, including Pfizer, GSK, Merck, AstraZeneca, Novartis, Eli Lilly and Bristol-Myers Squibb. They are active companies and have the capacity to offer large contracts. Many have centralized outsourcing departments that match the specific needs of a particular project to contractors with specific expertise in that area. They are very experienced at outsourcing and have the resources to overcome barriers such as distance, due diligence inspections, and technology transfer issues which may deter some smaller companies from outsourcing to overseas contractors. Small drug discovery companies are also an attractive opportunity but the low profile of many of these companies, coupled with their limited resources and experience in outsourcing, make marketing to them more difficult. The Kalorama Information report indicates that suppliers of synthetic services to the pharmaceutical industry are numerous but small, and mainly based in the USA or Europe. The largest supplier, Albany Molecular, has only a 6% market share.
During the course of 2007, Commonwealth Biotechnologies Inc significantly enhanced its R&D outsourcing capabilities through the acquisition of Mimotopes and Exelgen. Although there is increasing competition from low-cost providers in China and India, recent concerns over production standards and quality in some low-cost territories has led to a flight to quality providers. We believe we have a strong reputation for price competitive and high quality service and product delivery, which positions us well to grow business in high value niches in the pharmaceutical outsourcing market because of our unique combination of proprietary informatics systems and contract chemistry and biology services. Our “one stop shop” model is already attracting new customers and winning a broader range of business from existing customers.
Growth Strategy
During the course of 2007, our company acquired UK-based medicinal chemistry company Exelgen and Australian-based peptide chemistry company Mimotopes, transforming our company into a full-service pre-clinical drug discovery services provider with a global base of operations and clients. We believe our company is now well positioned for continued strong growth with a record number and value of new contracts, a growing market for high-quality R&D outsourcing and a dynamic and commercially driven management team.
With a focus on both revenue and cost synergies, integration of Mimotopes and Exelgen into our company in 2007 resulted in new contract signings. We aim to build on these successes to become a leading global contract drug-discovery solutions business. We will pursue a number of strategic initiatives aimed at increasing revenues, increasing margins, managing costs and increasing market awareness and value. These include:
Continued commitment to existing customers – a focus on existing customers and commitment to product quality has delivered strong sales growth and customer loyalty;
Expansion of customer base – through aggressive marketing and promotion;
Expansion into new geographies – through an expanded sales team and strategic partnering initiatives;
Cross functional sales team – we have appointed a Vice President, Business Development and Marketing who has re-organized the existing sales staff and has developed a marketing strategy focused on winning high-value contracts and building leading positions in selected growth markets;
New product development – we believe our technical expertise and the scalability of its operations enables quick response to customer demand for new products;
Outsourcing raw materials – we are turning to low-cost territories such as China as a means to outsource selected raw ingredients. This provides the opportunity for significant margin enhancement; and
Developing capacity for an expanding market – we believe we are well positioned to take advantage of the expanding global market in R&D outsourcing.
We will also actively pursue opportunities to acquire or partner with complementary businesses in the drug discovery outsourcing industry. By actively pursuing such opportunities, we ultimately aim to provide clients with a seamless link between drug discovery to scale up, multi-kilogram synthesis and GMP manufacture, thus capturing more value down the supply chain and proving the market with a truly vertically integrated product offering.
In particular, on March 28, 2008, we entered into a joint venture agreement with Venturepharm Laboratories Limited, a Cayman Islands company with its principal offices in Beijing, China (“Venturepharm”). While it is too recent to assess the effect of this new joint venture, we are hopeful that the joint venture, together with Venturepharm’s acquisition of 2,150,000 shares of our common stock, will extend the global reach of our company.
Operations
Our company operates on a fee-for-service basis and has integrated a number of foundation technologies to provide a broad range of capabilities to customers who otherwise must go to several different sources for their needs. We believe our business units have a strong reputation for:
World-leading expertise in drug development and discovery;
An innovative and collaborative culture;
Providing seamless information flow at all stages of the process;
Providing customers with a shorter time to market; and
Total intellectual property security.
Across our company, our business units have technical capabilities and proprietary technology platforms that differentiate them from other providers. For example:
Mimotopes’ patented SynPhase Technology provides our company with a competitive advantage to rapidly, efficiently and cost-effectively produce large libraries of research grade peptides.
Exelgen’s proprietary computational design and therapeutic medicinal chemistry tools and expertise are able to significantly reduce clients’ drug discovery timelines.
FIL is accredited by all major U.S. authorities and provides highly accurate DNA identity information.
CBI Services’ state-of-the-art laboratories, biodefense facility, government security clearance and accreditations provide us with access to contracts not appropriate for most contract research organizations.
All of the our company’s business units operate under strict Standard Operating Protocols (“SOPs”) which detail the particular technologies used to complete the work in progress. SOPs are made available to the customer upon request. In addition, CBI Services and FIL have instituted rigorous GLP reporting requirements, and have put in place the necessary features to meet all aspects of GLP compliance. The Quality Assurance Unit has enabled CBI Services and FIL to take on projects with customers who require adherence to compliance reporting. Other accreditations achieved by CBI Services and FIL include:
ISO/IEC 17025:2005 and forensic requirements for accreditation FRA 1 and FRA 2;
Forensic Quality Services accreditation for DNA forensic and CODIS analyses;
American Association of Blood Banking accreditation for Paternity DNA identify testing, New York State Accreditation for forensic analyses;
An FBI-approved Laboratory Quality Assurance Program for microbial forensics;
College of American Pathologist approval for performance of molecular diagnostics;
Basic Sentinel Lab of the Laboratory Response Network of Bioterrorism;
Compliance with and certification by CLIA for analysis of human samples;
Select agent registration with the Centers of Disease Control (“CDC”) and USDA;
Continuous successful operation of a CDC accredited BSL3 laboratory since 1996;
Extensive experience in SOW tasks including GLP-rated vaccine development programs and testing for the Department of Defense;
NRC accreditation for use of radionuclides;
DEA approval for experimental use and storage of Schedule 1-6 controlled substances; and
EPA and Virginia DEQ compliance certifications.
Marketing
We believe our business units have excellent customer service reputations. Sales and business development staff employ their technical know-how by way of a consultative/collaborative selling strategy and routinely assist clients with the design of their projects and synthesis of their products. In 2007, our company boasted seven of the top ten global pharmaceutical companies as clients. The reorganization of our global Sales and Marketing team in 2007 created an integrated service offering that provides cross-selling opportunities across our business units for clients based anywhere in the world.
We have embarked on an expanded marketing effort under the direction of the newly appointed Vice President of Business Development and Marketing. This will involve an increase in trade show and industry-based partnering activities, improvements to the web sites, and an enhanced e-commerce focus. We currently have ten full time sales and business development professionals operating in the major world markets, North America, Europe and Asia. We have sales operations in San Francisco, Minneapolis, Raleigh-Durham, Melbourne (Australia) and Wirral (UK) with the corporate office in San Diego and a satellite office in St. Louis. The business units all have internal technical support professionals to provide technical quotes and field support. An improved Client Relationship Management system has recently been implemented which will facilitate accurate forecasting and help pinpoint strengths and weaknesses in our marketing efforts.
Intellectual Property
While each of our business units is primarily focused on fee-for-service offerings, various intellectual properties have developed that have resulted in U.S. and international patents. For example, CBI Services has patented a potential human pharmaceutical product, termed HepArrest®. HepArrest is meant as a hospital drug for use in reversing the anti-coagulant effects of heparin. We have licensed HepArrest to Prism Pharmaceuticals, King of Prussia, Pennsylvania, for pre-clinical studies, leading to an Investigational New Drug application. We have other intellectual properties in the form of issued and pending patents, many of which underpin the various technology platforms employed by our individual business units.
We believe we take appropriate steps to protect its intellectual property rights and those of our customers. Our practice is to require our employees and consultants to execute non-disclosure and proprietary rights agreements upon commencement of employment or consulting arrangements with our company. These agreements require that all proprietary information disclosed to the individual by our company or our customers remain confidential.
Employees
Worldwide, we employ 110 full-time staff in three facilities. We believe we have an entrepreneurial executive management team with a wealth of scientific and commercial experience in the biotechnology and life science industries.
U.S. Government Regulation
We believe that we are in compliance with existing federal, state and local laws and regulations and do not anticipate that continuing compliance will have any material effect upon our capital expenditures, earnings or competitive position. While we do not require government regulatory approvals to provide our current services, numerous federal, state, and local agencies, such as federal and state environmental agencies, working condition and other similar regulators, have jurisdiction to take actions that could have a material adverse effect upon our ability to do business. We have put in place numerous procedures and guidelines which allow us to meet accreditation requirements of federal, state, and industry specific regulatory groups. We anticipate that we will continue to implement and upgrade our compliance capabilities under the FDA’s GLP Guidelines as codified in 21 CFR 58. We anticipate that eventually more of our service offerings will meet the FDA’s GMP and cCMP guidelines.
We currently operate in three facilities, located in Richmond, Virginia, Melbourne, Australia and Bude, England. Our headquarters are located in Richmond. We own our property in Richmond and Melbourne and lease our property in Bude. The addresses of our properties are set forth below:
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MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OverviewThe following discussion and analysis is based on, and should be read in conjunction with our financial statements, which are included elsewhere in this prospectus. Management’s Discussion and Analysis of Financial Condition and Results of Operations contains statements that are forward-looking. These statements are based on current expectations and assumptions that are subject to risk, uncertainties and other factors. These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue,” and similar expressions or variations. Actual results could differ materially because of the factors discussed in “Risk Factors” elsewhere in this prospectus, and other factors that we may not know.
Background
We are a clinical stage biopharmaceutical company that is seeking to discover, develop and commercialize innovative therapeutics for patients with certain cancers. Our core business consistspreliminary focus is on the development of pre-clinical contract drug discovery servicestherapies for skin, prostate and lung cancers in the fieldsU.S. market, with the first indication targeting basal cell carcinoma in patients with Gorlin Syndrome, a genetic disease also known as basal cell carcinoma nevus syndrome, which, among other conditions, causes the chronic formation of medicinal chemistry, peptide chemistry,basal cell tumors. Our proposed therapy is based upon the use of a patented formulation of the currently marketed anti-fungal drug itraconazole.
We have developed, licensed and biologics.are seeking to acquire and/or license, intellectual property and know-how related to the treatment of cancer patients using itraconazole and have applied for patents to cover our inventions. We continue to execute our long-term strategyhave exclusive rights in the U.S. to develop and growto commercialize a fully-integrated drug discovery and development services business targeting the growing pharmaceutical outsourcing market. In line with this strategy, CBI acquired Mimotopes (Melbourne, Australia), in February 2007 and Exelgen (Bude, England), in June 2007. The “CBI Groupspecially formulated, patented version of Companies” now includes CBI Services (Richmond, Virginia), FIL, a division of CBI Services, Mimotopes and Exelgen. Mimotopes and Exelgen are operateditraconazole, known as wholly-owned subsidiaries of CBI. These acquisitions have continued to drive revenue growth and value for our company through the addition of a highly technical international sales and marketing team and by way of strategic partnerships and contracts with leading biotechnology and pharmaceutical companies, including Genzyme Pharmaceuticals, Invitrogen Corporation and Schering Plough. Our management expects the full synergies from these acquisitions to be realized in 2008.
Outside of organic revenue growth in our core focus areas, we continue to look at potential corporate acquisitions which are complimentary to existing platform technologies and within our corporate expertise. With regard to any new potential acquisition, we analyze its revenue and expense impact on our company, whether the potential acquisition poses significant growth potential for our company, whether it is accretive to our stockholders, and whether the new company can be readily managed while retaining key personnel. The end goal of the CBI Group of Companies is to create a fully integrated service providerSUBA-Itraconazole, for the biotechtreatment of human cancer via oral administration. SUBA-Itraconazole was developed and pharmaceutical industries. With its increaseis licensed to us by our manufacturing partner Mayne Pharma. We believe that the dosing of oral capsules of SUBA-Itraconazole can affect the Hedgehog signaling pathway, a major regulator of many fundamental cellular processes, which, in turn, can impact the global market, we plan to use the presence of the CBI Group of Companies in obtaining new contracts.
CBI Services (www.cbi-biotech.com)
CBI Services is a preferred provider of early development contract research solutions to customers in biotechnology companies, academic institutions, government agencies, and pharmaceutical companies. CBI Services offers broad ranging expertise, a collaborative culture, and a comprehensive array of current analytical and synthetic chemistries and biophysical analysis technologies, many of which are not available from other commercial sources. CBI Services is well recognized for expertise in molecular genetics, mass spectrometry, peptide synthesis, DNA sequence analysis, ELISA development and reference lab work.growth of cancer such as basal cell carcinoma.
We were founded under the name “Commonwealth Biotechnologies, Inc.” in Virginia in 1992, and completed an initial public offering in October 1997. CBI Services facilitates strategic decisions for both short term and long term clients and has the experience and expertise usually found in much largerpreviously provided, on a contract research organizations (“CROs”). CBI Services houses numerous specialty labs; including Biosafety level 3 labs for bacteriology and virology, calorimetry and mass spectrometry labs, cell culture and fermentation labs, high throughput DNA sequence labs, and peptide synthesis labs and restricted access labs for toxin analysis and controlled substances research. CBI Services prides itself on its fully integrated platform technologies, and offers both GLP and non-GLP rated services.
CBI Services maintains three principal focus areas for sustained revenue growth: (1) government contracts in bio-defense and vaccine development; (2) laboratory supportbasis, specialized life sciences services for on-going clinical trials; and (3) comprehensive contract projects in the private sector.
Commercial and government contracts are CBI Service’s most important sources of revenue and further, emphasize its creative solutions approach. CBI Services’ re-vamped web page and new marketing materials have helped to clarify its role in the drug development and production pipeline, resulting in new contract initiatives in the private sector. We generally recognize revenues as services are rendered or as products are delivered. In some instances, we recognize revenue with performance-based installments payable over the contract as milestones are achieved.
Growth Strategy. CBI Services responds to formal requests for proposals and quotes issued by government and state agencies, and by private sector companies. Signed contracts often extend over several quarters, if not years, of operation.
CBI Services obtains most of its projects through the internet and from word-of-mouth advertising. CBI Services is a well-recognized provider of bio-defense and vaccine development services and has developed a reputation for design and implementation of novel ELISA protocols for numerous different analytes. CBI Services often performs validation studies for assays it develops on behalf of its clients and then provides the laboratory support for clinical trial work. Management believes that CBI Services will show continued growth in these areas.
Expanded marketing initiatives target potential clients in the private sector. Email “blasts” which advertise particular technologies and expertise have attracted new customers, and the seasoned sales force which came to our company in the acquisition of Mimotopes is helping to increase CBI Services’ exposure in the biotech and pharma sectors. Revenues from private sector customers help balance revenues from the government sector, which vary depending on changes in national priorities. In the third quarter of 2007, CBI Services signed new contracts totaling approximately $2.5 million, and the valuation of all new contracts at CBI Services for 2007 through the third quarter is slightly more than $6.7 million.
Fairfax Identity Labs (www.fairfaxidlabs.com)
FIL, a division of CBI Services, offers comprehensive genetic identity testing, including paternity, forensic, and Convicted Offender DNA Index System (“CODIS”) analyses. Since 1990, FIL has been heavily involved in DNA profiling techniques and innovations, and has continued to meet and exceed all industry standards. FIL is accredited by the American Association of Blood Banks, the National Forensic Science and Technology Council, the New York State Department of Public Health, and is CLIA certified.
FIL’s customers for genetic identity testing are mostly in the private sector, but FIL is also the named service provider under many public sector contracts. FIL also does immigration paternity test analyses and is looking to expand this particular service with overseas consulates and immigration offices. With regard to forensic test analysis, most of FIL’s customers are state crime labs that recognize the high level of expertise and rapid turn-around time offered by FIL. FIL offers expert witness testimony and a full range of forensic DNA analyses.
Growth Strategy. FIL is recognized for its work in all aspects of DNA reference lab work. Over the last year, the marketing efforts of FIL have shifted from public sector genetic identity analysis to the higher margin areas of private sector identity testing, including immigration paternity testing. In forensics, FIL focused less on CODIS analyses than on performance of case work analyses for state and government crime labs. FIL’s sales efforts have resulted in a significant increase of 18% in private paternity revenue over last year with new VAR accounts added representing all of the increases in revenue. FIL saw an increase in expenses resulting from one-time costs associated with accreditation and validation of the Forensic Lab as well as costs associated with a kit conversion for paternity fast turnaround services.
Mimotopes Pty Ltd (www.mimotopes.com)
Mimotopes is an internationally-focused peptide and discovery chemistry company with headquarters in Melbourne, Australia. Formed in 1988, Mimotopes is an industry leader in the synthesis of research grade peptides. Mimotopes’ products include:
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In August 2007, Mimotopes entered into a licensing agreement with the Baker Heart Research Institute (BHRI) for jointly-developed drug candidates targeting pulmonary arterial hypertension. As part of the licensing agreement, Mimotopes has assigned the intellectual property for a library of compounds to BHRI in return for a future milestone and/or licensing fees received by BHRI. Mimotopes will also contribute its medicinal chemistry expertise on a fee-for-service basis to assist in the clinical development of these compounds.
Growth Strategy. Mimotopes is pursuing an aggressive growth strategy through concerted sales and marketing efforts and strategic alliances. Mimotopes is currently targeting several high-value peptide chemistry service contracts with both local and international customers in the Biotech and Pharmaceutical sectors. In the custom peptide market, Mimotopes is endeavoring to position itself as a premium provider that applies more rigorous analysis, provides a higher level of technical support and has the ability to synthesize a wider range of peptides than any other provider. Mimotopes intends to launch a budget peptide brand in early 2008 to target academic institutions and public research customers that make up the high-volume, low-cost segment of the custom peptide market. Mimotopes also intends to re-launch its SynPhase™ combinatorial chemistry platform.
Exelgen Limited (www.triposdiscoveryresearch.com and www.leadquest.com)
Exelgen is a leading drug discovery services business that serves pharmaceutical and biotechnology companies. Applying proprietary computational design, medicinal chemistry tools and expertise integrated with biological screening capabilities, Exelgen is able to reduce drug discovery timelines by up to 30%. Notably, Exelgen’s computational ChemSpace® technology seeks to increase laboratory productivity throughsector. On January 20, 2011, CBI filed a voluntary petition for bankruptcy. We began our current business as HedgePath Pharmaceuticals, Inc. in August 2013 as a Delaware corporation following the rapid identificationemergence of novel compounds with both biological utility and synthetic feasibility. Exelgen’s patented and proven LeadHopping® technology is routinely used to develop novel back-up series for clients’ lead compounds, overcome structural liabilities in known leads and patent busting. In addition to its drug discovery services business, since 1997, Exelgen has offered off-the-shelf general screening compound libraries under the LeadQuest® brand, pre-formatted screening libraries under the LeadScreen® brand, gene family targeted sets of compounds under the LeadTarget brand and custom de novo compound libraries under the LeadSelectTM brand.
Exelgen employs a total of 37 scientists in its state-of-the-art laboratories in Bude, UK and an office in St. Louis, MO, USA. Its principal contracts are in the private sector, with major pharmaceutical, mid-size pharmaceutical and emerging biotechnology companies who depend on directed high-thoughput synthesis and screening for potential new lead compounds followed by rapid lead optimization. The Exelgen acquisition provides our company strategic synergies in production and sales and is designed to accelerate our revenue and earnings growth.
Growth Strategy. Exelgen’s growth strategy focuses on two areas: expansion of its contract services and enhancement of its LeadQuest and LeadTarget compound sets. In the area of contract services, Exelgen is undertaking a marketing and re-branding campaign in the wake of CBI’s acquisition of ExelgenCBI from its parent, Tripos, Inc. The target clients will be primarily major pharmaceutical firms, many of which are or have been clients of Exelgen. In addition to its customary service offerings of drug design and lead optimization, going forward Exelgen will also be offering a biological screening and testing service. Market analysis and discussion with Exelgen’s major client base have underscored that such a service is important in the drug discovery business. While the basic screening services will reside in the UK, they will be greatly enhanced by the availability of the extensive offerings of CBI Services and Mimotopes. The ability to offer the complete service package from design through biological testing will now represent a key differentiator for Exelgen in the marketplace.voluntary bankruptcy proceedings.
The Exelgen LeadQuest compound library currently numbers approximately 75,000 unique molecular entities. These are offered for sale on a non-exclusive basis for testing in the purchaser’s specific discovery program. Over the next 12-18 months, Exelgen will be seeking to supplement the library on a rolling inventory basis. For the most part, the expansion will focus on targeted screening compounds (branded LeadTarget) that have provided the most significant return on investment from sales during 2007.
Results of Operations
Year Ended December 31, 2007 Compared with Year Ended December 31, 2006.
Revenues
During the course of the year, our company had experienced fluctuations in all revenue categories. Continuation of existing projects or engagement for future projects is usually dependent upon the customer’s satisfaction with the scientific results provided in initial phases of the scientific program. Continuation of existing projects or engagement of future projects also often depends upon factors beyond our company’s control, such as the timing of product development and commercialization programs of our company’s customers. The combined impact of commencement and termination of research contracts from several large customers and unpredictable fluctuations in revenue for laboratory services can result in very large fluctuations in financial performance.
Total revenues increased by $5,889,711 or 90.2% from $6,532,482 during 2006 to $12,422,193 during 2007. Total revenues associated with the acquired companies (Mimotopes and Exelgen) represented $6,941,858 of this increase. Due to a decrease in government contracts, revenues from CBI Services and FIL decreased by $1,052,148 or 16.1% from $6,532,482 during 2006 to $5,480,334 in 2007.
Revenues realized from commercial contracts increased by $6,270,761 or 467.6%, from $1,340,996 during 2006 to $7,611,757 during 2007. Revenues for CBI Services amounted to $2,121,034 in 2007 as compared to $1,340,996 in 2006, an increase of $780,038 or 58.2%. Revenues for Mimotopes and Exelgen amounted to $3,253,818 and $2,236,905, respectively: comprising $5,490,723 of the increase in commercial contract revenue.
Revenues realized from various government contracts decreased by $1,513,350 or 49.9%, from $3,031,713 during 2006 to $1,518,363 during 2007. This decrease was primarily due to budget revisions of existing proposals which have pushed back the start dates of new contract work and to re-allocation of existing budget funds away from bio-defense into other areas. Expected start dates for three of the contracts are expected to begin in early April 2008.
Genetic identity decreased by $132,140 or 8.6%, from $1,542,129 during 2006 to $1,409,989 during 2007. This decrease is a result in the delay in one of the contracts that was expected to begin during the third quarter in 2007 and did not begin until the first quarter of 2008.
Product sales in 2007 amounted to $851,247. All product sales were from Exelgen. Sales from this category were from existing inventories are hand. There were no product sales in 2006.
Clinical testing decreased by $180,514 or 31.1%, from $580,279 during 2006 to $399,765 during 2007. The decrease was a result of one of our clients downsizing of forensic contract work and the elimination of a one time non-renewable project.
Cost of Services
Cost of services consists primarily of materials, labor and overhead. The cost of services increased by $5,186,434 or 95.4%, from $5,438,706 during 2006 to $10,625,140 during 2007. The cost of services as a percentage of revenue was 85.5% and 83.3% during 2007 and 2006, respectively. CBI Services and Fairfax Identity Labs cost of services amounted to $4,565,680 in 2007 compared to $5,438,706 in 2006. In 2007, Mimotopes and Exelgen costs of services were $2,882,584 and $3,176,876, respectively.
Total direct labor increased by $1,515,084, or 86.3% from $1,754,664 during 2006 to $3,269,748 during 2007. CBI Services and Fairfax Identity Labs direct labor amounted to $1,367,254 during 2007 as compared to $1,754,664 during the 2006 Period. This decrease in CBI Services and Fairfax Identity Labs is primarily due to lower contract revenue in 2007 in some of the government projects. In 2007 Mimotopes and Exelgen direct labor was $844,101 and $1,058,393, respectively resulting in $1,902,494 in additional cost of direct labor.
Total costs for direct materials increased by $1,249,351, or 111.1%, from $1,124,846 during 2006, to $2,374,197 during 2007. CBI Services and Fairfax Identity Labs direct materials amounted to $974,175 during the 2007 Period as compared to $1,124,846 during the 2006 Period. This decrease in CBI Services and Fairfax Identity Labs is primarily due to lower contract revenue in 2007 in some of the government projects. In 2007, Mimotopes and Exelgen direct materials were $1,035,663 and $364,359, respectively.
Overhead cost consists of indirect labor, depreciation, freight charges, repairs and miscellaneous supplies not directly related to a particular project. Total overhead costs increased by $2,421,999 or 94.6%, from $2,559,196 during 2006 to $4,981,195 during 2007. CBI Services and Fairfax Identity Labs overhead amounted to $2,224,251 during 2007 as compared to $2,559,196 during the 2006 Period. This decrease is primarily due to the costs associated with the acquisition of Fairfax Identity Labs being fully amortized. In 2007 Mimotopes and Exelgen overhead costs was $1,002,821 and $1,754,124, respectively.
Sales, General and Administrative
Sales, general and administrative expenses (“SGA”) consist primarily of compensation and related costs for administrative, marketing and sales personnel, facility expenditures, professional fees, consulting, taxes, and depreciation. Total SGA costs increased by $2,558,460 or 124.6%, from $2,053,176 during 2006 to $4,611,636 during 2007. As a percentage of revenue, these costs were 37.3% and 31.4% during 2007 and 2006, respectively.
Total compensation and benefits increased by $1,476,477 or 261.2% from $564,096 during 2006 to $2,040,873 during 2007. This increase is primarily attributable to the acquisition of Mimotopes and Exelgen and the addition of their support staff. This increase is also attributable to the accrual for the restricted stock compensation package for senior management, as well as accrual for the issuance of incentive stock options that are now expensed by our company. Stock option expenses increased by $92,563 or 147% from $62,796 in 2006 to $155,359 in 2007. Facility expenses increased by $119,738 or 162.8% from $73,542 during 2006 to $193,280 during 2007. Additional costs in utilities, telephones and internet services contributed to this increase. Professional fees increased by $448,919 or 161.7% from $277,706 during 2006 to $726,625 during 2007. This increase is primarily due to compliance costs associated with the Sarbanes-Oxley Act which is effective for the year ended December 31, 2007 and consulting costs related to the current year acquisitions.
Sales and Marketing costs increased by $540,603 or 71.9% from $752,187 during 2006 to $1,292,790 during the 2007 Period. In 2007, with the acquisition of Mimotopes and Exelgen, we organized a sales department consisting of employees from all operations. In 2006, our company did not have a sales unit.
Other Income (Expenses)
Other income during 2007 compared to 2006 decreased by $4,990 or 4.8% from $104,624 during 2006 to $99,634 during 2007. Interest expense increased by $436,116 or 146.4% from $297,873 during 2006 to $733,989 during 2007. The 2007 Period amount includes interest expense paid by Exelgen in the amount of $320,727. Interest expense for CBI Services and Fairfax Identity Labs amounted to $314,791 during the 2007 Period and $297,873 during the 2006 Period.
Extraordinary Gain from the Purchase of Exelgen
The purchase price for the acquisition of Exelgen was $1,474,581. We acquired assets of approximately $8,249,000 and assumed liabilities of approximately $5,991,000 resulting in negative goodwill of $782,833. This amount is recorded as an extraordinary gain on the Consolidated Statement of Operations.
Liquidity and Capital Resources
Recent operating losses may continue into future periods and there can be no assurance by management that our financial outlook will improve. For the years ended December 31, 2007, and 2006, operating losses were $2,758,101 and $1,152,649, respectively. Our company generated negative cash flows from operations in 2007 of $867,728, however in 2006 generated positive cash flows from operations of $77,074. Net working capital as of December 31, 2007 and 2006 was $1,378,707 and $2,210,894, respectively.
If operational results do not improve in 2008, our company has the opportunity to obtain additional funding from Venturepharm. Our company has the option to require Venturepharm to purchase $1 million of our common stock. Venturepharm may separately require us to sell Venturepharm up to $3 million of our common stock.
As of December 31, 2007, our company had $2,533,910 in cash and cash equivalents, this resulted in a 81.8% increase over the cash balance at December 31, 2006. This increase was the result of completing the convertible debt transaction between our company and LH Financial. Of the total cash balance at December 31, 2007, approximately $1,725,000 represented proceeds from the LH Financial.
Accounts receivables in December 2007 were approximately $2,895,000. Our company anticipates collection of these funds during the first quarter in 2008. The increase in receivables was primarily a result of higher sales in the fourth quarter of 2007.
Overall
Cash used by operating activities in 2007 was $867,728 as compared to cash provided by operations of $77,074 during 2006. The net decrease was primarily the result of the operating loss sustained during the period offset by increased accounts payable and other current liabilities of $2,631,627. With the acquisition of Exelgen in June 2007, we experienced a delay in contract revenues and incurred additional operational expenses contributing to the loss in 2007. Depreciation and amortization of $893,050, an increase in prepaid expenses and inventory of $900,846 also contributed to the decrease. The extraordinary gain from the purchase of Exelgen in the amount of $782,833 and an increase in accounts receivable of $200,764 also contributed to the increase in cash used by operating activities. Cash provided by investing activities in 2007 was $2,211,069, as compared to cash used in investing activities of $493,938 during 2006. This increase was primarily related to the net cash received in the acquisition of Exelgen in 2007. Net cash used in financing activities in 2007 amounted to $508,849 as compared to $489,895 during 2006. The cash received from LH Financial convertible debt was offset by debt repayments and an increase in restricted cash resulting in the financing use of cash for 2007. Cash used for financing activities in 2006 primarily consisted of debt payments.
Convertible Debt
On December 31, 2007 we issued $1,950,000 of convertible debt in a subscription agreement between our company and LH Financial. The debt carries an interest rate of 10% annually and matures in June 2009. We plan to convert the quarterly interest payments into shares of common stock at a conversion price of $2.00 per shares. In conjunction with the debt, our company also issued Class A warrants to purchase 975,000 shares of common stock at an exercise price of $2.85 per share and expire in May 2013. The fair value of the Class A warrants is $1.79 per share. The fair value of the Class A warrants is calculated using the Black-Scholes method. Assumptions for Class A options include the stock asset price at $2.55 and a stock option price of $2.85 with a maturity date of 5 years and risk free interest rate of 3.4%. Our company also issued Class B warrants to purchase 243,000 shares of common stock at an exercise price of $5.00 per share. The fair value of the Class B warrants is $.36 per share. The fair value of the Class B warrants is calculated using the Black-Scholes method. The debt carries a beneficial conversion feature and as a result a debt discount of approximately $1,950,000 was recorded and offset in additional paid in capital. This discount will be amortized as interest expense over the life of the debt.
Capital Leases
We lease equipment under non-cancelable capitalized leases. Total lease payments for the year ended December 31, 2007 amounted to $2,560,563. Future minimum lease payments in 2008 are approximately $2,101,899. All leases are collateralized by equipment and mature within the next eighteen months.
As mentioned above, our company has the option to require Venturepharm to purchase $1 million of our common stock. Venturepharm may separately require us to sell Venturepharm up to $3 million of our common stock. With this additional financing, we believe we will have the ability to meet all future lease payments in 2008.
Additional Capital Resources
In the event our company does not opt for additional funding, management will continue to take necessary steps to improve the cash flow and liquidity of our company. In December 2007, our company reduced personnel levels, curtailed research and development costs, reduced marketing expenditures, deferred directors’ fees and a portion of employees’ salaries. We have also reduced or delayed expenditures on items that are not critical to operations.
Our company’s business has undergone substantial change over the last twelve months in relation to size, scale and scope of activities. During this time, our company has developed significant capacity in peptide chemistry and medicinal chemistry through the acquisitions of Mimotopes and Exelgen. These strategic transactions compliment the core capabilities in genomics and proteomics at CBI Services and FIL. Our company is currently reviewing the consolidation of the activities of each operation. As such, our company in December 2007 implemented a Profit Recovery Plan, which identifies clear and immediate objectives related to the following:
New Accounting Pronouncements
In July 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement 109,” which provides guidance on the measurement, recognition, and disclosure of tax positions taken or expected to be taken in a tax return. The interpretation also provides guidance on de-recognition, classification, interest and penalties, and disclosure. FIN 48 prescribes that a tax position should only be recognized if it is more-likely-than-not that the position will be sustained upon examination by the appropriate taxing authority. A tax position that meets this threshold is measured as the largest amount of benefit that is more likely than not (greater than 50 percent) realized upon ultimate settlement. The cumulative effect of applying FIN 48 is to be reported as an adjustment to the beginning balance of retained earnings in the period of adoption. FIN 48 is effective for fiscal years beginning after December 15, 2006. The adoption of this standard did not have an impact on our financial condition or results of operations.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 applies to other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. The Statement does not require any new fair value measurements and was initially effective for our company beginning January 1, 2008. In February 2008, the FASB approved the issuance of FASB Staff Position (FSP) FAS 157-2. FSP FAS 157-2 defers the effective date of SFAS No. 157 until January 1, 2009 for nonfinancial assets and nonfinancial liabilities except those items recognized or disclosed at fair value on an annual or more frequently recurring basis. Management has not completed its review of the new guidance; however, the effect of the Statement’s implementation is not expected to be material to our results of operations or financial position.
In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141(R),Business Combinations, to further enhance the accounting and financial reporting related to business combinations. SFAS No. 141(R) establishes principles and requirements for how the acquirer in a business combination (1) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non controlling interest in the acquiree, (2) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and (3) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the
business combination. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Therefore, the effects of our adoption of SFAS No. 141(R) will depend upon the extent and magnitude of acquisitions after December 31, 2008.
In December 2007, the FASB issued SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51, to create accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 establishes accounting and reporting standards that require (1) the ownership interest in subsidiaries held by parties other than the parent to be clearly identified and presented in the consolidated balance sheet within equity, but separate from the parent’s equity, (2) the amount of consolidated net income attributable to the parent and the noncontrolling interest to be clearly identified and presented on the face of the consolidated statement of income, (3) changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary to be accounted for consistently, (4) when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary to be initially measured at fair value, and (5) entities to provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 applies to fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008, and prohibits early adoption. Management has not completed its review of the new guidance; however, the effect of the Statement’s implementation is not expected to be material to our results of operations or financial position.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. This Statement permits entities to choose to measure eligible items at fair value at specified election dates. For items for which the fair value option has been elected, unrealized gains and losses are to be reported in earnings at each subsequent reporting date. The fair value option is irrevocable unless a new election date occurs, may be applied instrument by instrument, with a few exceptions, and applies only to entire instruments and not to portions of instruments. SFAS No. 159 provides an opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting. SFAS No. 159 is effective for our company beginning January 1, 2008. Management has not completed its review of the new guidance; however, the effect of the Statement’s implementation is not expected to be material to our results of operations or financial position.
In March 19, 2008, the FASB issued FASB Statement No. 161,Disclosures about Derivative Instruments and Hedging Activities—an Amendment of FASB Statement 133. Statement 161 enhances required disclosures regarding derivatives and hedging activities, including enhanced disclosures regarding how: (a) an entity uses derivative instruments; (b) derivative instruments and related hedged items are accounted for under FASB Statement No. 133,Accounting for Derivative Instruments and Hedging Activities; and (c) derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Specifically, Statement 161 requires:
Disclosure of the objectives for using derivative instruments is disclosed in terms of underlying risk and accounting designation;
Disclosure of the fair values of derivative instruments and their gains and losses in a tabular format;
Disclosure of information about credit-risk-related contingent features; and
Cross-reference from the derivative footnote to other footnotes in which derivative-related information is disclosed.
Critical Accounting Policies and Estimates
A summary of our critical accounting policies follows:
Estimates:
The preparation of thecondensed financial statements requires management to make estimates and assumptions that affect the reported amounts of assetassets and liabilities and disclosure of contingent assetassets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates.
Revenue Recognition:
We recognize revenue uponcurrently have no ongoing source of revenues. Miscellaneous income is recognized when earned by us.
Cash and Cash Equivalents
We consider all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. At times, we may maintain cash balances in excess of Federal Deposit Insurance Corporation insured amounts which is $250,000 for substantially all depository accounts. As of March 31, 2015, we did not have any depository accounts containing a cash balance in excess of these insured limits.
Research and Development Expenses
Research and development costs are expensed in the completion of laboratory service projects, or uponperiod in which they are incurred and include the delivery and acceptance of biologically relevant materials that have been synthesized in accordance with project terms. Laboratory service projects are generally administered under fee for service contracts. We recognize any revenues fromexpenses paid to third parties who conduct research and development activities on behalf of our company and purchased in-process research and development.
Stock-Based Compensation
We account for stock-based awards to employees and non-employees using Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718 – Accounting for Share-Based Payments, which provides for the use of the fair value based method to determine compensation for all arrangements where shares of stock or equity instruments are issued for compensation. Fair values of equity securities issued are determined by us based predominantly on the trading price of the common stock. The value of these awards is based upon their grant-date fair value. That cost is recognized over the period during which the employee is required to provide service in exchange for the award.
Income Taxes
Deferred tax assets and liabilities are recognized for future tax consequences attributed to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases and are measured using enacted tax rates that are expected to apply to the differences in the periods that they are expected to reverse. Management has evaluated the guidance relating to accounting for uncertainty in income taxes and has determined that we had no uncertain income tax positions that could have a significant effect on the condensed financial statements for the three months ended March 31, 2015 or 2014.
Recent accounting pronouncements:
In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update 2014-09, “Revenue from Contracts with Customers,” which supersedes the revenue recognition requirements of Accounting Standards Codification (“ASC”) Topic 605, “Revenue Recognition” and most industry-specific guidance on revenue recognition throughout the ASC. The new standard is principles-based and provides a five step model to determine when and how revenue is recognized. The core principle of the new standard is that revenue should be recognized when a company transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The new standard also requires disclosure of qualitative and quantitative information surrounding the amount, nature, timing and uncertainty of revenues and cash flows arising from contracts with customers. The new standard will be effective for us in the first quarter of the year ending December 31, 2017 and can be applied either retrospectively to all periods presented or as a cumulative-effect adjustment as of the date of adoption. Early adoption is not permitted. We will evaluate the impact of adoption of the new standard on its financial statements upon commencement of revenue generating activities.
Results of Operations
For the three months ended March 31, 2015 compared to the three months ended March 31, 2014
Research and Development Expenses. We recognized approximately $0.3 million in research and development expenses during the three months ended March 31, 2015 compared to approximately $0.03 million for the three months ended March 31, 2014. Research and development expenses for the current period include salaries and consulting expenses related to clinical trial design and regulatory activities, legal expenses relating to patents, and stock-based compensation. Research and development expenses for the prior period consists primarily ofsalaries related to clinical trial design and regulatory activities.
General and Administrative Expenses. We recognized approximately $0.6 million and $0.2 million in general and administrative expenses during the three months ended March 31, 2015 and 2014, respectively. General and administrative expenses consist of compensation and related costs for corporate administrative staff, facility expenditures, professional fees, consulting and taxes. The increase is primarily a result of an increase in stock based compensation relating to restricted stock units issued in the quarter ended September 30, 2014.
Interest Expense. We recognized approximately $0.01 million in interest expense during the three months ended March 31, 2014 related to former employee notes. There was no such expense during thethree months ended March 31, 2015 as all notes were paid in full in 2014.
For the Year Ended December 31, 2014 Compared to the Year Ended December 31, 2013
Chapter 11 Expenses. We recognized $117,324 in Chapter 11 expenses during the year ended December 31, 2013. Chapter 11 expenses consist solely of U.S. Trustee fees and legal fees relating to the Company’s bankruptcy filing. There were no such expenses during 2014.
Research and Development Expenses. We recognized $2,430,735 and $1,065,169 in research and development expenses during the years ended December 31, 2014 and 2013, respectively. For the year ended December 31, 2014, research and development expenses consist of approximately $1.9 million of in-process research and development associated with the issuance of common stock shares and warrants to Mayne Pharma upon entering into our Amended and Restated Supply and License Agreement in June 2014. The balance of the research and development expenses consists primarily of salaries and consulting fees related to clinical trial design and regulatory activities as well as approximately $0.3 million in stock compensation expense related to research and development activities. For the year ended December 31, 2013, research and development expenses consisted of approximately $1.0 million in in-process research and development purchased with the issuance of the preferred shares to Hedgepath, LLC in August 2013, and salaries related to clinical trial design and regulatory activities.
General and Administrative Expenses. We recognized $1,507,082 and $817,316 in general and administrative expenses during the years ended December 31, 2014 and 2013, respectively. General and administrative expenses consist primarily of compensation and related costs for corporate administrative staff, facility expenditures, professional fees, consulting and taxes. The increase of approximately $0.7 million is primarily a result of the increase in stock compensation expense of $0.5 million during 2014. The increase in stock compensation was a result of the issuance, during 2014, of restricted stock units to certain employees and Directors under the 2014 Equity Incentive Plan.
Interest Expense. We recognized $37,481 and $1,923 in interest expense during the years ended December 31, 2014 and 2013, respectively. The increase was due primarily to increased interest related to former employee notes resulting from extensions of such notes which were paid in full in December 2014.
Gain on Reorganization. We recognized an aggregate of $166,676 in gain on reorganization during the year ended December 31, 2013. Gain on reorganization was associated with the final payments under the Chapter 11 reorganization plan. There was no such gain in 2014.
Liquidity and Capital Resources
We had approximately $84,000 cash on hand at March 31, 2015 and approximately $7,000 as of May 13, 2015. We are currently negotiating a common stock and equity financing with a significant stockholder which would bolster our cash balance. No assurances can be given, however, that we will be able to close such financing.
We will require significant additional financing in the near term in order to progress our business plan, and our failure to raise such funds could lead to the failure of our business in the near term. It is highly unlikely that any funds required during the next twelve months or thereafter can be generated from our operations. Moreover, there can be no assurances given that additional funds will be available from external sources, such as debt or equity financing or other potential sources on commercially acceptable terms, or at all.
We intend to seek financing for our research and development, commercialization and distribution efforts and our working capital needs primarily through:
There is a risk that none of these or similar efforts will raise needed capital for us. As a result of the foregoing circumstances, there is substantial doubt about our ability to continue as a going concern. Our current independent registered public accounting firm has included a paragraph emphasizing “going concern” uncertainty in their audit report on the 2014 financial statements dated February 13, 2015. The financial statements included herein do not include any adjustments relating to the recoverability or classification of asset carrying amounts or the amounts and classification of liabilities that may result should we be unable to continue as a going concern.
Overview
We are a clinical stage biopharmaceutical company that is seeking to discover, develop and commercialize innovative therapeutics for patients with certain cancers. Our preliminary focus is on the development of therapies for skin, lung and prostate cancers in the U.S. market. Our proposed therapy is based upon the use of a patented formulation of the currently marketed anti-fungal drug itraconazole known as SUBA-Itraconazole.
Following a meeting between our management and representatives of the United States Food and Drug Administration (or FDA) in August 2014, we submitted an Investigational New Drug (or IND) application in November 2014 for the use of our product candidate to treat basal cell carcinoma in patients with Gorlin Syndrome, a genetic disease also known as Basal Cell Carcinoma Nevus Syndrome, which, among other conditions, causes the chronic formation of basal cell tumors. Our IND application was cleared by the FDA in December 2014, and as such, we expect to commence patient recruiting during the third quarter of 2015 for a Phase II(b) clinical trial studying the safety and efficacy of the SUBA-Itraconazole formulation to determine how well it reduces basal cell carcinoma tumor burden in patents with Gorlin Syndrome. We expect to report results during the fourth quarter of 2015 and first quarter of 2016 in patients who continue treatment under our open-label protocol. Thereafter, we intend going forward to file individualized clinical trial protocols to expand the study of SUBA-Itraconazole for additional target cancer indications.
We have developed, licensed and are seeking to acquire and/or license, intellectual property and know-how related to the treatment of cancer patients using itraconazole and have applied for patents to cover our inventions. We have exclusive rights in the U.S. to develop and to commercialize SUBA-Itraconazole Capsules for the treatment of human cancer via oral administration. SUBA-Itraconazole was developed and is licensed to us by Mayne Pharma under the Supply and License Agreement, originally dated September 3, 2013 and most recently amended and restated on May 15, 2015. Mayne Pharma is an Australian specialty pharmaceutical company that develops and manufactures branded and generic products, which it distributes directly or through distribution partners and also provides contract development and manufacturing services. In addition to being our licensor and supply partner, under the Supply and License Agreement and related agreements, Mayne Pharma holds a significant minority equity stake in our company and holds important rights with respect to our company, such as the right to appoint a member to our Board of Directors. In addition, we expect to obtain a sublicense from Mayne Pharma to rights for certain patents regarding the use of itraconazole as a cancer treatment. See “—Manufacturing and Product Supply and Relationship with Mayne Pharma” and “Certain Relationships and Related Party Transactions” below for more information. We have also filed patent applications for the use of SUBA-Itraconazole for the treatment of skin, lung and prostate cancers with the US Patent and Trademark Office with an intent to enhance our IP protections should claims issue related to our applications.
“SUBATM technology” (which stands for “super bioavailability”) is designed to improve the bioavailability of orally administered drugs that are poorly soluble. In studies conducted by Mayne Pharma relating to the use of SUBA-Itraconazole for anti-fungal therapy, SUBA-Itraconazole demonstrated improved absorption and significantly reduced variability within and between patients compared to the branded and generic forms of itraconazole in human studies. We believe this technology is well-suited for the exploration of the potential anti-cancer effects of itraconazole.
Based on existing scientific (including in vitro, animal and human studies) data, we believe that itraconazole affects the Hedgehog signaling pathway in cells, a major regulator of many fundamental cellular processes, which will in turn impact the development and growth of certain cancers. Itraconazole appears to have notable anti-cancer effects by one or more independent or synergistic mechanisms, some of which are not clearly understood and continue to be the subject of on-going research. These anti-cancer effects have been demonstrated in various animal models and subsequently in human studies conducted by clinicians and investigators at leading research grants,institutions over the last several years, all of which are the basis of our interest in the clinical development of itraconazole for treatment of human cancers.
Our regulatory strategy is driven by the so called 505(b)(2) regulatory pathway, under which a drug (in our case, itraconazole) that has already been approved for use in humans in the United States by the FDA is developed for one or more new medical indications (in our case, as an anti-cancer agent). Due to the history of safe and efficacious use of itraconazole in humans for anti-fungal applications, we believe the 505(b)(2) pathway will be available to us, which may create the potential for significantly reducing the risk and time to achieve FDA approval of our anti-cancer therapy.
Pre-Bankruptcy and Emergence from Bankruptcy
Our predecessor, CBI, was founded as a Virginia corporation in 1992, and completed an initial public offering in October 1997. Its business model was providing, on a contract basis, specialized life sciences services to the pharmaceutical and biotechnology sector.
On January 20, 2011, CBI filed a voluntary petition in the Bankruptcy Court for the Eastern District of Virginia seeking relief under the provisions of Chapter 11 of Title 11 of the United States Code (or the Bankruptcy Code). The Chapter 11 case was captioned In re Commonwealth Biotechnologies, Inc., Case No. 11-30381-KRH. On January 4, 2013, CBI filed an Amended Plan of Reorganization (or the Plan) with the Bankruptcy Court. The Plan was approved by a vote of creditors and CBI stockholders on March 21, 2013. Hedgepath, LLC, a Florida limited liability company and a significant stockholder of our company of which our current Executive Chairman acts as manager, was the winning bidder for CBI (which is sometimes referred to herein as HPPI in its capacity as the reorganized company, after giving effect to the consummation of the transactions contemplated by the reincorporation merger and acquisition described below). CBI received an auction fee of $30,000 from Hedgepath, LLC in addition to an agreement to contribute certain assets related to our current business of commercializing innovative therapeutics for patients with cancer using the approved pharmaceutical itraconazole (which we refer to as the Itra Business Opportunity), as further described below.
On March 29, 2013, the Bankruptcy Court entered an order confirming the Plan pursuant to Chapter 11 of the Bankruptcy Code, and on April 17, 2013, CBI issued a press release announcing the effectiveness of such confirmation order.
Under the terms of the related agreementsPlan, and pursuant to a Contribution Agreement, dated August 13, 2013, Hedgepath, LLC contributed and assigned to HPPI certain assets relating to the Itra Business Opportunity, as work is performed or scientific milestones, if any, are achieved. We record amounts receivedthe reorganized debtor, in advanceexchange for 90% of fully diluted voting equity in HPPI (in the form of newly issued Series A Preferred Stock) on the date of issuance, with the prior stockholders of CBI retaining approximately 10% voting equity in HPPI, represented by 100% of HPPI’s issued and outstanding shares of Common Stock. As the elements of the performancePlan have been implemented (including the payment in full of services or acceptanceall company creditors), HPPI formally closed CBI’s bankruptcy case on September 20, 2013.
The assets contributed to our company by Hedgepath, LLC related to the Itra Business Opportunity consisted of the following:
(i) | U.S. Provisional Patent Application 61-813,122, “Prostate-Specific Antigen as Biomarker for Hedgehog Pathway Inhibitor Treatment and Prognostic Monitoring of Prostate Cancer” (previously assigned to Hedgepath, LLC by Dr. Frank E. O’Donnell, Jr. (our current executive chairman) and Nicholas J. Virca (our current president and chief executive officer), as inventors); |
(ii) | U.S. Provisional Patent Application 61-813,823, “Treatment and Prognostic Monitoring of Cancer Using Hedgehog Pathway Inhibitors” (previously assigned to Hedgepath, LLC by Dr. Frank E. O’Donnell, Jr. and Nicholas J. Virca, as inventors); |
(iii) | Assignment of Patents, dated November 1, 2012, by Dr. Frank E. O’Donnell, Jr. in favor of Hedgepath, LLC; |
(iv) | Assignment of Patents, dated November 1, 2012, by Nicholas J. Virca in favor of Hedgepath, LLC; |
(v) | Consulting Agreement, dated and effective as of September 1, 2012, by and between HPPI (as successor to Hedgepath, LLC) and Emmanuel Antonarakis, MD (“Antonarakis”); |
(vi) | Confidentiality and Intellectual Property Assignment Agreement, dated and effective September 1, 2012, between Antonarakis and HPPI (as successor to Hedgepath, LLC), which includes all intellectual property, know-how and other assets assigned to Hedgepath, LLC by Antonarakis under such agreement; |
(vii) | Consulting Agreement, effective as of April 11, 2013, by and between Hedgepath, LLC and Arianne Consulting, Inc. (“Arianne”); and |
(viii) | Confidentiality and Intellectual Property Assignment Agreement, dated and effective April 11, 2013, between Arianne and Hedgepath, LLC , which includes all intellectual property, know-how and other assets assigned to Hedgepath, LLC by Arianne under such agreement. |
The Contribution Agreement was entered into to carry out the purposes and intent of the Plan filed by CBI and confirmed by the Bankruptcy Court in connection with the Chapter 11 case.
As part of the Contribution Agreement, we have agreed to issue to a milestone as deferred revenue.
Accounts Receivable: Accounts receivable are carried at original invoice amount less an estimate for doubtful receivablesthird party service provider a number of restricted shares of our Common Stock to be determined based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history, and current economic conditions. Accounts receivable are written off when deemed uncollectible. Recoveries of accounts receivable previously written off are recorded when received.
Foreign Currency Translation.We report our consolidated financial statements in U.S. dollars. We translate assets and liabilities of foreign subsidiaries using rates of exchange asvaluation of the balance sheet date. We translate related revenues and expenses at average ratesshares to be issued to purchasers in connection with our planned $5 million offering of exchangesecurities as described in effect during the period. We record cumulative translation adjustments asPlan in payment for a separate component$52,500 claim. Such shares of Common Stock are to be issued to such service provider within other comprehensive income (loss)five (5) business days of stockholders’ equity. We include realized gains and losses from foreign currency translationsthe final determination of such valuation (as memorialized in other income.
PRIVATE PLACEMENT OF CONVERTIBLE NOTES AND WARRANTS
Backgroundthe final transaction documentation for such offering).
On December 31, 2007, we enteredAugust 12, 2013, CBI consummated a short-form reincorporation merger with and into and closed the Subscription Agreement with the Selling StockholdersHPPI, its wholly-owned Delaware subsidiary, pursuant to which we issuedCBI changed its name to “HedgePath Pharmaceuticals, Inc.” and became reincorporated as a Delaware corporation.
On August 13, 2013, HPPI and Hedgepath LLC consummated the Selling Stockholders purchased $1,950,000 of our Convertible Notes, 975,000 Class A Warrants and 243,750 Class B Warrants. The Class A and Class B Warrants were issued in proportion to the amount of Convertible Notes purchased by each Selling Stockholder.
As described in the Prospectus Summary, we are required to register 100% of the Shares underlying the Class A Warrants and Class B Warrants. We are also required to register 120% of the number of Shares initially underlying the Convertible Notes, or 1,170,000 Shares (also referred to as the “Registered Number”). Even though we are required to register the Registered Number, the most Shares we can issue under the Convertible Notes is 1,104,108 Shares, or the “Maximum Number.” If we do not take any action that increases the number of Shares underlying the Convertible Notes then only 975,000 Shares (the “Initial Number”) will underlie the Convertible Notes. We are requiredtransactions contemplated by the termsContribution Agreement, including the acquisition of Itra Business Opportunity assets, as contemplated by the Subscription Agreement to register in this offering at least 1,001,208 shares underlying the Convertible Notes and Class A and Class B Warrants and have registered this number of shares. We intend to register the remaining Shares we are obligated to register when permitted under, and in compliance with, applicable laws and regulations.Plan.
Prior to such transactions, CBI was a shell company, as defined in Rule 12b-2 under the Private Placement,Securities Exchange Act of 1934, as amended, having been subject to bankruptcy proceedings and with no operations. CBI formally emerged from Chapter 11 bankruptcy following the consummation of such transactions, which satisfied the final condition to effectiveness of the Plan.
The Hedgehog Pathway
The Hedgehog signaling pathway is a major regulator of many fundamental cellular processes in vertebrates, including primarily at the embryonic stage of development but also as it relates to stem cell maintenance, cell differentiation, tissue polarity and cell proliferation. Based on published research, we believe that inhibiting the Hedgehog pathway could delay or possibly prevent the development of certain cancers in patients. Research has shown that activation of the Hedgehog pathway can lead to the formation of cancerous tumors (a process known as tumorigenesis) such as the most common form of skin cancer known as basal cell carcinoma. A variety of other human cancers, including brain, gastrointestinal, lung, breast and prostate cancers, also demonstrate inappropriate activation of this pathway. Hedgehog signaling from the tumor to the surrounding cell structures has been shown to sometimes promote further tumorigenesis as well. This pathway has also been shown to regulate proliferation of cancer stem cells and to increase tumor invasiveness.
We believe that the targeted inhibition of Hedgehog signaling may be effective in the treatment and prevention of many types of human cancers. We also believe that the discovery and synthesis of specific Hedgehog pathway inhibitors may have significant clinical implications regarding the development of novel cancer therapies. Several synthetic Hedgehog antagonists are now being studied, some of which are undergoing clinical evaluation. The orally available compound, GDC-0449 (vismodegib, developed by Genentech, Inc., a subsidiary of Roche), is the first Hedgehog inhibitor based-therapy that has been approved for treatment of advanced stages of basal cell carcinoma by the FDA.
Repurposing Itraconazole for Treating Cancer
We are implementing clinical and regulatory plans to enable the repurposing of itraconazole, via the use of the new formulation of SUBA-Itraconazole oral capsules, for the treatment of a variety of cancers. This strategy is intended to significantly reduce the risk and time to potential FDA approvals for marketing in the United States. Initial target applications include therapies for skin, lung and prostate cancers, among others.
Itraconazole appears to have notable anti-cancer effects by one or more independent or synergistic mechanisms, some of which are not clearly understood and continue to be the subject of ongoing research. These anti-cancer effects have been demonstrated in various animal models and, subsequently in human studies over the last few years, all of which are the basis of our 5,520,545 then outstanding Shares were heldinterest in the clinical development of SUBA-Itraconazole for treatment of human cancers.
We believe that our development of SUBA-Itraconazole as follows:an anti-cancer therapy may lead to its use as an inhibitor of the Hedgehog pathway, thereby retarding the progression of cancer.
In animal models, itraconazole has demonstrated an anti-angiogenic effect (i.e., inhibiting the formation of new blood vessels), which may be important in controlling the proliferation of cancerous cells and tumors in humans based upon its interaction with certain cell-based growth factors. Itraconazole also appears to induce changes related to the mTOR pathway, an important regulator of cell growth, proliferation and survival which, when unregulated, can also lead to cancer.
We believe that the use of SUBA-Itraconazole to treat each of our target cancer patient populations has the potential to benefit from various FDA programs designed to expedite the approval process.
Basal Cell Carcinoma
SUBA-Itraconazole may offer a significant alternative therapy to Genentech’s drug, vismodegib, for treatment of basal cell carcinoma (known as BCC). Vismodegib is the first FDA-approved Hedgehog inhibitor based-therapy, yet has many reported toxicities and is associated with serious side effects that result in suspension of chronic dosing. As a result, basal cell tumors reoccur and patients are faced with the choice of returning to vismodegib therapy or, if possible, surgical alternatives. The SUBA-Itraconazole formulation of itraconazole may prove to be a more acceptable therapy for a larger number of patients or considered as a therapy which could easily be alternated with vismodegib, especially for patients who cannot endure vismodegib side-effects for extended periods or treatment. Additionally, recent reports indicate that vismodegib has led to resistance in some BCC patients, so use of SUBA-Itraconazole as an alternative therapy in this sub-population of patients could prove to be very useful for long term oral drug therapy. SUBA-Itraconazole treatment of patients with Gorlin Syndrome (a genetic disease which causes chronic BCC tumors) may qualify for orphan drug status, an FDA designation that expedites review of drugs for the treatment of diseases that have relatively small patient populations.
Lung Cancer
Patients with advanced non-squamous non-small cell lung cancer (most often caused by cigarette smoking) have few options when considering therapies to extend survival. With a median survival of only 8-10 months while on approved chemotherapy regimens, we believe that new therapies are needed. We believe that the pre-clinical data and recently reported human data on the use of itraconazole in conjunction with chemotherapy reflects positively on the use of itraconazole as an anti-cancer therapy for this form of lung cancer. If these data prove to be applicable to human treatment by improving survival, while dosing SUBA-Itraconazole in combination with first-line chemotherapy therapy (the combination of chemotherapy drugs Pemetrexed and Cisplatin), the treatment may qualify for one or more FDA accelerated programs, such as a breakthrough therapy or fast track status.
Prostate Cancer
Itraconazole has already been tested as a treatment for men with metastatic castrate resistant prostate cancer in a multi-institutional Phase II trial led by Johns Hopkins University and completed in 2011 and published in 2013, which showed that, at a specified dose, there was a significant correlation to slowing the progression of cancer and extending survival. Based on those encouraging results in metastatic disease, we are planning to test SUBA- Itraconazole in high-risk men with non-metastatic prostate cancer (who are castrate resistant, either based upon drug therapy or surgery) to study the effect of itraconazole therapy in delaying metastases. There is no currently approved drug therapy for these patients and yet they are treated with drugs designed for metastatic disease on an “off-label” basis. We believe this is a significant opportunity for us since we are offering a non-toxic, non-androgen dependent small molecule therapy to a very large population of patients. Therapy with SUBA-Itraconazole may offer great promise for delaying the use of, and associated side-effects due to, those Androgen Deprivation Therapy (ADT) Drugs which are formulated to lower testosterone levels but are intended for metastatic disease treatment.
Our Potential Market
The following table depicts our current estimate of the total available market opportunity for our proposed anti-cancer therapies based upon independent market research, scientific and industry publications and management’s knowledge of the U.S. oncology market. Our estimates (including estimated product pricing) are based on current assumptions and are subject to change.
HedgePath Pharmaceuticals, Inc. – Summary U.S. Market Opportunity
| ||||||||
| Therapy Indication | Potential for SUBA-Itraconazole | Target Patient Population | U.S. Total Available Market | ||||
Skin(1) | Patients with BCC (basal cell carcinoma) lesions First indication: BCC tumors in Gorlin Syndrome Patients requiring surgery Follow-on Indication: Patients with BCC facial lesions pending MOHs or other surgical procedures | Less toxic therapy than vismodegib for Gorlin Patients to delay surgeries; low toxicity therapy to delay or minimize surgical intervention for facial BCC tumors | 10,000 Gorlin patients needing chronic BCC therapy; 65,000 BCC patients pending surgical treatment for facial tumors that require excision and potential plastic surgery | $300M for Gorlin patients and $600M for patients with BCC facial lesions requiring surgery based upon HedgePath estimates of ~ $4K-$5K monthly cost of therapy for target populations | ||||
Lung(2) | Patients with advanced non-squamous cell, non-small cell lung cancer (NSCLC) who will be placed on Cisplatin/Pemetrexed IV Therapy | Improve the current median 8-10 month survival achieved with best supportive care | 56,000 men and women with late-stage disease on chemotherapy treatment | $1.7 B based on HedgePath estimates of ~ $4K-$5K monthly cost of therapy | ||||
Prostate(3) | Patients with non metastatic castrate resistant prostate cancer (NMCRPC) and rising PSA levels on “off-label” androgen deprivation therapy (ADT) | Delay the progression to metastatic disease while preventing or reducing the use of ADT and its associated side-effects | 45,000 high-risk men with prostate cancer which may lead to metastases of the bone | $1.5B based on HedgePath estimates of ~ $4K-$5K monthly cost of therapy |
References:
(1) | J Am Academy Dermatology, 2006; Skin Cancer Foundation, 2009; International Medicine News, 2011; Seeking Alpha, 2012; BCCNS Support Organization 2014 |
(2) | STATS MGU, 2009; Global Industry Analysts, 2010; BMC Health Services, 2011; World Health Organization, 2011; Cost of Treating Lung Cancer, 2012; National Center for Biotechnology Information, 2012 |
(3) | J. Urology, 2003; Oncology, 2004; J. Clinical Oncology, 2011; Medscape, 2012; Landes Bioscience, 2012 |
Our Strategy
Our goal is to be a leader in the development and commercialization of SUBA-Itraconazole-based therapeutics for the treatment of cancer patients. We believe that we can accomplish this goal by implementing the following key elements of our business strategy:
• | Rapidly Advance the Clinical Development of Our Therapies. With the history of safe use of itraconazole in humans for anti-fungal indications, we bypassed each of the required pre-clinical animal studies for toxicity and Phase I human trials to establish safety, and therefore are able to move directly into Phase II human trials. We filed an IND to test SUBA-Itraconazole for the treatment of basal cell carcinoma in patients with Gorlin Syndrome, and the IND was cleared by FDA for human testing as of late December 2014. As a result, we will begin recruiting patients for a Phase II(b) trial during the third quarter of 2015. Thereafter we intend to file individualized clinical protocols to expand the study of SUBA-Itraconazole for additional target cancer indications. |
• | Seek FDA Programs to Expedite Drug Approvals. The FDA has various programs intended to facilitate and expedite development and review of new drugs to address unmet medical needs in the treatment of serious or life-threatening conditions. These expedited programs help ensure that therapies for serious conditions are available as soon as it can be concluded that the therapies’ benefits justify their risks, taking into account the seriousness of the condition and the availability of alternative treatments. These programs include breakthrough therapy designation, fast track designation, accelerated approval, and priority review. We believe that SUBA-Itraconazole for the treatment of cancer may qualify for one of these designations, which could help expedite the regulatory review process. |
• | Commercialize and Market with Exclusivity. We are currently opening sites for the clinical testing of SUBA-Itraconazole for treatment of basal cell carcinoma in an initial Phase II(b) trial for patients with Gorlin Syndrome, in order to later seek FDA approval based upon its efficacy for this new indication. In addition, we are developing specific clinical trial designs to address different forms of cancer in order to pursue New Drug Application (or NDA) approvals for multiple indications. Further, we believe SUBA-Itraconazole can be commercialized in a way that maximizes benefits for cancer patients, based on our specific therapy regimens, while eliminating generic substitution and providing us with market exclusivity protections through our intellectual property rights. |
We intend to finance our research and development, commercialization and distribution efforts and our working capital needs primarily through:
Background on Cancer
Cancer is a heterogeneous group of diseases characterized by uncontrolled cell division and growth. Cancerous cells that arise in the lymphatic system and bone marrow are referred to as hematological tumors. Cancer cells that arise in other tissues or organs are referred to as solid tumors. Researchers believe that exposure to some chemicals, viruses and various forms of radiation can cause genetic alterations that cause cancer. Genetic predispositions also can increase the risk of cancer in some people.
Cancer is the second leading cause of death in the United States, exceeded only by heart disease. The American Cancer Society estimates that in 2013 there were approximately 1.6 million new cases of cancer and approximately 580,000 deaths from cancer in the United States.
The most common methods of treating patients with cancer are surgery, radiation and drug therapy. A cancer patient often receives treatment with a combination of these methods. Surgery and radiation therapy are particularly effective in patients in whom the disease is localized (not spread beyond the initial site of disease). Physicians generally use systemic drug therapies in situations in which the cancer has spread beyond the primary site or cannot otherwise be treated through surgery. The goal of drug therapy is to damage and kill cancer cells or to interfere with the molecular and cellular processes that control the development, growth and survival of cancer cells or tumors. In many cases, drug therapy entails the administration of several different drugs in combination. Over the past several decades, drug therapy has evolved from non-specific drugs that damage both healthy and cancerous cells, to drugs that target specific molecular pathways involved in cancer and more recently to therapeutics that target the specific oncogenic “drivers” of cancer.
Cytotoxic Chemotherapies. The earliest approach to pharmacological cancer treatment was to develop drugs, referred to as cytotoxic drugs, which kill rapidly proliferating cancer cells through non-specific mechanisms, such as disrupting cell metabolism or causing damage to cellular components required for survival and rapid growth. While these kinds of drugs have been effective in the treatment of some cancers, many unmet medical needs for the treatment of cancer remain. Also, cytotoxic drug therapies act in an indiscriminate manner, acting upon the metabolism of healthy as well as cancerous cells. Due to their mechanism of action, many cytotoxic drugs have a narrow dose range above which the toxicity causes unacceptable or even fatal levels of damage and below which the drugs are not effective in eradicating cancer cells.
Targeted Therapies. The next approach to pharmacological cancer treatment was to develop drugs, referred to as targeted therapeutics, that target specific biological molecules in the human body that play a role in rapid cell growth and the spread of cancer. Targeted therapeutics include vascular disruptors, also referred to as angiogenesis inhibitors, which prevent the formation of new blood vessels and restrict a tumor’s blood supply. Other targeted therapies affect cellular signaling pathways that are critical for the growth of cancer. While these drugs have been effective in the treatment of some cancers, most do not address the underlying cause of the disease. These drugs focus on inhibiting processes that help the cancer cell survive, but not the oncogenes that are the drivers or cause of the cancer itself.
Oncogenic Therapies. A more recent approach to pharmacological cancer treatment is to develop drugs that affect the drivers that cause uncontrolled growth of cancer cells because of a specific genetic alteration. In some cases, these agents were identified as therapeutics without knowledge of the underlying genetic change causing the disease. To date, the shortcoming of this research approach has been that it often follows a conventional trial and error approach to drug discovery. In this approach, clinical development involves the treatment of large populations from which a defined subpopulation that responds to treatment is identified. As a result, this approach can be time-consuming and costly, with success often uncertain. Another major concern of these newly discovered drugs, some of which have been recently approved, is that resistance to them occurs as the cancer finds new ways to circumvent the genetic pathway.
The Itraconazole Approach to Treating Cancer
We are focusing our developments on Hedgehog pathway inhibitor therapeutics for patients with certain cancers, including skin, lung and prostate cancers. Our initial product candidate is a new formulation of itraconazole, which is based upon new drug delivery technology that enhances its bioavailabilty. Previous formulations of itraconazole have exhibited anti-cancer properties in human trials and therefore, based on pre-clinical research regarding specific indicators of Hedgehog pathway inhibition, we believe have compelling evidence of being potential Hedgehog inhibitors for treatment of cancer in humans. We have obtained exclusive U.S. rights to use and develop SUBA-Itraconazole, a patented, more bioavailable formulation of the currently marketed drug itraconazole, which we have licensed from Mayne Pharma through an exclusive Supply and License Agreement.
Background of Itraconazole. Itraconazole is FDA approved for and used to treat serious fungal or yeast infections. This medicine works by killing the fungus or yeast and preventing its growth. Itraconazole is a prescription based medication, available as an IV solution, oral liquid, capsule or tablet.
Cancer and Hedgehog Inhibitors. The Hedgehog (also known as Hh) proteins comprise a group of secreted proteins that regulate cell growth, differentiation and survival. They are involved in organogenesis (the formation of organs), and have been shown to promote adult stem cell proliferation. Inappropriate activation of the Hh signaling pathway has been implicated in the development of several types of cancers including prostate, lung, pancreas, breast, brain and skin. Hedgehog pathway inhibitors are a relatively new class of therapeutic agents that act by targeting the proteins involved in the regulation of the Hh pathway. Many of these newly discovered inhibitors are currently undergoing preclinical testing and some have entered clinical studies as anti-cancer agents for a variety of cancers. Vismodegib was approved for treatment of locally advanced and metastatic basal cell carcinoma in early 2012.
Similarly, itraconazole has also been shown to suppress growth of brain tumors in animal models. It has also been shown to have anti-cancer effects in basal cell carcinoma, lung cancer and prostate cancer in human clinical trials. Itraconazole acts as a SMO (a protein receptor of the Hh pathway) antagonist (blocker), in a manner distinct from its anti-fungal activity which targets a compound found in fungi and yeast known as ergosterol (a steroid found in the cell walls of fungi and yeast that functions in a fashion similar to cholesterol in humans) as well as having anti-angiogenic properties.
Intellectual Property
We strive to protect the intellectual property that we believe will be important to our business, including seeking our own patent protection (or seeking licenses to patents) intended to cover the composition of matter of our product candidate, its methods of use, related technology and other inventions that are important to our business. We have acquired from Hedgepath, LLC the following two provisional patents related to Hedgehog pathway inhibitors via an assignment of patents underlying these provisional patents from each Dr. Frank E. O’Donnell, Jr. our executive chairman and director, and Nicholas J. Virca, our president, chief executive officer:
Under United States patent law, a provisional application is a legal document filed in the United States Patent and Trademark Office (or USPTO), that establishes an early filing date, but which does not mature into an issued patent unless the applicant files a regular non-provisional patent application within one year, which we are currently working on. A provisional application includes a specification, i.e. a description, and drawing(s) of an invention but does not require formal patent claims, inventors’ oaths or declarations or any information disclosure statement. A provisional application can establish an early effective filing date in one or more continuing patent applications later claiming the priority date of an invention disclosed in earlier provisional applications by one or more of the same inventors.
Additionally, the following Patent Application, filed by Hedgepath, LLC and dated February 5, 2014 was received by the USPTO on March 10, 2014 and also assigned to HPPI:
We also license the U.S. rights to SUBA-Itraconazole from Mayne Pharma as described below, and we will also rely on trade secrets and careful monitoring of our proprietary information to protect aspects of our business that are not amenable to, or that we do not consider appropriate for, patent protection.
Our viability as a company (including our ability to test, develop and ultimately commercialize SUBA-Itraconazole for the treatment of cancer) will depend significantly on our ability to obtain and maintain patent and other proprietary protection for commercially important technology, methods, inventions and know-how related to our business, defend and enforce our patents, maintain our licenses to use intellectual property owned by third parties, preserve the confidentiality of our trade secrets and operate without infringing the valid and enforceable patents and other proprietary rights of third parties. We also will rely on know-how, continuing technological innovation and in-licensing opportunities to develop, strengthen, and maintain our proprietary position in the field of anti-cancer therapy.
A third party may hold intellectual property, including patent rights, which are important or necessary to the development of our products or therapies. It may be necessary for us to use the patented or proprietary technology of third parties to commercialize our products or therapies, in which case we would be required to obtain a license from these third parties on commercially reasonable terms, or our business could be harmed, possibly materially. For example, some of the possible formulations of itraconazole include components covered by patents held by third parties. Although we believe that licenses to these patents are available from these third parties on commercially reasonable terms, if we were not able to obtain a license, or were not able to obtain a license on commercially reasonable terms, our business could be harmed, possibly materially.
We also plan to continue to expand our intellectual property estate by filing patent applications directed to dosage forms, methods of treatment, therapies for other cancers and additional Hedgehog inhibitor compounds and their derivatives.
Manufacturing and Product Supply and Relationship with Mayne Pharma
We are in the early stages of development and thus we do not have any production facilities or manufacturing personnel. We currently have a Supply and License Agreement in place with Mayne Pharma for the patented formulation of itraconazole, SUBA-Itraconazole. The agreement provides for the supply to HPPI of specially formulated capsules of SUBA-Itraconazole, manufactured by Mayne Pharma under cGMP (current good manufacturing practice) standards, for use by HPPI in its anticipated clinical trials, including the pending trial for basal cell carcinoma in patients with Gorlin Syndrome which has been cleared by FDA in December 2014 to begin during 2015, and for the future exclusive commercial supply following FDA approvals, if obtained.
Pursuant to the Supply and License Agreement, Mayne Pharma is obligated to: (i) supply us with its patented formulation of SUBA-Itraconazole in a particular dose formulation for the treatment of human patients with cancer via oral administration (with the initial areas of investigation being prostate, lung and skin cancer) in the United States, (ii) provide us with an exclusive license to perform specified development activities and to commercialize SUBA-Itraconazole for the treatment of cancer via oral administration in the United States and (iii) participate in a joint development committee (or JDC) with us to clinically develop SUBA-Itraconazole for the treatment of cancer in the United States. Mayne Pharma will also provide certain services to us (in accordance with the development plan and budget for our product) including to direct clinical programming (subject to the oversight and approval by the JDC and, in certain circumstances, the Board of Directors), and to direct the regulatory approval process and intellectual property strategy related to the product. Any services provided to us by Mayne Pharma in this regard will be provided at Mayne Pharma’s expense (other than third party costs agreed to by us and Mayne Pharma), and such services will be subject to our prior approval. The Supply and License Agreement may be terminated by Mayne Pharma if we fail to achieve regulatory approval to commercialize SUBA-Itraconazole in the U.S. by June 30, 2017, if we breach any provision of our Equity Holders Agreement, if we materially breach the Supply and License Agreement and do not cure such breach within a specified time period, or if either party files for bankruptcy or insolvency proceedings.
Pursuant to the Supply and License Agreement, we will develop and exploit SUBA-Itraconazole through a development plan which will be authorized by the JDC and updated as necessary. We cannot make changes to the development plan without Mayne Pharma’s consent. The license granted to us under the Supply and License Agreement may only be assigned or sub-licensed with the prior approval of Mayne Pharma. In addition, in support of the exclusive nature of the Supply and License Agreement, during the term, Mayne Pharma is prohibited from directly or indirectly importing, promoting, marketing, distributing or selling SUBA-Itraconazole for the treatment of cancer in the United States. If any other form of the SUBA-Itraconazole manufactured by Mayne Pharma is sold as a result of any non-promoted use, we shall be entitled to a royalty on such non-promoted sales. Further, during the term of and for a period following the term of the Supply and License Agreement, we may not develop products that are competitive with SUBA-Itraconazole for the treatment of cancer. Under the Supply and License Agreement, we are responsible for obtaining all of our requirements for SUBA-Itraconazole from Mayne Pharma, including for use in clinical trials, importation, promotion, marketing, sale and distribution in the United States. We and Mayne Pharma have established certain minimum floor prices that we must pay per unit of SUBA-Itraconazole and minimum order quantities for SUBA-Itraconazole. In addition, the agreement provides for certain annual minimum order quantities for SUBA-Itraconazole, and, if such quantities are not met, we must pay the shortfall or Mayne Pharma may terminate the agreement. In addition, we expect to gain access via sublicense to certain patents relating to itraconazole as a cancer treatment.
On June 24, 2014, we and Mayne Pharma, along with Nicholas J. Virca, our President and Chief Executive Officer, Frank E. O’Donnell, Jr., M.D., our Executive Chairman, and Hedgepath, LLC, a Florida limited liability company and the then majority stockholder of our company which is controlled by Black Robe Capital LLC, of which Dr. O’Donnell is the manager, consummated a series of related transactions to fulfill certain conditions of the Supply and License Agreement. In connection therewith, we and Mayne Pharma entered into an Amended and Restated Supply and License Agreement. In addition, on the June 24, 2014, in fulfillment of one of the conditions under the Supply and License Agreement, we entered into a Securities Purchase Agreement with Mayne Pharma (which we refer to as the Mayne Purchase Agreement). Pursuant to the terms of the Mayne Purchase Agreement, we issued to Mayne Pharma (i) 258,363.280 shares of our Series A Preferred Stock, and (ii) a warrant to purchase 10,250,569 shares of our common stock. The shares of Series A Preferred Stock converted into 87,843,897 shares of common stock on August 14, 2014. Such warrant has an exercise price of $0.0878 per share and may be exercised at any time, from time to time, by Mayne Pharma prior to the expiration on June 24, 2019.
On May 15, 2015, we and Mayne Pharma, along with Mr. Virca and Dr. O’Donnell consummated a series of related transactions to fulfill certain conditions of the Supply and License Agreement. In connection therewith, we and Mayne Pharma entered into a Second Amended and Restated Supply and License Agreement. In addition, on May 15, 2015, we entered into a Securities Purchase Agreement with Mayne Pharma (which we refer to as the 2015 Mayne Purchase Agreement). Pursuant to the terms of the 2015 Mayne Purchase Agreement, in consideration of Mayne Pharma’s investment of $2.5 million in our company we issued to Mayne Pharma (i) 33,333,333 shares of our common stock and (ii) a warrant to purchase 33,333,333 shares of our common stock. Such warrant has an exercise price of $0.075 per share and may be exercised at any time, from time to time, by Mayne Pharma prior to the expiration on May 15, 2020. As a result of the 2015 Mayne Purchase Agreement, Mayne Pharma owns approximately 51.1% of our equity securities on a fully diluted basis. See “Certain Relationships and Related Party Transactions” for further information.
Sales and Marketing
We are in the early stages of development and thus have not yet established a sales, marketing or product distribution infrastructure because our product candidate is still in clinical development. We may either license commercialization rights to our product candidate to larger third party partners, who will be responsible for sales, distribution and marketing efforts, or we may (assuming adequate resources are available) retain commercial rights for our product candidate, in which case we would seek to access the oncology market through a focused, specialized sales force of our own or in conjunction with a marketing partner under a co-promotion agreement.
Competition
The pharmaceutical industry is highly competitive and subject to rapid and substantial regulatory and technological changes. Developments by others may render our itraconazole therapies, or any proposed product candidates and formulations under development, non-competitive or obsolete, or we may be unable to keep pace with anti-cancer therapy developments or other market factors. Anti-cancer therapy competition from pharmaceutical and biotechnology companies, universities, governmental entities and others diversifying into the field is intense and is expected to increase.
Below are some examples of companies seeking to develop potentially competitive anti-cancer therapies or related products, though the examples are not all-inclusive. Many of these entities have significantly greater research and development capabilities than do we, as well as substantially more marketing, manufacturing, financial and managerial resources. These entities represent significant competition for us. In addition, acquisitions of, or investments in, competing pharmaceutical or biotechnology companies by large corporations could increase such competitors’ research, financial, marketing, manufacturing and other resources. Such potential competitive anti-cancer therapies may ultimately prove to be safer, more effective or less costly than any product candidates that we are currently developing or may be able to develop. Additionally, our competitive position may be materially affected by our ability to develop or commercialize our drugs and technologies before any such competitor. Other external factors may also impact the ability of our products to meet expectations or effectively compete, including pricing pressures, healthcare reform and other government interventions.
The chart below lists products or products in development that we believe may compete directly with our proposed itraconazole therapy:
| Company | Description | Status | |||
Taxotere® docetaxel | Sanofi-Aventis | Anti-tumor agent for MCRPC and late-stage NSCLC | Approved 2004; and new generics | |||
Jevtana® cabazitaxel | Sanofi-Aventis | MCRPC following docetaxel failure | Approved 2010 | |||
Provenge® sipuleucel-T | Dendreon | Immunotherapy for asymptomatic MCRPC | Approved 2010 | |||
Zytiga® aberaterone | Janssen Biotech | Androgen synthesis inhibitor for MCRPC | Approved 2011 | |||
Xtandi® enzalutamide | Astellas | Androgen receptor inhibitor for MCRPC previously on docetaxel | Approved 2012 | |||
Erivedge® vismodegib | Roche Genentech | Hedgehog inhibitor for advanced BCC and Gorlin Syndrome | Approved 2012 |
| Company | Description | Status | |||
LDE225 - erismodegib | Novartis | Hedgehog inhibitor for advanced BCC and Gorlin Syndrome | Late stage clinical trials | |||
Avastin® bevacizumab | Genentech | Angiogenesis inhibitor for NSCLC except squamous cell lung cancer | Approved for multiple cancers since 2004 | |||
Gemzar® gemcitabine | Lilly | Cytotoxic chemotherapy agent for NSCLC in combination with platinum drugs | Approved for multiple cancers since 1996 | |||
Trexall® methotrexate | Teva | Antimetabolite therapy to slow cancer cell growth | Approved before 1984 | |||
Tarceva® erlotinib | Epidermal growth factor inhibitor treatment for NSCLC - maintenance therapy after chemo or metastatic disease after chemo | Approved in 2013 | ||||
Xalkori® crizotinib | Pfizer | Selective inhibitor for late-state NSCLC patients who express the ALK gene | Approved in 2011 | |||
Gilotrif® afatinib | Boehringer | NSCLC with mutations in EGFR | Approved 2013 | |||
| Novartis | ALK-positive metastatic NSCLC for patients who progressed on Xalkori | Approved 2014 |
The TransactionAbbreviations: MCRPC (metastatic castrate resistant prostate cancer), NSCLC (non-small cell lung cancer), BCC (basal cell carcinoma).
The material termsGovernment Regulation and conditions ofProduct Approval
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federal, state and local level, and in other countries extensively regulate, among other things, the research, development, testing, manufacture, packaging, storage, recordkeeping, labeling, advertising, promotion, distribution, marketing, import and export of pharmaceutical products such as those we are developing. The investors cannot convert the Convertible Notes to the extent that after giving effect to such conversion, the investors (together with their affiliates) would beneficially own in excess of 9.99% of our Shares outstanding immediately after giving effect to the conversion.
We cannot engage in dilutive issuances that would resultprocesses for obtaining regulatory approvals in the Selling Stockholders being able to convertUnited States and in foreign countries, along with subsequent compliance with applicable statutes and regulations, require the Convertible Notes in excessexpenditure of 1,104,108 Shares insubstantial time and financial resources.
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In the aggregate.
The initial conversion price forUnited States, the Convertible Notes is $2.00 per Share.
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our failure to deliver Shares upon a conversion notice or notice of our intention notsubstantial time and financial resources. Failure to comply with the applicable United States requirements at any time during the product development process, approval process or after approval, may subject an applicant to a request for conversion (unless we are prohibited from issuingvariety of administrative or judicial sanctions, such Shares as described above);the FDA’s refusal to approve pending new drug applications, or NDAs, withdrawal of an approval, imposition of a clinical hold, issuance of warning or untitled letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, refusals of government contracts, restitution, disgorgement or civil or criminal penalties.
The process required by the FDA before a drug may be marketed in the United States generally involves the following:
the delistingcompletion of our Shares from any Principal Market for ten (10) consecutive trading days or receipt of notice that we are notpreclinical laboratory tests, animal studies and formulation studies in compliance with the conditions of continued listing from such Principal Market;
Preclinical Studies. Preclinical studies include laboratory evaluation of product chemistry, toxicity and formulation, as well as animal studies to assess potential safety and efficacy. An IND sponsor must submit the results of the preclinical tests, together with manufacturing information, analytical data and any SECavailable clinical data or judicial stop tradeliterature, among other things, to the FDA as part of an IND. Some preclinical testing may continue even after the IND is submitted. An IND automatically becomes effective 30 days after receipt by the FDA, unless before that lasts for five (5)time the FDA raises concerns or questions related to one or more consecutive trading days;proposed clinical trials and places the clinical trial on a clinical hold. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. As a result, submission of an IND may not result in the FDA allowing clinical trials to commence.
We have successfully avoided pre-clinical studies or any Phase I studies to demonstrate safety based on the fact that itraconazole has an established history of safe and effective use in humans for anti-fungal indications based upon the fact that human data are already available and published regarding use of itraconazole in humans for anti-cancer indications, such as basal cell carcinoma, lung cancer and prostate cancer, at the Phase II level and the December 2014 clearance of our failureIND for human testing in a Phase II(b) clinical trial scheduled for 2015.
Clinical Trials. Clinical trials involve the administration of the investigational new drug to human subjects under the supervision of qualified investigators in accordance with GCP requirements, which include the requirement that all research subjects provide their informed consent in writing for their participation in any clinical trial. Clinical trials are conducted under protocols detailing, among other things, the objectives of the trial, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated. A protocol for each clinical trial and any subsequent protocol amendments must be submitted to the FDA as part of the IND. In addition, an IRB (institutional review board) at each institution participating in the clinical trial must review and approve the plan for any clinical trial before it commences at that institution, and the IRB must continue to oversee the clinical trial while it is being conducted. Information about certain clinical trials must be submitted within specific timeframes to the National Institutes of Health, or NIH, for public dissemination on their ClinicalTrials.gov website.
Human clinical trials are typically conducted in three sequential phases, which may overlap or be combined. In Phase I, the drug is initially introduced into healthy human subjects or patients with the target disease or condition and tested for safety, dosage tolerance, absorption, metabolism, distribution, excretion and, if possible, to gain an initial indication of its effectiveness. In Phase II, the drug typically is administered to a limited patient population to identify possible adverse effects and safety risks, to preliminarily evaluate the efficacy of the product for specific targeted diseases and to determine dosage tolerance and optimal dosage. In Phase III, the drug is administered to an expanded patient population, generally at geographically dispersed clinical trial sites, in well-controlled clinical trials to generate enough data to statistically evaluate the efficacy and safety of the product for approval, to establish the overall risk-benefit profile of the product and to provide adequate information for the labeling of the product.
Progress reports detailing the results of the clinical trials must be submitted at least annually to the FDA and more frequently if serious adverse events occur. Phase I, Phase II and Phase III clinical trials may not be completed successfully within any specified period, or at all. Furthermore, the FDA or the sponsor may suspend or terminate a clinical trial at any time on various grounds, including a finding that the research subjects are being exposed to an unacceptable health risk. Similarly, an IRB can suspend or terminate approval of a clinical trial at its institution if the clinical trial is not being conducted in accordance with the IRB’s requirements or if the drug has been associated with unexpected serious harm to patients. As mentioned previously, we are moving directly into Phase II trials with SUBA-Itraconazole for our targeted anti-cancer indications based upon the previous, well-established safety profile of itraconazole use in humans for treatment of anti-fungal indications and based upon the previous human data regarding the use of itraconazole for anti-cancer indications such as basal cell carcinoma, lung cancer and prostate cancer and the IND clearance by FDA which occurred in December 2014.
Marketing Approval. Assuming successful completion of the required clinical testing, the results of the preclinical and clinical studies, together with detailed information relating to the product’s chemistry, manufacture, controls and proposed labeling, among other things, are submitted to the FDA as part of an NDA requesting approval to market the product for one or more indications. In most cases, the submission of an NDA is subject to a substantial application user fee. Under the Prescription Drug User Fee Act (or PDUFA) guidelines that are currently in effect, the FDA has agreed to certain performance goals regarding the timing of its review of an application.
The FDA also may require submission of a risk evaluation and mitigation strategy (or REMS) plan to mitigate any identified or suspected serious risks. The REMS plan could include medication guides, physician communication plans, assessment plans, and elements to assure safe use, such as restricted distribution methods, patient registries or other risk minimization tools. We believe that a REMS program, which includes intellectual property related to SUBA-Itraconazole and itraconazole, and the specific use of SUBA-Itraconazole for anti-cancer indications, may likely provide additional protection of our proposed therapies from generic substitution.
The FDA conducts a preliminary review of all NDAs within the first 60 days after submission, before accepting them for filing, to determine whether they are sufficiently complete to permit substantive review. The FDA may request additional information rather than accept an NDA for filing. In this event, the application must be resubmitted with the additional information. The resubmitted application is also subject to review before the FDA accepts it for filing. Once the submission is accepted for filing, the FDA begins an in-depth substantive review. The FDA reviews an NDA to determine, among other things, whether the drug is safe and effective and whether the facility in which it is manufactured, processed, packaged or held meets standards designed to assure the product’s continued safety, quality and purity.
The FDA typically refers a question regarding a novel drug to an external advisory committee. An advisory committee is a panel of independent experts, including clinicians and other scientific experts, that reviews, evaluates and provides a recommendation as to whether the application should be approved and under what conditions. The FDA is not bound by the recommendations of an advisory committee, but it considers such recommendations carefully when making decisions.
Before approving an NDA, the FDA typically will inspect the facility or facilities where the product is manufactured. The FDA will not approve an application unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure consistent production of the product within required specifications. Additionally, before approving an NDA, the FDA will typically inspect one or more clinical trial sites to assure compliance with GCP.
After evaluating the NDA and all related information, including the advisory committee recommendation, if any, and inspection reports regarding the manufacturing facilities and clinical trial sites, the FDA may issue an approval letter, or, in some cases, a complete response letter. A complete response letter generally contains a statement of specific conditions that must be met in order to secure final approval of the NDA and may require additional clinical or preclinical testing in order for FDA to reconsider the application. Even with submission of this additional information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval. If and when those conditions have been met to the FDA’s satisfaction, the FDA will typically issue an approval letter. An approval letter authorizes commercial marketing of the drug with specific prescribing information for specific indications.
Even if the FDA approves a product, it may limit the approved indications for use of the product, require that contraindications, warnings or precautions be included in the product labeling, including a boxed warning, require that post-approval studies, including
Phase 4 clinical trials, be conducted to further assess a drug’s safety after approval, require testing and surveillance programs to monitor the product after commercialization, or impose other conditions, including distribution restrictions or other risk management mechanisms under a REMS (Risk Evaluation Mitigation Strategy) which can materially affect the potential market and profitability of the product. The FDA may prevent or limit further marketing of a product based on the results of post-marketing studies or surveillance programs. After approval, some types of changes to the approved product, such as adding new indications, manufacturing changes, and additional labeling claims, are subject to further testing requirements and FDA review and approval.
Special FDA Expedited Review and Approval Programs. The FDA has various programs, including fast track designation, accelerated approval, priority review and breakthrough designation, that are intended to expedite or simplify the process for the development and FDA review of drugs that are intended for the treatment of serious or life threatening diseases or conditions and demonstrate the potential to address unmet medical needs. The purpose of these programs is to provide important new drugs to patients earlier than under standard FDA review procedures. To be eligible for a periodfast track designation, the FDA must determine, based on the request of at least five (5) Business Daysa sponsor, that a product is intended to paytreat a serious or life threatening disease or condition and demonstrates the potential to address an unmet medical need. The FDA will determine that a product will fill an unmet medical need if it will provide a therapy where none exists or provide a therapy that may be potentially superior to existing therapy based on efficacy or safety factors.
The FDA may give a priority review designation to drugs that offer major advances in treatment, or provide a treatment where no adequate therapy exists. A priority review means that the goal for the FDA to review an application is six months, rather than the standard review of ten months under current PDUFA guidelines. These six and ten month review periods are measured from the “filing” date rather than the receipt date for NDAs for new molecular entities, which typically adds approximately two months to the Holder any amounttimeline for review and decision from the date of Principal, Interest,submission. Most products that are eligible for fast track designation are also likely to be considered appropriate to receive a priority review.
In addition, products studied for their safety and effectiveness in treating serious or life-threatening illnesses and that provide meaningful therapeutic benefit over existing treatments may receive accelerated approval and may be approved on the basis of adequate and well-controlled clinical trials establishing that the drug product has an effect on a surrogate endpoint that is reasonably likely to predict clinical benefit, or on a clinical endpoint that can be measured earlier than irreversible morbidity or mortality, that is reasonably likely to predict an effect on irreversible morbidity or mortality or other amounts whenclinical benefit, taking into account the severity, rarity or prevalence of the condition and as duethe availability or lack of alternative treatments. As a condition of approval, the FDA may require a sponsor of a drug receiving accelerated approval to perform post-marketing studies to verify and describe the predicted effect on irreversible morbidity or mortality or other clinical endpoint, and the drug may be subject to accelerated withdrawal procedures.
Moreover, under the Convertible Noteprovisions of the new Food and Drug Administration Safety and Innovation Act, or FDASIA, enacted in 2012, a sponsor can request designation of a product candidate as a “breakthrough therapy.” A breakthrough therapy is defined as a drug that is intended, alone or in combination with one or more other drugs, to treat a serious or life-threatening disease or condition, and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development. Drugs designated as breakthrough therapies are also eligible for accelerated approval. The FDA must take certain actions, such as holding timely meetings and providing advice, intended to expedite the development and review of an application for approval of a breakthrough therapy.
Even if a product qualifies for one or more of these programs, the FDA may later decide that the product no longer meets the conditions for qualification or decide that the time period for FDA review or approval will not be shortened. We believe that we may qualify for one or more of these expedited approvals since our itraconazole anti-cancer therapies offer significant improvements in therapy for all of our targeted anti-cancer indications should they be approved by FDA.
Post-Approval Requirements. Drugs manufactured or distributed pursuant to FDA approvals are subject to pervasive and continuing regulation by the FDA, including, among other things, requirements relating to
recordkeeping, periodic reporting, product sampling and distribution, advertising and promotion and reporting of adverse experiences with the product. After approval, most changes to the approved product, such as adding new indications or other labeling claims are subject to prior FDA review and approval. There also are continuing, annual user fee requirements for any marketed products and the establishments at which such products are manufactured, as well as new application fees for supplemental applications with clinical data.
The FDA may impose a number of post-approval requirements as a condition of approval of an NDA. For example, the FDA may require post-marketing testing, including Phase IV clinical trials and surveillance to further assess and monitor the product’s safety and effectiveness after commercialization.
In addition, drug manufacturers and other Transaction Document (as definedentities involved in the Subscription Agreement);
our institutionmanufacture and distribution of a reverse split of our Shares without ten (10) days’ prior noticeapproved drugs are required to register their establishments with the FDA and state agencies, and are subject to periodic unannounced inspections by the FDA and these state agencies for compliance with cGMP requirements. Changes to the Holder;
our failuremanufacturing process are strictly regulated and often require prior FDA approval before being implemented. FDA regulations also require investigation and correction of any deviations from cGMP and impose reporting and documentation requirements upon the sponsor and any third party manufacturers that the sponsor may decide to reserveuse. Accordingly, manufacturers must continue to expend time, money and effort in the numberarea of Shares set forth in each ofproduction and quality control to maintain cGMP compliance.
Once an approval is granted, the Convertible Notes;
our assignment forFDA may withdraw the benefit of creditors, application for, appointment of,approval if compliance with regulatory requirements and standards is not maintained or consent to the appointment of, a receiver or trustee for us or a substantial part of our property or business;
institution of bankruptcy, insolvency, reorganization, liquidation or similar proceedings against our company, if not dismissed within forty-five (45) days after initiation;
a final judgment or judgments for the payment of money aggregating in excess of $250,000 are rendered against us or any of our Subsidiaries and which judgments are not, within thirty (30) daysproblems occur after the entry thereof, bonded, dischargedproduct reaches the market.
Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity or stayed (including through creditworthy insurancefrequency, or indemnity) pending appeal,with manufacturing processes, or are not discharged within thirty (30) days after the expiration of such stay;
our breach of any representation, warranty, covenant or other term or condition of any transaction document, except, in the case of a breach of a covenant or other term or condition of any transaction document which is curable, only if such breach continues for a period of at least ten (10) consecutive business days;
the commencement of litigation that, if effective, could result in a Material Adverse Effect on our company; or
any breach or failure in any respect to comply with regulatory requirements, may result in mandatory revisions to the Convertible Note covenants.approved labeling to add new safety information; imposition of post-market studies or clinical trials to assess new safety risks; or imposition of distribution or other restrictions under a REMS program. Other potential consequences include, among other things:
If, (i) the market price
We are required by the terms of the Subscription Agreement to file after the closing date with the Securities and Exchange Commission a registration statement to register the Shares issuable upon conversion of the Convertible Notes and exercise of the Warrantsdetention, or refusal to permit the investors to resell such Shares toimport or export of products; or
The FDA strictly regulates marketing, labeling, advertising and promotion of products that are placed on the termsmarket. Although physicians, in the practice of the Registration Rights Agreement, wemedicine, may prescribe approved drugs for unapproved indications, pharmaceutical companies generally are required to make certain cash payments if we are unablepromote their drug products only for the approved indications and in accordance with the provisions of the approved label. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to register or deliverhave improperly promoted off-label uses may be subject to significant liability.
In addition, the distribution of prescription pharmaceutical products is subject to the investorsPrescription Drug Marketing Act (or PDMA), which regulates the Shares underlyingdistribution of drugs and drug samples at the Convertible Notesfederal level, and Warrantssets minimum standards for the registration and regulation of drug distributors by the states. Both the PDMA and state laws limit the distribution of prescription pharmaceutical product samples and impose requirements to ensure accountability in distribution.
Federal and State Fraud and Abuse and Data Privacy and Security Laws and Regulations. In addition to FDA restrictions on marketing of pharmaceutical products, federal and state fraud and abuse laws restrict business practices in the biopharmaceutical industry. These laws include anti-kickback and false claims laws and regulations as well as data privacy and security laws and regulations.
The federal Anti-Kickback Statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce or in return for purchasing, leasing, ordering, or arranging for or recommending the purchase, lease, or order of any item or service reimbursable under Medicare, Medicaid or other federal healthcare programs. The term “remuneration” has been broadly interpreted to include anything of value. The Anti-Kickback Statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on one hand and prescribers, purchasers, and formulary managers on the other. Although there are a timely manner.
Wenumber of statutory exemptions and regulatory safe harbors protecting some common activities from prosecution, the exemptions and safe harbors are drawn narrowly. Practices that involve remuneration that may be alleged to be intended to induce prescribing, purchases, or recommendations may be subject to scrutiny if they do not qualify for an exemption or safe harbor. Several courts have interpreted the intention,statute’s intent requirement to mean that if any one purpose of an arrangement involving remuneration is to induce referrals of federal healthcare covered business, the statute has been violated.
The reach of the Anti-Kickback Statute was also broadened by the Patient Protection and Affordable Care Act of 2010, as amended by the Health Care and Education Reconciliation Act of 2010 (or collectively PPACA), which, among other things, amended the intent requirement of the federal Anti-Kickback Statute such that a reasonable basisperson or entity no longer needs to believehave actual knowledge of this statute or specific intent to violate it in order to have committed a violation. In addition, PPACA provides that we willthe government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the civil False Claims Act or the civil monetary penalties statute, which imposes penalties against any person who is determined to have presented or caused to be presented a claim to a federal health program that the financial ability, to make allperson knows or should know is for an item or service that was not provided as claimed or is false or fraudulent. PPACA also created new federal requirements for reporting, by applicable manufacturers of covered drugs, payments and dividends on the Convertible Notes. Our belief is based on our cash on hand, a security interest held by the Selling Stockholders in our propertyother transfers of value to physicians and the fact that proceedsteaching hospitals.
The federal False Claims Act prohibits any person from a proposed sale of such property are requiredknowingly presenting, or causing to be held in escrowpresented, a false claim for payment to ensure our ability to make such payments.
The material terms and conditions of the Warrants are summarized as follows:
The initial exercise price of the Class A Warrant is $2.85 per Share, subject to adjustment as provided in the Class A Warrant. Specifically, if we issue any securities convertible into our Shares at a price per Share lower than the Class A Warrant exercise price, the Class A Warrant exercise price will be automatically reduced to such lower amount.
The initial exercise price of the Class B Warrant is $5.00 per Share, subject to adjustment as provided in the Class B Warrant. Specifically, if we issue any securities convertible into our Shares at a price per Share lower than the Class B Warrant exercise price, the Class B Warrant exercise price will be automatically reduced to such lower amount.
The Class A Warrants may be exercised beginning six (6) months after issuance and expire sixty-five (65) months after their date of issuance of December 31, 2007.
The Class B Warrants may be exercised beginning six (6) months after issuance and expire one (1) year after their date of issuance of December 31, 2007.
The Warrants contain a “cashless exercise” feature if the registration statement covering the Shares underlying the Warrants is not available for the resale of the Shares upon exercise of the Warrants. In such case, the Holder may, in lieu offederal government or knowingly making, the cash payment otherwise contemplatedusing, or causing to be made or used a false record or statement material to us upona false or fraudulent claim to the exercisefederal government. A claim includes “any request or demand” for money or property presented to the U.S. government. Several pharmaceutical and other healthcare companies have been prosecuted under these laws for allegedly providing free product to customers with the expectation that the customers would bill federal programs for the product. Other companies have been prosecuted for causing false claims to be submitted because of the Warrant, elect insteadcompanies’ marketing of products for unapproved, and thus non-reimbursable, uses. The federal Health Insurance Portability and Accountability Act of 1996 (or HIPAA) created new federal criminal statutes that prohibit knowingly and willfully executing a scheme to receive upon such exercise the net number of Shares that would be issued if the exercise price were netted against the arithmetic average of the Weighted Average Prices of the Shares for the five (5) consecutive trading days ending on the date immediately preceding the date of the exercise notice.
The investors cannot exercise the Warrants to the extent that after giving effect to such conversion, the investors (together with their affiliates) would beneficially own in excess of 4.99% (or at their request, 9.99%) of our Shares outstanding immediately after giving effect to the exercise.
Expenses of Private Placement Transaction
We may need to make the following paymentsdefraud any healthcare benefit program, including private third party payors and knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services. Also, many states have similar fraud and abuse statutes or regulations that apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor.
In addition, we may be subject to data privacy and security regulation by both the federal government and the states in which we conduct our business. HIPAA, as amended by the Health Information Technology and Clinical Health Act (or HITECH) and its implementing regulations, imposes specified requirements relating to the privacy, security and transmission of individually identifiable health information. Among other things, HITECH makes HIPAA’s privacy and security standards directly applicable to “business associates,” defined as independent contractors or agents of covered entities that receive or obtain protected health information in connection with providing a service on behalf of a covered entity. HITECH also increased the civil and criminal penalties that may be imposed against covered entities, business associates and possibly other persons, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorney’s fees and costs associated with pursuing federal civil actions. In addition, state laws govern the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts.
Coverage and Reimbursement. The commercial success of our product candidate and our ability to commercialize any approved product candidate will depend in part on the extent to which governmental authorities, private placement. As describedhealth insurers and other third party payors provide coverage for and establish adequate reimbursement levels for our therapeutic product candidates and related companion diagnostics. Government health administration authorities, private health insurers and other organizations generally decide which drugs they will pay for and establish reimbursement levels for healthcare. In particular, in the United States, private health insurers and other third party payors often provide reimbursement for products and services based on the
level at which the government (through the Medicare or Medicaid programs) provides reimbursement for such treatments. In the United States, government authorities and third party payors are increasingly attempting to limit or regulate the price of medical products and services, particularly for new and innovative products and therapies, which often has resulted in average selling prices lower than they would otherwise be. Further, the increased emphasis on managed healthcare in the United States will put additional pressure on product pricing, reimbursement and usage, which may adversely affect our future product sales and results of operations. These pressures can arise from rules and practices of managed care groups, judicial decisions and governmental laws and regulations related to Medicare, Medicaid and healthcare reform, pharmaceutical reimbursement policies and pricing in general.
Third party payors are increasingly imposing additional requirements and restrictions on coverage and limiting reimbursement levels for medical products. For example, federal and state governments reimburse covered prescription drugs at varying rates generally below table,average wholesale price. These restrictions and limitations influence the purchase of healthcare services and products. Legislative proposals to reform healthcare or reduce costs under government insurance programs may result in lower reimbursement for our products and product candidates or exclusion of our products and product candidates from coverage. The cost containment measures that healthcare payors and providers are instituting and any healthcare reform could significantly reduce our revenues from the sale of any approved product candidates. We cannot provide any assurances that we will be able to obtain and maintain third party coverage or adequate reimbursement for our product candidate in whole or in part.
Impact of Healthcare Reform on Coverage, Reimbursement, and Pricing. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (or MMA) imposed new requirements for the distribution and pricing of prescription drugs for Medicare beneficiaries. Under Part D, Medicare beneficiaries may enroll in prescription drug plans offered by private entities that provide coverage of outpatient prescription drugs. Part D plans include both standalone prescription drug benefit plans and prescription drug coverage as a supplement to Medicare Advantage plans. Unlike Medicare Part A and B, Part D coverage is not standardized. Part D prescription drug plan sponsors are not required to pay for all covered Part D drugs, and each drug plan can develop its own drug formulary that identifies which drugs it will cover and at what tier or level. However, Part D prescription drug formularies must include drugs within each therapeutic category and class of covered Part D drugs, though not necessarily all the drugs in each category or class. Any formulary used by a Part D prescription drug plan must be developed and reviewed by a pharmacy and therapeutic committee. Government payment for some of the costs of prescription drugs may increase demand for any products for which we receive marketing approval. However, any negotiated prices for our future products covered by a Part D prescription drug plan will likely be lower than the prices we might otherwise obtain. Moreover, while the MMA applies only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own payment rates. Any reduction in payment that results from Medicare Part D may result in a similar reduction in payments from non-governmental payors.
The American Recovery and Reinvestment Act of 2009 provides funding for the federal government to compare the effectiveness of different treatments for the same illness. A plan for the research will be developed by the Department of Health and Human Services, the Agency for Healthcare Research and Quality and the National Institutes for Health, and periodic reports on the status of the research and related expenditures will be made to Congress. Although the results of the comparative effectiveness studies are not intended to mandate coverage policies for public or private payors, it is not clear what effect, if any, the research will have on the sales of any product, if any such product or the condition that it is intended to treat is the subject of a study. It is also possible that comparative effectiveness research demonstrating benefits in a competitor’s product could adversely affect the sales of our product candidates. If third party payors do not consider our product candidates to be cost-effective compared to other available therapies, they may not cover our product candidates, once approved, as a benefit under their plans or, if they do, the level of payment may not be sufficient to allow us to sell our products on a profitable basis.
The United States is considering enacting or has enacted a number of additional legislative and regulatory proposals to change the healthcare system in ways that could affect our ability to sell our products profitably. Among policy makers and payors in the United States and elsewhere, there is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality and expanding access. In the United States, the pharmaceutical industry has been a particular focus of these efforts and has been significantly affected by major legislative initiatives, including, most recently, PPACA, which became law in March 2010 and substantially changes the way healthcare is financed by both governmental and private insurers. Among other cost containment measures, the PPACA establishes an annual, nondeductible fee on
any entity that manufactures or imports specified branded prescription drugs and biologic agents; a new Medicare Part D coverage gap discount program; and a new formula that increases the rebates a manufacturer must pay under the Medicaid Drug Rebate Program. In the future, there may continue to be additional proposals relating to the reform of the U.S. healthcare system, some of which could further limit the prices we are able to charge for our product candidates, once approved, or the amounts of reimbursement available for our product candidates once they are approved.
Exclusivity and Approval of Competing Products
Hatch-Waxman Patent Exclusivity. In seeking approval for a drug through an NDA, applicants are required to list with the FDA each patent with claims that cover the applicant’s product or a method of using the product. Upon approval of a drug, each of the patents listed in the application for the drug is then published in the FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations, commonly known as the Orange Book. Drugs listed in the Orange Book can, in turn, be cited by potential competitors in support of approval of an abbreviated new drug application, or ANDA, or 505(b)(2) NDA.
Generally, an ANDA provides for marketing of a drug product that has the same active ingredients in the same strengths, dosage form and route of administration as the listed drug and has been shown to be bioequivalent throughin vitro orin vivo testing or otherwise to the listed drug. ANDA applicants are not required to conduct or submit results of preclinical or clinical tests to prove the safety or effectiveness of their drug product, other than the requirement for bioequivalence testing. Drugs approved in this way are commonly referred to as “generic equivalents” to the listed drug, and can often be substituted by pharmacists under prescriptions written for the original listed drug. 505(b)(2) NDAs generally are submitted for changes to a previously approved drug product, such as a new dosage form or indication. The 505(b)(2) regulatory pathway may be payableavailable for our proposed application of itraconazole as an anti-cancer therapy.
The ANDA or 505(b)(2) NDA applicant is required to certify to the Selling Stockholders. Where thisFDA concerning any patents listed for the approved product in the FDA’s Orange Book, except for patents covering methods of use for which the ANDA applicant is not seeking approval. Specifically, the applicant must certify with respect to each patent that:
Generally, the ANDA or 505(b)(2) NDA cannot be approved until all listed patents have expired, except when the ANDA or 505(b)(2) NDA applicant challenges a listed drug. A certification that the proposed product will not infringe the already approved product’s listed patents or that such patents are invalid or unenforceable is called a Paragraph IV certification. If the applicant does not challenge the listed patents or indicate that it is not seeking approval of a patented method of use, the ANDA or 505(b)(2) NDA application will not be approved until all the listed patents claiming the referenced product have expired.
If the ANDA or 505(b)(2) NDA applicant has provided a Paragraph IV certification to the FDA, the applicant must also send notice of the Paragraph IV certification to the NDA and patent holders once the application has been accepted for filing by the FDA.
The NDA and patent holders may then initiate a patent infringement lawsuit in response to the notice of the Paragraph IV certification. The filing of a patent infringement lawsuit within 45 days after the receipt of notice of the Paragraph IV certification automatically prevents the FDA from approving the ANDA or 505(b)(2) NDA until the earlier of 30 months, expiration of the patent, settlement of the lawsuit or a decision in the infringement case that is favorable to the ANDA applicant.
Hatch-Waxman Non-Patent Exclusivity. Market and data exclusivity provisions under the FDCA also can delay the submission or the approval of certain applications for competing products. The FDCA provides a five-year period of non-patent data exclusivity within the United States to the first applicant to gain approval of an
NDA for a new chemical entity. A drug is a new chemical entity if the FDA has not previously approved any other new drug containing the same active moiety, which is the case,molecule or ion responsible for the referenced payment isactivity of the drug substance. During the exclusivity period, the FDA may not accept for review an aggregate amount, which is prorated in accordanceANDA or a 505(b)(2) NDA submitted by another company that contains the previously approved active moiety. However, an ANDA or 505(b)(2) NDA may be submitted after four years if it contains a certification of patent invalidity or non-infringement.
The FDCA also provides three years of marketing exclusivity for an NDA, 505(b)(2) NDA, or supplement to an existing NDA or 505(b)(2) NDA if new clinical investigations, other than bioavailability studies, that were conducted or sponsored by the applicant, are deemed by the FDA to be essential to the approval of the application or supplement. Three-year exclusivity may be awarded for changes to a previously approved drug product, such as new indications, dosages, strengths or dosage forms of an existing drug. This three-year exclusivity covers only the conditions of use associated with the proportionate investmentnew clinical investigations and, as a general matter, does not prohibit the FDA from approving ANDAs or 505(b)(2) NDAs for generic versions of the original, unmodified drug product. Five-year and three-year exclusivity will not delay the submission or approval of a full NDA; however, an applicant submitting a full NDA would be required to conduct or obtain a right of reference to all of the preclinical studies and adequate and well-controlled clinical trials necessary to demonstrate safety and effectiveness.
Orphan Drug Exclusivity. The Orphan Drug Act provides incentives for the development of drugs intended to treat rare diseases or conditions, which generally are diseases or conditions affecting less than 200,000 individuals annually in Convertible Notesthe United States. If a sponsor demonstrates that a drug is intended to treat a rare disease or condition, the FDA grants orphan drug designation to the product for that use. The benefits of orphan drug designation include research and development tax credits and exemption from user fees. A drug that is approved for the orphan drug designated indication is granted seven years of orphan drug exclusivity. During that period, the FDA generally may not approve any other application for the same product for the same indication, although there are exceptions, most notably when the later product is shown to be clinically superior to the product with exclusivity. We have begun the process to seek orphan drug designation and exclusivity for our product candidate to include treatment of basal cell carcinoma in patients with Gorlin syndrome and may, in the future, apply for orphan drug indication for stage IV non-squamous, non-small cell lung cancer.
Foreign Regulation
Although it is not presently our intention to seek approval of our product candidate outside of the United States, in the future we may do so, either directly or in conjunction with a marketing partner. In order to market any product outside of the United States, we would need to comply with numerous and varying regulatory requirements of other countries regarding safety and efficacy and governing, among other things, clinical trials, marketing authorization, commercial sales and distribution of our products. This would be the responsibility of one or more of our potential marketing partners. We do however intend to include sites outside the United States for our clinical trials in order to be able to recruit more patients for testing at a greater number of locations and in less time than if we were to focus only on US-based sites. For example, in the European Union, we would need to obtain authorization of a clinical trial application (or CTA) in each member state in which we intend to conduct a clinical trial. Whether or not we obtain FDA approval for a product, we would need to obtain the necessary approvals by each Selling Stockholder.the comparable regulatory authorities of foreign countries before we can commence clinical trials or marketing of the product in those countries. The approval process varies from country to country and can involve additional product testing and additional administrative review periods. The time required to obtain approval in other countries might differ from and be longer than that required to obtain FDA approval. Regulatory approval in one country does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country may negatively impact the regulatory process in others.
Employees
As of July 10, 2015, we have 3 full-time employees and 1 part-time employee. One is involved in our clinical development program and operations and three handle our administration and accounting. None of our employees are covered by collective bargaining agreements. From time to time, we also employ independent contractors to support our clinical development and administrative functions. We currently have contracted a regulatory consultant, a Contract Research Organization to spearhead our efforts on clinical development. We consider relations with all of our employees to be good. Each of our employees has entered into confidentiality, intellectual property assignment and non-competition agreements with us.
Facilities
Hedgepath, LLC has allocated space for our use in its offices in Tampa, Florida and San Diego, California, for which we currently pay a pro-rated portion of the rent of approximately $2,000 per month.
Set forth below is information regarding our current directors and executive officers. Each director holds his office until he resigns or is removed and his successor is elected and qualified.
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Chief Financial Officer and Treasurer | ||||
In addition, duringMayne Pharma has the first year followingright to designate one director to our Board of Directors and to designate a second director if the completionsize of the private placement, we may needBoard of Directors is increased to make certain paymentsseven directors until the earlier to occur of: (i) the date that the Supply and License Agreement is terminated or expires or (ii) the date on behalfwhich Mayne Pharma ceases to own ten percent (10%) or more of our issued and outstanding common stock on a fully diluted basis. Mayne Pharma’s current designee to our Board of Directors is Stefan J. Cross.
There are no family relationships between any of our directors or executive officers.
Frank E. O’Donnell, Jr., M.D., age 65, is our Executive Chairman of the Selling Stockholders that would have the effectBoard of reducing the proceeds of the private placement transaction. The following table does not include any penalties or payments that would be required in the event of a breach or amounts that depend on unknown variables such as the amount of time spent by the Collateral Agent as described in the previous table. The table includes fees payable to the Selling Stockholders’ counsel and due diligence fees paid to a designee of the Selling Stockholders, as such fees would otherwise be the responsibility of the respective Selling Stockholders, even though neither the counsel nor the due diligence entity is an affiliate of any of the Selling Stockholders. Further, the table assumes no early conversion of the Convertible Notes and does not include any costs associated with the registration of the Shares. The table does not include any placement agent fees, as the placement agent is not an affiliate of the Selling Stockholders. Finally, the table does not include any of the costs associated with this offering.
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Executive Officers, Directors and Key Employees
The following individuals constitute our board of directors and executive management:
Name | Age | Position | Appointment Year | |||
Paul D’Sylva, Ph.D. | 38 | Chief Executive Officer and Director | 2007 | |||
Richard J. Freer, Ph.D. | 65 | Chairman, Chief Operating Officer and Director | 1992 | |||
Robert B. Harris, Ph.D. | 55 | President and Director | 1992 | |||
James D. Causey | 53 | Director | 2004 | |||
Daniel O. Hayden | 59 | Director | 2007 | |||
Donald A. McAfee, Ph.D. | 65 | Director | 2001 | |||
Samuel P. Sears, Jr. | 63 | Director | 2001 | |||
Thomas R. Reynolds | 45 | Senior Vice President and Secretary | ||||
James H. Brennan | 55 | Vice President, Financial Operations |
Paul D’ Sylva, Ph.D.Dr. D’Sylva assumed the position of Chief Executive Officera Director of our company in January 2007. Dr. D’Sylva served previously as the co-founder and Managing Director of PharmAust Limited. From 2001 to 2005, Dr. D’Sylva served as Director of Research and Development at Murdoch University. Dr. D’Sylvacompany. He has a strong track record in raising investment capital for early stage business ventures and has led the development of a number of successful research joint-venture institutes, companies and funds. During his tenure at Murdoch University, he founded and directed the AU$12.5m Investment Fund – Murdoch Westscheme Enterprise Partnership, founded and directed the commercial consulting company MurdochLink Pty Ltd, and was involved in the establishment and governance of a number of key research centers and institutes. He sits on the advisory board of the Centre for Computational Comparative Genomics, a joint-venture research institute in Bioinformatics based at Murdoch University and retains a non-executive role at Murdoch University as an Adjunct Professor of Business. He received a Ph.D. from the University of Arizona in public finance and econometrics. Dr. D’Sylva’s term as a director runs through 2010, or until his successor is appointed.
Richard J. Freer, Ph.D. Since founding our company in 1992, Dr. Freer has served asbeen the Chairman of the Board of BioDelivery Sciences International (NASDAQ:BDSI) since 2002, and currently serves as Executive Chairman of BDSI. For more than six years, Dr. O’Donnell has been involved with various private limited liability companies which engage in private equity and venture capital investing in disruptive technologies in healthcare, including Hedgepath, LLC. Dr. O’Donnell is qualified to serve on our Board of Directors due to his medical training and extensive experience with investing in and operating biotechnology companies. Dr. O’Donnell is a directorgraduate of The Johns Hopkins School of Medicine and received his residency training at the Wilmer Ophthalmological Institute, Johns Hopkins Hospital. Dr. O’Donnell is a former professor and Chairman of the Department of Ophthalmology, St. Louis University School of Medicine. He is a trustee of St. Louis University.
Nicholas J. Virca, age 68, has been our company. He assumedPresident and Chief Executive Officer since August 2013 and has been working on our business opportunity with Hedgepath, LLC since April 2012. From 2008 until April 2012, Mr. Virca served as the role of Chief Operating Officer in 2002.for LamdaGen Corporation, a privately held company focused on monitoring assays for biopharmaceutical development and manufacturing applications, as well as high-sensitivity detection for human diagnostic biomarkers, such as oncoproteins related to cervical cancer. From 1975 until 1997, Dr. Freer2005 to 2008, Mr. Virca was employedVice President for Global Biotechnology at Pall Life Sciences where he was responsible for growth strategies and programs in the Departmentbiotechnology arena, including new technology and product initiatives, joint ventures, licensing and acquisitions. He also founded the first Scientific Advisory Board for Pall’s Biopharmaceuticals Division. From 1997 to 2004, Mr. Virca was COO, and later CEO and President of PharmacologyAdventrx Pharmaceuticals focusing on anti-cancer drug development in human clinical trials. He was instrumental in transitioning the company from a private corporation to a listing on the American Stock Exchange. Mr. Virca held various marketing and Toxicologygeneral management positions at Virginia Commonwealth University (“VCU”), first as an Associate ProfessorDamon Biotech, Promega Corporation, Nicolet Imaging Systems, Ortho Diagnostic Systems, Fisher Scientific, Waters, Ross Laboratories and then a full Professor. In addition, from 1988 through 1995, Dr. Freer was first DirectorPfizer Diagnostics. Mr. Virca currently serves on the board of Panoptix Events and then Chairon the Life Sciences Advisory Board of Entegris, Inc. He previously served on the Biomedical Engineering Program. From 1996 through 1997, Dr. Freer served as Professor in VCU’s Departmentboards of BiochemistryAdventrx Pharmaceuticals between 2001 and Molecular Biophysics. Dr. Freer received2004, and Diametrix Detectors between 1991 and 1997. He earned a bachelor’s degree in Biology from Marist CollegeYoungstown State University, is the co-inventor of packaging technology for enzyme research reagents, and is a doctorate degree in Pharmacology from Columbia University. Dr. Freer’s term asmember of numerous biotechnology organizations for which he has been a director runs through 2009, or until his successor is appointed.speaker and organizer over the last two decades.
Robert B. Harris, Ph.D.Garrison J. Hasara, CPA, Since foundingage 45, has been our Chief Financial Officer and Treasurer since September 2013. From January 2011 to September 2013, he was the Acting Chief Financial Officer, Principal Financial Officer and Principal Accounting Officer of Accentia Biopharmaceuticals, Inc., a biotechnology company in 1992, Dr. Harris hasfocused on discovering, developing and commercializing innovative therapies that address the unmet medical needs of patients by utilizing therapeutic clinical products. He also served as Accentia’s Controller, a position that he held since June 2005. From November 2003 to June 2005, Mr. Hasara served as Accentia’s Compliance Specialist. Prior to that time, from 2000 to 2003, Mr. Hasara was the PresidentChief Financial Officer of Automotive Service Centers, Inc., a franchisee of Midas, Inc. In addition, from 1996 to 1999, Mr. Hasara served in various accounting roles at KForce Inc., a publicly traded staffing services company. Mr. Hasara has been a licensed Certified Public Accountant since 1993 and received his B.S. from the University of South Florida in 1991.
Samuel P. Sears, Jr., age 71, is a director of our company. He also served our company as its Chief Executive Officer from 2002 to 2007. Until 1997, Dr. Harris was employed in the Department of Biochemistry and Molecular Biophysics at VCU, first as an Assistant, then Associate and finally a full Professor. Dr. Harris received a joint bachelor’s degree in Chemistry and Biology from the University of Rochester, and a master’s degree and a doctorate degree in Biochemistry/Biophysical Chemistry from New York University. Dr. Harris’ term as a director runs through 2008, or until his successor is appointed.
James D. Causey. Since 2004, Mr. Causey has served as Vice President of Trader Publishing Company, a nationwide network of classified publications. From 2003 until 2004, Mr. Causey served as a consultant in the publishing industry. From 1999 to 2003, Mr. Causey served as the chief executive officer of Sabot Publishing, a Richmond, Virginia based publisher of leading special interest publications. Mr. Causey received a master’s degree in business from the University of Maryland. Mr. Causey’s term as a director runs through 2010, or until his successor is appointed.
Daniel O. Hayden. Mr. Hayden has been employed by Genzyme Corporation, Cambridge, Massachusetts (“Genzyme”), since 1999. Since 2003, Mr. Hayden has served as a Senior Vice President and General Manager of the Pharmaceuticals Business Unit of Genzyme. Prior to 2003, Mr. Hayden served Genzyme in a Vice President capacity. Genzyme is a leading, global biotechnology company and its Pharmaceuticals Business Unit is a global specialty pharmaceutical chemicals business focused on the production of active pharmaceutical ingredients and intermediates in the lipid and peptide markets. Mr. Hayden serves as the Chairman of the internal Genzyme, Liestal SwitzerlandCompensation Committee. He has been a member of the Board of Directors.Directors of BioDelivery Sciences International since October 2011 (NASDAQ: BDSI). Mr. Hayden’s term as a director runs through 2008, or until his successor is appointed.
Donald A. McAfee, Ph.D.Sears has extensive experience in the biopharmaceutical, nutraceutical and biotechnology industries. Since 2003, Dr. McAfee has served as Vice President of Research and Chief Scientific Officer for Cardiome Pharma Corp., a Vancouver-based drug discovery and development company. In addition, since 2004, Dr. McAfee has also served as a consultant for McAfee Scientific, a drug development consulting firm. In 1994, he co-founded Aderis Pharmaceuticals, Inc. (formerly Discovery Therapeutics, Inc.), a clinical stage pharmaceutical company, where he served as Chief Technical Officer and Director. Before organizing Discovery Therapeutics, Dr. McAfee served for eight years as Vice President, Research, at Whitby Research, Inc., Richmond, Virginia (formerly Nelson Research and Development, Irvine, California), managing drug discovery programs. Prior to entering industry, Dr. McAfee served as Chairman of the Division of Neurosciences at the Beckman Research Institute (City of Hope), Duarte, California, and held faculty appointments at the Yale University School of Medicine and the University of Miami School of Medicine. Dr. McAfee earned his Ph.D. in Physiology at the University of Oregon School of Medicine, and has authored more than 100 articles and book chapters in neuroscience and pharmacology. He is currently an adjunct professor at the Medical College of Virginia and a Director of the Virginia Biotech Association, an industry advocacy group. Dr. McAfee currently serves as a director of Duska Scientific Co., an emerging biopharmaceutical company. Dr. McAfee’s term as a director runs through 2009, or until his successor is appointed.
Samuel P. Sears, Jr. Since March 1999,2006, Mr. Sears has been ina partner at the law firm of Cetrulo LLP, where he currently serves as managing partner, and from 2000 to 2006, he provided private practiceconsulting and legal advisory services to start-up and early stage development companies. From 2000 to 2013, Mr. Sears served as an attorneyDirector, Chairman of the Audit Committee, Chairman of the Executive Committee, and has been providing business consulting services.Member of the Compensation Committee of Commonwealth Biotechnologies, Inc., a research and development support services company. From December 1998 through February 1999,to 2000, Mr. Sears served as Vice Chairman and Treasurer of American Prescription Providers, Inc., a specialty pharmacy network offering prescriptions and nutriceuticalsnutraceuticals to patients with chronic diseases. From 19951994 through May 1998, Mr. Sears was Chief Executive Officer and Chairman toof Star Scientific, Inc., a tobacco company focusing From 1968 to 1993, Mr. Sears was in private law practice. Mr. Sears is qualified to serve on demonstratingour Board of Directors because of his extensive legal and business experience, including in the commercial viability of potentially less harmful tobacco products.pharmaceutical industry. Mr. Sears is a graduate of Harvard College and Boston College Law School.
W. Mark Watson, CPA, age 64, is a director of our company and Chairman of the Audit Committee. Mr. Sears’Watson is a Certified Public Accountant with over 40 years of experience in public accounting and auditing, having spent his entire career from January 1973 to June 2013 at Deloitte Touche Tohmatsu and its predecessor, most recently as Central Florida Marketplace Leader. Among other industries, he has a particular expertise in the health and life sciences sector, having played a significant role in the development of Deloitte’s audit approach for health and life sciences companies and leading its national healthcare regulatory and compliance practice. He has served as lead audit partner and advisory partner on the accounts of many public companies ranging from middle market firms to Fortune 500 enterprises. Mr. Watson is a member of American Institute of Certified Public Accountants and the Florida Institute of Certified Public Accountants. Mr. Watson is qualified to serve on our Board of Directors due to his expertise in public accounting and his experience with pharmaceutical companies. He received his undergraduate degree in Accounting from Marquette University.
Stefan J. Cross, age 42, is a director of our company and the appointee of Mayne Pharma to our Board of Directors. Since November 2013, Mr. Cross has served as the President of the U.S. subsidiaries of Mayne Pharma Group Limited (ASX: MYX). Mr. Cross has more than 20 years of experience in the pharmaceutical industry. Prior to his current appointment as President, he served since 2012 as the Vice President, Business and Corporate Development of Mayne Pharma’s non-U.S. operations, where he was responsible for all in-licensing and out-licensing programs and research and development partnerships. Prior to joining Mayne Pharma, Mr. Cross was, from 2007 to 2012, Head of Marketing (Asia Pacific) for Hospira Inc., a leading global provider of pharmaceuticals and medical devices, where he was responsible for expansion of the new product portfolio and on-market product growth across all markets in the region. Prior to Hospira, Mr. Cross spent most of the period from 1991 to 2007 working in the pharmaceutical sector in the areas of strategy, business development/mergers and acquisitions, sales and marketing, human resources, finance and information technology. Mr. Cross is qualified to serve on our Board of Directors because of his extensive business experience in the pharmaceutical industry. Mr. Cross holds a Masters in Business in Administration from Swinburne University of Technology, Australia, and a degree in Business Information Systems from the University of South Australia.
Dr. R. Dana Ono, age 62, is a director of our company and Chairman of the Nominating and Governance Committee. Dr. Ono is currently an Entrepreneur-in-Residence for several universities in the United States. He was co-founder of the VIMAC Milestone Medica Fund LP, a Boston-based early-stage life sciences fund which was founded in 2000. Dr. Ono has over 30 years of experience in managing public and private life science companies, including, from 1995 to 2000, serving as President and Chief Executive Officer of IntraImmune Therapies, Inc., which was sold to Abgenix, Inc. in 2000. Throughout his career, he has been engaged in the strategic planning, product management, technology acquisition, and commercial development of life science start-ups and has been involved in a number of pioneering milestones in biotechnology. He has founded several biotech companies in the U.S., including in the areas of drug discovery and development, nutraceuticals and cosmeceuticals. He is a founding director of the Massachusetts Biotechnology Council, Inc. and served on the Board of Trustees of the Marine Biological Laboratory in Woods Hole, Massachusetts. Dr. Ono is qualified to serve on our Board of Directors because of his medical and business expertise, particularly in the pharmaceutical industry. Dr. Ono received his AB in Earth & Planetary Sciences from The Johns Hopkins University and his AM and PhD in Biology from Harvard University, where he also completed a program in business administration.
Board Committees and Director Independence
Director Independence
Of our current directors, we have determined that Samuel P. Sears, Jr., Dr. R. Dana Ono, and W. Mark Watson are “independent” as defined by NASDAQ Stock Market rules. Accordingly, a majority of our Board of Directors is “independent.”
Board Committees
Our Board of Directors has established three standing committees — Audit, Compensation, and Nominating and Corporate Governance. All standing committees operate under a charter that has been approved by our Board of Directors.
Audit Committee
Our board of directors has an Audit Committee, composed of W. Mark Watson, Stefan J. Cross and Samuel P. Sears, Jr. Mr. Watson and Mr. Sears are independent directors as defined in accordance with section Rule 10A-3 of the Securities Exchange Act of 1934, as amended, and the rules of the NASDAQ Stock Market. Mr. Watson serves as chairman of the committee. The board of directors has determined that Mr. Watson is an “audit committee financial expert” as defined in Item 407(d)(5)(ii) of Regulation S-K.
Our Audit Committee oversees our corporate accounting, financial reporting practices and the audits of financial statements. For this purpose, the Audit Committee has a charter (which will be reviewed annually) and performs several functions. The Audit Committee:
Nominating and Corporate Governance Committee
Our board of directors has a Nominating and Corporate Governance Committee composed of Dr. R. Dana Ono, Stefan Cross and W. Mark Watson. Dr. Ono serves as the chairman of the committee. The Nominating and Corporate Governance Committee is charged with the responsibility of reviewing our corporate governance policies and with proposing potential director nominees to the board of directors for consideration. The Nominating and Corporate Governance Committee has a charter which is reviewed annually. Dr. Ono and Mr. Watson are independent directors in accordance with the rules of the NASDAQ Stock Market. The Nominating and Corporate Governance Committee will consider director nominees recommended by security holders.
Compensation Committee
Our board of directors also has a Compensation Committee, which reviews or recommends the compensation arrangements for our management and employees and also assists the board of directors in
reviewing and approving matters such as company benefit and insurance plans, including monitoring the performance thereof. The Compensation Committee has a charter (which will be reviewed annually) and is composed of three members: Samuel P. Sears, Jr., Stefan Cross and Dr. R. Dana Ono. Mr. Sears serves as chairman of this committee. Mr. Sears and Dr. Ono are independent in accordance with rules of the NASDAQ Stock Market.
Code of Business Conduct and Ethics and Insider Trading Policy
In July 2014, our Board of Directors adopted a Code of Ethical Conduct and an Insider Trading Policy.
Executive Compensation
The following table sets forth all compensation paid to our named executive officers at the end of the fiscal years ended December 31, 2014 and 2013. Individuals we refer to as our “named executive officers” include our Chief Executive Officer and our most highly compensated executive officers whose salary and bonus for services rendered in all capacities exceeded $100,000 during the fiscal year ended December 31, 2014.
Name and principal position | Year | Salary ($) | Bonus ($) | Stock Awards ($) | Option Awards ($) | Non- Equity Incentive Plan Compensation ($) | Nonqualified Deferred Compensation Earnings ($) | All Other Compensation ($) | Total ($) | |||||||||||||||||||||||||||
Nicholas J. Virca | 2014 | $ | 136,250 | — | $ | 2,557,095 | — | — | — | $ | 1,886 | (2) | $ | 2,695,231 | ||||||||||||||||||||||
President and Chief Executive Officer(1) | 2013 | $ | 120,000 | — | — | — | — | — | — | $ | 120,000 | |||||||||||||||||||||||||
Garrison J. Hasara, CPA | 2014 | $ | 135,000 | — | $ | 980,000 | — | — | — | $ | 10,964 | (4) | $ | 1,125,964 | ||||||||||||||||||||||
Chief Financial Officer and Treasurer(3) | 2013 | $ | 72,692 | — | — | — | — | — | $ | 3,890 | (4) | $ | 76,582 |
(1) | Nicholas J. Virca was hired as Chief Executive Officer on August 1, 2013. |
(2) | Includes: $1,886 of health insurance premiums paid in 2014. |
(3) | Garrison J. Hasara was hired as Chief Financial Officer on August 1, 2013. |
(4) | Includes: $10,964 and $3,890 of health insurance premiums paid in 2014 and 2013, respectively. |
Narrative Disclosure to Summary Compensation Table
Employment Agreements
Except as set forth below, we currently have no written employment agreements with any of our officers, directors, or key employees.
Nicholas J. Virca,President and Chief Executive Officer - On June 24, 2014, Nicholas J. Virca entered into an employment agreement with us. Pursuant to his employment agreement, Mr. Virca will act as our President and Chief Executive Officer for a term of three (3) years from the effective date of the agreement. At the end of the three year term, the agreement will automatically renew for successive one year terms unless prior written notice is received from either party within 60 days prior to the end of the particular term. Mr. Virca will earn a base salary of $150,000 per year for services rendered. Such base salary will automatically increase to $250,000 per year upon achievement of certain funding goals as described in the employment agreement. Mr. Virca is also eligible for a bonus in cash or in kind of up to 50% of his base salary based upon his achievement of certain goals as established by the Board of Directors or a committee of the Board of Directors. In addition, in July 2014, Mr. Virca was awarded 15,041,738 restricted stock units from the 2014 Equity Incentive Plan (“EIP”), subsequently approved by our majority stockholders. Such restricted stock units will vest on the earlier to occur of September 3, 2016 and the receipt of written notice of acceptance for the filing of an NDA by us for SUBA-Itraconazole by the relevant regulatory authority.
Mr. Virca’s employment agreement may be terminated with or without cause by us or for or without good reason by Mr. Virca. In the event that the employment agreement is terminated for cause by us or without good reason by Mr. Virca, Mr. Virca is entitled to receive all accrued but unpaid salary and bonus amounts. In the event that the employment agreement is terminated without cause by us or for good reason by Mr. Virca, Mr. Virca is entitled to all accrued but unpaid salary and bonus amounts plus a cash payment equal to six months of Mr. Virca’s base salary, provided that such payment will equal twelve months of Mr. Virca’s base salary if we have reached certain milestones. In the event that the employment agreement is terminated for good reason by Mr. Virca following a change of control, Mr. Virca is entitled to all accrued but unpaid salary and bonus amounts plus a cash payment equal to twelve months of Mr. Virca’s base salary, provided that such payment will equal eighteen months of Mr. Virca’s base salary if we have reached certain performance milestones. The employment agreement is also terminable upon death and disability and upon the terms as described in the Equity Holders Agreement between Hedgepath, LLC and Mayne Pharma described under “Certain Relationships and Related Party Transactions. Mr. Virca may not compete against us or solicit employees or customers from us for a period of one (1) year after termination of his employment for any reason as described in his employment agreement.
On May 15, 2015, as a director runscondition of closing of the 2015 Mayne Purchase Agreement, Mr. Virca entered into the first amendment to employment agreement amends the terms of his employment agreement principally to redefine Mr. Virca’s responsibilities in his present role with the Company, including that Mr. Virca will report both to the Board of Directors and the JDC, remove a provision from the employment agreement requiring an automatic increase of Mr. Virca’s base salary to $250,000 per year upon achievement of certain funding goals and otherwise update the employment agreement in consideration of the Equity Holders Agreement. All other terms of the employment agreement remain in full force and effect.
Garrison J. Hasara, Chief Financial Officer and Treasurer - On September 4, 2014, we and Garrison Hasara, our Chief Financial Officer and Treasurer, entered into an employment agreement to memorialize the terms under which Mr. Hasara will continue to serve in such capacity. The employment agreement has a term through 2008,December 31, 2017. For services rendered, Mr. Hasara is entitled to cash compensation of $135,000 per year, increasing to $180,000 per year upon closing of a follow-on public offering. Mr. Hasara is further entitled to an annual bonus in cash or untilin securities of our company of up to 50% of Mr. Hasara’s annual fee beginning with fiscal year 2015. In addition, Mr. Hasara was awarded 7,000,000 restricted stock units from the EIP, subsequently approved by our majority stockholders. 3,500,000 of such restricted stock units will vest on the earlier to occur of September 3, 2016 and the receipt of written notice of acceptance for the filing of an NDA by us for SUBA-Itraconazole by the relevant regulatory authority. The balance will vest on September 3, 2017.
Mr. Hasara’s employment agreement may be terminated with or without cause by us or for or without good reason by Mr. Hasara. In the event that the employment agreement is terminated for cause by us or without good reason by Mr. Hasara, Mr. Hasara is entitled to receive all accrued but unpaid salary and bonus amounts. In the event that the employment agreement is terminated without cause by us or for good reason by Mr. Hasara, Mr. Hasara is entitled to all accrued but unpaid salary and bonus amounts plus a cash payment equal to six months of Mr. Hasara’s base salary, provided that such payment will equal twelve months of Mr. Hasara’s base salary if we have reached certain milestones. In the event that the employment agreement is terminated for good reason by Mr. Hasara following a change of control, Mr. Hasara is entitled to all accrued but unpaid salary and bonus amounts plus a cash payment equal to twelve months of Mr. Hasara’s base salary. The employment agreement is also terminable upon death and disability. Mr. Hasara may not compete against us or solicit employees or customers from us for a period of one (1) year after termination of his successor is appointed.employment for any reason as described in his employment agreement.
Executive CompensationOutstanding equity awards
The following table summarizes all compensation that we have recorded inoutstanding unexercised options, unvested stocks and equity incentive plan awards held by each of the last two completed fiscal years for our principal executive officer, our two most highly compensatednamed executive officers, other than our principal executive officer whose annual compensation exceeded $100,000, and up to two additional individuals for whom disclosure would have been made in this table but for the fact that the individual was not serving as an executive officer of our company at December 31, 2006 (collectively, the “Named Executive Officers”).2014:
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
Name and principal position(1) | Year | Salary ($) | Bonus ($) | Stock Awards ($)(2) | Option Awards ($)(2) | All other Compensation ($) | Total ($) | ||||||||
Richard J. Freer, Ph.D. | 2007 | 215,250 | — | 85,927 | — | 14,666 | (3) | 315,843 | |||||||
2006 | 215,250 | 19,714 | 100,333 | — | 28,259 | (3) | 363,556 | ||||||||
Robert B. Harris, Ph.D. | 2007 | 215,250 | — | 6,307 | — | 10,067 | (4) | 231,624 | |||||||
2006 | 215,520 | 19,714 | 6,307 | 32,187 | 23,486 | (4) | 297,214 | ||||||||
Paul D’Sylva, Ph.D. | 2007 | 156,628 | — | — | 52,400 | 60,011 | (5) | 269,039 |
OPTION AWARDS | STOCK AWARDS | |||||||||||||||||||||||||||||||||||
Name | Number of Securities Underlying Unexercised Options (#) Exercisable | Number of Securities Underlying Unexercised Options (#) Unexercisable | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) | Options Exercise Prices ($) | Option Expiration Date | Number of Shares or Units of Stock That Have Not Vested (#) | Market Value of Shares or Units of Stock That Have Not Vested ($) | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not vested ($) | |||||||||||||||||||||||||||
Nicholas Virca | — | — | — | — | — | — | — | 15,041,738 | (1) | $ | 1,805,009 | |||||||||||||||||||||||||
Garrison J. Hasara, CPA | — | — | — | — | — | — | — | 7,000,000 | (2) | $ | 840,000 |
(1) |
(2) |
Director2014 Equity Incentive Plan
In July 2014, our Board of Directors adopted our 2014 Equity Incentive Plan (which we refer to as the EIP). On September 30, 2014, the EIP was approved by the majority of stockholders pending delivery of required notice to all Company stockholders. The EIP is comprised of 32,583,475 shares of our common stock (ranking pari passu with our issued and outstanding common stock) to be available in the form of incentive stock options, non-qualified stock options, restricted stock, restricted stock units, performance awards and other customary equity incentives.
The purpose of our EIP is to attract and retain directors, officers, consultants, advisors and employees whose services are considered valuable, to encourage a sense of proprietorship and to stimulate an active interest of such persons in our development and financial achievements. The EIP will be administered by the compensation committee of our Board of Directors or by the full Board of Directors, which may determine, among other things, (a) the persons who are to receive awards, (b) the type or types of awards to be granted to such persons, (c) the number of shares of common stock to be covered by, or with respect to which payments, rights, or other matters are to be calculated in connection with the awards, (d) the terms and conditions of any awards, (e) whether, to what extent, and under what circumstances awards may be settled or exercised in cash, shares of common stock, other securities, other awards or other property, or canceled, forfeited, or suspended and the method or methods by which awards may be settled, exercised, canceled, forfeited, or suspended, (f) whether, to what extent, and under what circumstances the delivery of cash, shares of common stock, other securities, other awards or other property and other amounts payable with respect to an award, (g) interpret, administer, reconcile any inconsistency in, settle any controversy regarding, correct any defect in and/or complete any omission in the EIP and any instrument or agreement relating to, or award granted under, the EIP, (h) establish, amend, suspend, or waive any rules and regulations and appoint such agents as the compensation committee deems appropriate for the proper administration of the EIP, (i) accelerate the vesting or exercisability of, payment for or lapse of restrictions on, awards and (j) make any other determination and take any other action that the compensation committee deems necessary or desirable for the administration of the EIP.
The EIP provides that in the event of a change of control event, (i) all of the then outstanding options and stock appreciation rights granted pursuant to the EIP will immediately vest and become immediately exercisable as of a time prior to the change in control, (ii) any performance goal restrictions related to an award will expire as of a time prior to the change in control and (iii) any performance periods that relating to an award which have not yet expired on the date the change in control occurs will end on such date, and the compensation committee will (a) determine the extent to which performance goals with respect to each such performance period have been met based upon such audited or unaudited financial information or other information then available as it deems relevant and (b) cause the relevant participant to receive partial or full payment of awards for each such performance period based upon the compensation committee’s determination of the degree of attainment of the performance goals, or assuming that the applicable “target” levels of performance have been attained or on such other basis determined by the compensation committee.
In addition, subject to our Equity Holders Agreement, our Board of Directors may amend our EIP at any time. However, without stockholder approval, our EIP may not be amended in a manner that would:
Awards previously granted under our EIP may not be impaired or affected by any amendment of our EIP, without the consent of the affected grantees.
Option Exercises and Stock Vested
There were no options exercised by the executive officers during the years ended December 31, 2014 or 2013.
Pension Benefits
None of our employees participate in or have account balances in qualified or non-qualified defined benefit plans sponsored by us. Our Compensation Committee may elect to adopt qualified or non-qualified benefit plans in the future if it determines that doing so is in our company’s best interest.
Non-qualified Deferred Compensation
None of our employees participate in or have account balances in non-qualified defined contribution plans or other non-qualified deferred compensation plans maintained by us. Our Compensation Committee may elect to provide our officers and other employees with non-qualified defined contribution or other non-qualified compensation benefits in the future if it determines that doing so is in our company’s best interest.
Compensation of Directors
The following table showssummarizes the compensation of our directors for the fiscal year ended December 31, 2014.
Name | Fees Earned or Paid in Cash ($) | Stock Awards ($)(1) | Option Awards ($) | Non-Equity Incentive Plan Compensation ($) | Change in Pension Value and Nonqualified Deferred Compensation Earnings ($) | All Other Compensation ($) | Total ($) | |||||||||||||||
Frank E. O’Donnell, Jr., MD | $ | 22,500 | (2) | $ | — | $ | — | $ | 22,500 | |||||||||||||
Stefan J. Cross | $ | — | $ | 51,000 | $ | — | $ | 51,000 | ||||||||||||||
Dr. R. Dana Ono | $ | — | $ | 51,000 | $ | — | $ | 51,000 | ||||||||||||||
Samuel P. Sears, Jr. | $ | — | $ | 51,000 | $ | — | $ | 51,000 | ||||||||||||||
W. Mark Watson, CPA | $ | — | $ | 51,000 | $ | — | $ | 51,000 |
(1) | Each Director, other than O’Donnell, received 300,000 Restricted Stock Units issued under the 2014 Equity Incentive Plan which will vest on the earlier to occur of September 3, 2016 or the receipt of written notice of acceptance for the filing of an NDA by us for SUBA-Itraconazole by the relevant regulatory authority. |
(2) | Compensation for serving as Executive Chairman. |
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Hedgepath, LLC
August 2013 Contribution Agreement
As part of our bankruptcy reorganization plan, on August 13, 2013, we entered into the Contribution Agreement with Hedgepath, LLC, one of our principal stockholders, pursuant to which we acquired certain assets related to the our current business, and Hedgepath, LLC was issued the Series A Preferred Stock representing a 90% equity voting interest in our company. Hedgepath, LLC is a private company. Blackrobe Capital LLC, an entity managed by our executive chairman, Dr. O’Donnell, is also the manager of Hedgepath, LLC. Effectively, Dr. O’Donnell controls Hedgepath, LLC.
June 2014 Purchase Agreement
On the June 24, 2014 as a condition to the Mayne Purchase Agreement (as defined and described below), we entered into a Stock Purchase Agreement with Hedgepath, LLC. Pursuant to such agreement, Hedgepath, LLC purchased 20,000,000 shares of our common stock at a purchase price of $0.075 per share for an aggregate purchase price of $1,500,000. Such purchase price is payable as follows: (i) an advance payment of $125,000 made by Hedgepath, LLC on June 4, 2014 was deemed partial funding of the purchase price; (ii) a payment of $125,000 was made by Hedgepath, LLC on June 24, 2014; and (iii) the remaining $1,250,000 will be funded in monthly installments through December 31, 2014 pursuant to a promissory note issued by Hedgepath, LLC to us. Pursuant to the note, commencing on June 30, 2014 and ending on December 31, 2014, Hedgepath, LLC must make monthly payments to us in accordance with the terms and conditions of the note. We have the right, in our sole discretion, to request an advance payment of part or all cash compensation paidof the principal of the note. The note bears no interest except upon an event of default in which case interest accrues at 18% per annum. In the event that Hedgepath, LLC defaults on part or all of the note, we have the right to declare by written notice that Hedgepath, LLC forfeit some or all of the 20,000,000 shares of common stock purchased as well as 17,646.98 shares of Series A Preferred Stock (or the common stock equivalent upon conversion thereof) held by Hedgepath, LLC as described further below.
Debt Forgiveness Agreement
On June 24, 2014, as a condition of closing of the Mayne Purchase Agreement, we entered into a Debt Forgiveness Agreement with Hedgepath, LLC pursuant to which Hedgepath, LLC waived, canceled and forgave payment from us of an aggregate of $639,767 of indebtedness previously advanced by Hedgepath, LLC to us in exchange for 2,530,227 shares of common stock, 71,635.981 shares of Series A Preferred Stock and a warrant to purchase 10,250,569 shares of common stock. The shares of Series A Preferred Stock converted into 82,156,842 shares of common stock on August 14, 2014. The warrant may be exercised by Hedgepath, LLC at an exercise price of $0.0878 per share at any time, from time to time, by Hedgepath, LLC prior to expiration on June 24, 2019.
Equity Holders Agreement
On June 24, 2014, in fulfillment of one of the conditions of the Mayne Purchase Agreement, we, Mayne Pharma, Hedgepath, LLC, Dr. O’Donnell and Mr. Virca (who for these purposes we refer to together as the Equity Holder Parties) entered into an Amended and Restated Equity Holders Agreement (which we refer to as the Equity Holders Agreement). On May 15, 2015, as a condition of the 2015 Mayne Purchase Agreement, the Equity Holder Parties entered into the Second Amended and Restated Equity Holders Agreement. The Equity Holders Agreement governs the rights and obligations of each of the parties as they pertain to our directorssecurities and to the present and future governance of our company. Pursuant to the Equity Holders Agreement:
Mayne Pharma, Hedgepath, LLC, Mr. Virca and Dr. O’Donnell each agreed that during the Lock-Up Period none of them will own greater than 49.5% of our common stock on a fully-diluted basis (such ownership to include individual and affiliate ownership) except that
Mayne Pharma is permitted to own greater than 49.5% of our common stock on a fully-diluted basis, but only as a result of its ownership of the shares and the warrant issued pursuant to the 2015 Mayne Purchase Agreement, it being understood that Mayne Pharma will not exercise the Warrant until after the Lock-up Period; |
In addition to the foregoing, pursuant to the Equity Holders Agreement, the Equity Holder Parties agreed that we would seek to (i) close on one or more registered or unregistered equity, debt or equity-linked financings in which we receive aggregate net proceeds of at least $5,000,000 or (ii) enter into a license, development, commercialization or similar agreement relating to our product, provided that we receive a net upfront payment of at least $5,000,000 in connection with such agreement and that such agreement will be subject to the approval of Mayne Pharma (collectively, we refer to this goal as the Performance Goal) on or before May 31, 2016 (we refer to this date as the Performance Goal Date). Under the Equity Holders Agreement, all previously required performance goals as set forth in the chart beloworiginal Equity Holders Agreement have been removed and replaced solely with the Performance Goal.
If we do not meet the Performance Goal, in addition to the remedies described above, Dr. O’Donnell may be required by Mayne Pharma to resign from his position as Executive Chairman (in connection with his removal as a director), Dr. O’Donnell will forfeit all then unvested options, warrants, restricted stock units, or other right to acquire common stock (or securities convertible into common stock) and Hedgepath, LLC may be required to forfeit certain shares of common stock it owns. Furthermore, Mayne Pharma will continue to have the right to purchase (i) by written notice to Dr. O’Donnell all company securities owned by Dr. O’Donnell individually, including vested options, vested warrants, vested restricted stock units and the like, or otherwise transferred by him, as the case may be, at the fair market value (as such term is described in the Equity Holders Agreement) as of the date of such resignation or termination and (ii) any shares required to be forfeited by Hedgepath, LLC at the price described in the Equity Holders Agreement.
The Equity Holders Agreement terminates (i) if we receive an adjudication of bankruptcy, we execute an assignment for the benefit of creditors, a receiver is appointed for us or we are voluntarily or involuntarily dissolved or (ii) if we, Hedgepath, LLC and Mayne Pharma expressly agree in writing. Additionally, certain limited provisions of the Amended and Restated Equity Holders Agreement terminate at such time as the Mayne Pharma and its affiliates collectively own less than ten percent (10%) of our common stock on a fully diluted basis.
In connection with their entry into the Equity Holders Agreement, the Equity Holder Parties agreed to waive, among other things, certain specified prior breaches by us of our obligations under the Amended and Restated Equity Holders Agreement entered into in June 2014.
Mayne Pharma
Second Amended and Restated License and Supply Agreement
Pursuant to our Supply and License Agreement with Mayne Pharma, which was originally entered into on September 3, 2013, amended and restated on June 24, 2014 and most recently amended and restated on May 15, 2015, Mayne Pharma is obligated to: (i) supply us with its patented formulation of SUBA-Itraconazole in a particular dose formulation for the treatment of human patients with cancer via oral administration (with the initial areas of investigation being prostate, lung and skin cancer) in the United States, (ii) provide us with an exclusive license to perform specified development activities and to commercialize SUBA-Itraconazole for the treatment of cancer via oral administration in the United States and (iii) participate in a joint development committee (or JDC) with us to clinically develop SUBA-Itraconazole for the treatment of cancer in the United States. Mayne Pharma will also provide certain services to us (in accordance with the development plan and budget for our product) including to direct clinical programming (subject to the oversight and approval by the JDC and, in certain circumstances, the Board of Directors), and to direct the regulatory approval process and intellectual property strategy related to the product. Any services provided to us by Mayne Pharma in this regard will be provided at Mayne Pharma’s expense (other than third party costs agreed to by us and Mayne Pharma), and such services will be subject to our prior approval. The Supply and License Agreement may be terminated by Mayne Pharma if we fail to achieve regulatory approval to commercialize SUBA-Itraconazole in the U.S. by June 30, 2017, if we breach any provision of our Equity Holders Agreement or purchase agreements with Mayne Pharma, if we materially breach the Supply and License Agreement and do not cure such breach within a specified time period, or if either party files for bankruptcy or insolvency proceedings.
On June 24, 2014 and again on May 15, 2015, we and Mayne Pharma, along with Nicholas J. Virca, our President and Chief Executive Officer, Frank E. O’Donnell, Jr., M.D., our Executive Chairman, and Hedgepath, LLC consummated a series of related transactions to fulfill certain conditions of the original Supply and License Agreement and Amended and Restated Supply and License Agreements, respectively. In connection therewith, we and Mayne Pharma entered into the Second Amended and Restated Supply and License Agreement.
Securities Purchase Agreements with Mayne Pharma
On June 24, 2014, in fulfillment of one of the conditions under the original Supply and License Agreement, we entered into the Mayne Purchase Agreement. Pursuant to the terms of the Mayne Purchase Agreement, we issued to Mayne Pharma (i) 258,363.280 shares of our Series A Preferred Stock, and (ii) a warrant to purchase 10,250,569 shares of our common stock. The shares of Series A Preferred Stock converted into 87,843,897 shares of common stock on August 14, 2014. Such warrant has an exercise price of $2.05$0.0878 per share and expires on March 22, 2017.
Name | Fees Earned or Paid in Cash | Options Received | |||
Gerald P. Krueger | $ | 6,750 | 0 | ||
Donald A. McAfee, Ph.D. | $ | 11,500 | 3,000 | ||
Daniel O. Hayden | $ | 10,500 | 3,000 | ||
James D. Causey | $ | 11,500 | 3,000 | ||
Samuel P. Sears, Jr. | $ | 11,500 | 3,000 |
All non-employee directors receive an annual retainer fee (“Retainer Fee”) and a fee for each of the five regularly scheduled Board meetings attended per year (collectively, the “Director’s Fee”). Employee directors will notmay be eligibleexercised at any time, from time to receive the Retainer Fee or the Director’s Fee. The Retainer Fee and Director’s Fee for the upcoming year will be set at the last Board meeting during a calendar year. In additiontime, by Mayne Pharma prior to the Director’s Fee, all non-employee directors will receive reimbursement for travelexpiration on June 24, 2019.
On May 15, 2015, we entered into the 2015 Mayne Purchase Agreement pursuant to which, in consideration of Mayne Pharma’s investment of $2.5 million in our company we issued to Mayne Pharma (i) 33,333,333 shares of our common stock and other related expenses incurred in attending Board meetings(ii) a warrant to purchase 33,333,333 shares of our common stock. Such warrant has an exercise price of $0.075 per share and committee meetings. As ofmay be exercised at any time, from time to time, by Mayne Pharma prior to the date of this prospectus, the Board has not set the Retainer Fee or the Director’s Fee for 2009.expiration on May 15, 2020.
Outstanding Equity Awards at 2007 Fiscal Year-EndPRINCIPAL STOCKHOLDERS
The following table sets forth certain information concerning the valueownership of outstanding equity awards held by the following individualsour common stock as of December 31, 2007.
Name | Number of Securities Underlying Unexercised Options (#) Exercisable | Number of Securities Underlying Unexercised Options (#) Unexercisable | Option Exercise Price ($) | Option Expiration Date | Number of Shares or Units of Stock That Have Not Vested (#) | Market Value of Shares or Units of Stock That Have Not Vested ($)(1) | ||||||||||
Paul D’Sylva, Ph.D. | 40,000 | — | $ | 2.09 | 02/21/2017 | — | — | |||||||||
Richard J. Freer, Ph.D. | 7,069 | — | $ | 3.75 | 12/31/2010 | 44,459 | (2) | 200,954.68 | ||||||||
26,500 | — | $ | 3.85 | 11/09/2011 | ||||||||||||
4,606 | — | $ | 3.30 | 11/12/2013 | ||||||||||||
5,394 | — | $ | 3.30 | 11/12/2013 | ||||||||||||
7,885 | — | $ | 4.80 | 01/03/2016 | ||||||||||||
Robert B. Harris, Ph.D. | 12,619 | — | $ | 3.85 | 11/09/2011 | |||||||||||
4,606 | — | $ | 3.30 | 11/12/2013 | ||||||||||||
5,394 | — | $ | 3.30 | 11/12/2013 | ||||||||||||
10,000 | — | $ | 6.00 | 01/03/2015 | ||||||||||||
20,000 | — | $ | 5.35 | 02/03/2015 | ||||||||||||
3,943 | — | $ | 4.80 | 01/03/2016 |
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Employment Agreements
PAUL D’SYLVA, PH.D.
Asthe date of February 9, 2007, we entered into an employment agreementthis prospectus with Dr. D’Sylva pursuantrespect to: (i) each person known to which Dr. D’Sylva will serve as Chief Executive Officer. This agreement expires on February 9, 2010. The employment agreement provides Dr. D’Sylva with:
a base salary of at least $250,000 after his first year of employment, with any amount above such minimum levelus to be determined by the Boardbeneficial owner of Directors. In his first year of employment, Dr. D’Sylva will receive a salary of $100,000 and will also be reimbursed for up to $50,000, for moving and travel expenses related to his relocation to the United States. Notwithstanding the foregoing, we increased Dr. D’Sylva’s base salary to $250,000 effective of August 1, 2007.
a grant, on February 22, 2007, of incentive stock options to purchase 40,000 Sharesmore than five percent of our common stock;
an annual bonus to be based upon financial performance criteria determined by the Board of Directors;
a grant of 60,000 Shares of restricted common stock to be granted on a date (ii) all directors; (iii) all named executive officers; and with vesting terms mutually acceptable to Dr. D’Sylva and our company;
an annual equity compensation as determined on a yearly basis at the sole discretion of the Compensation Committee of our Board of Directors; and
participation in any and(iv) all employee benefit plans.
Under the employment agreement, upon Dr. D’Sylva’s death, our company shall pay Dr. D’Sylva’s beneficiary an amount equal to (i) one month’s salary, and (ii) a cash, option and restricted stock bonus with respect to that portion of our company’s fiscal year completed prior to Dr. D’Sylva’s death. In addition, upon Dr. D’Sylva’s death, all unvested, restricted Shares of our common stock held by Dr. D’Sylva shall immediately vest.
We may terminate Dr. D’Sylva’s employment at any time for “Cause,” as such term is defined in the employment agreement, without incurring any continuing obligations to Dr. D’Sylva.
If we terminate Dr. D’Sylva’s employment for any reason other than for “Cause” or if Dr. D’Sylva terminates his employment for “Good Reason,” as such term is defined in the employment agreement, Dr. D’Sylva is entitled to (a) monthly salary until the “Benefit End Date” as such term is defined in the employment agreement, (b) medical, dental and life insurance benefits until the “Benefit End Date”
To the extent a “Change-of-Control,” as such term is defined in the employment agreement, occurs during the term of the agreement, Dr. D’Sylva, at his sole option, may deem such event to be a termination of employment without Cause. As a result, Dr. D’Sylva would be entitled to receive the benefits noted above. In addition, all unvested options and Shares of restricted stock held by Dr. D’Sylva will immediately vest.
To the extent Dr. D’Sylva becomes “Disabled,” as such term is defined in the employment agreement, during the term of the agreement, we shall continue pay him his full salary and benefits until he shall become eligible for disability income under our disability plan. While receiving disability income payments, we shall pay Dr. D’Sylva the difference between such payments and his salary (without bonus), and he shall continue to participate in our company’s benefit plans until February 9, 2010.
The agreement contains a non-competition provision, which prohibits Dr. D’Sylva from competing with our company or soliciting its employees under certain circumstances. A court may, however, determine that this non-competition provision is unenforceable or only partially enforceable.
RICHARD J. FREER, PH.D.
As of June 27, 2005, we entered into an amended employment agreement with Dr. Freer pursuant to which Dr. Freer will serve as Chairman of the Board and Chief Operating Officer. This agreement expires on December 31, 2009. The employment agreement provides Dr. Freer with:
a base salary of at least $205,000, with any amount above such minimum level to be determined by the Board of Directors;
a grant, on January 1, 2007, of incentive stock options to purchase 30,000 Shares of our common stock;
an annual bonus to be based upon financial performance criteria determined by the Board of Directors. Assuming full satisfaction of such financial performance criteria, the maximum cash bonus payable shall not be less than $25,000 per year;
a number of annual incentive stock option and restricted stock grants to be based upon financial performance criteria determined by the Board of Directors. Assuming full satisfaction of such financial performance criteria, Dr. Freer is eligible to receive incentive stock options to purchase an aggregate of 10,000 Shares of common stock and 5,000 Shares of restricted common stock on a yearly basis. Such options and restricted Shares shall vest in three equal yearly installments beginning on the date that is one year following the date of grant;
a grant of 50,000 Shares of restricted common stock on June 27, 2005 and a grant of 50,000 Shares of restricted common stock on January 1, 2006, with such Shares vesting in quarterly installments of 10,000 Shares beginning on January 1, 2010; and
participation in any and all employee benefit plans.
Under the employment agreement, upon Dr. Freer’s death, our company shall pay Dr. Freer’s beneficiary an amount equal to (i) one month’s salary, and (ii) a cash, option and restricted stock bonus with respect to that portion of our company’s fiscal year completed prior to Dr. Freer’s death. In addition, upon Dr. Freer’s death, all unvested, restricted Shares of our common stock held by Dr. Freer shall immediately vest.
We may terminate Dr. Freer’s employment at any time for “Cause,” as such term is defined in the employment agreement, without incurring any continuing obligations to Dr. Freer.
If we terminate Dr. Freer’s employment for any reason other than for “Cause” or if Dr. Freer terminates his employment for “Good Reason,” as such term is defined in the employment agreement, Dr. Freer is entitled to (a) a lump cash sum equal to the aggregate amount of salary due to Dr. Freer up through December 31, 2009 and (b) medical, dental and life insurance benefits until December 31, 2009.
To the extent a “Change-of-Control,” as such term is defined in the employment agreement, occurs during the term of the agreement, Dr. Freer, at his sole option, may deem such event to be a termination of employment without Cause. As a result, Dr. Freer would be entitled to receive the benefits noted above. In addition, all unvested options and Shares of restricted stock held by Dr. Freer will immediately vest. In connection with the execution of this agreement, our company and Dr. Freer terminated that certain Executive Severance Agreement, dated June 27, 1997.
To the extent Dr. Freer becomes “Disabled,” as such term is defined in the employment agreement, during the term of the agreement, we shall continue pay him his full salary and benefits until he shall become eligible for disability income under our disability plan. While receiving disability income payments, we shall pay Dr. Freer the difference between such payments and his salary (without bonus), and he shall continue to participate in our company’s benefit plans until December 31, 2009.
The agreement contains a non-competition provision, which prohibits Dr. Freer from competing with our company or soliciting its employees under certain circumstances. A court may, however, determine that this non-competition provision is unenforceable or only partially enforceable.
ROBERT B. HARRIS, PH.D.
As of January 1, 2007, our company entered into an employment agreement with Dr. Harris pursuant to which Dr. Harris will serve our company as President. This agreement expires on December 31, 2011. The employment agreement provides Dr. Harris with:
a base salary of at least $225,000, with any amount above such minimum level to be determined by the Board of Directors;
an annual bonus to be based upon financial performance criteria determined by the Board of Directors. Assuming full satisfaction of such financial performance criteria, the maximum cash bonus payable shall not be less than $25,000 per year; and
a number of annual incentive stock option and restricted stock grants to be based upon financial performance criteria determined by the Board of Directors. Assuming full satisfaction of such financial performance criteria, Dr. Harris is eligible to receive incentive stock options to purchase an aggregate of 5,000 Shares of common stock and 5,000 Shares of restricted common stock on a yearly basis. Such options and restricted Shares shall vest in three equal yearly installments beginning on the date that is one year following the date of grant; and
participation in any and all employee benefit plans.
Under the employment agreement, upon Dr. Harris’ death, we shall pay Dr. Harris’ beneficiary an amount equal to (a) one month’s salary, and (b) a cash, option and restricted stock bonus with respect to that portion of our fiscal year completed prior to Dr. Harris’ death.
We may terminate Dr. Harris’ employment at any time for “Cause,” as such term is defined in the employment agreement, without incurring any continuing obligations to Dr. Harris.
If we terminate Dr. Harris’ employment for any reason other than for “Cause” or if Dr. Harris terminates his employment for “Good Reason,” as such term is defined in the employment agreement, Dr. Harris is entitled to (a) receive salary and benefits for a period of twelve months following the date of termination and (b) medical, dental and life insurance benefits until December 31, 2011.
To the extent that we have not offered to renew this agreement or enter into another employment arrangement with substantially similar or better terms for Dr. Harris on or before the date that is one year prior to the expiration date of this agreement, Dr. Harris may declare our company in default, and terminate this agreement for “Good Reason.” As such, Dr. Harris would be entitled to the benefits noted above for such a termination.
To the extent a “Change-of-Control,” as such term is defined in the employment agreement, occurs during the term of the agreement, Dr. Harris, at his sole option, may deem such event to be a termination of employment without Cause. As a result, Dr. Harris would be entitled to receive the benefits noted above. In addition, all unvested options and Shares of restricted stock held by Dr. Harris will immediately vest.
To the extent Dr. Harris becomes “Disabled,” as such term is defined in the employment agreement, during the term of the agreement, we shall continue pay him his full salary and benefits until he shall become eligible for disability income under our disability plan. While receiving disability income payments, we shall pay Dr. Harris the difference between such payments and his salary (without bonus), and he shall continue to participate in our company’s benefit plans until December 31, 2011.
The agreement contains a non-competition provision, which prohibits Dr. Harris from competing with our company or soliciting its employees under certain circumstances. A court may, however, determine that this non-competition provision is unenforceable or only partially enforceable.
Indemnification of Directors and Executive Officers and Limitations of Liability
Our Articles eliminate all liability of our directors and executive officers for monetary damages to our company or our stockholders except in the event of willful misconduct or a knowing violation of the criminal law or any federal or state securities law. Pursuant to such provisions, our directors or officers will not be liable for monetary damages to our company or our stockholders even if they should fail, through negligence or gross negligence, to satisfy their duty of care to our company or our stockholders.
Our Articles require indemnification of any person against liability incurred in connection with any proceeding to which that person is made a party by reason of (i) his service to our company as a director or officer or (ii) his service as director, officer, trustee, or partner to some other enterprise at the request of our company, except in the event of willful misconduct or a knowing violation of the criminal law. The Articles also authorize our Board of Directors to contract in advance to indemnify any director or officer by a majority vote of a quorum of disinterested directors. In addition, the Articles authorize our Board of Directors, by a majority vote of a quorum of disinterested directors, to cause our company to indemnify, or agree to indemnify in advance, to the same extent any person who serves as an employee, agent or consultant of our company or who serves at the request of our company in some other capacity. See “Risk Factors — Virginia law may limit our officers’ and directors liabilities.”
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of our company pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. Currently there is no pending litigation or proceeding involving a director or office of our company as to which indemnification is being sought, nor are we aware of any threatened litigation that may result in claims for indemnification by any officer or director.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PharmAust Limited
On November 24, 2006, CBI entered into a Stock Purchase Agreement (the “PharmAust Agreement”) with PharmAust Limited, an Australian limited company (the “Parent”), and PharmAust Chemistry Ltd, an Australian limited company (the “Seller”). Pursuant to the PharmAust Agreement, CBI acquired from the Seller all of the outstanding capital stock of Mimotopes. Mr. D’Sylva was, at the time of the entrance into and closing of the PharmAust Agreement, Managing Director of the Parent and became our Chief Executive Officer upon closing.
Purchase Price for Mimotopes Shares
Under the terms of the Agreement, CBI issued to the Seller 2,150,000 restricted shares of CBI’s unregistered common stock, without par value per share (the “Purchase Shares”), and Seller delivered to CBI all issued and outstanding ordinary shares of Mimotopes and any ordinary shares held in treasury by Mimotopes (the “Mimotopes Shares”).
Time of Closing
All deliveries of the Purchase Shares and the Mimotopes Shares were made at the closing of the Agreement, on February 9, 2007.
Registration Rights
In addition to customary covenants contained in the Agreement, CBI agreed to certain registration obligations. The registration rights agreement provides that at any time one (1) year after execution of the registration rights agreement, the Seller may demand that CBI register all or any portion of the Purchase Shares with the SEC.
Venturepharm Laboratories Ltd.
Effective as of March 28, 2008, PharmAust sold all of its Purchase Shares to Venturepharm (the “Venturepharm Sale”). As a result of the Venturepharm Sale, we entered into the following agreements with Venturepharm, all effective as of March 28, 2008.
Registration Rights Agreement.
We entered into a Registration Rights Agreement with Venturepharm. Pursuant to this agreement, we granted Venturepharm a single demand to require us to register the Purchase Shares pursuant to the Securities Act of 1933, as amended. The demand may be made at any time after March 28, 2010.
Voting and Lock-Up Agreement.
We entered into a Voting and Lock-Up Agreement with Venturepharm. Pursuant to this agreement, Venturepharm agreed, for six months after the closing of the Venturepharm Sale, to vote all of the Purchase Shares and any other shares Venturepharm may own in our company in favor of all proposals requiring shareholder approval that are adopted by our Board of Directors. In addition, pursuant to this agreement, Venturepharm agreed that it will not offer, sell, contract to sell, or otherwise dispose of any of the Purchase Shares for a period of eighteen months following the closing of the Venturepharm Sale.
Ancillary Agreement.
We entered into an ancillary agreement with Venturepharm. Pursuant to this agreement, Venturepharm has a right to purchase up to $3 million worth of additional shares of our common stock from us, and we have the right to require Venturepharm to purchase up to $1 million worth of additional shares of our common stock under certain circumstances. In each case, the purchase price would be paid half in cash and half in Venturepharm ordinary shares, and the purchase price will be at a 10% discount to the average closing price for our common stock for the 50 days prior to the exercise notice. Our put right may be exercised at any time beginning 60 days after the closing of the Venturepharm Sale and concluding on the third anniversary of the Venturepharm Sale. We are limited in our ability to issue common stock during the put period until we have exercised the put right. Venturepharm’s call right may be exercised twice during the period beginning on the closing of the Venturepharm Sale and ending on the third anniversary of the closing of the Venturepharm Sale. All obligations under the ancillary agreement are subject to compliance with NASDAQ rules and the terms of our private placement completed on December 31, 2007, and we shall not be obligated to issue any common stock in violation thereof.
Side Letter Agreement.
We entered into a side letter agreement with Venturepharm. Pursuant to this agreement, we have agreed, effective as of the execution and delivery of the last of the foregoing agreements, to amend our bylaws to remove the applicability of the Virginia Control Share Acquisition Act, to grant Venturepharm the right to appoint a member to our board of directors, to cooperate with Venturepharm in transferring the Purchase Shares, and to make certain representations regarding our company.
BENEFICIAL OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
group. Beneficial ownership is determined in accordance with the rules of the SEC. In computing the number of SharesSEC that deem shares to be beneficially owned by aany person and the percentage of ownership of that person,who has voting or investment power with respect to such shares. Shares of common stock subject to options andor warrants held by that person that are currently exercisable or become exercisable within 60 daysas of the date of this prospectus or are exercisable within 60 days of such date are deemed to be outstanding even if they have not actually been exercised. Those Shares, however,and to be beneficially owned by the person holding such options for the purpose of calculating the percentage ownership of such person but are not deemedtreated as outstanding for the purpose of computingcalculating the percentage ownership of any other person.
The following table sets forth certain information with respect to beneficial ownershippercentage of shares beneficially owned after the offering is based on 245,353,270 shares of our common stock based on 5,524,362 issued andto be outstanding Shares of common stock, by:after the offering.
Each person known to be the beneficial owner of 5% or more of the outstanding common stock of our company;
Each executive officer;
Each director; and
All of the executive officers and directors as a group.
Unless otherwise indicated, the persons and entities named in the table have sole voting and sole investment power with respect to the Shares set forth opposite the stockholder’s name, subject to community property laws, where applicable. Unless otherwise indicated, the address of each stockholder listed in the table is 601 Biotech Drive, Richmond, Virginia, 23235.
Name and Address of Beneficial Owner | Amount and Nature of Beneficial Ownership | Percentage of Class (%)(1) | |||
Paul D’Sylva, Ph.D.(2) | 40,000 | * | |||
Richard J. Freer, Ph.D.(3) | 227,206 | 4.11 | % | ||
Robert B. Harris, Ph.D.(4) | 111,626 | 2.02 | % | ||
Samuel P. Sears, Jr.(5) | 101,476 | 1.83 | % | ||
Donald A. McAfee, Ph.D.(6) | 38,267 | * | |||
James D. Causey(7) | 25,000 | * | |||
Gerald P. Krueger(8) | 26,000 | * | |||
Daniel O. Hayden(9) | 13,000 | * | |||
All directors and executive officers as a group (9 persons)(10) | 581,388 | 10.52 | % | ||
5% Holder: | |||||
Venturepharm Laboratories Limited Venturepharm Towers No. 3 Jinzhuang Si Ji Qing, Haidian District Beijing 10089, People’s Republic of China | 2,150,000 | 38.92 | % |
Name and address of beneficial owners | Amount and nature of beneficial ownership of Common Stock | Approximate percentage of outstanding Common Stock (1) | ||||||
Mayne Pharma Ventures Pty Ltd.(2) | 164,761,132 | 57.0 | % | |||||
Hedgepath, LLC(3) | 114,937,638 | 45.0 | % | |||||
Black Robe Capital LLC(4) | 114,937,638 | 45.0 | % | |||||
Frank E. O’Donnell, Jr., M.D.(4) | 114,937,638 | 45.0 | % | |||||
Nicholas J. Virca(5) | — | — | ||||||
Garrison J. Hasara, CPA(6) | — | — | ||||||
Samuel P. Sears(7) | 1,106,096 | * | ||||||
Stefan J. Cross(8) | — | — | ||||||
Dr. R. Dana Ono(9) | — | — | ||||||
W. Mark Watson, CPA(10) | 10,000 | * | ||||||
All directors and executive officers as a group (7 persons) | 116,043,734 | 45.4 | % |
* | Less than 1% |
(1) | Applicable percentages are based on |
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(4) | The |
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(6) | Mr. Hasara is our Chief Financial Officer and Treasurer. Excludes 7,000,000 unvested restricted stock units issued under our 2014 Equity Incentive Plan. Mr. Hasara’s address is 16904 Melissa Ann Drive, Lutz, FL 33558. |
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Common StockGeneral
We are authorizedOur Certificate of Incorporation authorizes the issuance of up to issue 100,000,000 Shares340,000,000 shares of common stock, without par value $0.0001 per share, and 10,000,000 shares of which 5,524,362 Shares arepreferred stock, par value $0.0001 per share. As of the date of this prospectus, we had 245,353,270 shares of common stock issued and outstanding, asand no shares of the date hereof. Each outstanding Share of commonpreferred stock is entitled to one vote, either in person or by proxy, on all matters that may be voted upon by their holders at meetings of the stockholders.issued and outstanding.
Common Stock
Holders of our common stock
(i) are entitled to one vote for each share held on all matters submitted to a vote of stockholders and do not have equal ratable rightscumulative voting rights. An election of directors by our stockholders is determined by a plurality of the votes cast by the stockholders entitled to vote on the election. Subject to the supermajority votes for some matters, other matters are decided by the affirmative vote of our stockholders having a majority in voting power of the votes cast by the stockholders present or represented and voting on such matter. Our amended and restated bylaws also provide that our directors may be removed only for cause by the affirmative vote of at least sixty-six and two-thirds percent (66 2/3%) of the votes that all our stockholders would be entitled to cast in any annual election of directors. In addition, the affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the votes that all of our stockholders would be entitled to cast in any annual election of directors is required to amend or repeal or to adopt any provisions inconsistent with any of the provisions of our amended and restated bylaws; provided, however, that no such change to any bylaw may alter, modify, waive, abrogate or diminish the our obligation to provide the indemnity called for by Article 10 thereunder. Holders of common stock are entitled to receive proportionately any dividends from funds legally available therefore, ifas may be declared by our Boardboard of Directors;directors, subject to any preferential dividend rights of outstanding preferred stock.
(ii)In the event of our liquidation or dissolution, the holders of common stock are entitled to share ratably inreceive proportionately all of our assets available for distribution to stockholders after the payment of all debts and other liabilities and subject to the prior rights of any outstanding preferred stock. Holders of common stock have no preemptive, subscription, redemption or conversion rights. The rights, preferences and privileges of holders of common stock upon our liquidation, dissolution or winding up;
(iii) do not have preemptive, subscription or conversion rights or redemption or sinking fund provisions; and
(iv) are entitled to one non-cumulative vote per Share on all matters on which stockholders may vote at all meetings of our stockholders.
The holders of Shares of our common stock do not have cumulative voting rights, which means that the holders of more than fifty percent (50%) of outstanding Shares voting for the election of directors can elect all of our directors if they so choose and, in such event, the holders of the remaining Shares will not be able to elect any of our directors.
Pursuant to the Private Placement, we have reserved the following number of Shares for issuance upon conversion of the Convertible Notes or exercise of the Warrants:
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Preferred Stock
We may issue up to 1,000,000 shares of our preferred stock, without par value per share, from time to time in one or more series. No shares of preferred stock have been issued. Our Board of Directors, without further approval of our stockholders, is authorized to fix the dividend rights and terms, conversion rights, voting rights, redemption rights, liquidation preferences and other rights and restrictions relating to any series. Issuances of shares of preferred stock, while providing flexibility in connection with possible financings, acquisitions and other corporate purposes, could, among other things, adversely affect the voting power of the holders of our common stock and prior series of preferred stock then outstanding.
Certain Provisions of our Articles of Incorporation and Bylaws
Our Articles and Bylaws contain provisions that make it more difficult to acquire control of our company by means of a tender offer, a proxy contest, open market purchases or otherwise. The Articles provide for our Board of Directors to be divided into three classes serving staggered terms. One class of directors is elected each year for a three-year term subject to and may be adversely affected by the rights of the holders of shares of any series or class of preferred stock that we may designate and issue in the future.
Preferred Stock then outstanding. A director
Our Certificate of Incorporation authorizes the issuance of 10,000,000 shares of blank check preferred stock with such designation, rights and preferences as may be removed only for cause.
Our Articles follow the Virginia Actdetermined from time to time by requiring the affirmative voteour board of more than two-thirdsdirectors. No shares of thepreferred stock are currently issued or outstanding as all were converted into shares of common stock foras of August 14, 2014. Accordingly, our board of directors is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, redemption, voting or other rights which could adversely affect the approvalvoting power or other rights of mergers, share exchanges, certain dispositionsthe holders of assets and other extraordinary transactions.common stock. We may issue some or all of the preferred stock to effect a business transaction. In addition, the affirmative votepreferred stock could be utilized as a method of at least two-thirdsdiscouraging, delaying or preventing a change in control of us.
Warrants
As of the outstanding sharesdate of each voting group of capital stock is required for approval of an Affiliated Transaction (as defined below) with an Interested Stockholder (as defined below), subjectthis prospectus, warrants to certain exceptions comparable to those contained in the Virginia Act. See “ — Certain Corporate Governance Provisions of the Virginia Act.” The Articles further require the affirmative vote of the majority of the outstandingpurchase 53,834,471 shares of common stock forwere issued and outstanding. Warrants, issued in the approvalamount of amendments10,250,569 to the Articles, except that the affirmative voteeach of at least two-thirdsHPLLC and Mayne Pharma on June 24, 2014, have a term of the outstanding5 years and an exercise price of $0.878. Additional warrants to purchase 33,333,333 shares of Common Stock is requiredcommon stock issued to approveMayne Pharma on May 15, 2015 have a term of 5 years and an amendment to the provisionsexercise price of the Articles establishing the classified board$0.075.
Delaware Anti-Takeover Law and the super majority voting requirement for Affiliated Transactions.
Our Bylaws establish an advance notice procedure for the nomination of candidates for election as directors, other than by our Board of Directors, and for certain matters to be brought before an Annual Meeting of our company. A stockholder must give our company notice not less than 90 days prior to an Annual Meeting of stockholders to (i) nominate persons to be elected directors of our company at such meeting or (ii) propose business matters to be considered at such meeting.
The purpose of the relevant provisions of the Articles and Bylaws is to discourage certain types of transactions that may involve an actual or threatened change of control of our company and to encourage persons seeking to acquire control of our company to consult first with our Board of Directors to negotiate the terms of any proposed business combination or offer. The provisions are designed to reduce our vulnerability to an unsolicited proposal for a takeover that does not have the effect of maximizing long-term stockholder value or is otherwise unfair to our stockholders, or an unsolicited proposal for the restructuring or sale of all or part of our company that could have such effects. See “Risk Factors — Anti-Takeover Provisions.”
Certain Corporate Governance Provisions of the Virginia ActCertificate of Incorporation and By-Laws
Delaware Anti-Takeover Law
We are subject to the “affiliated transactions” provisionsSection 203 of the Virginia Act which restrict certain transactions between our company and any person (an “Interested Stockholder”) who beneficially owns more than 10% of any class of our voting securities (“Affiliated Transactions”). These restrictions, which are described below, do not apply to an Affiliated Transaction with an Interested Stockholder who has been such continuously since the date we first had 300 stockholders of record or whose acquisition of shares making such person an Interested stockholder was previously approved byDelaware General Corporation Law. Section 203 generally prohibits a majority of our company’s Disinterested Directors. “Disinterested Director” means, with respect to a particular Interested Stockholder, a member of our Board of Directors who was (i) a member on the date on which an Interested Stockholder became an Interested Stockholder or (ii) recommended for election by, or was elected to fill a vacancy and received the affirmative vote of, a majority of the Disinterested Directors then on our Board of Directors. Affiliated Transactions include mergers, share exchanges, material dispositions of corporate assets not in the ordinary course of business, any dissolution of our company proposed by or on behalf of an Interested Stockholder, or any reclassification, including reverse stock splits, recapitalization or merger of our company with its subsidiaries, which increases the percentage of voting shares owned beneficially by an Interested Stockholder by more than five percent.
The “affiliated transactions” statute prohibits uspublic Delaware corporation from engaging in an Affiliated Transactiona “business combination” with an Interested Stockholder“interested stockholder” for a period of three years after the Interested Stockholder became such unlessdate of the transaction in which the person became an interested stockholder, unless:
Section 203 defines a “business combination” to include:
In general, Section 203 defines an “interested stockholder” as any person that is:
Under specific circumstances, Section 203 makes it more difficult for an “interested stockholder” to effect various business combinations with a corporation for a three-year period, although the stockholders may, by adopting an amendment to the corporation’s certificate of incorporation or bylaws, elect not to be governed by this section, effective 12 months after adoption.
Our certificate of incorporation and amended and restated bylaws do not exclude us from the restrictions of Section 203. We anticipate that the provisions of Section 203 might encourage companies interested in acquiring us to negotiate in advance with our Board of Directors since the stockholder approval requirement would be avoided if a majority of the directors then in office approve either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder.
Certificate of Incorporation and Amended and Restated Bylaws
On May 15, 2015, our Board of Directors approved and adopted our second amended and restated bylaws. Provisions of our second amended and restated bylaws and our certificate of incorporation may delay or discourage transactions involving an actual or potential change of control or change in our management, including transactions in which stockholders might otherwise receive a premium for their shares, or transactions that our stockholders might otherwise deem to be in their best interests. Therefore, these provisions could adversely affect the price of our common stock. Among other things, our certificate of incorporation and amended and restated bylaws:
A corporation may, at its option, elect not to be governed by the foregoing provisions of the Virginia Act by amending its articles of incorporation or bylaws to exempt itself from coverage; provided, however, any such election not to be governed by the “affiliated transactions” statute must be approved by the corporation’s stockholders and will not become effective until 18 months after the date it is adopted. We have not elected to exempt our company from coverage under these statutes. We have elected to exempt our company from another provision (the Virginia Control Share Acquisition Act) which, if our company was not so exempted, would limit the voting rights of the acquirer of our stock under certain circumstances. See “Risk Factors — Limitation on Officers and Directors Liabilities Under Virginia Law.”
Effect of Certain Provisions on an Attempt to Acquire Control of Our CompanySELLING STOCKHOLDERS
The foregoing provisionsshares of our Articles and Bylaws, as well as the provisions of Virginia law described above, make more difficult, and may discourage certain types of potential acquirers from proposing, a merger, tender offer or proxy contest, even if such transaction or occurrence may be favorable to the interests of the stockholders. Similarly, such provisions may delay or frustrate the assumption of control by a holder of a large block of Common Stock and the removal of incumbent management, even if such removal might be beneficial to stockholders. By discouraging takeover attempts, these provisions might have the incidental effect of inhibiting (i) certain changes in management and (ii) the temporary fluctuations in the market price of the shares that often result from actual or considered takeover attempts. See “Risk Factors — Limitations on Officers’ and Directors’ Liabilities Under Virginia Law.”
Transfer Agent
The transfer agent and registrar for our common stock is Computershare Trust Company, N.A.
The Shares being offered by the Selling Stockholders are issuableselling stockholders listed below (or their successors and assigns) were issued in connection with our June 2014 private placement, upon conversion of theour Series A Convertible NotesPreferred Stock and upon exercise of the Class A and Class B Warrants. For additional information regarding the issuance of those Convertible Notes and Warrants, see “Private Placement of Convertible Notes and Warrants” above. We are registering the Shares in order to permit the Selling Stockholders to offer the Sharesour outside law firm for resale from time to time. Except for the ownership of the Convertible Notes and the Warrants issued pursuant to the Subscription Agreement, the Selling Stockholders have not had any material relationship with us within the past three years.services rendered.
The table below lists the Selling Stockholdersselling stockholders and other information regarding the beneficial ownership of the Sharesshares of common stock by each of the Selling Stockholders. In the ordinary course of their business in trading securities positions, the Selling Stockholders may enter into short sales. However, no such short sales are entered into prior to the public announcement of any private placement pursuant to which the applicable securities were acquired by the Selling Stockholders, and the Selling Stockholders are aware of and adhere to the position of the Staff of the Commission setselling stockholders. The table below sets forth in Item A.65 of the SEC Telephone Interpretations Manual. The second column lists the number of Shares beneficially owned by each Selling Stockholder, based on its ownership of the Convertible Notes and Warrants, as of April 30, 2008, assuming conversion of all Convertible Notes and exercise of the Warrants held by the Selling Stockholders on that date, without regard to any limitations on conversions or exercise. The third column lists the Shares being offered by this prospectus by each Selling Stockholder. In accordance with the terms of a registration rights agreement among the Selling Stockholders and our company, this prospectus generally covers the resale of the maximum number of Shares issued or issuable (i) upon conversion of the Convertible Notes and (ii) upon exercise of the related Warrantsinformation as of the trading day immediately precedingdate of this prospectus, to our knowledge, about the date the registration statement is initially filed with the SEC. The fourth column assumes the salebeneficial ownership of all of the Shares offeredour common stock by the Selling Stockholders pursuant toselling stockholders both before and immediately after this prospectus.offering.
Under the terms of the Convertible Notes and the Warrants, a Selling Stockholder may not convert the Convertible Notes or exercise the Warrants to the extent such conversion or exercise would cause such Selling Stockholder, together with its affiliates, to beneficially own a number of Ordinary Shares which would exceed 4.99% (or, at a Selling Stockholder’s request, 9.99%) of our then outstanding Ordinary Shares following such conversion or exercise, excluding for purposes of such determination Ordinary Shares issuable upon conversion of the Convertible Notes which have not been converted and upon exercise of the Warrants that have not been exercised. The number of Shares in the second column does not reflect this limitation. The Selling Stockholdersselling stockholders may sell all, some or none of their Sharesshares in this offering. See “Plan of Distribution” beginning on page 45.Distribution.”
Name of Selling Stockholder | Number of Shares Owned Prior to Offering(1) | Maximum Number of Shares to be Sold Pursuant to this Prospectus(1) | Number of Shares Owned After Offering(1) | Percentage Ownership After Offering | |||||
Alpha Capital Anstalt(2) | 1,225,000 | 513,440 | 711,560 | 10.90 | % | ||||
Assameka Capital(3) | 30,625 | 12,836 | 17,789 | 0.27 | % | ||||
Brio Capital L.P.(4) | 214,375 | 89,852 | 124,523 | 1.91 | % | ||||
Brio Capital Select LLC(5) | 61,250 | 25,672 | 35,578 | 0.55 | % | ||||
Centurion Microcap, LP(6) | 490,000 | 205,376 | 284,624 | 4.36 | % | ||||
Chestnut Ridge Partners(7) | 367,500 | 154,032 | 213,468 | 3.27 | % | ||||
Total | 2,388,750 | 1,001,208 | 1,387,542 | 21.26 | % |
Name of Selling Stockholder | Number of Shares of Common Stock Owned Prior to Offering (1) | Maximum Number of Shares of Common Stock Offered by this Prospectus | Number of Shares of Common Stock Owned After Offering | Percentage of Common Stock Owned After Offering Assuming All Shares are Sold (2) | ||||||||||||
Hedgepath, LLC (3) | 114,937,638 | 30,000,000 | 84,937,638 | 34.6 | % | |||||||||||
Ellenoff Grossman & Schole LLP | 600,000 | 600,000 | — | — |
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Potential Profits to Selling Stockholders from Private Placement
As we have noted above, we sold the Convertible Notes at a discount to the market value of our Shares on the date of closing of the private placement. The market value of our Shares was $2.48 per Share, and the conversion price for the Convertible Notes is $2.00 per Share. By contrast, the exercise price of the Class A Warrants is $2.85 per Share, a 15% premium to the closing price of the Registrant’s Shares on December 31, 2007. Similarly, the Class B Warrants are exercisable at $5.00 per Share, which represented approximately twice the market price of the Registrant’s Shares on December 31, 2007.
If all of the Shares underlying the Convertible Notes, Class A Warrants and Class B Warrants were sold at their respective strike or conversion prices, the aggregate sale price of these Shares would be greater than the market price of the Shares on December 31, 2007, regardless of whether the Initial Number, Registered Number or Maximum Number of Shares underlying the Convertible Notes is used.
Market price per Share of Shares underlying Convertible Notes and Warrants on 12/31/2007 Conversion Price per Share on 12/31/2007 Total Possible Shares Underlying Convertible Notes and Warrants Combined Market Price of Shares Underlying Convertible Notes and Warrants as of 12/31/2007 Total exercise/conversion price to receive total possible Shares Total possible discount to the market price as of 12/31/2007 (market price less exercise/conversion price) Convertible
Notes -
Initial
Number Convertible
Notes -
Maximum
Number Convertible
Notes -
Registered
Number Class A
Warrants Class B
Warrants Sum of
Initial
Number of
Convertible
Notes, Class
A and Class
B Warrants Sum of
Maximum
Number of
Convertible
Notes, Class
A and Class
B Warrants Sum of
Registered
Number of
Convertible
Notes, Class
A and Class
B Warrants $ 2.48 $ 2.48 $ 2.48 $ 2.48 $ 2.48 $ 2.48 $ 2.48 $ 2.48 $ 2.00 $ 2.00 $ 2.00 $ 2.85 $ 5.00 N/A N/A N/A 975,000 1,104,108 1,170,000 975,000 243,750 2,193,750 2,322,858 2,388,750 $ 2,418,000.00 $ 2,738,187.84 $ 2,901,600.00 $ 2,418,000.00 $ 604,500.00 $ 5,440,500 $ 5,760,688 $ 5,924,100 $ 1,950,000.00 $ 2,208,216.00 $ 2,340,000.00 $ 2,778,750.00 $ 1,218,750.00 $ 5,947,500 $ 6,205,716 $ 6,337,500 $ 468,000.00 $ 529,971.84 $ 561,600.00 $ (360,750.00 ) $ (614,250.00 ) $ (507,000.00 ) $ (445,028.16 ) $ (413,400.00 )
SHARES ELIGIBLE FOR FUTURE SALE
As of April 17, 2008, we had outstanding 5,524,362 Shares of common stock. All of the 1,001,208 Shares registered in this offering will be freely tradable without restriction or further registration under the Securities Act. If Shares are purchased by our “affiliates” as that term is defined in Rule 144 under the Securities Act, their sales of Shares would be governed by the limitations and restrictions that are described below.
Rule 144
In general, under Rule 144 as currently in effect, a person, or persons whose Shares are aggregated, who has beneficially owned Shares of our common stock for least six months, including the holding period of any prior owner, except if the prior owner was one of our affiliates, would be entitled to sell within any three-month period a number of Shares that does not exceed the greater of:
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the average weekly trading volume of our common stock during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale.
Sales under Rule 144 are also subject to manner of sale provisions and notice requirements and to the availability of current public information about our company.
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been one of our affiliates at any time during the 90 days preceding a sale, and who has beneficially owned the Shares proposed to be sold for at least one year, including the holding period of any prior owner except one of our affiliates, is entitled to sell the Shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144.
Lock-Up Agreements
The Shares held by our Chief Executive Officer and Chairman are subject to lock-up agreements. These lock-up agreements provide that our Chief Executive Officer and Chairman will not offer, sell, contact to sell, grant an option to purchase, effect a short sale or otherwise dispose of or engage in any hedging or other transaction that is designed or reasonably expected to lead to a disposition of Shares or any option to purchase Shares or any securities exchangeable for or convertible into common stock until the sooner of (i) the date that no Convertible Notes are outstanding or (ii) 270 days after the date of this prospectus, even though these Shares may be eligible for earlier sale under the provisions of the Securities Act.
We are registering the Shares issuable upon conversionshares of the Convertible Notes and upon exercise of the Warrantscommon stock to permit the resale of these Sharesshares of common stock by the holders of the Convertible Notesthereof (and such holders’ successors and Warrantsassigns) from time to time after the date of this prospectus. We will not receive any of the proceeds from the sale by the Selling Stockholdersselling stockholders of the Shares.shares of common stock. We will bear all fees and expenses incident to our obligation to register the Shares.shares of common stock.
The Selling Stockholdersselling stockholders may sell all or a portion of the Sharesshares of common stock beneficially owned by them and offered hereby from time to time directly or through one or more underwriters, broker-dealers or agents. If the Sharesshares of common stock are sold through underwriters or broker-dealers, the Selling Stockholdersselling stockholders will be responsible for underwriting discounts or commissions or agent’s commissions. The Sharesshares of common stock may be sold in one or more transactions at fixed prices, at prevailing market prices at the time of the sale, at varying prices determined at the time of sale, or at negotiated prices. These sales may be effected in transactions, which may involve crosses or block transactions,
on any national securities exchange or quotation service on which the securities may be listed or quoted at the time of sale;
in the over-the-counter market;
in transactions otherwise than on these exchanges or systems or in the over-the-counter market;
through the writing of options, whether such options are listed on an options exchange or otherwise;
ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;
block trades in which the broker-dealer will attempt to sell the Sharesshares as agent but may position and resell a portion of the block as principal to facilitate the transaction;
purchases by a broker-dealer as principal and resale by the broker-dealer for its account;
an exchange distribution in accordance with the rules of the applicable exchange;
privately negotiated transactions;
short sales;
sales pursuant to Rule 144;
broker-dealers may agree with the Selling Stockholdersselling securityholders to sell a specified number of such Sharesshares at a stipulated price per Share;
a combination of any such methods of sale; and
any other method permitted pursuant to applicable law.
If the Selling Stockholdersselling stockholders effect such transactions by selling Sharesshares of common stock to or through underwriters, broker-dealers or agents, such underwriters, broker-dealers or agents may receive commissions in the form of discounts, concessions or commissions from the Selling Stockholdersselling stockholders or commissions from purchasers of the Sharesshares of common stock for whom they may act as agent or to whom they may sell as principal (which discounts, concessions or commissions as to particular underwriters, broker-dealers or agents may be in excess of those customary in the types of transactions involved). In connection with sales of the Sharesshares of common stock or otherwise, the Selling Stockholdersselling stockholders may enter into hedging transactions with broker-dealers, which may in turn engage in short sales of the Sharesshares of common stock in the course of hedging in positions they assume. The Selling Stockholdersselling stockholders may also sell Sharesshares of common stock short and deliver Sharesshares of common stock covered by this prospectus to close out short positions and to return borrowed Sharesshares in connection with such short sales. The Selling Stockholdersselling stockholders may also loan or pledge Sharesshares of common stock to broker-dealers that in turn may sell such Shares.shares.
The Selling Stockholdersselling stockholders may pledge or grant a security interest in some or all of the Convertible Notes, Warrantswarrants or Sharesshares of common stock owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the Sharesshares of common stock from time to time pursuant to this prospectus or any amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act, amending, if necessary, the list of Selling Stockholdersselling stockholders to include the pledgee, transferee or other successors in interest as Selling Stockholdersselling stockholders under this prospectus. The Selling Stockholdersselling stockholders also may transfer and donate the Sharesshares of common stock in other circumstances in which case the transferees, donees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus.
The Selling Stockholdersselling stockholders and any broker-dealer participating in the distribution of the Sharesshares of common stock may be deemed to be “underwriters” within the meaning of the Securities Act, and any commission paid, or any discounts or concessions allowed to, any such broker-dealer may be deemed to be underwriting commissions or discounts under the Securities Act. At the time a particular offering of the Sharesshares of common stock is made, a prospectus supplement, if required, will be distributed which will set forth the aggregate amount of Sharesshares of common stock being offered and the terms of the offering, including the name or names of any broker-dealers or agents, any discounts, commissions and other terms constituting compensation from the Selling Stockholdersselling stockholders and any discounts, commissions or concessions allowed or reallowed or paid to broker-dealers.
Under the securities laws of some states, the Sharesshares of common stock may be sold in such states only through registered or licensed brokers or dealers. In addition, in some states the Sharesshares of common stock may not be sold unless such Sharesshares have been registered or qualified for sale in such state or an exemption from registration or qualification is available and is complied with.
There can be no assurance that any Selling Stockholderselling stockholder will sell any or all of the Sharesshares of common stock registered pursuant to the registration statement, of which this prospectus forms a part.
The Selling Stockholdersselling stockholders and any other person participating in such distribution will be subject to applicable provisions of the Securities Exchange Act and the rules and regulations thereunder, including, without limitation, Regulation M of the Exchange Act, which may limit the timing of purchases and sales of any of the Sharesshares of common stock by the Selling Stockholdersselling stockholders and any other participating person. Regulation M may also restrict the ability of any person engaged in the distribution of the Sharesshares of common stock to engage in market-making activities with respect to the Shares.shares of common stock. All of the foregoing may affect the marketability of the Sharesshares of common stock and the ability of any person or entity to engage in market-making activities with respect to the Shares.shares of common stock.
We will pay all expenses of the registration of the Sharesshares of common stock pursuant to the registration rights agreement, estimated to be approximately $30,000 in total, including, without limitation, Securities and Exchange Commission filing fees and expenses of compliance with state securities or “blue sky” laws; provided, however, that a Selling Stockholderselling stockholder will pay all underwriting discounts and selling commissions, if any. We will indemnify the Selling Stockholdersselling stockholders against liabilities, including some liabilities under the Securities Act, in accordance with the registration rights agreements, or the Selling Stockholdersselling stockholders will be entitled to contribution. We may be indemnified by the Selling Stockholdersselling stockholders against civil liabilities, including liabilities under the Securities Act, that may arise from any written information furnished to us by the Selling Stockholderselling stockholder specifically for use in this prospectus, in accordance with the related registration rights agreement, or we may be entitled to contribution.
Once sold under the registration statement, of which this prospectus forms a part, the Sharesshares of common stock will be freely tradable in the hands of persons other than our affiliates.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling us, we have been informed that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
The validityCertain legal matters with respect to the shares of the common stock offered by this prospectushereby will be passed upon for us by KaufmanEllenoff Grossman & Canoles, P.C., Three James Center, 12th Floor, 1051 East Cary Street, Richmond, Virginia 23219.Schole LLP, New York, New York.
ConsolidatedThe financial statements as of December 31, 2007 and 2006, and for the years ended December 31, 2007 and 2006 includedour company appearing in this prospectus have been so included andherein in reliance onupon the report (which report includes an explanatory paragraph relating to our ability to continue as a going concern) of BDO Seidman,Cherry Bekaert LLP, an independent registered public accounting firm, appearing elsewhere herein, given onand upon the authority of said firmCherry Bekaert LLP as experts in auditingaccounting and accounting.auditing.
WHERE YOU CAN FIND ADDITIONALMORE INFORMATION
We have filed a registration statement on Form S-1 with the Securities and Exchange Commission a registration statement on Form SB-2 (as amended on Form S-1) under the Securities Act of 1933(SEC) for the Shares ofour common stock offered in this offering. This prospectus does not contain all of the information set forth in the registration statement and the exhibits and schedule that were filed with the registration statement. For further information with respect to us and our common stock, weYou should refer you to the registration statement and theits exhibits and schedule that were filed with the registration statement. Statements containedfor additional information. Whenever we make references in this prospectus aboutto any of our contracts, agreements or other documents, the contents of any contract or any other document that is filed as an exhibit to the registration statementreferences are not necessarily complete and weyou should refer you to the full text of the contract or other document filed as an exhibitexhibits attached to the registration statement. A copystatement for the copies of the registration statement and the exhibits and schedules that were filed with the registration statement may be inspected without charge at the Public Reference Room maintained by the Securities and Exchange Commission at 100 F Street, N.E. Washington, DC 20549, and copies of allactual contract, agreement or any part of the registration statement may be obtained from the Securities and Exchange Commission upon payment of the prescribed fee. Information regarding the operation of the Public Reference Room may be obtained by calling the Securities and Exchange Commission at 1-800-SEC-0330. The Securities and Exchange Commission maintains a web site that contains reports, proxy and information statements, and other information regarding registrants that file electronically with the SEC. The address of the site is www.sec.gov.document.
Our fiscal year ends on December 31. We are subject to the informationa reporting company and periodic reporting requirements of the Securities Exchange Act of 1934, and in accordance with the Securities Exchange Act of 1934, we file annual, quarterly, and specialcurrent reports, and other information with the SecuritiesSEC. You may read and Exchange Commission. These periodiccopy any reports, andstatements, or other information are available for inspection and copyingwe file at the regional offices,SEC’s public reference facilities and websiteroom at 100 F. Street, N.E., Washington D.C. 20549. You can request copies of these documents, upon payment of a duplicating fee by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the Securitiespublic reference rooms. Our SEC filings are also available to the public on the SEC’s Internet site at http://www.sec.gov. We maintain a website at www.hedgepathpharma.com. Information contained in or accessible through our website is not and Exchange Commission referredshould not be considered a part of this prospectus and you should not rely on that information in deciding whether to above.invest in our common stock.
HEDGEPATH PHARMACEUTICALS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Balance Sheets as of March 31, 2015 and December 31, 2014 | F-18 | ||||||
| F-19 | ||||||
| F-20 | ||||||
| F-21 | ||||||
| F-22 |
Report of Independent Registered Public Accounting FirmREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders’
Commonwealth Biotechnologies
Richmond, Virginiaof HedgePath Pharmaceuticals, Inc.
We have audited the accompanying balance sheets of Commonwealth Biotechnologies,HedgePath Pharmaceuticals, Inc. (the “Company”) as of December 31, 20072014 and 20062013 and the related statements of operations, stockholders’ equity (deficit) and cash flows for the years then ended. TheseThe Company’s management is responsible for these financial statements are the responsibility of the Company’s management.statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States)States of America). Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis forof designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,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 financial statements referred to above present fairly, in all material respects, the financial position of Commonwealth Biotechnologies,HedgePath Pharmaceuticals, Inc. atas of December 31, 20072014 and 2006,2013 and the results of its operations and its cash flows for the years then ended,in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company incurred cumulative net losses since inception of approximately $32 million at December 31, 2014, of which approximately $5.5 million was incurred subsequent to the emergence from bankruptcy, as discussed in Note 1. Furthermore, the Company expects to continue to incur net losses through the foreseeable future. These factors, among others as discussed in Note 2 to the financial statements, 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 accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.
BDO Seidman,/s/ Cherry Bekaert LLP
Richmond, VirginiaTampa, Florida
April 8, 2008February 13, 2015
Commonwealth Biotechnologies, Inc.HEDGEPATH PHARMACEUTICALS, INC.
Consolidated Balance SheetsBALANCE SHEETS
DECEMBER 31, 2014 AND 2013
December 31, | ||||||||
2007 | 2006 | |||||||
Assets | ||||||||
Current Assets | ||||||||
Cash and cash equivalents (Note 6) | $ | 2,533,910 | $ | 1,404,370 | ||||
Accounts receivable, net of allowance for doubtful accounts of approximately $ 176,000 and $55,000 | 2,894,513 | 962,049 | ||||||
Inventory (Note 2) | 2,164,464 | 44,343 | ||||||
Prepaid expenses and other assets | 647,398 | 387,099 | ||||||
Total current assets | 8,240,285 | 2,797,861 | ||||||
Property and equipment, net(Note 1 and 3) | 7,516,715 | 5,612,145 | ||||||
Other assets | ||||||||
Restricted Cash (Note 6) | 735,143 | 500,000 | ||||||
Deferred financing fees | 297,678 | 65,285 | ||||||
Intangible assets, net | — | 36,667 | ||||||
Deposits | 4,500 | — | ||||||
Goodwill (Note 9) | 3,243,731 | 490,000 | ||||||
Total other assets | 4,281,052 | 1,091,952 | ||||||
$ | 20,038,052 | $ | 9,501,958 | |||||
December 31 | ||||||||
2007 | 2006 | |||||||
Liabilities and Stockholders’ Equity | ||||||||
Current liabilities | ||||||||
Current maturities of long-term debt (Note 3) | $ | 2,656,571 | $ | 228,545 | ||||
Accounts payable | 2,137,053 | 307,884 | ||||||
Other current liabilities | 1,192,160 | — | ||||||
Accrued payroll liabilities | 337,314 | 18,922 | ||||||
Interest payable | 18,858 | 16,689 | ||||||
Deferred revenue | 519,622 | 14,927 | ||||||
Total current liabilities | 6,861,578 | 586,967 | ||||||
Long-term debt,less current maturities (Note 3) | 3,243,525 | 3,786,069 | ||||||
Total liabilities | 10,105,103 | 4,373,036 | ||||||
Commitments and contingencies (Notes 3 and 4) | ||||||||
Stockholders’ equity | ||||||||
Preferred stock, no par value 1,000,000 shares authorized – none issued and outstanding (Note 11) | — | — | ||||||
Common stock, no par value, 100,000,000 shares authorized, 2007 – 5,520,545; 2006 – 3,322,769, shares issued and outstanding (Note 11) | — | — | ||||||
Additional paid-in capital | $ | 22,595,023 | $ | 15,823,614 | ||||
Restricted stock | (200,667 | ) | (301,000 | ) | ||||
Other comprehensive income (loss) | 682,282 | (8,104 | ) | |||||
Accumulated deficit | (13,143,689 | ) | (10,385,588 | ) | ||||
Total stockholders’ equity | 9,932,949 | 5,128,922 | ||||||
$ | 20,038,052 | $ | 9,501,958 | |||||
December 31, 2014 | December 31, 2013 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 365,161 | $ | 217 | ||||
Prepaid expenses | 97,817 | 10,000 | ||||||
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Total current assets | 462,978 | 10,217 | ||||||
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Total assets | $ | 462,978 | $ | 10,217 | ||||
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LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 324,966 | $ | 287,072 | ||||
Notes payable, related party | — | 68,428 | ||||||
Other liabilities | 75,933 | 52,500 | ||||||
Accrued interest | — | 1,923 | ||||||
Due to related party | — | 366,130 | ||||||
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Total current liabilities | 400,899 | 776,053 | ||||||
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Total liabilities | 400,899 | 776,053 | ||||||
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Commitments and contingencies | — | — | ||||||
Stockholders’ equity (deficit): | ||||||||
Series A Preferred Stock, $0.0001 par value; 500,000 shares authorized; no shares and 170,001 shares issued and outstanding in 2014 and 2013, respectively. | — | 17 | ||||||
Undesignated Preferred Stock, $0.0001 par value; 9,500,000 shares authorized; no shares issued or outstanding. | — | — | ||||||
Common Stock, $0.0001 par value; 340,000,000 shares authorized; 211,419,937 and 18,888,971 shares issued and outstanding in 2014 and 2013, respectively | 21,142 | 1,889 | ||||||
Additional paid-in capital | 32,263,890 | 27,479,913 | ||||||
Accumulated deficit | (32,222,953 | ) | (28,247,655 | ) | ||||
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Total stockholders’ equity (deficit) | 62,079 | (765,836 | ) | |||||
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Total liabilities and stockholders’ equity (deficit) | $ | 462,978 | $ | 10,217 | ||||
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See accompanying summary of accounting policies and notes to financial statements.statements
Consolidated Statements of OperationsHEDGEPATH PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2014 AND 2013
Years Ended December 31, | ||||||||
2007 | 2006 | |||||||
Revenues | ||||||||
Commercial contracts | $ | 7,611,757 | $ | 1,340,996 | ||||
Government contracts | 1,518,363 | 3,031,713 | ||||||
Genetic identity | 1,409,989 | 1,542,129 | ||||||
Product sales | 851,247 | — | ||||||
Clinical services | 399,765 | 580,279 | ||||||
Other revenue | 631,072 | 37,365 | ||||||
Total revenues | 12,422,193 | 6,532,482 | ||||||
Cost of services | ||||||||
Overhead | 4,981,195 | 2,559,196 | ||||||
Direct labor | 3,269,748 | 1,754,664 | ||||||
Direct materials | 2,374,197 | 1,124,846 | ||||||
Total cost of services | 10,625,140 | 5,438,706 | ||||||
Gross profit | 1,797,053 | 1,093,776 | ||||||
Selling, general and administrative | 4,611,636 | 2,053,176 | ||||||
Operating loss | (2,814,583 | ) | (959,400 | ) | ||||
Other income (expense) | ||||||||
Exchange gains (losses) | (91,996 | ) | — | |||||
Interest expense | (733,989 | ) | (297,873 | ) | ||||
Other income | 99,634 | 104,624 | ||||||
Total other (expense) | (726,351 | ) | (193,249 | ) | ||||
Loss before extraordinary gain | (3,540,934 | ) | (1,152,649 | ) | ||||
Extraordinary gain (Note 10) | 782,833 | — | ||||||
Net loss | $ | (2,758,101 | ) | $ | (1,152,649 | ) | ||
Basic and diluted loss per common share before extraordinary gain | $ | (0.69 | ) | $ | (0.35 | ) | ||
Basic and diluted loss per common share after extraordinary gain | $ | (0.54 | ) | $ | (0.35 | ) | ||
Year Ended December 31, | ||||||||
2014 | 2013 | |||||||
Revenues: | $ | — | $ | — | ||||
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Total revenues | — | — | ||||||
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Expenses: | ||||||||
Chapter 11 expenses | — | 117,324 | ||||||
Research and development | 2,430,735 | 1,065,169 | ||||||
General and administrative | 1,507,082 | 817,316 | ||||||
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Total expenses | 3,937,817 | 1,999,809 | ||||||
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Loss from operations | (3,937,817 | ) | (1,999,809 | ) | ||||
Interest expense | (37,481 | ) | (1,923 | ) | ||||
Gain on reorganization: | ||||||||
Gain on settlement of pre-petition claims | — | 166,676 | ||||||
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Net loss | $ | (3,975,298 | ) | $ | (1,835,056 | ) | ||
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Basic and diluted loss per share | $ | (0.04 | ) | $ | (0.10 | ) | ||
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Weighted average common shares outstanding | 95,884,524 | 17,940,586 | ||||||
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See accompanying summary of accounting policies and notes to financial statements.statements
Consolidated Statements of Stockholders’ EquityHEDGEPATH PHARMACEUTICALS, INC.
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 2014 AND 2013
Shares | Paid in | Restricted | Comprehensive | |||||||||||||||||||
Number Of | Additional Paid-in Capital | Restricted Stock | Other Comprehensive (income)/loss | Accumulated Deficit | Total | |||||||||||||||||
Balance, December 31, 2005 January 1, 2006 |
3,253,556 | $ | 15,489,370 | $ | (191,556 | ) | $ | (48,275 | ) | $ | (9,232,939 | ) | $ | 6,016,600 | ||||||||
Stock options exercised | 16,585 | 22,834 | — | — | — | 22,834 | ||||||||||||||||
Restricted stock | 52,628 | 248,614 | (109,444 | ) | — | — | 139,170 | |||||||||||||||
Stock option expense | — | 62,796 | — | — | — | 62,796 | ||||||||||||||||
Net loss | — | — | — | — | (1,152,649 | ) | (1,152,649 | ) | ||||||||||||||
Change in unrealized gain (loss) on interest rate swap | — | $ | — (48,275 | ) | — | 40,171 | — | 40,171 | ||||||||||||||
Total comprehensive loss | — | — | — | — | — | (1,112,478 | ) | |||||||||||||||
Balance, December 31, 2006 | 3,322,769 | 15,823,614 | (301,000 | ) | (8,104 | ) | (10,385,588 | ) | 5,128,922 | |||||||||||||
Issuance of common stock Mimotopes | 2,150,000 | 4,622,550 | — | — | — | 4,622,550 | ||||||||||||||||
Issuance of common stock | 4,998 | 23,892 | — | — | — | 23,892 | ||||||||||||||||
Stock options exercised | 42,778 | 43,549 | — | — | — | 43,549 | ||||||||||||||||
Relative fair value of warrants and beneficial conversion impact on convertible securities | — | 1,950,000 | — | — | — | 1,950,000 | ||||||||||||||||
Restricted stock | — | — | 100,333 | — | — | 100,333 | ||||||||||||||||
Stock option expense | — | 131,418 | — | — | — | 131,418 | ||||||||||||||||
Net loss | — | — | — | — | (2,758,101 | ) | (2,758,101 | ) | ||||||||||||||
Change in unrealized gain (loss) on interest rate swap | — | — | — | 8,104 | — | 8,104 | ||||||||||||||||
Foreign currency gain | — | — | — | 682,282 | — | 682,282 | ||||||||||||||||
Total comprehensive loss | — | — | — | — | — | (2,067,715 | ) | |||||||||||||||
Balance, December 31, 2007 | $5,520,545 | $ | 22,595,023 | $ | (200,667 | ) | $ | 682,282 | 13,143,689 | 9,932,949 | ||||||||||||
Preferred Stock Series A | Common Stock | Common Stock Subscription Receivable – Related Party | Accumulated Deficit | Total Stockholders’ Equity (Deficit) | ||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Additional Paid-In Capital | ||||||||||||||||||||||||||||
Balances, December 31, 2012 | — | $ | — | 15,560,504 | $ | — | $ | 26,279,815 | $ | — | $ | (26,412,599 | ) | $ | (132,784 | ) | ||||||||||||||||
Issuance of preferred stock pursuant to the contribution agreement | 170,001 | 17 | — | — | 1,049,987 | — | — | 1,050,004 | ||||||||||||||||||||||||
Issuance of restricted stock in lieu of cash payment under the Bankruptcy Plan | — | — | 3,328,467 | — | 152,000 | — | — | 152,000 | ||||||||||||||||||||||||
Initiation of par value pursuant to agreement and plan of merger and reorganization | — | — | — | 1,889 | (1,889 | ) | — | — | — | |||||||||||||||||||||||
Net loss | — | — | — | — | — | (1,835,056 | ) | (1,835,056 | ) | |||||||||||||||||||||||
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Balances, December 31, 2013 | 170,001 | 17 | 18,888,971 | 1,889 | 27,479,913 | — | (28,247,655 | ) | (765,836 | ) | ||||||||||||||||||||||
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Issuance of preferred and common stock in debt forgiveness transaction | 71,636 | 7 | 2,530,227 | 253 | 189,508 | — | — | 189,768 | ||||||||||||||||||||||||
Sale of common stock to related party | — | — | 20,000,000 | 2,000 | 1,498,000 | (1,250,000 | ) | — | 250,000 | |||||||||||||||||||||||
Issuance of warrants for debt forgiveness | — | — | — | — | 450,000 | — | — | 450,000 | ||||||||||||||||||||||||
Issuance of common stock warrants in acquisition of research and development and development license agreement | — | — | — | — | 619,134 | — | — | 619,134 | ||||||||||||||||||||||||
Issuance of preferred stock in acquisition of research and development license agreement | 258,363 | 26 | — | — | 1,290,700 | — | — | 1,290,726 | ||||||||||||||||||||||||
Collection of stock subscription receivable | — | — | — | — | — | 1,250,000 | — | 1,250,000 | ||||||||||||||||||||||||
Conversion of preferred stock to common stock | (500,000 | ) | (50 | ) | 170,000,739 | 17,000 | (16,950 | ) | — | — | — | |||||||||||||||||||||
Stock compensation expense | — | — | — | — | 753,585 | — | — | 753,585 | ||||||||||||||||||||||||
Net Loss | (3,975,298 | ) | (3,975,298 | ) | ||||||||||||||||||||||||||||
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Balances, December 31, 2014 | — | $ | — | 211,419,937 | $ | 21,142 | $ | 32,263,890 | $ | — | $ | (32,222,953 | ) | $ | 62,079 | |||||||||||||||||
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See accompanying summary of accounting policies and notes to financial statements.statements
Consolidated Statements of Cash FlowsHEDGEPATH PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2014 AND 2013
Year Ended December 31, | ||||||||||||||||
2007 | 2006 | |||||||||||||||
Operating activities | ||||||||||||||||
Net loss | $ | (2,758,101 | ) | $ | (1,152,649 | ) | ||||||||||
Adjustments to reconcile net loss to cash provided by (used in) operating activities | ||||||||||||||||
Depreciation and amortization | 893,050 | 899,891 | ||||||||||||||
Extraordinary gain | (782,833 | ) | — | |||||||||||||
Stock based compensation | 155,359 | 101,634 | ||||||||||||||
Changes in assets and liabilities | ||||||||||||||||
Accounts receivable | (203,783 | ) | 380,243 | |||||||||||||
Prepaid expenses and inventory | (900,846 | ) | (51,281 | ) | ||||||||||||
Accounts payable and accrued expenses | 2,631,627 | (57,788 | ) | |||||||||||||
Deposits | (4,500 | ) | — | |||||||||||||
Deferred revenue | 102,299 | (42,976 | ) | |||||||||||||
Cash provided by (used in) operating activities | (867,728 | ) | 77,074 | |||||||||||||
Investing activities | ||||||||||||||||
Purchase of Mimotopes | (451,044 | ) | (257,235 | ) | ||||||||||||
Purchase of Exelgen | 2,809,679 | — | ||||||||||||||
Purchases of property and equipment | (147,566 | ) | (236,703 | ) | ||||||||||||
Cash provided by (used in) investing activities | 2,211,069 | (493,938 | ) | |||||||||||||
Financing activities | ||||||||||||||||
Principal payments of debt obligations, FIL | — | (300,000 | ) | |||||||||||||
Principal payments on debt obligations, including capital lease obligations | (1,892,296 | ) | (212,729 | ) | ||||||||||||
Increase in deferred financing fees | (254,783 | ) | — | |||||||||||||
Increase in restricted cash | (355,319 | ) | — | |||||||||||||
Proceeds from exercise of stock options | 43,549 | 22,834 | ||||||||||||||
Proceeds from issuance of convertible debt | 1,950,000 | — | ||||||||||||||
Cash used in financing activities | (508,849 | ) | (489,895 | ) | ||||||||||||
Effect of exchange rates on cash | 295,048 | — | ||||||||||||||
Net increase (decrease) in cash and cash equivalents | 1,129,540 | (906,759 | ) | |||||||||||||
Cash and cash equivalents, beginning of year | 1,404,370 | 2,311,129 | ||||||||||||||
Cash and cash equivalents, end of year | $ | 2,533,910 | $ | 1,404,370 | ||||||||||||
Supplemental Disclosure of Cash Flow Information | ||||||||||||||||
Cash payments for interest | $ | 726,350 | $ | 297,873 | ||||||||||||
Non cash investing and financing activities: purchase of equipment through a capitalized lease | $ | 26,535 | — | |||||||||||||
Fair value of stock issued in Mimotopes acquisition | $ | 4,622,000 | — | |||||||||||||
Year Ended December 31, | ||||||||
2014 | 2013 | |||||||
Operating activities: | ||||||||
Net loss | $ | (3,975,298 | ) | $ | (1,835,056 | ) | ||
Adjustments to reconcile net loss to net cash flows from operating activities: | ||||||||
In-process research and development purchased with the issuance of preferred stock and common stock warrants | 1,909,860 | 1,020,004 | ||||||
Non-cash interest expense | 34,819 | — | ||||||
Share-based compensation | 753,585 | — | ||||||
Changes in assets and liabilities: | ||||||||
Other current assets | (87,817 | ) | 68,733 | |||||
Accounts payable and other current liabilities | 61,327 | 46,645 | ||||||
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Net cash flows provided by (used in) operating activities before reorganization items | (1,303,524 | ) | (699,674 | ) | ||||
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Reorganization items: | ||||||||
Gain on reorganization | — | (166,676 | ) | |||||
Decrease in liabilities subject to compromise | — | (357,265 | ) | |||||
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Net cash flows provided by (used in) operating activities | (1,303,524 | ) | (1,223,615 | ) | ||||
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Financing activities: | ||||||||
Proceeds from related party advances | 273,638 | 366,130 | ||||||
Payments on notes payable | (105,170 | ) | — | |||||
Proceeds from sale of common stock and collection of stock subscription receivable, related party | 1,500,000 | — | ||||||
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| |||||
Net cash flows provided by (used in) financing activities | 1,668,468 | 366,130 | ||||||
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Net change in cash and cash equivalents | 364,944 | (857,485 | ) | |||||
Cash and cash equivalents at beginning of year | 217 | 857,702 | ||||||
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Cash and cash equivalents at end of year | $ | 365,161 | $ | 217 | ||||
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Cash paid for interest | $ | 2,005 | $ | — | ||||
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Supplemental disclosure of non-cash financing activities: | ||||||||
Reclassification of deposit to additional paid-in capital | $ | — | $ | 30,000 | ||||
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Promissory notes issued in payment of related party obligations | $ | — | $ | 68,428 | ||||
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Stock payments to officers and directors (liabilities subject to compromise) in lieu of cash payments under the Bankruptcy Plan | $ | — | $ | 152,000 | ||||
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Issuance of preferred and common stock in debt forgiveness transaction | $ | 189,768 | $ | — | ||||
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Issuance of warrants in debt forgiveness transaction | $ | 450,000 | $ | — | ||||
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See accompanying summary of accounting policies and notes to financial statements.statements
SummaryHEDGEPATH PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2014 AND 2013
1. | Corporate overview: |
Overview
The accompanying audited financial statements of Significant Accounting Policies
Nature of Business
HedgePath Pharmaceuticals, Inc., a Delaware corporation (the “Company”, “HPPI”, “we”, “us” or similar terminology) as successor to Commonwealth Biotechnologies, Inc., (the “Company” or “CBI”a Virginia corporation (“CBI”), have been prepared by the Company as a going concern.
As used herein, the term “Common Stock” means the Company’s common stock, $0.0001 par value per share.
Nature of the Business
The Company is a biopharmaceutical company that is seeking to discover, develop and commercialize innovative therapeutics for patients with certain cancers. The Company’s preliminary focus is on the development of therapies for skin, lung and prostate cancers in the U.S. market, with the first indication targeting basal cell carcinoma in patients with Basal Cell Carcinoma Nevus Syndrome (also known as Gorlin Syndrome). The Company’s proposed therapy is based upon the use of SUBA-Itraconazole, which is a patented, oral formulation of the currently marketed anti-fungal drug itraconazole. The Company believes that the dosing of oral capsules of this formulation can affect the Hedgehog signaling pathway, a major regulator of many fundamental cellular processes, which, in turn, can impact the development and growth of cancers such as basal cell carcinoma. Itraconazole is FDA approved for, and extensively used to, treat fungal infections and has an extensive history of safe and effective use in humans. The Company has developed, optioned and licensed intellectual property and know-how related to the treatment of cancer patients using itraconazole and has applied for patents to cover the Company’s inventions.
Pre-Bankruptcy and Emergence from Bankruptcy
CBI was formed on September 30, 1992,a specialized life sciences outsourcing business that offered certain peptide-based discovery chemistry and biology products and services. On January 20, 2011, CBI filed a voluntary petition captionedIn re Commonwealth Biotechnologies, Inc., Case No. 11-30381-KRH (the “Chapter 11 case”) in the United States Bankruptcy Court for the purposeEastern District of providing specialized analytical laboratory servicesVirginia (the “Bankruptcy Court”) seeking relief under the provisions of Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”).
On August 12, 2013, in furtherance of CBI’s emergence from bankruptcy as described further below, CBI effected a “short-form” reincorporation merger with HPPI, a newly created and wholly owned Delaware subsidiary of CBI, pursuant to which CBI merged with and into HPPI, with HPPI surviving the merger and with the effect of CBI becoming reincorporated as a Delaware corporation and changing its corporate name. Each outstanding share of CBI was converted into one share of HPPI. HPPI’s Certificate of Incorporation (and thus the Certificate of Incorporation of the surviving company) authorizes the issuance of up to 340,000,000 shares of common stock, par value $0.0001 per share, and 10,000,000 shares of preferred stock, par value $0.0001 per share. The par value of the common stock was changed from no par value to $0.0001, which par value is customary for newly formed Delaware corporations.
As described further below, the Company’s present business is the development of the currently-marketed drug itraconazole (currently approved by the U.S. Food and Drug Administration (the “FDA”) as an anti-fungal agent) for the life scientist.treatment of certain cancers.
On January 4, 2013, CBI filed an Amended Plan of Reorganization (the “Plan”) with the Bankruptcy Court. The Plan was approved by a vote of creditors and CBI stockholders on March 21, 2013. CBI received an auction fee of $30,000 from Hedgepath, LLC, a Florida limited liability company, (which fee was a binding, irrevocable offer for the purchase of a portion of CBI’s equity interests) in addition to the contribution of Assets as described below. Hedgepath, LLC was the winning bidder for CBI, which is more fully described below inPost-Bankruptcy Business of HPPI-General.This auction fee was recognized as an increase in additional paid-in capital when the Contribution Agreement (as defined below) became effective.
On March 29, 2013, the Bankruptcy Court entered an order (the “Confirmation Order”) confirming the Plan pursuant to Chapter 11 of the Bankruptcy Code. Under the terms of the Plan, and pursuant to the Contribution Agreement (as described further below), Hedgepath, LLC contributed and assigned the Assets (as such term is defined below) to HPPI, as the reorganized debtor, in exchange for the right to receive 90% of the then fully diluted voting equity in HPPI (in the form of the Series A Preferred Stock) on the date of issuance, with the prior stockholders of CBI retaining approximately 10% voting equity in HPPI, represented by 100% of the issued and outstanding shares of Common Stock.
HEDGEPATH PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2014 AND 2013
1. | Corporate overview (continued): |
Contribution Agreement
On August 13, 2013, the Company matured, it re-focusedentered into a Contribution Agreement, dated as of August 13, 2013 (the “Contribution Agreement”), by and between the Company and Hedgepath, LLC (“HPLLC”) pursuant to which, and subject to the terms and conditions contained therein, in exchange for the right to receive 170,001 shares of the Company’s newly created Series A Convertible Preferred Stock (the “Series A Preferred Stock”), representing 90% of the fully diluted voting securities of the Company as of the date of issuance (or 170,000,739 shares of Common Stock on an as converted basis), Hedgepath, LLC contributed and/or assigned various assets and contract rights to the Company associated with the going forward business of the Company (collectively, the “Assets”) to the Company as described below.
(i) | U.S. Provisional Patent Application 61-813,122, “Prostate-Specific Antigen as Biomarker for Hedgehog Pathway Inhibitor Treatment and Prognostic Monitoring of Prostate Cancer” (previously assigned to Hedgepath, LLC by Dr. Frank E. O’Donnell, Jr. and Nicholas J. Virca, as inventors); |
(ii) | U.S. Provisional Patent Application 61-813,823, “Treatment and Prognostic Monitoring of Cancer Using Hedgehog Pathway Inhibitors” (previously assigned to Hedgepath, LLC by Dr. Frank E. O’Donnell, Jr. and Nicholas J. Virca, as inventors); |
(iii) | Assignment of Patents, dated November 1, 2012, by Dr. Frank E. O’Donnell, Jr. in favor of Hedgepath, LLC; |
(iv) | Assignment of Patents, dated November 1, 2012, by Nicholas J. Virca in favor of Hedgepath, LLC; |
(v) | Consulting Agreement, dated and effective as of September 1, 2012, by and between HPPI (as successor to Hedgepath, LLC) and Emmanuel Antonarakis, MD (“Antonarakis”). |
(vi) | Confidentiality and Intellectual Property Assignment Agreement, dated and effective September 1, 2012, between Antonarakis and HPPI (as successor to Hedgepath, LLC), which includes all intellectual property, know-how and other assets assigned to Hedgepath, LLC by Antonarakis under such agreement. |
(vii) | Consulting Agreement, effective as of April 11, 2013, by and between Hedgepath, LLC and Arianne Consulting, Inc. (“Arianne”); and |
(viii) | Confidentiality and Intellectual Property Assignment Agreement, dated and effective April 11, 2013, between Arianne and Hedgepath, LLC, which includes all intellectual property, know-how and other assets assigned to Hedgepath, LLC by Arianne under such agreement. |
The Contribution Agreement was entered into to carry out the purposes and intent of the Plan filed by CBI and confirmed by the Bankruptcy Court in connection with the Chapter 11 case.
Hedgepath, LLC is a development stage pharmaceutical company. Since its coreformation in late 2011, Hedgepath, LLC has sought, among other pharmaceutical business opportunities, to acquire technology rights and to conduct activities related to the development of the currently-marketed drug itraconazole (currently FDA approved as an anti-fungal agent) for the treatment of certain cancers (the “Itra Business Opportunity”). Hedgepath, LLC had expended approximately $0.1 million acquiring assets and now provides integrated contract research support in four principal areas; bio-defense; laboratory support services for on-going clinical trials; comprehensive contract projectsdeveloping the ITRA Business Opportunity including approximately $82,500 on technical and medical consulting and $15,000 on option fees related to intellectual property agreement that has since expired.
In accordance with the Plan, and as a result of the transactions contemplated by the Contribution Agreement, from and after August 13, 2013, HPPI has been engaged in the private sector;Itra Business Opportunity. The Assets contributed to the Company by Hedgepath, LLC represent the assets and through its Fairfax Identity Labs (FIL) division, for paternity testing, forensic case-work analysisrights heretofore developed or acquired by Hedgepath, LLC related to the Itra Business Opportunity, and Convicted Offender Data Base Index System CODIS work. During 2007,by virtue of the Contribution Agreement, the Company acquired Mimotopes Pty, Ltd.all of Hedgepath, LLC’s right, title and interest in and to the Assets.
As part of the Contribution Agreement, Hedgepath, LLC, which owned a certain claim against CBI in the amount of $52,500, payable to a third party service provider, contributed such claim to the Company. HPPI has developedagreed to issue to such service provider a number of proprietary and patented technologies and is an industry leaderrestricted shares of its Common Stock to be determined based on the valuation of the shares to be issued to purchasers in connection with HPPI’s planned $5 million offering of securities as described in the synthesisPlan. Such shares of Common Stock are to be issued to such service provider within five (5) business days of the final determination of such valuation (as memorialized in the final transaction documentation for such offering).
Hedgepath, LLC did not contribute any of its liabilities to the Company in connection with the Contribution Agreement, and retained all of its assets other than those related to the Itra Business Opportunity.
HEDGEPATH PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2014 AND 2013
1. | Corporate overview (continued): |
In conjunction with the execution of the Contribution Agreement, the Company has expensed, as in-process research grade peptides. Exelgen, formally knownand development cost, approximately $1.0 million. The value was calculated by taking 90% of the market capitalization on the date the assets were contributed to reflect the 90% ownership exchanged for the assets contributed by Hedgepath, LLC.
Mayne Pharma Supply and License Agreement
On September 3, 2013, the Company entered into an exclusive Supply and License Agreement (the “Supply and License Agreement”) with Mayne Pharma International Pty Ltd., a company incorporated in Australia (“MPI”), pursuant to which MPI agreed to: (i) supply the Company with its patented formulation of the drug itraconazole, in a particular dose formulation (the “Product”) for the treatment of human patients with cancer via oral administration (the “Field”) (with the initial areas of investigation being skin, lung and prostate cancer) in the United States (the “Territory”), (ii) provide the Company with an exclusive license to use and develop the intellectual property related to the Product in the Field and in the Territory and (iii) participate in a joint development committee with the Company to clinically develop the Product in the Field and in the Territory. The Company expects to pursue the development of the Product for treatment of a variety of cancers (initially basal cell carcinoma in patients with Gorlin Syndrome) with a focus on clinical development, seeking regulatory approvals and, if regulatory approval is obtained, marketing in the United States.
Subject to earlier termination if certain conditions (“Conditions”) were not met (which Conditions were subsequently eliminated as Tripos Discovery Researchdescribed further below), the term of the Supply and License Agreement shall last until the later of: (i) 10 years from the target launch date of the Product for the treatment of human patients with cancer via oral administration or (ii) the date on which all issued patents of MPI or any of its affiliates referred to in the Supply and License Agreement have lapsed or expired. The Company entered into Amendment No. 1 and Amendment No. 2 to the Supply and License Agreement (the “Amended Supply and License Agreement”) with MPI to extend the date by which the Conditions were to be met from December 16, 2013 to June 30, 2014.
On June 24, 2014, the Company and Mayne Pharma Ventures Pty Ltd (“Mayne Pharma”), an Australian company and assignee of MPI’s rights, along with Nicholas J. Virca, the Company’s President and Chief Executive Officer (“Virca”), Frank O’Donnell, Jr., M.D., the Company’s Executive Chairman (“O’Donnell”) and HPLLC, consummated a series of related transactions to fulfill the Conditions in a manner mutually acceptable to the Company and Mayne Pharma. In connection therewith, the Company and Mayne Pharma entered into an Amended and Restated Supply and License Agreement as of June 24, 2014 (the “Amended and Restated Supply and License Agreement”) principally to eliminate the Conditions and related early termination rights of Mayne Pharma.
Mayne Pharma Securities Purchase Agreement
On June 24, 2014, the Company and Mayne Pharma entered into a Securities Purchase Agreement (the “Mayne Purchase Agreement”). Pursuant to the Mayne Purchase Agreement, the Company (i) issued 258,363 shares of Series A Preferred Stock (the “Mayne Series A Shares”) and (ii) issued, upon closing of a separate Securities Purchase Agreement, dated June 24, 2014 (as described further below, the “HPLLC Purchase Agreement”) by and between the Company and HPLLC, a warrant to purchase 10,250,569 shares of Common Stock (the “Mayne Make-Up Warrant”). The Mayne Series A Shares converted into 87,843,897 shares of Common Stock on August 14, 2014 pursuant to the terms of the Equity Holders Agreement (discussed below) and in accordance with the terms of the Series A Preferred Stock. The Mayne Make-Up Warrant has an exercise price of $0.0878 per share and may be exercised at any time, from time to time, by Mayne Pharma prior to the expiration on June 24, 2019. In conjunction with the execution of the Mayne Purchase Agreement, the Company has expensed, as in-process research and development costs, approximately $1.9 million for the fair value of the preferred stock and warrant issued. The value of the issued stock was acquiredcalculated by taking approximately 42% of the market capitalization on the date the agreement was entered into to reflect the 42% ownership exchanged for entering into the agreement. The value of the warrant was calculated by using the Black-Scholes valuation model that uses assumptions for expected volatility (104.9%), expected dividends (none), expected term (5 years), and risk-free interest rate (1.7%). Expected volatilities are based on historical volatilities of peer companies. The risk-free rate is based upon the U.S. Treasury yield curve in effect at the time of the grant for the period of the expected term.
HEDGEPATH PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2014 AND 2013
1. | Corporate overview (continued): |
HPLLC Purchase Agreement
On June 200724, 2014, the Company and HPLLC entered into the HPLLC Purchase Agreement, pursuant to which the Company sold HPLLC 20,000,000 shares of Common Stock at a purchase price of $0.075 per share for an aggregate purchase price of $1,500,000, which monies were funded in monthly installments through December 2014 pursuant to the promissory note (the “HPLLC Note”) issued by HPLLC to the Company on June 24, 2014. Funds received under this transaction are being used by the Company for research and development as well as for general and administrative expenses.
Equity Holders Agreement
On June 24, 2014, in fulfillment of one of the Conditions of the Supply and License Agreement, and as a condition of the Mayne Purchase Agreement and in consideration for Mayne Pharma not exercising its right to terminate the Supply and License Agreement, the Company, Mayne Pharma, HPLLC, O’Donnell and Virca (together, the “Equity Holder Parties”) entered into an Equity Holders Agreement (the “Equity Holders Agreement”). The Equity Holders Agreement governs the rights and obligations of each of the parties as they pertain to the Company’s securities and to the present and future governance of the Company. Pursuant to the Equity Holders Agreement:
In addition to the foregoing, the Equity Holder Parties also agreed that the Company would seek to meet certain goals for the commercialization of the Product (the “Commercialization Goals”) and certain funding goals for the Company (the “Funding Goals”). In the event that the Company fails to achieve the Commercialization Goals or the Funding Goals, Mayne Pharma has the right to demand the resignation of O’Donnell and/or Virca from their positions with novel approachesthe Company. In the event that O’Donnell or Virca do not submit their resignations in a timely manner, Mayne Pharma can terminate the Amended and Restated Supply and License Agreement.
HEDGEPATH PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2014 AND 2013
1. | Corporate overview (continued): |
Additionally, if the Commercialization Goals are not achieved, the Company has the right to drug discovery.declare that HPLLC forfeit 17,647 shares of Series A Preferred Stock (now equal to approximately six million shares of Common Stock following the conversion of the Series A Preferred Stock in August 2014).
Consolidation PolicyIf O’Donnell or Virca are required to resign pursuant to the Equity Holders Agreement, then, notwithstanding the Employment Agreement between the Company and Virca or the Executive Chairman Agreement between the Company and O’Donnell, no severance, compensation, consideration or other payment will be due or payable in connection therewith and O’Donnell or
Virca, as the case may be, will forfeit all then unvested options, warrants, restricted stock units, or other right to acquire
Common Stock (or securities convertible into Common Stock) and will waive any claim to severance pay. Furthermore, upon such resignation or termination, Mayne Pharma will have the right to purchase by written notice to O’Donnell or Virca, as the case may be, all Company securities owned by O’Donnell or Virca, including vested options, vested warrants, vested restricted stock units and the like individually held by O’Donnell and/or Virca or otherwise transferred by either of them, as the case may be, at the fair market value (as such term is defined in the Equity Holders Agreement) as of the date of such resignation or termination.
The consolidatedEquity Holders Agreement terminates if (i) the Company receives an adjudication of bankruptcy, the Company executes an assignment for the benefit of creditors, a receiver is appointed for the Company or the Company is voluntarily or involuntarily dissolved or (ii) the Company, HPLLC and Mayne Pharma expressly agree in writing. Additionally, certain limited provisions of the Equity Holders Agreement terminate at such time as the Mayne Pharma Group collectively owns less than ten percent (10%) of the Common Stock on a fully diluted basis.
Related Party Debt Forgiveness Agreement
Following the Company’s emergence from bankruptcy in August 2013, certain expenses had been incurred for officer salary, travel, legal and patent expenses. These expenses, totaling $639,768, were paid by HPLLC on behalf of the Company. This debt was forgiven pursuant to a Debt Forgiveness Agreement, dated June 24, 2014 (the “Debt Forgiveness Agreement”), which was entered into by the Company and HPLLC as a condition of closing of the Mayne Purchase Agreement and was accounted for as a capital transaction due to the related party nature of the agreement. Pursuant to the Debt Forgiveness Agreement, HPLLC waived, canceled and forgave payment from the Company of the aforementioned $639,768 of indebtedness previously advanced by HPLLC to the Company in exchange for 2,530,227 shares of Common Stock, 71,636 shares of Series A Preferred Stock (the “Debt Forgiveness Series A Shares”) and a warrant (the “Debt Forgiveness Warrant”) to purchase 10,250,569 shares of Common Stock. The Debt Forgiveness Series A Shares together with Series A Preferred Shares previously issued to HPLLC converted into 82,156,842 shares of Common Stock on August 14, 2014 pursuant to the terms of the Equity Holders Agreement and in accordance the with the terms of the Series A Preferred Stock. The Debt Forgiveness Warrant may be exercised by HPLLC at an exercise price of $0.0878 per share at any time, from time to time, prior to the expiration of the Debt Forgiveness Warrant on June 24, 2019.
2. | Liquidity and management’s plans: |
The Company presently has very limited cash resources and requires significant additional financing for its research and development, commercialization and distribution efforts and its working capital and intends to finance these activities primarily through:
However, there can be no assurance that any of these plans will be implemented on commercially reasonable terms, if at all.
The Company had cash and cash equivalents of $365,161 as of December 31, 2014.
HEDGEPATH PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2014 AND 2013
3. | Summary of Significant Accounting Policies: |
Recent accounting pronouncements
In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update 2014-09, “Revenue from Contracts with Customers,” which supersedes the revenue recognition requirements of Accounting Standards Codification (“ASC”) Topic 605, “Revenue Recognition” and most industry-specific guidance on revenue recognition throughout the ASC. The new standard is principles-based and provides a five step model to determine when and how revenue is recognized. The core principle of the new standard is that revenue should be recognized when a company transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The new standard also requires disclosure of qualitative and quantitative information surrounding the amount, nature, timing and uncertainty of revenues and cash flows arising from contracts with customers. The new standard will be effective for the Company for annual reporting periods beginning after December 15, 2016 and can be applied either retrospectively to all periods presented or as a cumulative-effect adjustment as of the date of adoption. Early adoption is not permitted. The Company will evaluate the impact of adoption of the new standard on its financial statements include the accountsupon commencement of Commonwealth Biotechnologies, Inc. and its wholly owned subsidiaries’ Mimotopes Pty, Ltd, Australia and Exelgen, England. All inter-company accounts and transactions have been eliminated in consolidation.revenue generating activities.
Estimates
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assetassets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates.
Revenue Recognition
The Company recognizes revenue upon the completioncurrently has no ongoing source of laboratory service projects, or upon the delivery of biologically relevant materials that have been synthesized in accordance with project terms. Laboratory service projects are generally administered under fee-for-service contracts or purchase orders. Any revenues from research and development arrangements, including corporate contracts and research grants, are recognized pursuant to the terms of the related agreements as workrevenues. Miscellaneous income is performed, or as scientific milestones, if any, are achieved. Product sales are recognized when shipped. Amounts received in advance ofearned by the performance of services or acceptance of a milestone, are recorded as deferred revenue and recognized when completed.Company.
Foreign Currency Translation
The Company’s consolidated financial statements are reported in U.S. dollars. Assets and liabilities of foreign subsidiaries are translated using rates of exchange as of the balance sheet date, and related revenues and expenses are translated at average rates of exchange in effect during the period. Cumulative translation adjustments have been recorded as a separate component within other comprehensive income (loss) of stockholders’ equity. Realized gains and losses from foreign currency translations are included in other income (expense).
Long-Lived Assets
Long-lived assets, such as property, plant, and equipment, are evaluated for impairment when events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable through the estimated undiscounted future cash flows from the use of those assets. When any such impairment exists, the related assets will be written down to fair value. No impairment losses have been recorded through December 31, 2007.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. At times, the Company maintainsmay maintain cash balances in excess of FDICFederal Deposit Insurance Corporation insured amounts. The excess over the FDIC amount was approximately $2,450,000 and $1,800,000 atamounts of $250,000 for substantially all accounts. As of December 31, 20072014, the Company had approximately $15,000 in excess of the amount covered by Federal Deposit Insurance Corporation with one financial institution.
Research and 2006, respectively.
Accounts ReceivableResearch and development costs are expensed in the period in which they are incurred and include the expenses paid to third parties who conduct research and development activities on behalf of the Company as well as purchased in-process research and development.
The majority of our accounts receivableAccounting for Enterprises in Reorganization
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 852—Reorganizations(“ASC Topic 852”), which is applicable to companies in Chapter 11, generally does not change the manner in which financial statements are due from trade customers. Credit is extended based on evaluation of our customers’ financial condition and collateral is not required. Accounts receivable payment terms vary and are stated inprepared. However, it does require that the financial statements at amounts due from customers net of an allowance for doubtful accounts. Accounts outstanding longer thanperiods subsequent to the payment terms are considered past due. We determine our allowance by considering a number of factors, including the length of time trade accounts receivable are past due, our previous loss history, customers’ current ability to pay their obligations to us, and the conditionfiling of the general economyChapter 11 petition distinguish transactions and events that are directly associated with the industryreorganization from the ongoing operations of the business. Revenues, expenses, realized gains and losses, and provisions for losses that can be directly associated with the reorganization and restructuring of the business must be reported separately as reorganization items in the statements of operations beginning in the quarter ending March 31, 2011. The balance sheet must distinguish prepetition liabilities subject to compromise from both those prepetition liabilities that are not subject to compromise and from post-petition liabilities. Liabilities that may be affected by a whole. We write off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts.
Inventory
Inventories consistsplan of raw materials, work-in-process and finished goods and are statedreorganization must be reported at the loweramounts expected to be allowed by the Bankruptcy Court, even if they may be settled for lesser amounts. In addition, cash flows from reorganization items must be disclosed separately in the statement of FIFO cost (first-in, first-out method) or market.cash flows. The Company reviews its recorded inventory periodicallybecame subject to ASC Topic 852 effective on January 20, 2011, and estimates on allowance for obsolete, excess, or slow movinghas segregated those items as necessary.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed principallyoutlined above. The Company officially emerged from bankruptcy on April 17, 2013, followed by the straight-line method over their estimated useful lives providing depreciationreincorporation merger and amortization for financial reporting purposes. The costcontribution of repairs and maintenance is expensed as incurred. The estimated useful livesassets by HPLLC, which satisfied the final condition to effectiveness of the assets arePlan as follows:
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Assets under capital lease obligations are recorded at the lesser of the present value of the minimum lease payments or the fair market value of the leased asset, at inception of the lease.
Intangible Assets
Intangible assets consist of a covenant not to compete, commercial contracts, listing of draw sites, listing of providers to assistdetailed in paternity testing and other related intangibles acquired in the purchase of Fairfax Identity Labs which are being amortized over 2 to 3 years. Amounts are fully amortized at December 31, 2007.
Deferred Financing Fees
Loan costs are being amortized on a straight-line basis, which approximates the interest method, over the expected term of the related obligations.
Goodwill
Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is evaluated at least annually for impairment by comparing its fair value with its recorded amount and is written down when appropriate. Projected net operating cash flows are compared to the carrying amount of the goodwill recorded and if the estimated net operating cash flows are less than the carrying amount, a loss is recognized to reduce the carrying amount to fair value. GoodwillNote 1. Accordingly, all pre-petition liabilities had been settled as of December 31, 20072013, and Decemberthere are no further reorganization items requiring recognition in the 2014 statement of operations.
HEDGEPATH PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2006 is a result2014 AND 2013
3. | Summary of Significant Accounting Policies (continued): |
Stock-Based Compensation
The Company accounts for stock-based awards to employees and non-employess using Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718 – Accounting for Share-Based Payments, which provides for the use of the acquisitionfair value based method to determine compensation for all arrangements where shares of stock or equity instruments are issued for compensation. Fair values of equity securities issued are determined by the Company based predominantly on the trading price of Mimotopesthe common stock. The value of these awards is based upon their grant-date fair value. That cost is recognized over the period during 2007 and Fairfax Identity Labs during 2004. There was no impairment of goodwill at December 31, 2007 or December 31, 2006.which the employee is required to provide service in exchange for the award.
Income Taxestaxes
Deferred taxes are provided on the asset and liability method whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are thefuture tax consequences attributed to differences between the reportedconsolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferredbases and are measured using enacted tax rates that are expected to apply to the differences in the periods that they are expected to reverse. See Note 7 for details. Management has evaluated the guidance relating to accounting for uncertainty in income taxes and has determined that the Company had no uncertain income tax positions that could have a significant effect on the consolidated financial statements for the years ended December 31, 2014 or 2013.
4. | Prepaid Expenses: |
At December 31, 2014, prepaid expenses of $97,817 consisted primarily of $60,000 in expenses relating to the Company’s proposed S-1 Offering and approximately $40,000 relating to the Company’s Directors and Officers insurance premiums. The $10,000 in prepaid expenses at December 31, 2013 related to financing fees that were expensed during 2014.
5. | Notes Payable |
On August 1, 2013, the Company formalized amounts due to two former employees and a former director of CBI by issuing three non-interest bearing promissory notes. The two employee notes totaling approximately $62,000 were due on November 1, 2013. Interest began accruing at 18% per annum on the unpaid principal on November 1, 2013, in accordance with the specified terms. On January 31, 2014, the Company extended the two former employee notes to March 31, 2014 while adding accrued interest through January 31, 2014 and an additional $3,000 to the principal balance of each. Additional extensions were entered into in May 2014 to extend the maturity to July 12, 2014, which includes additional principal of approximately $9,000 each along with accrued and unpaid interest through May 13, 2014. On July 10, 2014, a partial payment of $57,000 was made by the Company and the maturity was extended to December 31, 2014, with an interest rate of 9% per annum effective July 10, 2014. The notes balances, including accrued interest, were paid in full in December 2014.
The former director non-interest bearing note of approximately $6,000 was due the later of five days following the date on which the Company has raised $1 million, or November 1, 2013. Interest began accruing at a rate of 5% per annum on November 1, 2013 in accordance with the specified terms. The former director note and the related accrued interest were paid in full on July 2, 2014.
6. | Other liabilities |
Pursuant to the Contribution Agreement dated August 13, 2013, the Company has agreed to issue to a third party service provider a number of restricted shares of its Common Stock to be determined based on the valuation of the shares to be issued to purchasers in connection with the Company’s planned offering of securities as described in CBI’s Amended Plan of Reorganization in payment of a $52,500 claim. Such shares of Common Stock are to be issued to such service provider within five (5) business days of the final determination of such valuation (as memorialized in the final transaction documentation for such offering). The $52,500 is included in the balance of other liabilities in the Balance Sheets for December 31, 2014 and 2013. Additional accrued amounts for unbilled legal expenses and research and development are included in the December 31, 2014 total of $73,178.
HEDGEPATH PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2014 AND 2013
7. | Income Taxes: |
The difference between expected income tax benefits and income tax benefit recorded in the financial statements is explained below:
December 31, | ||||||||
2014 | 2013 | |||||||
Income taxes (benefit) computed at statutory rate | $ | (1,351,601 | ) | $ | (627,319 | ) | ||
State income tax benefit, net | (137,219 | ) | (63,688 | ) | ||||
Other | 80,899 | — | ||||||
Change in valuation allowance | 1,407,921 | 691,007 | ||||||
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$ | — | $ | — | |||||
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The significant components of deferred income tax assets areand liabilities consist of the following:
December 31, | ||||||||
Deferred tax assets (liabilities) | 2014 | 2013 | ||||||
In-process research and development | $ | 996,154 | $ | 346,801 | ||||
Net operating loss carry forward | 878,706 | 407,398 | ||||||
R&D credit | 15,779 | 2,584 | ||||||
Share-based compensation | 256,219 | — | ||||||
Accrued expenses | 17,850 | — | ||||||
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2,164,708 | 756,783 | |||||||
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Less: valuation allowance | (2,164,708 | ) | (756,783 | ) | ||||
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$ | — | $ | — | |||||
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In accordance with GAAP, it is required that a deferred tax asset be reduced by a valuation allowance when, inif, based on the opinionweight of management,available evidence it is more likely than not (a likelihood of more than 50 percent) that some portion or all of the deferred tax assets will not be realized. DeferredThe valuation allowance should be sufficient to reduce the deferred tax asset to the amount which is more likely than not to be realized. As a result, the Company recorded a valuation allowance with respect to all of the Company’s deferred tax assets.
The Company has a federal net operating loss (“NOLs”) of approximately $2.4 million as of December 31, 2014. Under Section 382 and 383 of the Internal Revenue Code, if an ownership change occurs with respect to a “loss corporation”, as defined, there are annual limitations on the amount of the NOLs and other deductions which are available to the Company. The portion of the NOLs incurred prior to August 12, 2013 is subject to this limitation. As such, the use of these NOLs to offset taxable income is limited to approximately $35,000 per year and the Company has written off the deferred tax assets and liabilitiesassociated with the NOLs limited due to the ownership change that occurred on August 12, 2013. The Company’s State NOLS are adjusted for the effectsapproximately $2.2 million as of changes in tax laws and rates on the date of enactment.
Income (Loss) Per Common Share
Basic income (loss) per share has been computed on the basis of the weighted-average number of common shares outstanding. Common shares which can be issued upon exercise of stock options and warrants have not been included in the computation for the years December 31, 2007 and 2006 because their inclusion would have been anti-dilutive. Weighted average shares outstanding for basic and diluted2013. The loss per common share were 5,135,951 and 3,281,360 forcarryforwards begin to expire in 2018.
8. | Chapter 11 Information: |
During the yearsyear ended December 31, 20072013, the Company settled all pre-petition claims associated with the bankruptcy in cash and 2006, respectively.Common Stock. The Company paid $357,265 in cash and $152,000 in Common Stock to settle the claims. The Common Stock was valued using the 30 day average of the Company’s stock price. The $166,676 difference between pre-petition liabilities and the settled amount was recognized as gain on reorganization in the accompanying statement of operations for the year ended December 31, 2013. There was no such gain for the year ended December 31, 2014.
HEDGEPATH PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2014 AND 2013
9. | Stockholders’ Equity: |
Employee Stock Plans
The Company adopted a Stock Incentive Plan on June 24, 1997. The Plan provides for granting to employees, officers, directors, consultants and certain other non-employees of the Company options to purchase shares of common stock. A maximum of 410,000 shares of common stock may be issued pursuant to the Plan. Of the maximum number of shares to be issued under the Plan, 270,000 have been reserved for incentive awards to be granted to the founders of the Company, and 140,000 are reserved for incentive awards to be granted to others.
A 2000 Stock Incentive Plan was adopted by the Board of Directors and approved by the stockholders. The Plan makes up to 300,000 shares of common stock available for grants of restricted stock awards and stock options in the form of incentive stock options and non-qualified options to employees, directors and consultants of the Company.
A 2002 Stock Incentive Plan was adopted by the Board of Directors and approved by the stockholders. The Plan makes upshareholders of CBI. However, all options were canceled on July 16, 2013, which was 90 days subsequent to 600,000 shares of common stock available for grants of restricted stock awards and stock options in the form of incentive stock options and non-qualified options to employees, directors and consultantseffective date of the Company.emergence from bankruptcy.
A 2007 Stock Incentive Plan was adopted by the Board of Directors and approved by the shareholders of CBI. However, all options were canceled on July 16, 2013, which was 90 days subsequent to the effective date of the emergence from bankruptcy.
A 2009 Stock Incentive Plan was adopted by the Board of Directors and approved by the shareholders of CBI. There are no options outstanding under this plan.
On July 18, 2014, a 2014 Equity Incentive Plan (“EIP”) was adopted by the Company’s Board of Directors. On September 30, 2014, the EIP was approved by the majority of stockholders. The Plan makes2014 EIP authorizes the issuance of up to 1,000,00032,583,475 shares of the Company’s common stock available for grants ofstock. In July 2014, 15,041,738 restricted stock awardsunits (“RSUs”) were granted to the Company’s Chief Executive Officer, Nicholas J. Virca, and stock options inshall vest upon the formearlier to occur of incentive stock options(i) September 3, 2016 or (ii) the acceptance by the FDA of a New Drug Application (“NDA”) by the Company for any Company product candidate with a cancer indication utilizing the Company’s licensed SUBA-itraconazole technology, provided that Mr. Virca is actively employed by the Company on the earlier of such date. An additional 1.5 million RSUs were issued to various Board members and non-qualified optionsofficers with the same vesting schedule. In August 2014, 7,000,000 RSUs were issued to employees, directors and consultantsthe Company’s Chief Financial Officer, Garrison J. Hasara. Of those RSUs, 50% shall vest upon the earlier to occur of (i) September 3, 2016 or (ii) the acceptance by the FDA of a NDA by the Company for any Company product candidate with a cancer indication utilizing the Company’s licensed SUBA-itraconazole technology, provided that Mr. Hasara is actively employed by the Company on the earlier of such date. The balance of the Company.RSUs will vest September 3, 2017.
IncentiveGoing forward, incentive awards may be in the form of stock options, restricted stock, incentiverestricted stock or tax offset rights.units and performance and other awards. In the case of incentive stock options, (within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended), the exercise price will not be less than 100% of the fair market value of shares covered at the time of the grant, or 110% for incentive stock options granted to persons who own more than 10% of the Company’s voting stock. Options granted under the Planswill generally vest over a five-yearthree-year period from the date of grant and arewill be exercisable for ten years, except that the term may not exceed five years for incentive stock options granted to persons who own more than 10% of the Company’s outstanding common stock.
Stock Based Compensation Plans
Beginning January 1, 2006, the Company adopted SFAS 123R, which recognizes share-based compensation expense for stock option grants. Prior to 2006, the Company applied Accounting Principles Bulletin (APB) Opinion 25, Accounting for Stock Issued to Employees, and related Interpretations to account for employee stock compensation plans, and accordingly did not recognize compensation expense for stock options granted when the option price is greater than or equal to the underlying stock price at the date of grant.
Fair Value of Financial Instruments
The Company has determined, based on available market information and appropriate valuation methodologies, that the fair value of its financial instruments approximates carrying value. The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to the short-term maturity of the instruments. The carrying amount of debt approximates fair value because of the short term maturities or the interest rates under the credit agreements are predominantly variable, based on current market conditions.
Derivative Instruments and Hedging Activities
The Company uses interest rate swap agreements to manage variable interest rate exposure on the majority of its long-term debt. The Company’s objective for holding these derivatives is to decrease the volatility of future cash flows associated with interest payments on its variable rate debt. The Company does not issue derivative instruments for trading purposes. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in “other comprehensive income or loss” on the consolidated balance sheets and subsequently reclassified to interest expense when the hedged exposure affects income (i.e. as interest expense accrues on the related outstanding debt). Differences between the amounts paid and amounts received under the swap agreements are recognized in interest expense.
Changes in the ineffective portion of the fair value of the derivative are accounted for through interest expense. The notional principal value of the Company’s swap agreement outstanding as of December 31, 2007 is equal to the outstanding principal balance of the corresponding debt instrument.
New Accounting Pronouncements
In July 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement 109,” which provides guidance on the measurement, recognition, and disclosure of tax positions taken or expected to be taken in a tax return. The interpretation also provides guidance on de-recognition, classification, interest and penalties, and disclosure. FIN 48 prescribes that a tax position should only be recognized if it is more-likely-than-not that the position will be sustained upon examination by the appropriate taxing authority. A tax position that meets this threshold is measured as the largest amount of benefit that is more likely than not (greater than 50 percent) realized upon ultimate settlement. The cumulative effect of applying FIN 48 is to be reported as an adjustment to the beginning balance of retained earnings in the period of adoption. FIN 48 is effective for fiscal years beginning after December 15, 2006. The adoption of this standard did not have an impact on the Company’s financial condition or results of operations.
In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 applies to other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. The Statement does not require any new fair value measurements and was initially effective for the Company beginning January 1, 2008. In February 2008, the FASB approved the issuance of FASB Staff Position (FSP) FAS 157-2. FSP FAS 157-2 defers the effective date of SFAS No. 157 until January 1, 2009 for nonfinancial assets and nonfinancial liabilities except those items recognized or disclosed at fair value on an annual or more frequently recurring basis. Management has not completed its review of the new guidance; however, the effect of the Statement’s implementation is not expected to be material to the Company’s results of operations or financial position.
In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141(R),Business Combinations, to further enhance the accounting and financial reporting related to business combinations. SFAS No. 141(R) establishes principles and requirements for how the acquirer in a business combination (1) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non controlling interest in the acquire, (2) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and (3) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Therefore, the effects of the Company’s adoption of SFAS No. 141(R) will depend upon the extent and magnitude of acquisitions after December 31, 2008.
In December 2007, the FASB issued SFAS No. 160,No controlling Interests in Consolidated Financial Statements – an amendment of ARB No. 51, to create accounting and reporting standards for the no controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 establishes accounting and reporting standards that require (1) the ownership interest in subsidiaries held by parties other than the parent to be clearly identified and presented in the consolidated balance sheet within equity, but separate from the parent’s equity, (2) the amount of consolidated net income attributable to the parent and the no controlling interest to be clearly identified and presented on the face of the consolidated statement of income, (3) changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary to be accounted for consistently, (4) when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary to be initially measured at fair value, and (5) entities to provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 applies to fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008, and prohibits early adoption. Management has not completed its review of the new guidance; however, the effect of the Statement’s implementation is not expected to be material to the Company’s results of operations or financial position.
In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities. This Statement permits entities to choose to measure eligible items at fair value at specified election dates. For items for which the fair value option has been elected, unrealized gains and losses are to be reported in earnings at each subsequent reporting date. The fair value option is irrevocable unless a new election date occurs, may be applied instrument by instrument, with a few exceptions, and applies only to entire instruments and not to portions of instruments. SFAS No. 159 provides an opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting. SFAS No. 159 is effective for the Company beginning January 1, 2008. Management has not completed its review of the new guidance; however, the effect of the Statement’s implementation is not expected to be material to the Company’s results of operations or financial position.
In March, 2008, the FASB issued FASB Statement No. 161,Disclosures about Derivative Instruments and Hedging Activities-an Amendment of FASB Statement 133. Statement 161 enhances required disclosures regarding derivatives and hedging activities, including enhanced disclosures regarding how: (a) an entity uses derivative instruments; (b) derivative instruments and related hedged items are accounted for under FASB Statement No. 133,Accounting for Derivative Instruments and Hedging Activities; and (c) derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Specifically, Statement 161 requires:
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Notes to Consolidated Financial Statements
1. Property and Equipment
Property and equipment consisted of the following:
December 31, | ||||||||
2007 | 2006 | |||||||
Land | $ | 404,269 | $ | 403,919 | ||||
Building | 6,722,042 | 5,206,637 | ||||||
Laboratory equipment | 5,865,599 | 5,136,424 | ||||||
Furniture, fixtures and office and computer equipment | 1,129,673 | 663,123 | ||||||
14,121,583 | 11,410,103 | |||||||
Less accumulated depreciation and amortization | 6,604,868 | 5,797,958 | ||||||
$ | 7,516,715 | $ | 5,612,145 | |||||
Depreciation expense was $828,676 and $595,289 for the years ended December 31, 2007 and 2006, respectively. The increase in property plant and equipment resulted primarily from the acquisitions of Mimotopes and Exelgen. One of our buildings is subject to a land lease. Lease payments associated with this land lease amounted to $96,732 in 2007.
2. Inventory
Inventory consisted of the following:
December 31, | ||||||
2007 | 2006 | |||||
Raw materials | $ | 1,794,320 | $ | — | ||
Work in process | 136,608 | — | ||||
Finished Goods | 233,536 | 44,343 | ||||
$ | 2,164,464 | $ | 44,343 | |||
3. Long-Term Debt
Long-term debt consists of:
December 31, | |||||||
2007 | 2006 | ||||||
Mortgage payable to BB&T due in monthly installments of approximately $36,000 with an interest rate of 8.75% as of December 31, 2007. The loan will mature in November 2009 and is collateralized by the corporate offices and laboratory facilities located in Richmond, Virginia, as well as all assets of the Company. The Company also entered into a interest rate agreement essentially locking the interest rate paid by the Company to 7.975%. | $3,634,362 | $ | 3,740,890 | ||||
In January 2005, the Company entered into a capitalized leasing agreement with Technology Leasing Concepts for two pieces of laboratory equipment. The monthly principal and interest payments are $11,378 with an interest rate of 7.5%. Both leases are for a forty-eight month period. | 147,686 | 273,724 | |||||
In February 2007, the Company entered into a thirty-six month capitalized leasing agreement with Technology Leasing Concepts for several pieces of computer equipment. The monthly principal and interest payments are $898. | 20,188 | — |
419,611 — 1,088,133 — 434,944 — 146,159 — 1,950,000 — 9,013 — 7,850,096 4,014,614 2,656,571 228,545 1,950,000 — $ 3,243,525 $ 3,786,069Capitalized lease agreement with Bank of America which matures in April 2008. The lease is collateralized by laboratory equipment located in Bude, Cornwall England. The quarterly principal and interest payments are approximately $218,000 with an interest rate of 6.91%. Capitalized lease agreement with Lombard North Central which matures in December 2008. The lease is collateralized by laboratory equipment located in Bude, Cornwall England. The quarterly principal and interest payments are approximately $298,000 with an interest rate of 7.41%. Lease agreement with De Lage Landen which matures in February 2009. The lease is collateralized by laboratory equipment located in Bude, Cornwall England. The quarterly principal and interest payments are approximately $97,000 with an interest rate of 8.66%. Capitalized lease agreement with Societe Genrale which matures in December 2008. The lease is collateralized by laboratory equipment located in Bude, Cornwall England. The quarterly principal and interest payments are approximately $48,000 with an interest rate of 10.07%. Secured convertible promissory notes with LH Financial which mature in June 2009. The note is collateralized by a security interest – in substantially all of the assets of the Company. Interest compounds monthly at a rate of 10%. Interest is payable in cash, or at the election of the Company, with registered shares of common stock. The amount payable at December 31, 2007 represents the gross note amount of $1,950,000, which is reflected net of a discount of $1,950,000 in the consolidated balance sheets. (See Note 12) Miscellaneous capital leases Less current maturities and unamortized discounts Less discount on convertible promissory notes Long term debt
Scheduled maturities of long-term debt are as follows:
For the year ended December 31, | |||
2008 | $ | 2,656,571 | |
2009 | 5,191,752 | ||
2010 | 1,773 | ||
$ | 7,850,096 | ||
The mortgage includes certain restrictive covenants, which require the Company to maintain minimum levels of the current ratio, debt to net worth and cash flow ratio’s. At December 31, 2007, the Company was in violation of covenants related to cash flows, however, the Company was granted a waiver of the covenants by the bank for a period of one year to December 31, 2008.
4. Leasing Commitments
The Company leases equipment and facilities under non-cancelable operating leases. Total expense for the years ended December 31, 2007 and 2006 was $67,305 and $42,394, respectively. Leases are secured by the equipment. Future minimum lease payments and the present value thereof under capitalized leases and future minimum rentals under all non-cancelable operating leases with remaining terms in excess of one year as of December 31, 2007 are as follows:
Year Ended December 31, | Capitalized | Operating | |||||
2008 | $ | 2,101,899 | $ | 119,000 | |||
2009 | 76,064 | 85,000 | |||||
2010 | — | 68,000 | |||||
2011 | — | 68,000 | |||||
2012 | — | 8,000 | |||||
Total | 2,177,963 | 348,000 | |||||
Less amount representing interest | (86,114 | ) | — | ||||
Present value of minimum lease payments under capital leases | $ | 2,091,849 | $ | — | |||
5. Retirement Plan
CBI and FIL maintain a 401(k) Plan (the “Plan”) which covers substantially all employees. Under the Plan, employees may elect to defer a portion of their salary, up to the maximum allowed by law, and the Company can elect to match the contribution up to 1% of the employee’s contribution. Company contributions were $20,348 and $22,285 for the years ended December 31, 2007 and 2006, respectively.
Exelgen maintains a retirement plan. Under the Plan, employees may contribute up to 25% of their salary. The Company can elect to match the contribution up to 8% of the employee’s contribution. Company contributions were $80,745 in 2007.
Mimotopes is required by law to make contributions to a retirement plan covering all of its eligible employees at a rate of 9% of their base earnings. Company contributions were $157,693 in 2007.
6. Restricted Cash
Under the terms of the Company’s mortgage (Note 3), $400,000 is being held in escrow at December 31, 2007 by BB&T. At the discretion of BB&T, these funds will be released in 2008 to pay down the principal balance of the mortgage and therefore are classified in cash and cash equivalents at December 31, 2007.
Pursuant to the terms of the Company’s building lease in England, $646,773 is being held in escrow at December 31, 2007 by the Southwest Economic Development Agency. These funds are scheduled for release in November 2008 and May 2009.
Under the terms of the Company’s land lease in Australia, $88,370 is being held in escrow at December 31, 2007. This amount is equivalent to one year of lease payments.
7. Income Taxes
The difference between expected income tax benefits and income tax benefits recorded in the financial statements is explained below:
Year Ended December 31, | |||||
2007 | 2006 | ||||
Income taxes (benefit) computed at 34% statutory rate | $(963,800) | $ | (391,800) | ||
State income tax benefit, net | (143,600) | (58,000) | |||
Change in valuation allowance | 1,248,600 | 464,000 | |||
Non-taxable Gain | (156,600) | — | |||
Other | 15,400 | (14,200) | |||
$ — | $ | — | |||
The significant components of deferred income tax assets and liabilities consist of the following:
December 31, | ||||||
2007 | 2006 | |||||
Deferred tax assets | ||||||
Net operating loss carryforward | $ | 14,036,300 | $ | 3,948,000 | ||
Research and development credit carryforward | 52,600 | 52,600 | ||||
Intangibles | 192,000 | 179,000 | ||||
Interest rate swap | — | 8,100 | ||||
Allowance for doubtful accounts | 59,400 | 20,800 | ||||
Stock based compensation | 50,000 | 38,600 | ||||
Other | 30,600 | 8,300 | ||||
14,420,900 | 4,255,400 | |||||
Deferred tax liabilities | ||||||
Tax depreciation in excess of book depreciation | 135,300 | 218,400 | ||||
Net deferred tax asset before valuation allowance | 14,285,600 | 4,037,000 | ||||
Less valuation allowance | 14,285,600 | 4,037,000 | ||||
Net deferred tax asset | $ | — | $ | — | ||
Operating loss carryforwards at December 31, 2007 relating to US operations of approximately $13,000,000 may be used to offset future taxable income and expire through 2025. The Company has foreign operating loss carryforwards of approximately $45,450,000 to offset future taxable income which may be carried forward indefinitely. The Company also has research and development credit carryforwards at December 31, 2007 of approximately $53,000 that expire through 2022. A valuation allowance has been established for deferred tax assets at December 31, 2007 as realization is dependent upon generating future taxable income.
8. Stock Compensation
Stock-based compensation expense recognized during a period is determined based on the fair value of the portion of stock-based awards that is ultimately expected to vest duringand recognized over the vesting period. Stock-basedThe Company recognized $753,585 in stock-based compensation expense recognized inrelated to Restricted Stock Units for the year ended December 31, 2007 included compensation2014. There was no comparable expense for stock-based awards granted prior to, but not yet vested as of December 31, 2006, based on the fair value on the grant date. As stock-based compensation expense recognized in fiscal 2007 is based on awards ultimately expected to vest, it has been reduced for forfeitures.
Stock-based compensation expense related to employee stock options recognized under SFAS No. 123(R) for the yearsyear ended December 31, 2007 and 2006 was $131,418 and $62,796 respectfully and is included in selling general and administrative expenses.2013. As of December 31, 2007, total2014 there was approximately $3.0 million in unamortized stock-based compensation cost related to non-vested stock options was $121,205, net of expected forfeitures, which is expected to be recognized during 2008.awards.
The total intrinsic value of options (which is the amount by which the stock price exceeded the exercise price of the options on the date of exercise) exercised during the year ended December 31, 2007 was $102,207. The total outstanding and exercisable intrinsic value of options as of December 31, 2007 was approximately $55,686. During the year ended December 31, 2007, the Company received cash from the exercise of stock options in the amount of $43,500.
The following table sets forth fair value per share information, including related weighted-average assumptions, used to determine compensation cost for stock options consistent with the requirements of SFAS No. 123R. No stock options were granted in 2006.
Stock option transactionsactivity for the years ended December 31, 20072014 and 2006 are summarized2013 is as follows:
2007 | Weighted Average Exercise Price | 2006 | Weighted Average Exercise Price | |||||||||
Options and warrants outstanding, beginning of year | 924,839 | $ | 6.07 | 987,419 | $ | 5.93 | ||||||
Granted | 64,000 | 2.05 | — | — | ||||||||
Exercised | (42,778 | ) | 1.02 | (23,471 | ) | 1.53 | ||||||
Expired | (160,184 | ) | 8.56 | (39,109 | ) | 4.41 | ||||||
Options and warrants outstanding, end of year | 785,877 | $ | 5.52 | 924,839 | $ | 6.07 | ||||||
Options and warrants exercisable, end of year | 757,187 | $ | 5.32 | 888,584 | $ | 6.13 | ||||||
Weighted-average fair value per option and warrants granted during the year | $ | 1.31 | — | |||||||||
Number of Shares | Weighted Average Exercise Price Per Share | Aggregate Intrinsic Value | ||||||||||
Outstanding at December 31, 2012 | 245,443 | $ | 3.02 | $ | — | |||||||
Granted in 2013 | — | — | — | |||||||||
Exercised | — | — | — | |||||||||
Canceled | (245,443 | ) | 3.02 | — | ||||||||
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Outstanding at December 31, 2013 | — | — | — | |||||||||
Granted in 2014 | — | — | — | |||||||||
Exercised | — | — | — | |||||||||
Outstanding at December 31, 2014 | — | $ | — | $ | — | |||||||
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The assumptions used to determine the fair value per option are as follows:
HEDGEPATH PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2014 AND 2013
9. | Stockholders’ Deficit (continued): |
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The following table summarizes information about stock options and warrants outstanding at December 31, 2007:
Outstanding | Exercisable | |||||||||||
Exercise Prices | Number Outstanding | Weighted Average Remaining Contractual Life (Years) | Weighted Average Exercise Price Per Share | Number Exercisable | Weighted Average Exercise Price Per Share | |||||||
$0.90 – 2.00 | 22,408 | 7 | $ | 1.36 | 22,408 | $ | 1.36 | |||||
$2.01 – 5.49 | 436,931 | 6 | 3.91 | 408,562 | 3.55 | |||||||
$5.50 – 7.00 | 86,750 | 2 | 5.98 | 86,429 | 5.28 | |||||||
$7.01 – 9.49 | 124,000 | 5 | 7.57 | 124,000 | 7.57 | |||||||
$9.50 –12.50 | 115,788 | 3 | 9.90 | 115,788 | 9.90 | |||||||
$0.90 –12.50 | 785,877 | $ | 5.52 | 757,187 | $ | 5.32 | ||||||
The following table summarizes information aboutIssuance of Restricted Stock Unit (RSU) activity
In April 2013, restricted shares were issued to CBI’s CEO, one CBI board member and one former CBI officer for a portion of their approved claims. The number of shares issued, which totaled 3,328,467, was determined by using a per share price equal to the average of the 30 day closing price of Common Stock and was valued at $152,000.
Issuance of Preferred and Common Stock
Upon entering into the Amended and Restated Supply and License Agreement with Mayne Pharma, the Company issued 258,363 shares of Series A Preferred Stock to Mayne Pharma. The fair value of such issued shares of Series A Preferred Stock has been accounted for as in-process research and development totaling approximately $1.3 million and is included in research and development expense for the year ended December 31, 2007:2014.
See Note 1 for discussion of Series A Preferred Stock issued for related party debt forgiveness.
See Note 1 for discussion of Common Stock issued.
Warrants
Pursuant to the Mayne Purchase Agreement (Note 1), a warrant to purchase 10,250,569 shares of the Company’s common stock at $0.0878 were granted to Mayne Pharma. The warrant will expire on June 24, 2019. The fair value of warrants has been accounted for as in-process research and development totaling approximately $0.6 million and is included in research and development expense for the year ended December 31, 2014.
Pursuant to the Debt Forgiveness Agreement (Note 1) with HPLLC, a warrant to purchase 10,250,569 shares of the Company’s common stock at $0.0878 was granted to HPLLC. The warrant will expire on June 24, 2019. The amount of debt forgiven of $450,000 was recorded as additional paid-in capital for the year ended December 31, 2014.
Number of Restricted Stock Units | Weighted Average Grant Date Fair Value | ||||
Non-vested at December 31, 2006 | 66,667 | $ | 4.52 | ||
Granted | — | — | |||
Vested | 22,208 | 4.52 | |||
Forfeited | — | — | |||
Non-vested at December 31, 2007 | 44,459 | $ | 4.52 | ||
10. | Related party transactions: |
AtAs part of the short-form reincorporation merger with HPPI, certain expenses had been incurred for officer salary, travel, legal and patent expense. These expenses, totaling $366,130, were paid by Hedgepath, LLC on behalf of the newly formed HPPI and are included in due to related party in the accompanying balance sheet as of December 31, 2007, there2013. An additional $273,638 was approximately $250,000advanced during 2014. The balance of total unrecognized compensation cost$639,768 was exchange for preferred stock, common stock and common stock warrants as discussed further in note 1 (Related Party Debt Forgiveness Agreement).
11. | Legal Proceedings: |
Chien Connecticut Case
In October 2012, Andrew Chien (“Chien”), an alleged shareholder of the Company’s predecessor, CBI, filed suit in Connecticut state court (later removed to the United States District Court for the District of Connecticut (the “CT District Court”)) against CBI, Dr. Richard J. Freer (a director and officer of CBI) (“Freer”), and the law firm LeClairRyan (the “Chien Connecticut Case”).
In October 2012, the CT District Court in the Chien Connecticut Case entered an Order dismissing Chien’s claims without prejudice on account of CBI’s pending Chapter 11 bankruptcy.
Chien filed various motions in response to the CT District Court’s decision dismissing the claims asserted against Freer and LeClairRyan, including a motion for reconsideration. On Thursday, May 29, 2014, the presiding judge issued several orders. The CT District Court granted Chien’s request that he be allowed to proceed with the fifth and six claims he asserted against CBI in his Complaint, namely (i) a claim for relief entitled “Securities Fraud and Fiduciary Duty Violation against CBI” and (ii) a claim for relief entitled “Fiduciary Duty violation against CBI” (collectively, the “Chien Claims”). A related scheduling order provided that CBI had until June 20, 2014 to answer or otherwise respond to the Complaint. The Company retained LeClairRyan to serve as CBI’s counsel in the Chien Connecticut Case. On June 20, 2014, LeClairRyan filed on CBI’s behalf a motion to dismiss seeking a dismissal with prejudice of the Chien Claims. LeClairRyan also filed on CBI’s behalf a motion to stay discovery. On August 5, 2014, the CT District Court granted CBI’s motion to stay discovery.
HEDGEPATH PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2014 AND 2013
11. | Legal Proceedings (continued): |
Chien Connecticut Case (continued):
On November 4, 2014, the CT District Court dismissed the case and the matter was closed by the court. On December 1, 2014, Chien filed various motions including a Motion to Reargue. In response, the Company filed a consolidated opposition to Chien’s various pleadings, including to the Motion to Reargue. The Company is now awaiting a decision from the Court. The Company strongly refutes as without merit Chien’s claims and will continue to vigorously defend the lawsuit.
Chien Virginia Case
In April 2013, Chien filed an adversary proceeding to recover monetary and injunctive relief against CBI and Freer in the United States Bankruptcy Court for the Eastern District of Virginia (the “EDVA Bankruptcy Court”). On June 19, 2013, the EDVA Bankruptcy Court held a hearing on CBI’s and Freer’s motions to strike and / or dismiss Chien’s adversary proceeding Complaint. At the conclusion of the June 19, 2013 hearing the EDVA Bankruptcy Court granted CBI’s and Freer’s motions to strike and / or dismiss and ordered that Chien’s adversary proceeding be dismissed. On July 1, 2013, the EDVA Bankruptcy Court entered a Memorandum Opinion memorializing its decision. Chien perfected an appeal of the EDVA Bankruptcy Court’s decision (the “Bankruptcy Appeal”) to the United States District Court for the Eastern District of Virginia (the “EDVA District Court”).
On August 14, 2014, the EDVA District Court dismissed the case and the matter was closed by the court on September 16, 2014.
Other
On July 24, 2013 and August 5, 2013, purported class actions were filed in the United States District Court for the Middle District of Florida (Tampa Division) against Accentia Biopharmaceuticals, Inc., and several current and former directors and officers of Accentia and its former subsidiary, Biovest International, Inc. (collectively the “Class Action”), including Frank E. O’Donnell, Jr. M.D., the Company’s Executive Chairman. The complaints allege that the defendants violated federal securities laws by making or causing Accentia and/or Biovest to make false statements, and by failing to disclose or causing Accentia and/or Biovest to fail to disclose material information, concerning the results of the clinical trial of Biovest’s cancer vaccine, BiovaxID, and status of its approval by the FDA. Plaintiffs seek damages in an unspecified amount on behalf of shareholders who purchased common stock of Accentia or Biovest during a defined time period. All defendants, including Dr. O’Donnell, believe this litigation to be without merit, deny any wrongdoing or liability and have vigorously defended the alleged claims. A settlement of this matter, in which defendants make no admissions of wrongdoing or liability, has been agreed upon by all parties and approved by the Court.
HEDGEPATH PHARMACEUTICALS, INC.
CONDENSED BALANCE SHEETS
AS OF MARCH 31, 2015 AND DECEMBER 31, 2014
(Unaudited)
March 31, 2015 | December 31, 2014 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 83,951 | $ | 365,161 | ||||
Other current assets | 43,723 | 97,817 | ||||||
|
|
|
| |||||
Total current assets | 127,674 | 462,978 | ||||||
|
|
|
| |||||
Total assets | $ | 127,674 | $ | 462,978 | ||||
|
|
|
| |||||
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 493,877 | $ | 324,966 | ||||
Other liabilities | 74,689 | 75,933 | ||||||
|
|
|
| |||||
Total current liabilities | 568,566 | 400,899 | ||||||
|
|
|
| |||||
Total liabilities | 568,566 | 400,899 | ||||||
|
|
|
| |||||
Commitments and contingencies (note 7) | — | — | ||||||
Stockholders’ (deficit) equity: | ||||||||
Common stock, $0.0001 par value; 340,000,000 shares authorized; 211,419,937 shares issued and outstanding | 21,142 | 21,142 | ||||||
Additional paid-in capital | 32,683,593 | 32,263,890 | ||||||
Accumulated deficit | (33,145,627 | ) | (32,222,953 | ) | ||||
|
|
|
| |||||
Total stockholders’ (deficit) equity | (440,892 | ) | 62,079 | |||||
|
|
|
| |||||
Total liabilities and stockholders’ (deficit) equity | $ | 127,674 | $ | 462,978 | ||||
|
|
|
|
See notes to condensed financial statements
HEDGEPATH PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2015 AND 2014
(Unaudited)
Three Months Ended March 31, | ||||||||
2015 | 2014 | |||||||
Revenues: | ||||||||
|
|
|
| |||||
Total Revenues: | $ | — | $ | — | ||||
|
|
|
| |||||
Expenses: | ||||||||
Research and development expenses | 313,017 | 25,325 | ||||||
General and administrative | 609,657 | 161,605 | ||||||
|
|
|
| |||||
Total Expenses: | 922,674 | 186,930 | ||||||
|
|
|
| |||||
Loss from operations | (922,674 | ) | (186,930 | ) | ||||
Interest expense | — | (9,558 | ) | |||||
|
|
|
| |||||
Net loss | $ | (922,674 | ) | $ | (196,488 | ) | ||
|
|
|
| |||||
Basic and diluted net loss per share | $ | — | $ | (0.01 | ) | |||
|
|
|
| |||||
Weighted average common stock shares outstanding | 211,419,937 | 18,888,971 | ||||||
|
|
|
|
See notes to condensed financial statements
HEDGEPATH PHARMACEUTICALS, INC.
CONDENSED STATEMENT OF STOCKHOLDERS’ (DEFICIT) EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2015
(Unaudited)
Common Stock | Additional Paid-In Capital | Accumulated Deficit | Total Stockholders’ (Deficit) Equity | |||||||||||||||||
Shares | Amount | |||||||||||||||||||
Balances, January 1, 2015 | 211,419,937 | $ | 21,142 | $ | 32,263,890 | $ | (32,222,953 | ) | $ | 62,079 | ||||||||||
Stock based compensation | — | — | 419,703 | — | 419,703 | |||||||||||||||
Net loss | — | — | — | (922,674 | ) | (922,674 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Balances, March 31, 2015 | 211,419,937 | $ | 21,142 | $ | 32,683,593 | $ | (33,145,627 | ) | $ | (440,892 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
See notes to condensed financial statements
HEDGEPATH PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014
(Unaudited)
Three months Ended March 31, | ||||||||
2015 | 2014 | |||||||
Operating activities: | ||||||||
Net loss | $ | (922,674 | ) | $ | (196,488 | ) | ||
Adjustments to reconcile net loss to net cash flows from operating activities: | ||||||||
Non-cash interest expense | — | 6,666 | ||||||
Stock based compensation | 419,703 | — | ||||||
Changes in assets and liabilities: | ||||||||
Prepaid expense and other current assets | 54,094 | — | ||||||
Accounts payable and other current liabilities | 167,667 | 81,317 | ||||||
|
|
|
| |||||
Net cash used in operating activities | (281,210 | ) | (108,505 | ) | ||||
|
|
|
| |||||
Financing activities: | ||||||||
Proceeds from related party advances | — | 108,744 | ||||||
|
|
|
| |||||
Net cash flows from financing activities | — | 108,744 | ||||||
|
|
|
| |||||
Net change in cash and cash equivalents | (281,210 | ) | 239 | |||||
Cash and cash equivalents at beginning of period | 365,161 | 217 | ||||||
|
|
|
| |||||
Cash and cash equivalents at end of period | $ | 83,951 | $ | 456 | ||||
|
|
|
|
See notes to condensed financial statements
HEDGEPATH PHARMACEUTICALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2015 AND 2014
(Unaudited)
1. | Corporate overview: |
Overview
The accompanying unaudited condensed financial statements of HedgePath Pharmaceuticals, Inc., a Delaware corporation (the “Company”, “HPPI”, “we”, “us” or similar terminology), have been prepared by the Company without audit. In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows as of March 31, 2015, and for all periods presented, have been made.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to the Securities and Exchange Commission (“SEC”) rules and regulations. These unaudited condensed financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2014, which are included in the Company’s 2014 Annual Report on Form 10-K, filed with the SEC on February 13, 2015 (the “2014 Annual Report”). The accompanying condensed balance sheet at December 31, 2014 has been derived from the audited financial statements at that date, but does not include all information and footnotes required by GAAP for complete financial statements.
As used herein, the term “Common Stock” means the Company’s common stock, $0.0001 par value per share.
The results of operations for the three month period ended March 31, 2015 are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year. Readers of this Quarterly Report are strongly encouraged to review the risk factors relating to the Company which are set forth in the 2014 Annual Report and our other filings with the SEC.
The accompanying financial statements have been prepared on a going concern basis which contemplates the realization of assets and satisfaction of liabilities of the Company in the normal course of business. If the Company is unable to raise required funding to continue to pursue its business plan, it may have to cease operations. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Nature of the Business and Background
The Company is a biopharmaceutical company that is seeking to discover, develop and commercialize innovative therapeutics for patients with certain cancers. The Company’s preliminary focus is on the development of therapies for skin, lung and prostate cancers in the United States of America (“U.S.”) market, with the first indication targeting basal cell carcinoma in patients with Basal Cell Carcinoma Nevus Syndrome (also known as Gorlin Syndrome). The Company’s proposed therapy is based upon the use of SUBA-Itraconazole, a patented, oral formulation of the currently marketed anti-fungal drug itraconazole. The Company believes that the dosing of oral capsules of this formulation can affect the Hedgehog signaling pathway, a major regulator of many fundamental cellular processes, which, in turn, can impact the development and growth of cancers such as basal cell carcinoma. Itraconazole has been approved by the U.S. Food and Drug Administration (“FDA”) for, and has been extensively used to treat, fungal infections and has an extensive history of safe and effective use in humans. The Company has developed, optioned and licensed intellectual property and know-how related to non-vestedthe treatment of cancer patients using itraconazole and has applied for patents to cover the Company’s inventions.
Mayne Pharma Supply and License Agreement
On September 3, 2013, the Company entered into an exclusive Supply and License Agreement (the “Supply and License Agreement”) with Mayne Pharma International Pty Ltd., a company incorporated in Australia (“MPI”), pursuant to which MPI agreed to: (i) supply the Company with its patented formulation of the drug itraconazole in a particular dose formulation (the “Product”) for the treatment of human patients with cancer via oral administration (the “Field”) (with the initial areas of investigation being skin, lung and prostate cancer) in the United States (the “Territory”), (ii) provide the Company with an exclusive license to use and develop the intellectual property related to the Product in the Field and in the Territory and (iii) participate in a joint development committee with the Company to clinically develop the Product in the Field and in the Territory. The Company expects to pursue the development of the Product for treatment of a variety of cancers (initially basal cell carcinoma in patients with Gorlin Syndrome) with a focus on clinical development, seeking regulatory approvals and, if regulatory approval is obtained, marketing in the U.S.
HEDGEPATH PHARMACEUTICALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2015 AND 2014
(Unaudited)
1. | Corporate overview (continued): |
Subject to earlier termination if certain conditions (“Conditions”) were not met (which Conditions were subsequently eliminated as described further below), the term of the Supply and License Agreement was until the later of: (i) 10 years from the target launch date of the Product for the treatment of human patients with cancer via oral administration or (ii) the date on which all issued patents of MPI or any of its affiliates referred to in the Supply and License Agreement had lapsed or expired. The Company entered into Amendment No. 1 and Amendment No. 2 to the Supply and License Agreement (the “Amended Supply and License Agreement”) with MPI to extend the date by which the Conditions were to be met to May 30, 2014.
On June 24, 2014, the Company and Mayne Pharma Ventures Pty Ltd (“Mayne Pharma”), an Australian company and assignee of MPI’s rights, along with Nicholas J. Virca, the Company’s President and Chief Executive Officer (“Virca”), Frank O’Donnell, Jr., M.D., the Company’s Executive Chairman (“O’Donnell”) and HPLLC, consummated a series of related transactions to fulfill the Conditions in a manner mutually acceptable to the Company and Mayne Pharma. In connection therewith, the Company and Mayne Pharma entered into, among other agreements, an Amended and Restated Supply and License Agreement as of June 24, 2014 (the “Amended and Restated Supply and License Agreement”) principally to eliminate the Conditions and related early termination rights of Mayne Pharma.
2. | Liquidity and management’s plans: |
The Company presently has very limited cash resources and requires significant additional financing for its research and development, commercialization and distribution efforts and its working capital and intends to finance these activities primarily through:
However, there can be no assurance that any of these plans will be implemented or that the Company will be able to obtain additional financing on commercially reasonable terms, if at all.
There is substantial doubt about the Company’s ability to continue as a going concern. The Company’s current independent registered public accounting firm has included a paragraph emphasizing “going concern” uncertainty in their audit report on the 2014 financial statements dated February 13, 2015. The financial statements included herein do not include any adjustments relating to the recoverability or classification of asset carrying amounts or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern.
The Company had cash and cash equivalents of approximately $84,000 as of March 31, 2015 and approximately $7,000 as of May 13, 2015. The Company is currently negotiating a common stock and equity financing with a significant stockholder which would bolster our cash balance. No assurances can be given, however, that the Company will be able to close such financing.
3. | Summary of Significant Accounting Policies: |
Estimates
The preparation of condensed financial statements 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 period. Actual results could differ from those estimates.
Revenue Recognition
The Company currently has no ongoing source of revenues. Miscellaneous income is recognized when earned by the Company.
HEDGEPATH PHARMACEUTICALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2015 AND 2014
(Unaudited)
3. | Summary of Significant Accounting Policies (continued): |
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. At times, the Company may maintain cash balances in excess of Federal Deposit Insurance Corporation insured amounts which is $250,000 for substantially all depository accounts. As of March 31, 2015, the Company had did not have any depository accounts containing a cash balance in excess of these insured limits.
Research and Development Expenses
Research and development costs are expensed in the period in which they are incurred and include the expenses paid to third parties who conduct research and development activities on behalf of the Company and purchased in-process research and development.
Stock-Based Compensation
The Company accounts for stock-based awards to employees and non-employees using Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718 – Accounting for Share-Based Payments, which provides for the use of the fair value based method to determine compensation for all arrangements where shares of stock or equity instruments are issued for compensation. Fair values of equity securities issued are determined by the Company based predominantly on the trading price of the common stock. The value of these awards is based upon their grant-date fair value. That cost is recognized over the period during which the employee is required to provide service in exchange for the award.
Income Taxes
Deferred tax assets and liabilities are recognized for future tax consequences attributed to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases and are measured using enacted tax rates that are expected to apply to the differences in the periods that they are expected to reverse. Management has evaluated the guidance relating to accounting for uncertainty in income taxes and has determined that the Company had no uncertain income tax positions that could have a significant effect on the condensed financial statements for the three months ended March 31, 2015 or 2014.
Recent accounting pronouncements:
In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update 2014-09, “Revenue from Contracts with Customers,” which supersedes the revenue recognition requirements of Accounting Standards Codification (“ASC”) Topic 605, “Revenue Recognition” and most industry-specific guidance on revenue recognition throughout the ASC. The new standard is principles-based and provides a five step model to determine when and how revenue is recognized. The core principle of the new standard is that revenue should be recognized when a company transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The new standard also requires disclosure of qualitative and quantitative information surrounding the amount, nature, timing and uncertainty of revenues and cash flows arising from contracts with customers. The new standard will be effective for the Company in the first quarter of the year ending December 31, 2017 and can be applied either retrospectively to all periods presented or as a cumulative-effect adjustment as of the date of adoption. Early adoption is not permitted. The Company will evaluate the impact of adoption of the new standard on its financial statements upon commencement of revenue generating activities.
4. | Prepaid Expenses: |
At March 31, 2015, prepaid expenses of $43,723 consist primarily of premiums related to the Company’s directors and officers insurance. Prepaid expenses of $97,817 at December 31, 2014 consist primarily of $60,000 in professional fees related to a potential registered securities offering that were expensed during the three months ended March 31, 2015 and approximately $40,000 related to directors and officers insurance premiums.
HEDGEPATH PHARMACEUTICALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2015 AND 2014
(Unaudited)
5. | Other liabilities |
At March 31, 2015 and December 31, 2014 other liabilities include $52,500 payable to a third party service provider for which the Company has agreed to issue a number of restricted shares of its Common Stock to be determined based on the valuation of the shares to be issued to purchasers in connection with the Company’s offering of securities as described in Commonwealth Biotechnology, Inc.’s (“CBI”) Amended Plan of Reorganization filed in 2013. Such shares of Common Stock are to be issued to such service provider within five (5) business days of the final determination of such valuation (as memorialized in the final transaction documentation for such offering).
6. | Stockholders’ Equity: |
Employee Stock Plans
On July 18, 2014, a 2014 Equity Incentive Plan (“EIP”) was adopted by the Company’s Board of Directors. On September 30, 2014, the EIP was approved by the majority of stockholders. The 2014 EIP authorizes the issuance of up to 32,583,475 shares of the Company’s common stock. In July 2014, 15,041,738 Restricted Stock Units (RSUs)(“RSUs”) were granted under ourto the Company’s Chief Executive Officer, Nicholas J. Virca, and shall vest upon the earlier to occur of (i) September 3, 2016 or (ii) the acceptance by the FDA of a New Drug Application (“NDA”) by the Company for any Company product candidate with a cancer indication utilizing the Company’s licensed SUBA-itraconazole technology, provided that Mr. Virca is actively employed by the Company on the earlier of such date. An additional 1.5 million RSUs were issued to various Board members and officers with the same vesting schedule. In August 2014, 7,000,000 RSUs were issued to the Company’s Chief Financial Officer, Garrison J. Hasara. Of those RSUs, 50% shall vest upon the earlier to occur of (i) September 3, 2016 or (ii) the acceptance by the FDA of a NDA by the Company for any Company product candidate with a cancer indication utilizing the Company’s licensed SUBA-itraconazole technology, provided that Mr. Hasara is actively employed by the Company on the earlier of such date. The balance of the RSUs will vest September 3, 2017.
Going forward, incentive awards may be in the form of stock planoptions, restricted stock, restricted stock units and performance and other awards. In the case of incentive stock options, the exercise price will not be less than 100% of the fair market value of shares covered at the time of the grant, or 110% for incentive stock options granted to persons who own more than 10% of the Company’s voting stock. Options granted will generally vest over a three-year period from the date of grant and will be exercisable for ten years, except that the term may not exceed five years for incentive stock options granted to persons who own more than 10% of the Company’s outstanding common stock.
Total stock-based compensation for the three months ended March 31, 2015 was $419,703, is related to certain RSUs issued in 2014 and is classified as research and development expense and general and administrative expense in the accompanying condensed 2015 statement of operations. There was approximately $2.6 million in unamortized stock-based compensation relating the RSUs at March 31, 2015, which is expected to be recognized over a weighted-average period of 2.8 years. Compensation expense related to RSUs for the years ended December 31, 2007 and 2006 was $100,000 for both periods, and is included in selling, general and administrative expenses.
9. Purchase of Mimotopes
In February 2007, the Company acquired all outstanding shares of Mimotopes Pty Ltd, an Australian limited company by issuing 2,150,000 shares of its common stock to PharmAust Chemistry Ltd, an Australian limited company. Based on the 2,150,000 shares at $2.15 per shares, the acquisition price for the purchase of Mimotopes was $4,622,500. In addition, the Company incurred approximately $432,262 of acquisition related costs.
Goodwill amounted to $2,463,762 which is not deductible for income tax purposes. The issuance of the shares amounted to approximately 39.5% of the Company’s then outstanding shares. The results of operations of Mimotopes are included in the Company’s financial statements for the period beginning February 1, 2007 and are reported on a consolidated basis. The estimated fair value of the assets and liabilities acquired were as follows:
As of February 1, 2007 $(000) | ||||
Cash | $ | 107 | ||
Accounts receivable | 645 | |||
Other current assets | 34 | |||
Property plant and equipment | 2,199 | |||
Total assets acquired | 2,985 | |||
Accounts payable and accruals | (376 | ) | ||
Long term debt | (18 | ) | ||
Total liabilities assumed | (394 | ) | ||
Net assets acquired | $ | 2,591 | ||
10. Purchase Of Exelgen (Formerly Known As “Tripos Discovery Research”)
In June 2007, the Company acquired all outstanding shares of Exelgen, an English limited company. The purchase price of Exelgen was $1,474,581 (including acquisition costs) resulted in negative goodwill of $782,833 which is recorded as an extraordinary gain on the Consolidated Statement of Operations. The estimated fair value of the assets and liabilities acquired were as follows:
As of June 1, 2007 $(000) | |||
Cash | $ | 4,759 | |
Accounts receivable | 1,070 | ||
Inventory | 2,091 | ||
Other current assets | 329 | ||
Total assets acquired | 8,249 | ||
Accounts payable and accruals | 1,828 | ||
Other current liabilities | 2,940 | ||
Long term debt | 1,223 | ||
Total liabilities assumed | 5,991 | ||
Net assets acquired | $ | 2,258 | |
If the acquisition of Exelgen occurred at the beginning of January 2007, the Company’s pro forma results would have been as follows:
For the Year Ended December 31, 2007 | ||||||
Revenue | $ | 14,618,514 | ||||
Operating expenses (1) | (20,425,422 | ) | ||||
Extraordinary gain | 782,833 | |||||
Proforma net loss | $ | (5,024,075 | ) | |||
Proforma loss before extraordinary gain | $ | (5,806,908 | ) | |||
Diluted loss per share before extraordinary gain | $ | (1.10 | ) | |||
Diluted loss per share | $ | (0.96 | ) |
11. Stockholders’ Equity
In May 2007, stockholders approved an amendment to the Company’s Articles of Incorporation increasing the number of authorized shares of common stock from 10,000,000 to 100,000,000.
In May 2007, stockholders approved an amendment to the Company’s Articles of Incorporation creating a new class of 1,000,000 shares of undesignated preferred stock.
12. Convertible Debt
On December 31, 2007 the Company issued $1,950,000 of convertible debt in a subscription agreement between the Company and LH Financial. The debt carries an interest rate of 10% annually and matures in June 2009. Quarterly interest payments may be made in the form of either cash or common stock. The debt may be converted into shares of common stock at a conversion price of $2.00 per shares. In conjunction with the debt, the Company also issued Class A warrants to purchase 975,000 shares of common stock at an exercise price of $2.85 per share and expire in May 2013.next 30 months. The fair value of RSUs was determined using the Class A warrants is $1.79 per share. The fair valuequoted market price of the Class A warrants is calculated usingCompany’s common stock on the Black-Scholes method. Assumptions for Class A options include the stock asset price at $2.55 and a stock option price of $2.85 with a maturity date of issuance and the number of shares expected to vest.
7. | Legal Proceedings: |
Chien Connecticut Case
In October 2012, Andrew Chien (“Chien”), an alleged shareholder of our predecessor, CBI, filed suit in Connecticut state court (later removed to the United States District Court for the District of Connecticut (the “CT District Court”)) against CBI, Dr. Richard J. Freer (a director and officer of CBI) (“Freer”), and the law firm LeClairRyan (the “Chien Connecticut Case”).
In October 2012, the CT District Court in the Chien Connecticut Case entered an Order dismissing Chien’s claims without prejudice on account of CBI’s pending Chapter 11 bankruptcy.
Chien filed various motions in response to the CT District Court’s decision dismissing the claims asserted against Freer and LeClairRyan, including a motion for reconsideration. On Thursday, May 29, 2014, the presiding judge issued several orders. The CT District Court granted Chien’s request that he be allowed to proceed with the fifth and six claims he asserted against CBI in his Complaint, namely (i) a claim for relief entitled “Securities Fraud and Fiduciary Duty Violation against CBI” and (ii) a claim for relief entitled “Fiduciary Duty violation against CBI” (collectively, the “Chien Claims”). A related scheduling
HEDGEPATH PHARMACEUTICALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2015 AND 2014
(Unaudited)
7. | Legal Proceedings: (continued) |
order provided that CBI had until June 20, 2014 to answer or otherwise respond to the Complaint. We have retained LeClairRyan to serve as CBI’s counsel in the Chien Connecticut Case. On June 20, 2014, LeClairRyan filed on CBI’s behalf a motion to dismiss seeking a dismissal with prejudice of the Chien Claims. LeClairRyan also filed on CBI’s behalf a motion to stay discovery. On August 5, years2014, the CT District Court granted CBI’s motion to stay discovery.
On November 4, 2014, the CT District Court dismissed the case and risk-free interest rate of 3.4%.the matter was closed by the CT District Court. On December 1, 2014, Chien filed various motions including a Motion to Reargue. In response, the Company filed a consolidated opposition to Chien’s various pleadings, including to the Motion to Reargue. The Company is now awaiting a decision from the CT District Court. The Company strongly refutes as without merit Chien’s claims and will continue to vigorously defend the lawsuit.
You should rely only on the information contained in this document. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document.
Additional risks and uncertainties not presently known or that are currently deemed immaterial may also issued Class B warrants toimpair our business operations. The risks and uncertainties described in this document and other risks and uncertainties which we may face in the future will have a greater impact on those who purchase 243,000 shares ofour common stock. These purchasers will purchase our common stock at an exercisethe market price of $5.00 per share. The fair value of the Class B warrants is $.36 per share. The fair value of the Class B warrants is calculated using the Black-Scholes method. The debt carries a beneficial conversion feature, which along with the relative fair value of the warrants, resulted in a debt discount of approximately $1,950,000 was recorded against the convertible debt and offset in additional paid in capital. This discount will be amortized as interest expense over the life of the debt.
13. Earnings per Share
The Company follows the guidance provided in the Statement of Financial Accounting Standards (“SFAS”) No. 128, Earnings Per Share, which establishes standards for computing and presenting earnings per share and applies to entities with publicly held common stock or potential common stock. Basic earnings (loss) per common share are computed by dividing the net earnings (loss) by the weighted average number of common shares outstanding during the period. Diluted per share amounts assume the conversion, exercise or issuance of all potential common stock instruments such as warrants and convertible securities, unless the effect is to reduce a loss or increase earnings per share.
BASIC EARNINGS (LOSS) PER SHARE: Net loss before extraordinary gain Extraordinary gain Net loss Weighted average shares outstanding Basic loss per share, before extraordinary gain Basic loss per share DILUTED EARNINGS (LOSS) PER SHARE: Net loss before extraordinary gain Extraordinary gain Net loss Weighted average shares outstanding Stock options and warrants Weighted average diluted shares outstanding Diluted loss per share, before extraordinary gain Diluted loss per share Year Ended
December 31, 2007 Year Ended
December 31, 2006 $ (3,540,934 ) $ (1,152,649 ) 782,833 — $ (2,758,101 ) $ (1,152,649 ) 5,135,951 3,281,360 $ (0.69 ) $ (0.35 ) $ (0.54 ) $ (0.35 ) $ (3,540,934 ) $ (1,152,649 ) 782,833 — $ (2,758,101 ) $ (1,152,649 ) 5,135,951 3,281,360 — — 5,135,951 3,281,360 $ (0.69 ) $ (0.35 ) $ (0.54 ) $ (0.35 )
14. Subsequent Event
In 2008, the Company entered into a strategic relationship with Venturepharm Laboratories Limited, a Cayman Islands limited company (Venturepharm) with its principal offices in Beijing, Peoples Republic of China. This relationship is multi-faceted and was entered into following a private transaction between Venturepharm and PharmAust Limited (PAA), an Australian company, whereupon Venturepharm acquired all of the 2.15 million shares of CBI held by PAA. Coincident with the transaction, CBI entered into a) an Ancillary Agreement with Venturepharm to provide a $1 million put option from CBI to Venturepharm and a $3 million call option from Venturepharm to CBI both at a 10% discount to market with a three year expiration date, b) a Voting Lock Up Agreement to require Venturepharm to vote in favorprivately negotiated price and will run the risk of all matters brought before the stockholders for a period of six months and to escrow its acquired shares for a eighteen months, c) a Registration Rights Agreement to effective after twenty-four months, and d) a Joint Venture (JV) agreement to establish an unincorporated JV, which provides CBI access on a preferred basis to the extensive, low cost capabilities of Venturepharm in China. The JV will be jointly funded and managed.losing their entire investment.
30,600,000 SHARES
COMMON STOCK
PROSPECTUS
, 2015
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
The following table sets forth the expenses in connection with this registration statement. All of such expenses are estimates, other than the filing fees payable to the Securities and Exchange Commission and to FINRA.
Description | Amount to be Paid | |||
Filing Fee - Securities and Exchange Commission | $ | 302.24 | ||
Attorney’s fees and expenses | 20,000.00 | * | ||
Accountant’s fees and expenses | 2,000.00 | * | ||
Transfer agent’s and registrar fees and expenses | 2,000.00 | * | ||
Printing and engraving expenses | 500.00 | * | ||
Miscellaneous expenses | 5,000.00 | * | ||
Total | $ | 29,802.24 | * |
* | Estimated |
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 13.1-697145 of the Virginia StockDelaware General Corporation Act permits corporations toLaw provides that a corporation may indemnify an individualdirectors and officers as well as other employees and individuals against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with any threatened, pending or completed actions, suits or proceedings in which such person is made a party to a proceeding because he isby reason of such person being or washaving been a director, against liabilityofficer, employee or agent of the corporation. Section 145 of the Delaware General Corporation Law also provides that expenses (including attorneys’ fees) incurred by a director or officer in defending an action may be paid by a corporation in advance of the proceedingfinal disposition of an action if the director:
director or officer undertakes to repay the advanced amounts if it is determined such person is not entitled to be indemnified by the corporation. The Delaware General Corporation Law provides that Section 145 is not exclusive of other rights to which those seeking indemnification may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise. Our articles of incorporation containamended and restated bylaws provide that, to the following provision relating to indemnification of our officers and directors:
The Corporationfullest extent permitted by law, we shall indemnify (a)and hold harmless any person who was or is made or may becomeis threatened to be made a party toor is otherwise involved in any threatened, pending or completed action, suit or proceeding, including a proceeding brought by a stockholder in the right of the Corporationwhether civil, criminal, administrative or brought by or on behalf of stockholders of the Corporation,investigative by reason of the fact that such person, or the person for whom he is the legally representative, is or was a director or officer of ours, against all liabilities, losses, expenses (including attorney’s fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such proceeding.
Section 102(b)(7) of the Delaware General Corporation Law permits a corporation to provide in its certificate of incorporation that a director of the corporation shall not be personally liable to the corporation or (b)its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director’s duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for unlawful payments of dividends or unlawful stock repurchases, redemptions or other distributions, or (iv) for any transaction from which the director derived an improper personal benefit.
Our certificate of incorporation provides that we shall, to the maximum extent permitted from time to time under the law of the State of Delaware, indemnify and upon request shall advance expenses to any person who is or was a party or is threatened to be made a party to any threatened, pending or completed action, suit, proceeding or claim, whether civil, criminal, administrative or investigative, by reason of the fact that such person is or was or has agreed to be a director or officer whoof ours or while a director or officer is or was serving at theour request of the Corporation as a director, officer, partner, trustee, partneremployee or agent of any corporation, partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, against expenses (including attorneys’ fees and expenses),
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judgments, fines, penalties and amounts paid in settlement incurred in connection with the investigation, preparation to defend or defense of such action, suit, proceeding or claim; provided, however, that the foregoing shall not require us to indemnify or advance expenses to any person in connection with any action, suit, proceeding or claim initiated by or on behalf of such person or any counterclaim against us initiated by or on behalf of such person. Such indemnification shall not be exclusive of other indemnification rights arising under any by-law, agreement, vote of directors or stockholders or otherwise and shall inure to the benefit of the heirs and legal representatives of such person. Any person seeking indemnification shall be deemed to have met the standard of conduct required for such indemnification unless the contrary shall be established. Any repeal or modification of our certificate of incorporation shall not adversely affect any right or protection of a director or officer of ours with respect to any acts or omissions of such director or officer occurring prior to such repeal or modification.
Our amended and restated bylaws provide we shall, to the fullest extent permitted under the laws of the State of Delaware, as amended and supplemented from time to time, indemnify each person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such party is or was, or has agreed to become, a director or officer of ours, or is or was serving, or has agreed to serve, at our request, as a director, officer or trustee of, or in a similar capacity with, another corporation, partnership, joint venture, trust or other enterprise, including any employee benefit plan, or other enterprise,by reason of any action alleged to have been taken or omitted in such capacity, against any liabilityall expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by himsuch party or on such party’s behalf in connection with such action, suit or proceeding unless he engaged in willful misconduct or a knowing violation of criminal law. A person is considered to be serving an employee benefit plan at the Corporation’s request if his duties to the Corporation also impose duties on, or otherwise involve securities by, him to the plan or to participants in or beneficiaries of the plan. The Board of Directors is hereby empowered, by a majority vote of a quorum of disinterested Directors, to enter into a contract to indemnifyand any Director or officer in respect of any proceedings arising from any act or omission, whether occurring before or after the execution of such contract.appeal therefrom.
Expenses incurred by such a person who is otherwise entitled to be indemnified by us in defending a civil or investigating a threatened or pendingcriminal action, suit or proceeding by reason of the fact that such person is or was, or has agreed to become, a director or officer of ours, or is or was serving, or has agreed to serve, at our request, as a director, officer or trustee of, or in a similar capacity with, another corporation, partnership, joint venture, trust or other enterprise, including any employee benefit plan, or by reason of any action alleged to have been taken or omitted in such capacity shall be paid by us in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such person to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by us.us as authorized by relevant sections of the Delaware General Corporation Law. Notwithstanding the foregoing, we shall not be required to advance such expenses to a person who is a party to an action, suit or proceeding brought by us and approved by a majority of our Board of Directors that alleges willful misappropriation of corporate assets by such person, disclosure of confidential information in violation of such person’s fiduciary or contractual obligations to us or any other willful and deliberate breach in bad faith of such person’s duty to us or our stockholders.
We shall not indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person unless the initiation thereof was approved by our Board of Directors.
The indemnification rights provided in our amended and restated bylaws shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any by-law, agreement or vote of stockholders or disinterested directors or otherwise, both as to action in their official capacities and as to action in another capacity while holding such office, continue as to such person who has ceased to be a director or officer, and inure to the benefit of the heirs, executors and administrators of such a person.
If the Delaware General Corporation Law is amended to expand further the indemnification permitted to indemnitees, then we shall indemnify such persons to the fullest extent permitted by the Delaware General Corporation Law, as so amended.
We may, to the extent authorized from time to time by our Board of Directors, grant indemnification rights to other employees or agents of ours or other persons serving us and such rights may be equivalent to, or greater or less than, those set forth in our amended and restated bylaws.
Our obligation to provide indemnification under our amended and restated bylaws provide shall be offset to the extent of any other source of indemnification or any otherwise applicable insurance coverage under a policy maintained by us or any other person.
To assure indemnification under our amended and restated bylaws of all directors, officers, employees or agents who are determined by us or otherwise to be or to have been “fiduciaries” of any employee benefit plan of ours
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that may exist from time to time, Section 145 of the Delaware General Corporation Law shall, for the purposes of our amended and restated bylaws, be interpreted as follows: an “other enterprise” shall be deemed to include such an employee benefit plan, including without limitation, any plan of ours that is governed by the Act of Congress entitled “Employee Retirement Income Security Act of 1974,” as amended from time to time; we may indemnify everyshall be deemed to have requested a person to serve an employee benefit plan where the performance by such person of his duties to us also imposes duties on, or otherwise involves services by, such person to the plan or participants or beneficiaries of the plan; and excise taxes assessed on a person with respect to an employee benefit plan pursuant to such Act of Congress shall be deemed “fines.”
Our amended and restated bylaws shall be deemed to be a contract between us and each person who was or is a party or is or was threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he or sheperson is or was, or has agreed to become, a director or officer of ours, or is or was serving, or has agreed to serve, at our request, as a director, officer or trustee of, or in a similar capacity with, another corporation, partnership, joint venture, trust or other enterprise, including any employee benefit plan, or agentby reason of any action alleged to have been taken or omitted in such capacity, at any time while this by-law is in effect, and any repeal or modification thereof shall not affect any rights or obligations then existing with respect to any state of facts then or theretofore existing or any action, suit or proceeding theretofore or thereafter brought based in whole or in part upon any such state of facts.
The indemnification provision of our amended and restated bylaws does not affect directors’ responsibilities under any other laws, such as the federal securities laws or state or federal environmental laws.
We may purchase and maintain insurance on behalf of any person who is or was a director, officer or employee of ours, or agent, is or was serving at our request as ana director, officer, employee or agent or trustee orof another corporation,company, partnership, limited liability company, joint venture, trust employee benefit plan or other enterprise against expenses (including counsel fees), judgments, finesliability asserted against him and amounts paid in settlement actually and reasonably incurred by him in any such capacity, or herarising out of his status as such, whether or not we would have the power to indemnify him against liability under the provisions of this section. We currently maintain such insurance.
The right of any person to be indemnified is subject to our right, in connection withlieu of such indemnity, to settle any such claim, action, suit or proceeding toat our expense of by the extent permitted by applicable law.payment of the amount of such settlement and the costs and expenses incurred in connection therewith.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers andor persons controlling persons,our company pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the SEC,Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
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The following table sets forthIn the costsevent that a claim for indemnification against such liabilities (other than the payment of expenses incurred or paid by a director, officer or controlling person in a successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered herewith, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to the court of appropriate jurisdiction the question whether such indemnification by us is against public policy as expressed in the Securities Act and expenses, other than underwriting discounts and commissions, if any, payablewill be governed by the Registrant relatingfinal adjudication of such issue.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On August 13, 2013, we issued to Hedgepath, LLC, as consideration for the contribution of certain assets as described in that certain contribution agreement, dated August 13, 2013 by and between us and Hedgepath, LLC, an aggregate of 170,000.739 shares of Series A Preferred Stock which have since been converted into 82,156,842 shares of common stock. Such securities were issued in a transaction exempt from the registration requirements under Section 4(a)(2) and/or Regulation D of the Securities Act inasmuch as they were issued to less than ten sophisticated persons who represented to us that they are accredited investors as defined in Rule 501 of Regulation D promulgated under the Securities Act and acquiring the securities for investment, for their own account, and not for resale or with a view to distribution thereof in violation of the Securities Act, and the rules and regulations promulgated thereunder.
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On June 24, 2014 as a condition to the saleMayne Purchase Agreement, we entered into a Securities Purchase Agreement with Hedgepath, LLC. Pursuant to such agreement, Hedgepath, LLC purchased 20,000,000 shares of our common stock at a purchase price of $0.075 per share for an aggregate purchase price of $1,500,000. Such purchase price is payable as follows: (i) an advance payment of $125,000 made by Hedgepath, LLC on June 4, 2014 was deemed partial funding of the purchase price; (ii) a payment of $125,000 was made by Hedgepath, LLC on June 24, 2014; and (iii) the remaining $1,250,000 will be funded in monthly installments through December 31, 2014 pursuant to a promissory note issued by Hedgepath, LLC to us. Pursuant to the note, commencing on June 30, 2014 and ending on December 31, 2014, Hedgepath, LLC must make monthly payments to us in accordance with the terms and conditions of the note. We have the right, in our sole discretion, to request an advance payment of part or all of the principal of the note. The note bears no interest except upon an event of default in which case interest accrues at 18% per annum. In the event that Hedgepath, LLC defaults on part or all of the note, we have the right to declare by written notice that Hedgepath, LLC forfeit some or all of the 20,000,000 shares of common stock being registered. All amountspurchased as well as 17,646.98 shares of Series A Preferred Stock (or the common stock equivalent upon conversion thereof) held by Hedgepath, LLC. Such securities were issued in a transaction exempt from the registration requirements under Section 4(a)(2) and/or Regulation D of the Securities Act inasmuch as they were issued to less than ten sophisticated persons who represented to us that they are estimates exceptaccredited investors as defined in Rule 501 of Regulation D promulgated under the SECSecurities Act and acquiring the securities for investment, for their own account, and not for resale or with a view to distribution thereof in violation of the Securities Act, and the rules and regulations promulgated thereunder.
On June 24, 2014, as a condition of closing of the Mayne Purchase Agreement, we entered into a Debt Forgiveness Agreement with Hedgepath, LLC pursuant to which Hedgepath, LLC waived, canceled and forgave payment from us of an aggregate of $639,767 of indebtedness previously advanced by Hedgepath, LLC to us in exchange for 2,530,227 shares of common stock, 71,635.981 shares of Series A Preferred Stock and a warrant to purchase 10,250,569 shares of common stock. The shares of Series A Preferred Stock converted into 82,156,842 shares of common stock on August 14, 2014. The warrant may be exercised by Hedgepath, LLC at an exercise price of $0.0878 per share at any time, from time to time, by Hedgepath, LLC prior to expiration on June 24, 2019. The issuances contemplated by the Debt Forgiveness Agreement are exempt from registration fee.pursuant to Section 4(a)(2) and/or 3(a)(9) of the Securities Act.
Securities and Exchange Commission registration fee | $ | 96 | |
Accounting fees and expenses | 8,000 | ||
Legal fees and expenses | 50,000 | ||
Miscellaneous | 10,000 | ||
Total | $ | 68,096 |
On February 9, 2007,June 24, 2014, in fulfillment of one of the conditions under the Supply and License Agreement, we completedentered into the Mayne Purchase Agreement. Pursuant to the terms of the Mayne Purchase Agreement, we issued to Mayne Pharma (i) 258,363.280 shares of our Series A Preferred Stock, and (ii) a warrant to purchase 10,250,569 shares of our common stock. The shares of Series A Preferred Stock converted into 87,843,897 shares of common stock purchaseon August 14, 2014. The warrant has an exercise price of $0.0878 per share and may be exercised at any time, from time to time, by Mayne Pharma prior to the expiration on June 24, 2019. Such securities were issued in a transaction exempt from the registration requirements under Section 4(a)(2) and/or Regulation D of the Securities Act inasmuch as they were issued to less than ten sophisticated persons who represented to us that they are accredited investors as defined in Rule 501 of Regulation D promulgated under the Securities Act and acquiring the securities for investment, for their own account, and not for resale or with PharmAust Limiteda view to distribution thereof in violation of the Securities Act, and PharmAust Chemistry, Ltd,the rules and regulations promulgated thereunder.
On May 15, 2015, we entered into the 2015 Mayne Purchase Agreement pursuant to which we acquired all of the issued and outstandingto Mayne Pharma (i) 33,333,333 shares of Mimotopes Pty Ltd. We reliedour common stock and (ii) a warrant to purchase 33,333,333 shares of our common stock. Such warrant has an exercise price of $0.075 per share and may be exercised at any time, from time to time, by Mayne Pharma prior to the expiration on an exemptionMay 15, 2020. Such securities were issued in a transaction exempt from the registration providedrequirements under Section 4(2)4(a)(2) and/or Regulation D of the Securities Act inasmuch as they were issued to less than ten sophisticated persons who represented to us that they are accredited investors as defined in Rule 501 of 1933. The terms ofRegulation D promulgated under the Mimotopes stock purchase are describedSecurities Act and acquiring the securities for investment, for their own account, and not for resale or with a view to distribution thereof in Part I of this Registration Statement. See “Certain Relationships and Related Transactions.”
On December 31, 2007, we completed a stock purchase with certain institutional investors, pursuant to which we sold securities convertible into Shares of our common stock. We relied on an exemption from registration provided under Section 4(2)violation of the Securities Act, of 1933. The terms of this stock purchase are described in Part I of this Registration Statement. See “Private Placement of Convertible Notes and Warrants.”the rules and regulations promulgated thereunder.
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ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Exhibit | Description | |||
3.2 | Amended and Restated Certificate of Designation for Series A Preferred Stock (5) | |||
3.3 | Certificate of Amendment to the Company’s Certificate of Incorporation(*) | |||
3.4 | Second Amended and Restated Bylaws of | |||
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Mayne Pharma. (7) | ||||
Employment Agreement, | ||||
101.lab | XBRL Taxonomy Label Linkbase Document(*) | |||
101.pre | XBRL Taxonomy Presentation Linkbase Document(*) |
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ITEM 17. UNDERTAKINGS
The undersigned small business issuerregistrant hereby undertakes with respect to the securities being offered and sold in this offering:undertakes:
(1) To file, during any period in which it offers or sells securities,sales are being made, a post effectivepost-effective amendment to this Registration Statement to:registration statement:
(a) Include(i) To include any prospectus required by Section 10(a)(3) of the Securities Act;Act of 1933;
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(b) Reflect(ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or together,in the aggregate, represent a fundamental change in the information set forth in thisthe registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Securities and Exchange Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; and
(c) Include(iii) To include any additional or changed material information onwith respect to the plan of distribution.distribution not previously disclosed in the registration statement or any material change to such information in the registration statement;
(2) ForThat, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
(4) That, for the purpose of determining liability under the Securities Act treat each post- effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering.
(3) File a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering.
(4) For determining liability of the undersigned small business issuer under the Securities Act1933 to any purchaser, in the initial distribution of the securities, the undersigned small business issuer undertakes that in a primary offering of securities of the undersigned small business issuer pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned small business issuer will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
(a) Any preliminary prospectus or prospectus of the undersigned small business issuer relating to the offering required to be filed pursuant to Rule 424;
(b) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned small business issuer or used or referred to by the undersigned small business issuer;
(c) The portion of any other free writing prospectus relating to the offering containing material information about the undersigned small business issuer or its securities provided by or on behalf of the undersigned small business issuer; and
(d) Any other communication that is an offer in the offering made by the undersigned small business issuer to the purchaser.
Eacheach prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A (§230.430A of this chapter), shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.
Insofar as indemnification(5) That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities:
The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;
(ii) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned small business issuerregistrant;
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(iii) The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and
(iv) Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the small business issuerregistrant pursuant to the foregoing provisions, or otherwise, the small business issuerregistrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable.
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In the event that a claim for indemnification against such liabilities (other than the payment by the small business issuerregistrant of expenses incurred or paid by a director, officer or controlling person of the small business issuerregistrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the small business issuerregistrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrantregistrant has duly caused this Registration StatementAmendment No. 1 to its registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Richmond, Virginia,the City of Tampa, State of Florida, on the 30th day of April, 2008.July 22, 2015.
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Name: |
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Title: | |||
(Principal Executive Officer) |
In accordance withPursuant to the requirements of the Securities Act as amended,of 1933, this registration statement has been signed by the following persons in the capacities statedand on the dates indicated:indicated.
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/s/
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Nicholas J. Virca | (Principal Executive Officer) | |||
| Chief Financial Officer and (Principal Financial and Accounting Officer) | |||
/s/ * | Executive Chairman and Director | July 22, 2015 | ||
Frank E. O’Donnell, Jr., M.D. | ||||
/s/ *
| Director | |||
Samuel P. Sears, Jr. | ||||
/s/ * | Director | |||
W. Mark Watson | ||||
/s/ * | Director |
July 22, 2015 | ||||
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Cross | ||||
/s/ * | Director | July 22, 2015 | ||
Dr. R. Dana Ono |
* By Nicholas J. Virca, attorney-in-fact
EXHIBIT INDEX
II-8
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S-3