NOTES TO FINANCIAL STATEMENTS
|
1.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Overview of the Business
Capstone Therapeutics Corp. (the “Company”, “we”,
“our” or “us”) is a biotechnology company committed to developing a pipeline of novel peptides and other
molecules aimed at helping patients with under-served medical conditions. Previously, we were focused on the development and commercialization
of two product platforms: AZX100 and Chrysalin (TP508). In 2012, we terminated the license for Chrysalin (targeting orthopedic
indications). In 2014, we terminated the license for AZX100 (targeting dermal scar reduction). Capstone no longer has any rights
to or interest in Chrysalin or AZX100.
On August 3, 2012, we entered into a joint venture, LipimetiX Development,
LLC, (now LipimetiX Development, Inc.), (the “JV”), to develop Apo E mimetic peptide molecule AEM-28 and its analogs.
The JV has a development plan to pursue regulatory approval of AEM-28, and/or an analog, as treatment for Homozygous Familial Hypercholesterolemia
(granted Orphan Drug Designation by FDA in 2012), other hyperlipidemic indications, and acute coronary syndrome/atherosclerosis
regression. The initial AEM-28 development plan extended through Phase 1a and 1b/2a clinical trials and was completed in the fourth
quarter of 2014. The clinical trials had a safety primary endpoint and an efficacy endpoint targeting reduction of cholesterol
and triglycerides.
The JV received allowance from regulatory authorities in Australia
permitting the JV to proceed with the planned clinical trials. The Phase 1a clinical trial commenced in Australia in April 2014
and the Phase 1b/2a clinical trial commenced in Australia in June 2014. The clinical trials for AEM-28 were randomized, double-blinded,
placebo-controlled studies to evaluate the safety, tolerability, pharmacokinetics and pharmacodynamics of six escalating single
doses (Phase 1a in healthy patients with elevated cholesterol) and multiple ascending doses of the three highest doses from Phase
1a (Phase 1b/2a in patients with hypercholesterolemia and healthy volunteers with elevated cholesterol and high Body Mass Index).
The Phase 1a clinical trial consisted of 36 patients and the Phase 1b/2a consisted of 15 patients. Both clinical trials were completed
in 2014 and the Medical Safety Committee, reviewing all safety-related aspects of the clinical trials, observed a generally acceptable
safety profile. As first-in-man studies, the primary endpoint was safety; yet efficacy measurements analyzing pharmacodynamics
yielded statistical significance in the pooled dataset favoring AEM-28 versus placebo in multiple lipid biomarker endpoints.
Concurrent with the clinical development activities of AEM-28, the
JV has performed pre-clinical studies that have identified analogs of AEM-28, and a new formulation, that have the potential of
increased efficacy, higher human dose toleration and an extended composition of matter patent life (application filed with the
U.S. Patent and Trademark Office in 2014).
The JV and the Company are exploring fundraising, partnering or licensing,
to obtain additional funding to continue development activities and operations.
The JV and the Company do not have sufficient funding at this time
to continue additional material development activities. The JV may conduct future clinical trials in Australia, the USA, and other
regulatory jurisdictions if regulatory approvals, additional funding, and other conditions permit.
The Company, funding permitting, intends to continue limiting its
internal operations to a virtual operating model while monitoring and participating in the management of JV’s development
activities.
Description of Current Peptide Drug Candidates.
Apo E Mimetic Peptide Molecule – AEM-28 and its analogs
Apolipoprotein E is a 299 amino acid protein that plays an important
role in lipoprotein metabolism. Apolipoprotein E (Apo E) is in a class of protein that occurs throughout the body. Apo E is essential
for the normal metabolism of cholesterol and triglycerides. After a meal, the postprandial (or post-meal) lipid load is packaged
in lipoproteins and secreted into the blood stream. Apo E targets cholesterol and triglyceride rich lipoproteins to specific receptors
in the liver, decreasing the levels in the blood. Elevated plasma cholesterol and triglycerides are independent risk factors for
atherosclerosis, the buildup of cholesterol rich lesions and plaques in the arteries. AEM-28 is a 28 amino acid mimetic of Apo
E and AEM-28 analogs, are also 28 amino acid mimetics of Apo E (with an aminohexanoic acid group and a phospholipid), and both
contain a domain that anchors into a lipoprotein surface while also providing the Apo E receptor binding domain, which allows clearance
through the heparan sulfate proteoglycan (HSPG) receptors (Syndecan-1) in the liver. AEM-28 and its analogs, as Apo E mimetics,
have the potential to restore the ability of these atherogenic lipoproteins to be cleared from the plasma, completing the reverse
cholesterol transport pathway, and thereby reducing cardiovascular risk. This is an important mechanism of action for AEM-28 and
its analogs. Atherosclerosis is the major cause of cardiovascular disease, peripheral artery disease and cerebral artery disease,
and can cause heart attack, loss of limbs and stroke. Defective lipid metabolism also plays an important role in the development
of adult onset diabetes mellitus (Type 2 diabetes), and diabetics are particularly vulnerable to atherosclerosis, heart and peripheral
artery diseases. Our joint venture has an Exclusive License Agreement with the University of Alabama at Birmingham Research Foundation
for a broad domain of Apo E mimetic peptides, including AEM-28 and its analogs.
Company History
Prior to November 26, 2003, we developed, manufactured and marketed
proprietary, technologically advanced orthopedic products designed to promote the healing of musculoskeletal bone and tissue, with
particular emphasis on fracture healing and spine repair. Our product lines, which included bone growth stimulation and fracture
fixation devices, are referred to as our “Bone Device Business.” In November 2003, we sold our Bone Device Business.
In August 2004, we purchased substantially all of the assets and
intellectual property of Chrysalis Biotechnology, Inc., including its exclusive worldwide license for Chrysalin, a peptide, for
all medical indications. Subsequently, our efforts were focused on research and development of Chrysalin with the goal of commercializing
our products in fresh fracture healing. (In March 2012, we returned all rights to the Chrysalin intellectual property and no longer
have any interest in, or rights to, Chrysalin.)
In February 2006, we purchased certain assets and assumed certain
liabilities of AzERx, Inc. Under the terms of the transaction, we acquired an exclusive license for the core intellectual property
relating to AZX100, an anti-fibrotic peptide. In 2014, we terminated the License Agreement with AzTE (Licensor) for the core intellectual
property relating to AZX100 and returned all interest in and rights to the AZX100 intellectual property to the Licensor.
On August 3, 2012, we entered into a joint venture with LipimetiX
Development, LLC, (now LipimetiX Development, Inc.) (see Note 8 below) to develop Apo E mimetic peptide molecule AEM-28 and its
analogs.
Our development activities represent a single operating segment as
they shared the same product development path and utilized the same Company resources. As a result, we determined that it is appropriate
to reflect our operations as one reportable segment.
OrthoLogic Corp. commenced doing business under the trade name of
Capstone Therapeutics on October 1, 2008, and we formally changed our name from OrthoLogic Corp. to Capstone Therapeutics Corp.
on May 21, 2010.
In these notes, references to “we”, “our”,
“us”, the “Company”, “Capstone Therapeutics”, “Capstone”, and “OrthoLogic”
refer to Capstone Therapeutics Corp. References to our joint venture or “JV”, refer to LipimetiX Development, Inc.
(formerly LipimetiX Development, LLC).
Basis of presentation, Going Concern, and Management’s Plans.
The accompanying financials statements have been prepared assuming the Company will continue as a going concern, which contemplates
the realization of assets and satisfaction of liabilities in the normal course of business.
Management has determined that the Company will require additional
capital above its current cash and working capital balances to further develop AEM-28 and its analogs or to continue operations.
Accordingly, the Company has significantly reduced its development activities. The Company’s corporate strategy is to raise
funds by possibly engaging in a strategic/merger transaction or conducting a private or public offering of debt or equity securities
for capital. As described in Note 10 to the Financial Statements included in this Annual Report on Form 10-K, the Company, on July
14, 2017, raised $3,440,000, with net proceeds of approximately $2,074,000, after paying off the Convertible Promissory Notes described
in Note 9 to the Financial Statements included in this Annual Report on Form 10-K, and transaction costs of $287,000. (As discussed
in Note 8 to the Financial Statements included in this Annual Report on Form 10-K, in August 2017, the Company used $1,000,000
of the net proceeds to purchase 93,458 shares of LipimetiX Development, Inc.’s Series B-2 Preferred Stock.) The additional
funds, as well as a commitment of additional funding from the same investor on an as needed basis of up to $500,000 through an
increase in its outstanding long-term debt, alleviated the substantial doubt about the entity’s ability to continue as a
going concern; however, additional funds will be required for the joint venture to reach its development goals and for the Company
to continue its planned operations
Use of estimates.
The preparation of financial statements
in accordance with accounting principles generally accepted in the United States of America requires that management make a number
of assumptions and estimates that affect the reported amounts of assets, liabilities, and expenses in our financial statements
and accompanying notes. Management bases its estimates on historical experience and various other assumptions believed to be reasonable.
Although these estimates are based on management’s assumptions regarding current events and actions that may impact the Company
in the future, actual results may differ from these estimates and assumptions.
Our significant estimates include valuation of our joint venture
patent rightsand accounting for stock-based compensation.
Fair value measurements.
We determine the fair value measurements
of our applicable assets and liabilities based on a three-tier fair value hierarchy, which prioritizes the inputs used in measuring
fair value. These tiers include: Level 1, defined as observable inputs such as quoted market prices in active markets; Level 2,
defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined
as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.
Cash and cash equivalents.
Cash and cash equivalents consist
of highly liquid investments with an original maturity of three months or less.
Furniture and equipment
. Furniture and equipment are stated
at cost. Depreciation is calculated on a straight-line basis over the estimated useful lives of the various assets, which range
from three to seven years. Leasehold improvements are amortized over the life of the asset or the period of the respective lease
using the straight-line method, whichever is the shortest.
Accounts Payable.
Accounts payable includes officer compensation
of
$
135,000 and $23,000 at December 31, 2018 and 20017, respectively, that is payable the earlier of July 15, 2020, occurrence
of certain transaction or approval by the Company’s Board of Directors.
Research and development expenses
. Research and development
represents costs incurred for research and development activities, including costs incurred to fund the pre-clinical and clinical
testing of our product candidates. Research and development costs are generally expensed when incurred.
Stock-based compensation
. We account for share-based compensation
arrangements in accordance with ASC Topic 718 “Compensation - Stock Compensation” (“ASC 718”). ASC 718
requires all share-based payments, including grants of stock options, restricted stock units and employee stock purchase rights,
to be recognized in our financial statements based on their respective grant date fair values. Under this standard, the fair value
of each grant is estimated on the date of grant using a valuation model that meets certain requirements. We use the Black-Scholes
option pricing model to estimate the fair value of our share-based payment awards. The determination of the fair value of share-based
payment awards utilizing the Black-Scholes model was affected by our stock price and a number of assumptions, including expected
volatility, expected term, risk-free interest rate and an expected dividend yield. We used our historical volatility as adjusted
for future expectations. The expected life of the stock options was based on historical data and future expectations of when the
awards will be exercised. The risk-free interest rate assumption was based on observed interest rates with durations consistent
with the expected terms of our stock options. The dividend yield assumption was based on our history and expectation of dividend
payouts. The fair value of our restricted stock units was based on the fair market value of our common stock on the date of grant.
We evaluated the assumptions used to value our share-based payment awards on a quarterly basis. For non-employees, expense was
recognized as the service was provided and when performance was complete in accordance with ASC Topic 505 – 550 “Equity-Based
Payments to Non-Employees.”
Effective January 1, 2006, stock-based compensation expense recognized
in our financial statements has been based on awards that were ultimately expected to vest. We recognized compensation cost for
an award with only service conditions that had a graded vesting schedule on a straight-line basis over the requisite service period
as if the award was, in-substance, a multiple award. However, the amount of compensation cost recognized at any date was at least
equal to the portion of grant-date fair value of the award that was vested at that date. The amount of stock-based compensation
expense is reduced for estimated forfeitures. Forfeitures were required to be estimated at the time of grant and revised, if necessary,
in subsequent periods if actual forfeitures differed from those estimates.
ASC 718 requires the benefits associated with tax deductions that
are realized in excess of recognized compensation cost to be reported as a financing cash flow rather than as an operating cash
flow as previously required. Subsequent to the adoption of ASC 718 on January 1, 2006, we have not recorded any excess tax benefit
generated from option exercises, due to our net operating loss carryforwards, which cause such excess benefits to be unrealized.
The Company recorded stock-based compensation of $0 in 2018 and 2017.
Accordingly, loss per weighted average basic and diluted shares outstanding were not affected by stock-based compensation.
Loss per common share
. In determining loss per common share
for a period, we use weighted average shares outstanding during the period for primary shares and we utilize the treasury stock
method to calculate the weighted average shares outstanding during the period for diluted shares. Utilizing the treasury stock
method for the year ended December 31, 2018, no shares were determined to be outstanding and excluded from the calculation of loss
per share because they were anti-dilutive. At December 31, 2018, options and warrants to purchase 3,007,000 and 6,321,930 shares,
respectively, of our common stock, at exercise prices ranging from $0.05 to $.82 per share, were outstanding.
Income Taxes.
Under ASC Topic 740 “Income Taxes”
(“ASC 740”), income taxes are recorded based on current year amounts payable or refundable, as well as the consequences
of events that give rise to deferred tax assets and liabilities. We base our estimate of current and deferred taxes on the tax
laws and rates that are estimated to be in effect in the periods in which deferred tax liabilities or assets are expected to be
settled or realized. Pursuant to ASC 740, we have determined that the deferred tax assets at December 31, 2018 and 2017 require
a full valuation allowance given that it is not “more-likely-than-not” that the assets will be recovered.
We adopted the provisions of Financial Accounting Standards Board
(“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement
No. 109” (now ASC 740) on January 1, 2007. ASC 740 clarifies the accounting for uncertainty in income taxes recognized in
an enterprise’s financial statements and prescribes a recognition threshold and measurement process for financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
Subsequent to adoption of ASC 740, each period we evaluate the tax
years that remain open for assessment for federal and state tax purposes. At December 31, 2018, tax years 2014 through 2018 remain
open.
We may, from time-to-time, be assessed interest or penalties by major
tax jurisdictions, although any such assessments historically have been minimal and immaterial to our financial results. The Company
recognizes accrued interest and penalties, if applicable, related to unrecognized tax benefits in income tax expense. During the
years ended December 31, 2018 and 2017, the Company did not recognize a material amount in interest and penalties.
Patents.
Patent license rights were recorded at $1,045,000,
their estimated fair value on the date they were acquired, August 3, 2012. Their cost will be amortized on a straight-line basis
over the key patent life of eighty months. At December 31, 2018, accumulated amortization totaled $1,006,000. If a change in conditions
occurs, that indicates a material change in the future utility of the patent license rights, an evaluation will be performed to
determine if impairment of the asset has occurred, and if so, the impairment will be recorded.
Joint Venture Accounting.
The Company entered into a joint
venture in which it has contributed $6,000,000, and the noncontrolling interests have contributed certain patent license rights.
As discussed in Note 8 to the Financial Statements included in this Annual Report on Form 10-K, in August 2017, the Company purchased
93,458 shares of LipimetiX Development, Inc.’s Series B-2 Preferred Stock for $1,000,000. Neither the Company nor the noncontrolling
interests have an obligation to contribute additional funds to the joint venture or to assume any joint venture liabilities or
to provide a guarantee of either joint venture performance or any joint venture liability. The financial position and results of
operations of the joint venture are presented on a consolidated basis with the financial position and results of operations of
the Company. Intercompany transactions have been eliminated. Joint venture losses were recorded on the basis of common ownership
equity interests until common ownership equity was reduced to $0. Subsequent joint venture losses were allocated to the Series
A and B-1 preferred ownership. Subsequent to March 31, 2013, all joint venture losses had been allocated to the Company. On August
25, 2016, the JV raised $1,012,000 ($946,000 net of issuance costs) in a Series B-1 Preferred Stock and Warrant offering and in
2016, $946,000 in losses were allocated to the Series B-1 Preferred Stock ownership interests. As of December 31, 2018, losses
incurred by the JV exceeded the capital accounts of the JV. The Company has a revolving loan agreement with the joint venture and
advanced the joint venture funds for operations, with the net amount due December 31, 2016. As described in Note 8 to the Financial
Statements included in this Annual Report on Form 10-K, the due date of the revolving loan has been extended to July 15, 2020,
with early payment required upon certain additional funding of the joint venture by non-affiliated parties. Losses incurred by
the joint venture in excess of the capital accounts of the joint venture will be allocated to the Company to the extent of net
outstanding advances.
Legal and Other Contingencies
The Company is subject to legal proceedings and claims, as well as
potential inquires and action by the Securities and Exchange Commission, that arise in the course of business. The Company records
a liability when it is probable that a loss has been incurred and the amount is reasonably estimable. There is significant judgment
required in both the probability determination and as to whether an exposure can be reasonably estimated. In the opinion of management,
there was not at least a reasonable possibility the Company may have incurred a material loss with respect to loss contingencies.
However, the outcome of legal proceedings and claims brought against the Company are subject to significant uncertainty.
Legal costs related to contingencies are expensed as incurred and
were not material in either 2018 or 2017.
Revenue Accounting
In May 2014, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASC 606”) No. 2014-09 “Revenue from Contracts from Customers”. The
Company adopted ASC 606 effective January 1, 2018 and as no revenue was recognized under the old standard, no transition was required.
Pursuant to ASC 606, revenue is recognized by the Company when a customer obtains control of promised goods or services. The amount
of revenue that is recorded reflects the consideration that the Company expects to receive in exchange for those goods or services.
The Company applies the following five-step model in order to determine this amount: (i) identification of the promised goods
or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including
whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint
on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue
when (or as) the Company satisfies each performance obligation.
Upfront License Fees
: If a license to the Company’s intellectual property
is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenues
from nonrefundable, upfront license fees based on the relative value prescribed to the license compared to the total value of the
arrangement. The revenue is recognized when the license is transferred to the collaborator and the collaborator is able to use
and benefit from the license. For licenses that are not distinct from other obligations identified in the arrangement, the Company
utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation
is satisfied over time or at a point in time. If the combined performance obligation is satisfied over time, the Company applies
an appropriate method of measuring progress for purposes of recognizing revenue from nonrefundable, upfront license fees. The Company
evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue
recognition.
Recent Accounting Pronouncements
Leases. In February 2016 the FASB issued ASU 2016-02
Leases (Topic 842)
and
subsequently amended the guidance relating largely to transition considerations under the standard in January 2018 and July 2018.
The objective of this update is to increase the transparency and comparability among organizations by recognizing lease assets
and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This ASU is effective for
fiscal years beginning after December 15, 2018, including interim periods within those annual periods and is to be applied utilizing
a modified retrospective approach. The Company believes the guidance will not have a material impact on its financial statements.
Cooperation Agreement.
In May 2018 the Company’s joint venture (“JV”)
entered into an agreement to cooperate with Anji Pharmaceuticals Inc. (“ANJI”) (see Note 12 to the Financial Statements
included in this Annual Report on Form 10-K) in the development of AEM-28 and its analogs. The JV entered into a License Agreement
(the “Sub-License”) with ANJI to sublicense, under its Exclusive License Agreement with the UAB Research Foundation,
the use of the JV’s AEM-28 and analogs intellectual property in the Territory of the People’s Republic of China, Taiwan
and Hong Kong (the “Territory”). As both parties intend to develop AEM-28 and its analogs, conducting independent development
activities would result in both parties performing the same or similar pre-clinical work and clinical trial drug development. As
such, the parties agreed to cooperate by the JV agreeing to perform certain preclinical work at its expense and for ANJI to cover
the cost of clinical trial drug development. For efficiency and cost effectiveness the JV has agreed to manage the initial clinical
trial drug development. Accordingly, the vendors performing the clinical trial drug development will bill the JV and ANJI will
reimburse the JV. As provided for in ASC 606 and ASC 808 Cooperation Arrangements, the JV will net the reimbursements against the
clinical trial drug development costs in Operating Expenses – Research & Development in the Consolidated Statements of
Operations and the cash flow effect will be shown net in Operating Activities – Net Loss in the Consolidated Statements of
Cash Flows in the Financial Statements included in this Annual Report on Form 10-K. Activity under the Cooperation Agreement as
of December 31, 2018 totaled $52,000 and were all costs of ANJI. For the year ended December 31, 2018, Cooperation Agreement costs
and reimbursement activity of $52,000 has been shown net and, accordingly, the Cooperation Agreement had no impact on the Consolidated
Statements of Operations at December 31, 2018.
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting
Standards Update (“ASU”) 2018-18 Collaborative Arrangements (Topic 808) - Clarifying the Interaction between Topic
808 and Topic 606. This ASU is effective for effective for fiscal years beginning after December 15, 2019, and interim periods
within those fiscal years. As provided for in the ASU, the Company has elected to early adopt the ASU. The adoption of the ASU
did not have a material effect on the Company’s financial statements at December 31, 2018.
|
2.
|
FURNITURE AND EQUIPMENT
|
The components of furniture and equipment at December 31 are as follows
(in thousands):
|
|
|
December 31,
|
|
|
|
2018
|
|
2017
|
|
Machinery and equipment
|
|
$
|
47
|
|
|
$
|
221
|
|
|
Furniture and fixtures
|
|
|
4
|
|
|
|
34
|
|
|
|
|
|
51
|
|
|
|
255
|
|
|
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation and amortization
|
|
|
(51
|
)
|
|
|
(255
|
)
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
All furniture and equipment are fully depreciated and there was no
depreciation or leasehold improvement amortization expenses for the years ended December 31, 2018 and 2017.
The components of deferred income taxes at December 31 are as follows
(in thousands):
|
|
|
December 31,
|
|
|
|
2018
|
|
2017
|
|
Accruals and reserves
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Valuation allowance
|
|
|
—
|
|
|
|
—
|
|
|
Total current
|
|
$
|
—
|
|
|
$
|
—
|
|
|
NOL, AMT and general business credit carryforwards
|
|
|
37,607
|
|
|
|
37,557
|
|
|
Other
|
|
|
114
|
|
|
|
157
|
|
|
Valuation allowance
|
|
|
(37,721
|
)
|
|
|
(37,714
|
)
|
|
Total non current
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Total deferred income taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
ASC 740 requires that a valuation allowance be established when it
is more-likely-than-not that all or a portion of a deferred tax asset will not be realized. Changes in valuation allowances from
period-to-period are included in the tax provision in the period of change. In determining whether a valuation allowance is required,
we take into account all evidence with regard to the utilization of a deferred tax asset including past earnings history, expected
future earnings, the character and jurisdiction of such earnings, unsettled circumstances that, if unfavorably resolved, would
adversely affect utilization of a deferred tax asset, carryback and carryforward periods, and tax strategies that could potentially
enhance the likelihood of realization of a deferred tax asset. Management has evaluated the available evidence about future taxable
income and other possible sources of realization of deferred tax assets and has established a valuation allowance of approximately
$38 million at December 31, 2018 and $38 million at December 31, 2017. Effective January 1, 2018, the Federal corporate income
tax rate has been decreased from 34% to 21%. The effect of this change on deferred taxes and the valuation allowance at December
31, 2017 was approximately $19 million. The valuation allowance as of December 31, 2018 and 2017 includes approximately $1.8 million
for net operating loss carry forwards that relate to stock compensation expense for income tax reporting purposes that upon realization,
would be recorded as additional paid-in capital. The valuation allowance reduces deferred tax assets to an amount that management
believes will more likely than not be realized.
The components of the income tax provision (benefit) are as follows
(in thousands):
|
|
|
Years Ended December 31,
|
|
|
|
2018
|
|
2017
|
|
Provision (benefit) for income taxes
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
(52
|
)
|
|
$
|
(36
|
)
|
|
Deferred
|
|
|
—
|
|
|
$
|
—
|
|
|
Income tax provision (benefit)
|
|
$
|
(52
|
)
|
|
$
|
(36
|
)
|
The 2018 and 2017 income tax benefits result from the Australian
refundable research and development tax credit as explained in Note 6. Additionally, in 2018 the Company recorded a $49,000 AMT
refundable tax credit, as provided for in the Tax Cuts and Jobs Act.
We have accumulated approximately $149 million in federal and $15
million in state net operating loss carryforwards (“NOLs”) and approximately $5.4 million of research and development
and alternative minimum tax credit carryforwards. The federal NOLs expire between 2023 and 2038. The Arizona state NOL’s
expire between 2032 and 2038. The availability of these NOL’s to offset future taxable income could be limited in the event
of a change in ownership, as defined in Section 382 of the Internal Revenue Code.
A reconciliation of the difference between the provision (benefit)
for income taxes and income taxes at the statutory U.S. federal income tax rate is as follows for the years ended December 31,
2018 and 2017:
|
|
|
Years Ended December 31,
|
|
|
|
2018
|
|
2017
|
|
Income tax provision (benefit) at statutory rate
|
|
$
|
(90
|
)
|
|
$
|
(597
|
)
|
|
State income taxes
|
|
|
(20
|
)
|
|
|
(26
|
)
|
|
Efect of change in federal tax rate
|
|
|
—
|
|
|
|
19,159
|
|
|
Other
|
|
|
51
|
|
|
|
437
|
|
|
Change in valuation allowance
|
|
|
7
|
|
|
|
(19,009
|
)
|
|
Net provision (benefit)
|
|
$
|
(52
|
)
|
|
$
|
(36
|
)
|
In May 2006, our stockholders approved the 2005 Equity Incentive
Plan (the “2005 Plan”) and reserved 2,000,000 shares of our common stock for issuance. Our stockholders approved the
reservation of an additional 1,750,000 shares of common stock for issuance under the 2005 Plan, which increased the total shares
available for grant under the 2005 Plan to 3,750,000 shares. The 2005 Plan expired in April 2015. In June 2015, our stockholders
approved the 2015 Equity Incentive Plan (the “2015 Plan”) and reserved 1,000,000 shares of our common stock for issuance.
At December 31, 2018, no shares remained available to grant under the 2015 Plan (the 2005 plan and the 2015 plan are collectively
referred to as “The Plans”). Two types of options may be granted under the Plans: options intended to qualify as incentive
stock options under Section 422 of the Internal Revenue Code (the “Code”) and other options not specifically authorized
or qualified for favorable income tax treatment by the Code. All eligible employees may receive more than one type of option. Any
director or consultant who is not an employee of the Company shall be eligible to receive only nonqualified stock options under
the Plans.
The Plans provide that in the event of a takeover or merger of the
Company in which 100% of the equity of the Company is purchased or a sale of all or substantially all of the Company’s assets,
75% of all unvested employee options will vest immediately and the remaining 25% will vest over the following twelve-month period.
If an employee or holder of stock options is terminated as a result of or subsequent to the acquisition, 100% of that individual’s
stock option will vest immediately upon employment termination.
We use the Black-Scholes model to determine the total fair value
of options to purchase shares of our common stock. No options were granted in 2018 and at December 31, 2018 no options remained
available to grant under the Plans.
Summary
There was no non-cash stock compensation cost for the year ended
December 31, 2018 or 2017. Non-cash stock compensation cost, if any, would be recorded as a general and administrative expense
in the Statement of Operations.
No options were exercised in the years ended December 31, 2018 and
2017.
At December 31, 2018, there was no remaining unamortized non-cash
stock compensation costs.
In March 2019, the Company filed Post-Effective Amendments to the
Form S-8s for our 2005 Equity Incentive Plan and our 2015 Equity Incentive Plan to terminate the effectiveness of the Registration
Statements and to remove from registration all securities that remain unsold under the Plans. This action does not affect the terms
of the outstanding options but may subject subsequently exercised options to additional resale restrictions or requirements.
A summary of option activity under our stock option plans for the
years ended December 31, 2018 and 2017 is as follows:
|
|
|
2018
|
|
2017
|
|
|
|
Number of
Options
|
|
Weighted
average
exercise
price
|
|
Number of
Options
|
|
Weighted
average
exercise
price
|
|
Weighted
average
remaining
contractual
term (years)
|
|
Options outstanding at the beginning of the year:
|
|
|
3,516,706
|
|
|
$
|
0.34
|
|
|
|
3,611,706
|
|
|
$
|
0.37
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
$ 0.37
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Expired/Forfeited
|
|
|
(509,706
|
)
|
|
$
|
0.64
|
|
|
|
(95,000
|
)
|
|
$
|
1.49
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
3,007,000
|
|
|
$
|
0.29
|
|
|
|
3,516,706
|
|
|
$
|
0.34
|
|
|
|
4.46
|
|
|
Options exercisable at year-end
|
|
|
3,007,000
|
|
|
$
|
0.29
|
|
|
|
3,516,706
|
|
|
$
|
0.34
|
|
|
|
4.46
|
|
|
Options vested and expected to vest at year end
|
|
|
3,007,000
|
|
|
$
|
0.29
|
|
|
|
3,516,706
|
|
|
$
|
0.34
|
|
|
|
4.38
|
|
The Company had no unvested common stock share awards as of December
31, 2018, or December 31, 2017, and no common stock awards were made in 2018 or 2017.
It is the Company’s policy to issue options from stockholder
approved incentive plans. However, if the options are issued as an inducement for an individual to join the Company, the Company
may issue stock options outside of stockholder approved plans. The options granted to employees under stockholder approved incentive
plans have a ten-year term and normally vest over a two to four-year period of service. All stock options are granted with an exercise
price equal to the current market value on the date of grant and, accordingly, stock options have no intrinsic value on the date
of grant. Based on the closing market price of the Company’s common stock at December 31, 2018 of $0.02, stock options exercisable
or expected to vest at December 31, 2018, have no intrinsic value.
As described in our Current Report on Form
8-K filed with the Securities and Exchange Commission on February 1, 2018, on January 30, 2018, the Company entered into the First
Amendment to Securities Purchase, Loan and Security Agreement (the “Amendment”) with BP Peptides, LLC (“Brookstone").
Brookstone currently owns approximately 34.1% of our outstanding common stock. Under the original Agreement (see Note 10), interest
on the Secured Debt was payable quarterly. The Amendment defers the payment of interest until the Secured Debt’s maturity,
October 15, 2020. In consideration for the deferral, the Company issued a Warrant to Brookstone to purchase up to 6,321,930 shares
of the Company’s Common Stock with an exercise price of $.075 per share. The warrant expires October 15, 2025 and provides
for quarterly vesting of shares in amounts approximately equal to the amount of quarterly interest payable that would have been
payable under the Agreement, converted into shares at $.075. At December 31, 2018 2,436,811 shares are fully vested and exercisable.
Rent expense for the years ended December 31, 2018 and 2017, was
$45,000 and $74,000, respectively.
In 2007, the Company entered into a lease for 17,000 square feet
of space in a Tempe, Arizona office and research facility. The term of this lease was sixty months from March 1, 2008. In January
of 2013, this lease was amended to extend the lease to February 28, 2015, with the rentable square feet of space reduced to 2,845
square feet and monthly rental payments of approximately $4,400 plus a proportionate share of building operating expenses and property
taxes. This lease has been extended to February 28, 2020. Effective March 1, 2018 the rentable square feet of space was reduced
to 1,379 square feet, with monthly rental payments of approximately $2,500 plus a proportionate share of building operating expenses
and property taxes.
|
6.
|
Australian Refundable Research & Development Credit
|
In March 2014, LipimetiX Development LLC, (Now LipimetiX Development,
Inc. - see Note 8 in the financial statements included in this Annual Report on Form 10-K) formed a wholly-owned Australian subsidiary,
Lipimetix Australia Pty Ltd, to conduct Phase 1a and Phase1b/2a clinical trials in Australia. Currently Australian tax regulations
provide for a refundable research and development tax credit equal to either 43.5% or 45% (depending on the tax period) of qualified
expenditures. Subsequent to the end of its Australian tax years, Lipimetix Australia Pty Ltd intends to submit claims for a refundable
research and development tax credit. For the tax year ended December 31,2017 Lipimetix Australia Pty Ltd received a refundable
research and development tax credit of AUD$42,000, and at December 31, 2018 a AUD$4,000 refundable research and development tax
credit has been recorded by Lipimetix Australia Pty Ltd.
|
7.
|
AUTHORIZED PREFERRED STOCK
|
We have 2,000,000 shares of authorized preferred stock, the terms
of which may be fixed by our Board of Directors. We presently have no outstanding shares of preferred stock. Our Board
of Directors has the authority, without stockholder approval, to create and issue one or more series of such preferred stock and
to determine the voting, dividend and other rights of holders of such preferred stock. If we raise additional funds to continue
development of AEM-28 and its analogs, or operations, we may issue preferred stock. The issuance of any of such series of preferred
stock may have an adverse effect on the holders of common stock.
The Board of Directors of the Company approved a Tax Benefit Preservation
Plan (“Benefit Plan”) dated April 18, 2017, between the Company and Computershare. The Benefit Plan and the exercise
of rights to purchase Series A Preferred Stock, pursuant to the terms thereof, may delay, defer or prevent a change in control
without the approval of the Board. In addition to the anti-takeover effects of the rights granted under the Benefit Plan, the issuance
of preferred stock, generally, could have a dilutive effect on our stockholders.
Under the Benefit Plan, each outstanding share of our common stock
has attached one preferred stock purchase right. Each share of our common stock subsequently issued prior to the expiration of
the Benefit Plan will likewise have attached one right. Under specified circumstances involving an “ownership change,”
as defined in Section 382 of the Internal Revenue Code (the “Code”), the right under the Benefit Plan that attaches
to each share of our common stock will entitle the holder thereof to purchase 1/100 of a share of our Series A preferred stock
for a purchase price of $5.00 (subject to adjustment), and to receive, upon exercise, shares of our common stock having a value
equal to two times the exercise price of the right. The Benefit Plan expires December 31, 2020.
|
8.
|
JOINT VENTURE FOR DEVELOPMENT OF APO E MIMETIC PEPTIDE MOLECULE AEM-28 AND ANALOGS
|
On August 3, 2012, we entered into a Contribution Agreement with
LipimetiX, LLC to form a joint venture, LipimetiX Development, LLC (“JV”), to develop Apo E mimetic molecules, including
AEM-28 and its analogs. In June 2015, the JV converted from a limited liability company to a corporation, LipimetiX Development,
Inc. The Company contributed $6 million, which included $1 million for 600,000 voting common ownership units (now common stock),
representing 60% ownership in the JV, and $5 million for 5,000,000 non-voting preferred ownership units (now Series A Preferred
Stock), which have preferential distribution rights. On March 31, 2016, the Company converted 1,500,000 shares of its preferred
stock into 120,000 shares of common stock, increasing its common stock ownership from 60% to 64%. On August 11, 2017, the remaining
$3,500,000 (3,500,000 shares) of Series A preferred stock became convertible, at the Company’s option, into common stock,
at the lower of the Series B Preferred Stock Conversion Price, as may be adjusted for certain events, or the price of the next
LipimetiX Development, Inc. financing, exceeding $1,000,000 on independently set valuation and terms. On August 11, 2017, the Company
purchased 93,458 shares of LipimetiX Development, Inc.’s Series B-2 Preferred Stock for $1,000,000 (LipimetiX Development,
Inc. incurred $15,000 in transaction costs as part of the Series B-2 Preferred Stock issuance, which was been shown as a reduction
of Additional Paid in Capital on the Consolidated Statements of Changes in Equity and a cash flow provided by financing activities
in the Consolidated Statements of Cash Flows at December 31, 2017). As discussed below, the JV Series B-1 and B-2 Preferred Stock
issuances, because of the participating and conversion features of the preferred stock, effectively changes the Company’s
ownership in the JV to 62.2%. With the Series B-1 and B-2 Preferred Stock on an as-converted basis, and the Company converting
its Series A Preferred Stock to common stock, the Company’s ownership would change to 69.75%. The JV 2016 Equity Incentive
Plan has 83,480 shares of the JV’s common stock available to grant, of which, at December 31, 2018, options to purchase JV
common stock shares totaling 81,479 have been granted and are fully vested. All options were granted with an exercise price of
$1.07, vested 50% on the date of grant and monthly thereafter in equal amounts over a twenty-four-month period and are exercisable
for ten years from the date of grant. If all stock available to grant in the JV 2016 Equity Incentive Plan were granted and exercised,
and the Series B-1 Preferred Stock Warrants were exercised, the Company’s fully diluted ownership (on an as-converted basis)
would be approximately 65.11%. On October 27, 2017 the Board granted Mr. Holliman an option to purchase 14,126 shares of the LipimetiX
Development, Inc. Series B-2 Preferred Stock it currently owns, at an exercise price of $10.70 per share, subject to adjustment
and other terms consistent with the Series B-2 Preferred Stock. The option is exercisable for a five-year period from the date
of grant. If exercised, this option would reduce the Company’s fully diluted ownership (on an as-converted basis including
assumed exercise of other options and warrants) to approximately 64.31%.
LipimetiX, LLC was formed by the principals of Benu BioPharma, Inc.
(“Benu”) and UABRF to commercialize UABRF’s intellectual property related to Apo E mimetic molecules, including
AEM-28 and analogs. Benu is currently composed of Dennis I. Goldberg, Ph.D. and Eric M. Morrel, Ph.D. LipimetiX, LLC contributed
all intellectual property rights for Apo E mimetic molecules it owned and assigned its Exclusive License Agreement between The
University of Alabama at Birmingham Research Foundation (“UABRF”) and LipimetiX, LLC, for the UABRF intellectual property
related to Apo E mimetic molecules AEM-28 and its analogs to the JV, in return for 400,000 voting common ownership units (now common
stock), representing a 40% ownership interest in the JV at formation, and $378,000 in cash (for certain initial patent-related
costs and legal expenses).
On August 25, 2016, LipimetiX Development, Inc. closed a Series B-1
Preferred Stock offering, raising funds of $1,012,000 ($946,000 net of issuance costs of approximately $66,000). Individual accredited
investors and management participated in the financing. This initial closing of the Series B-1 Preferred Stock offering resulted
in the issuance of 94,537 shares of preferred stock, convertible to an equal number of the JV’s common stock at the election
of the holders and warrants to purchase an additional 33,088 shares of JV preferred stock, at an exercise price of $10.70, with
a ten-year term.
As disclosed above, on August 11, 2017, the Company purchased 93,458
shares of LipimetiX Development, Inc.’s Series B-2 Preferred Stock for $1,000,000.
Series B (B-1 and B-2) Preferred Stock is a participating preferred
stock. As a participating preferred, the preferred stock will earn a 5% dividend, payable only upon the election by the JV or in
liquidation. Prior to the JV common stock holders receiving distributions, the participating preferred stockholders will receive
their earned dividends and payback of their original investment. Subsequently, the participating preferred will participate in
future distributions on an equal “as-converted” share basis with common stock holders. The Series B Preferred Stock
has “as-converted” voting rights and other terms standard to a security of this nature.
The Exclusive License Agreement assigned by LipimetiX, LLC to the
JV on formation of the JV, as amended, calls for payment of patent filing, maintenance and other related patent fees, as well as
a royalty of 3% on Net Sales of Licensed Products during the Term of the Agreement. The Agreement terminates upon the expiration
of all Valid Patent Claims within the Licensed Patents, which are currently estimated to expire between 2019 and 2035. The Agreement,
as amended, also calls for annual maintenance payments of $25,000, various milestone payments of $50,000 to $500,000 and minimum
royalty payments of $500,000 to $1,000,000 per year commencing on January 1 of the first calendar year following the year in which
the First Commercial Sale occurs. UABRF will also be paid 5% of Non-Royalty Income received.
Concurrent with entering into the Contribution Agreement and the
First Amendment and Consent to Assignment of Exclusive License Agreement between LipimetiX, LLC, UABRF and the Company, the Company
and LipimetiX, LLC entered into a Limited Liability Company Agreement for JV which established a Joint Development Committee (“JDC”)
to manage JV development activities. Upon conversion by the JV from a limited liability company to a corporation, the parties entered
into a Stockholders Agreement for the JV, and the JDC was replaced by a Board of Directors (JV Board). The JV Board is composed
of three members appointed by the non-Company common stock ownership group, three members appointed by the Company and one member
appointed by the Series B-1 Preferred Stockholders. Non-development JV decisions, including the issuance of new equity, incurrence
of debt, entry into strategic transactions, licenses or development agreements, sales of assets and liquidation, and approval of
annual budgets, will be decided by a majority vote of the common and Series B Preferred Stock (voting on an “as -converted”
basis) stockholders.
The JV, on August 3, 2012, entered into a Management Agreement with
Benu to manage JV development activities for a monthly fee of approximately $63,000 during the twenty-seven-month development period,
and an Accounting Services Agreement with the Company to manage JV accounting and administrative functions. The services related
to these agreements have been completed. New Management and Accounting Services Agreements were entered into effective June 1,
2016. The monthly management fee in the new Management Agreement was set at $80,000 and the monthly accounting services fee in
the new Accounting Services Agreement was set at $10,000. However, no Management or Accounting Services fees are due or payable
except to the extent funding is available, as unanimously approved by members of the JV Board of Directors and as reflected in
the approved operating budget in effect at that time. In connection with the Series B-1 Preferred Stock issuance, Management Fees
totaling $300,000, of which $250,000 was charged to expense in 2016 and $50,000 was charged to expense in the first quarter of
2017, and Accounting Fees totaling $60,000, charged to expense in 2016, were paid in 2016. In August 2017 the Accounting Services
Agreement monthly fee was increased to $20,000 and will thereafter be accrued but not payable, until certain levels of joint venture
funding are obtained from non-affiliated parties. At December 31, 2018, accounting fees of $340,000 were earned but unpaid. In
August 2017, a Management Fee of $300,000 was approved by the joint venture’s Board of Directors with $150,000 paid and charged
to expense in the third quarter of 2017 and $150,000 paid and expensed in the first quarter of 2018. Commencing April 2018, a monthly
Management Fee of $50,000 was paid. Commencing January 1, 2019, the monthly Management Fee of $50,000 will be accrued with payment
due on the occurrence of a significant financing event and availability of cash.
The joint venture formation was as follows ($000’s):
|
Patent license rights
|
|
$
|
1,045
|
|
|
Noncontrolling interests
|
|
|
(667
|
)
|
|
Cash paid at formation
|
|
$
|
378
|
|
Patent license rights were recorded at their estimated fair value
and are being amortized on a straight-line basis over the key patent life of eighty months.
The financial position and results of operations of the joint venture
are presented on a consolidated basis with the financial position and results of operations of the Company. Intercompany transactions
have been eliminated. In the Company’s consolidated financial statements, joint venture losses were recorded on the basis
of common ownership equity interests until common ownership equity was reduced to $0. Subsequent joint venture losses were being
allocated to the Series A preferred ownership equity (100% Company). Subsequent to March 31, 2013, all joint venture losses had
been allocated to the Company. On August 25, 2016 the JV raised $1,012,000, ($946,000 net of issuance costs) in a Series B-1 Preferred
Stock and Warrant offering and in 2016, $946,000 of losses were allocated to the Series B-1 Preferred Stock ownership interests.
As of December 31, 2018, losses incurred by the JV exceeded the capital accounts of the JV. The Company has a revolving loan agreement
with the joint venture, with the loan due December 31, 2016. In August 2017, the due date of the revolving loan was extended to
July 15, 2020, with early payment required upon certain additional funding of the joint venture by non-affiliated parties. Subsequent
to June 30, 2017, interest due on the revolving loan will be accrued and payable only upon certain additional funding of the joint
venture by non-affiliated parties. Until repayment, the outstanding revolving loan and interest balance is convertible, at the
Company’s option, into Series B Preferred Stock at the Series B-1 conversion price. Losses incurred by the joint venture
in excess of the capital accounts of the joint venture will be allocated to the Company to the extent of the unpaid loan and accrued
interest balance. At December 31, 2018, the revolving loan agreement balance, including accrued interest subsequent to June 30,
2017 of $120,000, was $1,720,000.
The joint venture incurred net operating income (expenses), prior
to the elimination of intercompany transactions, of $53,000 in 2018 and ($9,598,000) for the period from August 3, 2012 (inception)
to December 31, 2018, of which $53,000, and ($7,985,000), respectively, have been recorded by the Company. The joint venture operating
expenses are included in research and development expenses in the condensed consolidated statements of operations.
Neither the Company nor the noncontrolling interests have an obligation
to contribute additional funds to the joint venture or to assume any joint venture liabilities or to provide a guarantee of either
joint venture performance or any joint venture liability. Losses allocated to the common stock noncontrolling interests represent
an additional potential loss for the Company as the common stock noncontrolling interests are not obligated to contribute assets
to the joint venture and, depending on the ultimate outcome of the joint venture, the Company could potentially absorb all losses
associated with the joint venture. From formation of the joint venture, August 3, 2012, through December 31, 2018, losses totaling
$667,000 have been allocated to the common stock noncontrolling interests. If the joint venture or Company is unable to obtain
additional funding, the ability of the joint venture to continue development of AEM-28 and its analogs would be impaired as would
the joint venture’s ability to continue operations. If the joint venture does not continue as a going concern, at December
30, 2018, the Company would incur an additional loss of $667,000 for the joint venture losses allocated to the common stock noncontrolling
interests.
|
9.
|
CONVERTIBLE PROMISSORY NOTES
|
On December 11, 2015, we entered into a Securities Purchase Agreement
with Biotechnology Value Fund affiliated entities Biotechnology Value Fund, L.P., Biotechnology Value Fund II, L.P., Biotechnology
Value Trading Fund OS, L.P., Investment 10, LLC, and MSI BVF SPV,), which provided $1,000,000 in funding for our operations in
the form of Convertible Promissory Notes (“Notes”). The Notes bear interest at 5% and were due April 30, 2017, with
the due date subsequently extended to July 14, 2017. The Notes were secured by all intangible and tangible assets of the Company
and convertible, either at the election of the Lenders or mandatory on certain future funding events, into either the Company’s
Common or Preferred Stock. A portion of the funds were advanced to JV to initiate preclinical development activities for our lead
commercial drug candidate, AEM-28-14. As described in Note 10 to this Annual Report on Form 10-K, the Convertible Promissory Notes
and accrued interest thereon of $79,000 were paid off on July 14, 2017. Prior to the July 14, 2017 transaction, the Biotechnology
Value Fund affiliated entities owned approximately 19% of our outstanding common stock.
|
10.
|
SALE OF COMMON STOCK AND ISSUANCE OF SECURED debt
|
As described in our Current Report on Form 8-K filed with the Securities
and Exchange Commission on July 17, 2017, on July 14, 2017, the Company entered into a Securities Purchase, Loan and Security Agreement
(the “Agreement”) with BP Peptides, LLC (“Brookstone"). The net funds will be used to fund our operations,
infuse new capital into our joint venture, LipimetiX Development, Inc. ("JV") (As described in Note 8 to this Annual
Report on Form 10-K, in August 2017, the Company used part of the net proceeds to purchase 93,458 shares of LipimetiX Development,
Inc.’s Series B-2 Preferred Stock for $1,000,000.), to continue its development activities, and pay off the Convertible Promissory
Notes (as described in Note 9 to this Annual Report on Form 10-K) totaling $1,000,000, plus $79,000 in accrued interest.
Pursuant to the Agreement, Brookstone funded an aggregate of $3,440,000, with net proceeds
of approximately $2,074,000, after paying off the Convertible Promissory Notes and transaction costs, of which $1,012,500 was for
the purchase of 13,500,000 newly issued shares of our Common Stock, and $2,427,500 was in the form of a secured loan, due October
15, 2020. On July 14, 2017 Brookstone also purchased 5,041,197 shares of the Company’s Common Stock directly from Biotechnology
Value Fund affiliated entities, resulting in ownership of 18,541,197 shares of the Company’s Common Stock, representing approximately
34.1% of outstanding shares of the Company’s Common Stock at December 31, 2018. Transaction costs of $287,000 have been deferred
and will be written off over the life of the secured loan, thirty-nine months from July 14, 2017 to October 20, 2020, on the straight-line
basis. Additional transaction costs of $12,000 were incurred with the Amendment (see Note 11) and will be written off over the
period of the date of the Amendment, January 30, 2018, to October 15, 2020. At December 31, 2018 transaction costs of $134,000
($93,000 in 2018 and $41,000 in the second half of 2017), have been amortized and included in the Consolidated Statements of Operations
in Interest and Other Expenses. At December 31, 2018 and December 31, 2017, unamortized transaction costs of $165,000 and $246,000,
respectively, have been netted against the outstanding Secured Debt balance on the Consolidated Balance Sheets. As discussed in
Note 11 below, interest payable on the Secured Debt is now due at loan maturity, October 15, 2020, and, at December 31, 2018 and
December 31, 2017, accrued interest of $213,000 and $68,000, respectively, has been included in the Secured Debt balance on the
Consolidated Balance Sheets. The interest on the secured debt ($145,000 in 2018 and $68,000 in the second half of 2017) has been
included in the Consolidated Statements of Operations in Interest and other income (expense), net.
A summary of the Secured Debt activity is as follows (000’s):
|
|
|
December 31, 2018
|
|
December 31, 2017
|
|
|
|
|
|
|
|
Secured Debt
|
|
$
|
2,427
|
|
|
$
|
2,427
|
|
|
Transaction costs
|
|
|
(299
|
)
|
|
|
(287
|
)
|
|
|
|
$
|
2,128
|
|
|
$
|
2,140
|
|
|
Amortization
|
|
|
134
|
|
|
|
41
|
|
|
|
|
$
|
2,262
|
|
|
$
|
2,181
|
|
|
Accrued interest
|
|
|
213
|
|
|
|
68
|
|
|
|
|
$
|
2,475
|
|
|
$
|
2,249
|
|
The secured loan bears interest at 6% per annum, with interest payable
quarterly (now due at loan maturity see Note 11 below) and is secured by a security interest in all of our assets. As part of the
Agreement, the Company and Brookstone entered into a Registration Rights Agreement granting Brookstone certain demand and piggyback
registration rights.
A provision in the Agreement entered into with Brookstone also requires
the Company to nominate two candidates for a director position that have been recommended by Brookstone as long as Brookstone beneficially
owns over 20% of the Company’s outstanding common stock and to nominate one candidate for a director position that has been
recommended by Brookstone as long as Brookstone beneficially owns over 5% but less than 20% of the Company’s outstanding
common stock.
On April 18, 2017, the Company and Computershare
Trust Company, N.A., as Rights Agent (the “Rights Agent”) entered into Tax Benefit Preservation Plan Agreement (the
“Plan”), dated as of April 18, 2017, between the Company and the Rights Agent, as described in the Company’s
Current Report on Form 8-K filed with the Securities and Exchange Commission on April 19, 2017. The Plan is intended to act as
a deterrent to any person (together with all affiliates and associates of such person) acquiring “beneficial ownership”
(as defined in the Plan) of 4.99% or more of the outstanding shares of Common Stock without the approval of the Board (an “Acquiring
Person”), in an effort to protect against a possible limitation on the Company’s ability to use its net operating loss
carryforwards. The Board, in accordance with the Plan, granted an Exemption to Brookstone with respect to the share acquisition
described above, and Brookstone’s acquisition of 5,041,197 shares of the Company’s Common Stock from Biotechnology
Value Fund affiliated entities, making Brookstone an Exempt Person in respect of such transactions.
As described in our Current Report on Form
8-K filed with the Securities and Exchange Commission on March 19, 2019, on March 15, 2019, the Company entered into the Second
Amendment to Securities Purchase, Loan and Security Agreement (the “2
nd
Amendment”) with Brookstone. The
2
nd
Amendment provides for additional advances to the Company up to a Maximum amount of $500,000 to be used for Company
operations. Advances made will be added to the secured debt and be subject to the terms and conditions of the Securities Purchase,
Loan and Security Agreement. At Brookstone’s sole discretion, the Maximum amount of the advances may be increased to an amount
not exceeding $700,000.
|
11.
|
RELATED PARTY TRANSACTION - DEFERRAL OF SECURED DEBT INTEREST
PAYMENTS AND ISSUANCE OF WARRANTS TO PURCHASE SHARES OF THE COMPANY’S COMMON STOCK
|
As described in our Current Report on Form
8-K filed with the Securities and Exchange Commission on February 1, 2018, on January 30, 2018, the Company entered into the First
Amendment to Securities Purchase, Loan and Security Agreement (the “Amendment”) with BP Peptides, LLC (“Brookstone").
Brookstone currently owns approximately 34.1% of our outstanding common stock. Under the original Agreement (see Note 10 above),
interest on the Secured Debt was payable quarterly. The Amendment defers the payment of interest until the Secured Debt’s
maturity, October 15, 2020. In consideration for the deferral, the Company issued a Warrant to Brookstone to purchase up to 6,321,930
shares of the Company’s Common Stock with an exercise price of $.075 per share. The warrant expires October 15, 2025 and
provides for quarterly vesting of shares in amounts approximately equal to the amount of quarterly interest payable that would
have been payable under the Agreement, converted into shares at $. 075. At December 31, 2018 2,436,811 shares are fully vested
and exercisable.
The fair value of the Warrants was determined
to be $43,000. The fair value of the Warrants will be amortized over the deferral period, January 30, 2018 to October 15, 2020,
on the straight-line basis, as additional interest expense. Amortization expense totaled $15,000 for 2018 and is included in Interest
and other expenses, net, in the Consolidated Statements of Operations.
Note 12. LIPIMETIX DEVELOPMENT, INC. LICENSE AGREEMENT
As described in our Current Report on Form 8-K filed with the Securities
and Exchange Commission on May 7, 2018, on May 2, 2018, our JV, LipimetiX Development, Inc., entered into a License Agreement (the
“Sub-License”) with Anji Pharmaceuticals Inc. (“ANJI") to sublicense, under its Exclusive License Agreement
with the UAB Research Foundation, the use of the JV’s AEM-28 and analogs intellectual property in the Territory of the People’s
Republic of China, Taiwan and Hong Kong (the “Territory”). The Sub-License calls for an initial payment of $2,000,000,
payment of a royalty on future Net Sales in the Territory and cash milestone payments based on future clinical/regulatory events.
ANJI will perform all development activities allowed under the Sub-License in the Territory at its sole cost and expense. The JV
recorded the receipt of the $2,000,000 payment as revenue in the second quarter of 2018. Transaction costs related to the revenue
totaled $254,000 and consisted of a $100,000 payment to the UAB Research Foundation, as required by the UAB Research Foundation
Exclusive License Agreement, a $100,000 advisory fee and $54,000 in legal fees. As described in Note 8 above, at December 31, 2018,
JV net losses exceeded the JV capital accounts and all losses were being allocated to the Company. Revenue recorded for the $2,000,000
payment reduced the amount of JV net losses previously allocated to the Company.
A copy of the UAB Research Foundation Exclusive License Agreement
was attached as Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the period ending June 30, 2012 filed with
Securities and Exchange Commission (‘SEC”) on August 10, 2012. A copy of the First Amendment and Consent to Assignment
of the Exclusive License Agreement was attached as Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the period
ending June 30, 2012 filed with the SEC on August 10, 2012. The Second Amendment to the Exclusive License Agreement was attached
as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on January 30, 2015.
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