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 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 an analog of AEM-28, referred to as AEM-28-14, and a new formulation,
that has 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 2015). The JV’s current intent is to prioritize the development of AEM-28-14.
The JV and the Company are exploring fundraising, partnering or licensing,
to obtain additional funding to continue development activities of AEM-28-14, and operations.
The JV and the Company do not have sufficient funding at this time
to continue additional material development activities of AEM-28-14. 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 AEM-28-14 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 and
its analogs, including AEM-28-14, is a 28 amino acid mimetic 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, including
AEM-28-14, 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-28-14. 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 (see Note 9 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-28-14 or 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. In August 2016, the Company’s joint venture raised net funds of $946,000 in a Series B-1 Preferred Stock and
Warrant offering. As described in Note 11 to the Financial Statements included in this Annual Report on Form 10-K/A, the Company,
on July 14, 2017, raised $3,440,000, with net proceeds of approximately $2,078,000, after paying off the Convertible Promissory
Notes described in Note 10 and transaction costs. As discussed in Note 9 to the Financial Statements included in this Annual Report
on Form 10-K/A, 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 raised has 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 AEM-28-14
development goals and for the Company to continue its planned operations.
These financial statements do not include
any adjustments that might result from the outcome of this uncertainty of corporate strategy.
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 income
taxes, contingencies, accounting for stock-based compensation, and accounting for the Australian refundable research and development
tax credit.
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 include money market accounts.
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.
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. Nonrefundable advance payments are capitalized and recorded as expense when the respective product or
service is delivered.
Accrued Clinical.
Accrued
clinical represents the liability recorded for the costs incurred for our human clinical trials. Total patient costs are based
on the specified clinical trial protocol, recognized over the period of time service is provided to the subject. We had no active
clinical trials at December 31, 2016 or December 31, 2015.
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 $35,000 in 2016 and $174,000 in 2015, which increased the net loss. Loss per weighted average basic and diluted shares outstanding
increased by less than $0.01 per share in 2016 and $0.01 per share in 2015 due to 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, 2016, 1,000 shares were determined
to be outstanding and excluded from the calculation of loss per share because they were anti-dilutive. At December 31, 2016, options
to purchase 3,611,706 shares of our common stock, at exercise prices ranging from $0.05 to $1.53 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, 2016 and 2015 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, 2016, tax
years 2012 through 2016 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, 2016 and 2015, 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, 2016, accumulated amortization totaled $692,000.
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 9 to the Financial Statements included in this Annual Report on Form 10-K/A,
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 31,2016, losses incurred by the JV exceeded the capital accounts of the JV. The Company has a revolving loan agreement
with the joint venture to advance the joint venture funds for operations in an amount not to exceed a net (net of expected tax
credits or other funds obtained) of $1,600,000, with the net amount due December 31, 2016. As described in Note 9 to the Financial
Statements included in this Annual Report on Form 10-K/A, 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 2016 or 2015.
Recent Accounting
Pronouncements
In August 2014, the Financial Accounting
Standards Board issued Accounting Standard Update (“ASU”) No. 2014-15,
Presentation of Financial Statements
– Going Concern (Subtopic 205-40)(“Update”): Disclosure of Uncertainties about an Entity’s Ability to
Continue as a Going Concern, providing a requirement under U.S. GAAP for an entity’s management to evaluate whether there
are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue
as a going concern within one year after the date the financial statements are issued; and if those conditions exist, to disclose
that fact, the conditions and the potential effects on the entity’s ability to meet its obligations. The Update will be
effective for an annual period ending after December 15, 2016, with early application permitted
. If additional funds are not
obtained to continue the development of AEM-28-14, it will impair our ability to reach our joint venture AEM-28-14 development
goals and possibly to continue as a going concern. In August 2016, the Company’s joint venture raised net funds of $946,000
in a Series B-1 Preferred Stock and Warrant offering. As described in Note 11 to the Financial Statements included in this Annual
Report on Form 10-K/A, the Company on July 14, 2017, raised $3,440,000, with net proceeds of approximately $2,078,000, after paying
off the Convertible Promissory Notes described in Note 10 and transaction costs. As discussed in Note 9 to the Financial Statements
included in this Annual Report on Form 10-K/A, in August 2017, the Company purchased 93,458 shares of LipimetiX Development, Inc.’s
Series B-2 Preferred Stock for $1,000,000. The additional funds raised has 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 AEM-28-14
development goals and for the Company to continue its planned operations. If we do not continue as a going concern, the Company
may incur additional losses, up to, and possibly exceeding our joint venture investment and revolving loan balance.
In May 2014, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”) No. 2014-09 “Revenue from Contracts from Customers,” which
supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605),” and requires entities to recognize
revenue in a way that depicts the transfer of potential goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled to the exchange for those goods or services. ASU 2014-09 is effective for fiscal years,
and interim periods within those years, beginning after December 15, 2017 and earlier application is permitted only as of annual
reporting periods beginning after December 15, 2016. Should the Company begin to generate revenue, the Company does not anticipate
any material impact on its operations and financial statements.
At December 31, 2016 and December 31,
2015, investments were classified as held-to-maturity securities. As of December 31, 2016 and 2015, all investments were in a
Money Market Fund with maturities less than 90 days, and are included in cash and cash equivalents.
3.
|
FURNITURE AND EQUIPMENT
|
The components of furniture and equipment at December 31 are as follows (in thousands):
|
|
December 31,
|
|
|
2016
|
|
2015
|
Machinery and Equipment
|
|
$
|
221
|
|
|
$
|
221
|
|
Furniture and fixtures
|
|
$
|
34
|
|
|
$
|
34
|
|
Leasehold Improvements
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
$
|
255
|
|
|
$
|
255
|
|
Less accumulated depreciation and amortization
|
|
$
|
(255
|
)
|
|
$
|
(255
|
)
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
Depreciation and leasehold improvement amortization expenses for
the years ended December 31, 2016 and 2015 were $0 and $0, respectively.
The components of deferred income taxes at December 31 are as follows
(in thousands):
|
|
December 31,
|
|
|
2016
|
|
2015
|
Accruals and reserves
|
|
$
|
1
|
|
|
$
|
1
|
|
Valuation allowance
|
|
$
|
(1
|
)
|
|
$
|
(1
|
)
|
Total current
|
|
$
|
-
|
|
|
$
|
-
|
|
NOL, AMT and general business credit carryforwards
|
|
$
|
56,600
|
|
|
$
|
57,096
|
|
Other
|
|
$
|
123
|
|
|
$
|
262
|
|
Valuation allowance
|
|
$
|
(56,723
|
)
|
|
$
|
(57,358
|
)
|
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
$57 million at December 31, 2016 and $57 million at December 31, 2015. The valuation allowance as of December 31, 2016 and 2015
includes approximately $2.7 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,
|
|
|
2016
|
|
2015
|
Provision (benefit) for income taxes
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
(56
|
)
|
|
$
|
(192
|
)
|
Deferred
|
|
|
-
|
|
|
$
|
-
|
|
Income tax provision (benefit)
|
|
$
|
(56
|
)
|
|
$
|
(192
|
)
|
The 2016 and 2015 income tax benefits result from the Australian
refundable research and development tax credit as explained in Note 7.
We have accumulated approximately $148 million in federal and $14
million in state net operating loss carryforwards (“NOLs”) and approximately $6 million of research and development
and alternative minimum tax credit carryforwards. The federal NOLs expire between 2024 and 2036. The Arizona state NOL’s
expire between 2022 and 2036. 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,
2016 and 2015:
|
|
Years Ended December 31,
|
|
|
2016
|
|
2015
|
Income tax provision (benefit) at statutory rate
|
|
$
|
(547
|
)
|
|
$
|
(942
|
)
|
State income taxes
|
|
$
|
(24
|
)
|
|
$
|
(85
|
)
|
Other
|
|
$
|
(120
|
)
|
|
$
|
531
|
|
Change in valuation allowance
|
|
$
|
635
|
|
|
$
|
304
|
|
Net provision (benefit)
|
|
$
|
(56
|
)
|
|
$
|
(192
|
)
|
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, 2016, 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 used the Black-Scholes model with the following assumptions to
determine the total fair value of $35,000 and $174,000 for options to purchase 280,000 and 1,210,000 shares of our common stock
issued during 2016 and 2015, respectively.
|
|
2016
|
|
2015
|
Risk free interest rate
|
|
|
1.5%
|
|
|
|
1.6%
|
|
Volatility
|
|
|
100%
|
|
|
|
100%
|
|
Expected term
|
|
|
4.5 Years
|
|
|
|
4.4 Years
|
|
Dividend yield
|
|
|
0%
|
|
|
|
0%
|
|
Summary
Non-cash stock compensation cost for the year ended December 31,
2016 and 2015 totaled $35,000 and $174,000, respectively, and was recorded as a general and administrative expense in the Statement
of Operations.
No options were exercised in the years ended December 31, 2016 and
2015.
At December 31, 2016, there was no remaining unamortized non-cash
stock compensation costs.
A summary of option activity under our stock option plans for the
years ended December 31, 2016 and 2015 is as follows:
|
|
2016
|
|
2015
|
|
|
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:
|
|
|
4,162,706
|
|
|
$
|
0.81
|
|
|
|
3,022,706
|
|
|
$
|
1.06
|
|
|
|
|
|
Granted
|
|
|
280,000
|
|
|
$
|
0.86
|
|
|
|
1,210,000
|
|
|
$
|
0.22
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired/Forfeited
|
|
|
(831,000
|
)
|
|
$
|
2.47
|
|
|
|
(70,000
|
)
|
|
$
|
1.31
|
|
|
|
|
|
Outstanding at end of year
|
|
|
3,611,706
|
|
|
$
|
0.37
|
|
|
|
4,162,706
|
|
|
$
|
0.81
|
|
|
|
5.58
|
|
Options exercisable at year-end
|
|
|
3,611,706
|
|
|
$
|
0.37
|
|
|
|
4,031,039
|
|
|
$
|
0.83
|
|
|
|
5.58
|
|
Options vested and expected to vest at year end
|
|
|
3,611,706
|
|
|
$
|
0.37
|
|
|
|
4,075,808
|
|
|
$
|
0.82
|
|
|
|
5.52
|
|
The Company had no unvested common stock share awards as of December
31, 2016, or December 31, 2015, and no common stock awards were made in 2016 or 2015.
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, 2016 of $0.07, stock options exercisable
or expected to vest at December 31, 2016, have an intrinsic value of $2,000.
Rent expense for the years ended December 31, 2016 and 2015, was
$69,000 and $70,000, 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 is 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.
7.
|
Australian Refundable Research & Development Credit
|
In March 2014, LipimetiX Development LLC, (Now LipimetiX Development,
Inc. - see Note 9 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 31,2015 Lipimetix Australia Pty Ltd received a refundable
research and development tax credit of AUD$189,000, and at December 31, 2016 a AUD$78,000 refundable research and development tax
credit has been recorded by Lipimetix Australia Pty Ltd. The refundable research and development tax credit for 2016 was received
by the company in May 2017.
8.
|
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.
9.
|
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 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 currently $3,500,000
(3,500,000 shares) of preferred stock became convertible, at the Company’s option, into common stock, at the lower of the
Series B-1 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, 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. 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%.
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 40% ownership in
JV at the date of contribution, 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. 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. Following
this initial Series B-1 closing, on an “as converted” basis, the Company owned 59.3% of the JV.
As disclosed above, the Company purchased 93,458 shares of LipimetiX
Development, Inc.’s Series B-2 Preferred Stock for $1,000,000. Following this Series B-2 closing, on an “as converted”
basis, the Company owned 62.2% of the JV. 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.
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 composed of Dennis I. Goldberg, Ph.D. and Eric M. Morrel, Ph.D. The Exclusive License Agreement, 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 new monthly management fee is $80,000 and the new monthly accounting services
fee is $10,000. During 2016 a management fee of $250,000 was earned and paid. At December 31, 2016 an additional management
fee of $50,000 had been paid and is included in other current assets as a prepaid expense at December 31, 2016. 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.
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, 2016, losses incurred by the JV exceeded the capital accounts of the JV. The Company has a revolving loan agreement
with the joint venture to advance the joint venture funds for operations in an amount not to exceed a net (net of expected tax
credits or other funds obtained) of $1,600,000, with the net amount 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. 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. At December 31, 2016, outstanding advances on the revolving
loan agreement totaled $1,594,000.
The joint venture incurred net operating expenses, prior to the elimination
of intercompany transactions, of $1,081,000 in 2016 and $8,472,000 for the period from August 3, 2012 (inception) to December 31,
2016, of which $137,000, after the previously described reduction in loses recognized of $946,000, and $6,860,000, respectively,
have been recorded by the Company. The joint venture operating expenses are included in research and development expenses in the
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 September 30, 2016, 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-28-14, 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 31, 2016
the Company would incur an additional loss of $667,000 for the joint venture losses allocated to the common stock noncontrolling
interests.
10.
|
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. Interest on the Notes is payable upon maturity and accrued interest of $53,000
at December 31, 2016 is included in other accrued liabilities. 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. At December31, 2016 the Biotechnology Value Fund affiliated entities owned approximately
19% of our outstanding common 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 11 to these Financial Statements, the Convertible Promissory
Notes and accrued interest thereon of $1,079,000 were paid off on July 14, 2017.
11.
|
SUBSEQUENT EVENTS
– SALE OF COMMON
STOCK and SECURED LOAN
|
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 9 above, in August
2017, the Company purchased 93,458 shares of LipimetiX Development, Inc.’s Series B-2 Preferred Stock for $1,000,000.), to
continue its AEM-28-14 development activities, and pay off the Convertible Promissory Notes (as described in Note10 above) 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 $2,078,000, after paying off the Convertible Promissory Notes and transaction costs, of which
$1,102,500 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. The secured loan bears interest at 6% per annum, with interest payable quarterly, 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.
As disclosed above, management has
determined that the Company will require additional capital above its current cash and working capital balances to further develop
AEM-28-14. Accordingly, the Company will continue to limit its development activities. The Company’s corporate strategy is
to raise funds either by the Company, or directly in its joint venture, by possibly engaging in a strategic/merger transaction,
or conducting a private or public offering of debt or equity securities for capital
.
F-20