See notes to unaudited condensed consolidated financial statements
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
Note A. OVERVIEW OF BUSINESS
D
escription 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) and other hyperlipidemic indications. 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. 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. For patients
that lack LDL receptors (Homozygous Familial Hypercholesterolemia-HoFH), or have hypercholesterolemia or hypertriglyceridemia,
AEM-28-14 may provide a therapeutic solution. 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 B 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.
The audit opinion of our independent accounting firm on our December 31, 2014 financial statements, included in our Annual report
on Form 10-K filed with the Securities and Exchange Commission on March 16, 2015, included an explanatory paragraph as to the uncertainty
with regards to our ability to raise funds to implement the future business strategy of the Company, raising substantial doubt
about the Company’s ability 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. These funds allowed the joint venture to continue its development
activities in 2016, but additional funds are required for both the joint venture and the Company to continue as a going concern.
As described in Note C to the Financial Statements included in this Quarterly Report on Form 10-Q, the Convertible Promissory Notes
were due and payable at April 30, 2017. On April 28, 2017, the Lenders agreed to extend the maturity of the Notes to June 15, 2017.
As of the date of this Report, the Lenders have not notified the Company of their intent to convert the Convertible Promissory
Notes into Company common stock or preferred stock. The ultimate resolution of the Convertible Promissory Notes could have a material
effect on the Company’s ability to continue as a going concern.
These financial statements do not include any adjustments that might
result from the outcome of this uncertainty of corporate strategy.
In the opinion of management, the unaudited condensed interim financial
statements include all adjustments necessary for the fair presentation of our financial position, results of operations, and cash
flows, and all adjustments were of a normal recurring nature. The results of operations for the interim periods are not necessarily
indicative of the results to be expected for the complete fiscal year. The financial statements include the consolidated results
of Capstone Therapeutics Corp. and our 64% owned subsidiary, LipimetiX Development, Inc. Intercompany transactions have been eliminated.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant
to Securities and Exchange Commission rules and regulations, although we believe that the disclosures herein are adequate to make
the information presented not misleading. These unaudited condensed financial statements should be read in conjunction with the
financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2016.
Use of Estimates
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States 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 us in the future, actual results may differ
from these estimates and assumptions.
Legal and Other Contingencies
The Company is subject to legal proceedings and claims that arise
in the ordinary 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.
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. 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. 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.
Cash and Cash Equivalents
At March 31, 2017, cash and cash equivalents included money market
accounts.
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 or its analogs, or operations, it will
impair our ability to continue as a going concern. As described in Note C to the Financial Statements included in this Quarterly
Report on Form 10-Q, the Convertible Promissory Notes are due and payable at April 30, 2017. On April 28, 2017, the Lenders agreed
to extend the maturity of the Notes to June 15, 2017. As of the date of this Report, the Lenders have not notified the Company
of their intent to convert the Convertible Promissory Notes into Company common stock or preferred stock. The ultimate resolution
of the Convertible Promissory Notes could have a material effect on the Company’s ability to continue as a going concern.
If we do not continue as a going concern, the Company may incur additional losses, up to, and possibly exceeding our joint venture
investment balance.
Note B. 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%. As discussed below, the JV Series B-1 Preferred
Stock issuance, because of the participating and conversion features of the preferred stock, effectively reduces the Company’s
ownership in the JV to 59.3%.
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 (now 36%), 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. The preferred stock represents 7.8% of the post-closing common stock of the JV, on an “as-converted”
basis. Following this initial Series B-1 closing, on an “as converted” basis, the Company owns 59.3% of the JV.
In connection with the Series B-1 financing, the JV entered into
the Series B Preferred Stock and Warrant Purchase Agreement. The Series B Preferred Stock and Warrant Purchase Agreement allows
for issuance of up to an additional 45,640 Series B-1 preferred stock and 15,975 preferred stock warrants at the same terms as
the current Series B-1 preferred stock and warrants, and up to 1,200,000 additional Series B-2 preferred stock, at terms yet to
be determined. Series B 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, two 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-1 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 and 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. 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 and Accounting Fees totaling $60,000 were paid in 2016.
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. 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 March 31, 2017, outstanding advances on the revolving loan agreement totaled $1,600,000.
The joint venture incurred net operating expenses, prior to the elimination
of intercompany transactions, of $276,000 in 2017 and $8,748,000 for the period from August 3, 2012 (inception) to March 31, 2017,
of which $276,000, and $7,126,000, 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 March 31, 2017, 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.
Note C. NOTE PAYABLE – FUNDRAISING ACTIVITIES
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 and its analogs and to
continue operations. Accordingly, the Company has reduced 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.
On December 11, 2015, we entered into a Securities Purchase Agreement
(the “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, LLC (the "Lenders"), to
provide short-term funding for our operations. A portion of the funds have been advanced to JV to initiate preclinical development
activities for our lead commercial drug candidate, AEM-28-14. The Lenders, at March 31, 2017 and December 31, 2016, owned in the
aggregate, approximately 19% of our outstanding Common Stock.
Pursuant to the Agreement, the Lenders funded an aggregate of $1,000,000
of loans to us, evidenced by Convertible Promissory Notes (the “Notes”) dated December 11, 2015 and due April 30, 2017.
On April 28, 2017, the Lenders agreed to extend the maturity of the Notes to June 15, 2017. The Notes bear interest at 5% per annum
and are secured by a security interest in all of our assets.
The unpaid principal amount of the Notes will convert automatically
upon the closing of a Qualified Equity Financing, which is defined in the Agreement as an offering of equity securities with aggregate
gross proceeds of at least $5,000,000 including the principal of any converted Notes. Such conversion will be into the same securities
and on the same terms as provided for the other investors in the Qualified Equity Financing.
As a Qualified Equity Financing was not consummated by March 31,
2016, the unpaid principal amount of the Notes may be converted, at the election of the Lenders, into shares of Common Stock, at
a conversion price (the "Optional Conversion Price") equal to the trailing 10-day weighted average trading price of the
Common Stock, but not be less than $.135 or more than $.18 per share. Upon a change in control of the Company, the Lenders may
elect to accelerate the Notes or convert them into Common Stock at a conversion price equal to the Optional Conversion Price.
Under the Agreement, the Lenders have the right to elect to acquire,
upon conversion of the Notes, convertible preferred stock rather than Common Stock, such preferred stock to vote with the Common
Stock and to be convertible into the equivalent number of shares of Common Stock as would have been originally issued if the Notes
conversion had been into Common Stock. Such preferred shares would have no preferential liquidation or distribution rights and
would not have any dividend or preferred return rights.
Note D.
Australian Refundable Research &
Development Credit
In March 2014, LipimetiX Development LLC, (Now LipimetiX Development,
Inc. - see Note B) 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. The transitional
Australian tax periods/years granted for Lipimetix Australia Pty Ltd end on June 30, 2014, December 31, 2014 and thereafter December
31 of each succeeding year. For the tax year ended June 30, 2014, Lipimetix Australia Pty Ltd received a refundable research and
development tax credit of AUD$227,000. For the tax years ended December 31, 2014 and 2015 Lipimetix Australia Pty Ltd received
a refundable research and development tax credit of AUD$301,000 and AUD$189,000, respectively, and at December 31, 2016 a AUD$78,000
refundable research and development tax credit has been recorded by Lipimetix Australia Pty Ltd. For the three months ended March
31, 2017, an additional AUD$11,000 refundable research and development tax credit has been recorded by LipimetiX Australia Pty
Ltd.
Note E:
Contingency
– Non-Compliance with Securities and Exchange Commission Reporting Requirements and OTCQB Market Requirements
Our current level of funds available for operation has led to additional
cost cutting, which included the decision to not engage an independent public accountant to audit and express an opinion on our
December 31, 2016 and 2015, respectively, financial statements included in our Annual Report on Form 10-K filed with the SEC on
March 31, 2017, or to review this Current Report on Form 10-Q, as required by current SEC rules and regulations, and as required
to be listed on the OTCQB Market. We cannot currently predict the response to these actions by the SEC or the OTCQB Market, nor
the effects of their actions, including the possible effect on the trading of our common stock. The decision to not engage an independent
public accountant to audit and express an opinion on our December 31, 2016 and 2015 financial statements or review this Current
Report on Form 10-Q could have a material adverse effect on the Company and its Stockholders.