NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three
Months Ended March 31, 2017 and 2016
1.
Organization and Basis of Presentation
The
condensed consolidated financial statements of the Lixte Biotechnology Holdings, Inc., a Delaware corporation (“Holdings”),
including its wholly-owned Delaware subsidiary, Lixte Biotechnology, Inc. (“Lixte”) (collectively, the “Company”),
at March 31, 2017, and for the three months ended March 31, 2017 and 2016, are unaudited. In the opinion of management of the
Company, all adjustments, including normal recurring accruals, have been made that are necessary to present fairly the financial
position of the Company as of March 31, 2017, and the results of its operations for the three months ended March 31, 2017 and
2016, and its cash flows for the three months ended March 31, 2017 and 2016. Operating results for the interim periods presented
are not necessarily indicative of the results to be expected for a full fiscal year. The consolidated balance sheet at December
31, 2016 has been derived from the Company’s audited financial statements at such date.
The
statements and related notes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission
(the “SEC”). Accordingly, certain information and footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. These financial
statements should be read in conjunction with the financial statements and other information included in the Company’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2016, as filed with the SEC.
2.
Business
The
Company is a drug discovery company that uses biomarker technology to identify enzyme targets associated with serious common diseases
and then designs novel compounds to attack those targets. The Company’s product pipeline encompasses two major categories
of compounds at various stages of pre-clinical and clinical development that the Company believes have broad therapeutic potential
not only for cancer but also for other debilitating and life-threatening diseases.
The
Company’s activities are subject to significant risks and uncertainties, including the need for additional capital, as described
below. The Company has not yet commenced any sustainable revenue-generating operations, does not have positive cash flows from
operations, and is dependent on periodic infusions of equity capital to fund its operating requirements.
The
Company’s common stock is traded on the OTCQB operated by the OTC Markets under the symbol “LIXT”.
Going
Concern
The
Company’s condensed consolidated financial statements have been presented on the basis that it is a going concern, which
contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has not generated
any sustainable revenues from operations to date, and does not expect to do so in the foreseeable future. The Company has experienced
recurring operating losses and negative operating cash flows since inception, and has financed its working capital requirements
during this period primarily through the recurring sale of its equity securities and the exercise of outstanding common stock
purchase warrants.
As
a result, management has concluded that there is substantial doubt about the Company’s ability to continue as a going concern
within one year of the date that the consolidated financial statements were issued. In addition, the Company’s independent
registered public accounting firm, in their report on the Company’s consolidated financial statements for the year ended
December 31, 2016, has expressed substantial doubt about the Company’s ability to continue as a going concern.
The
Company’s ability to continue as a going concern is dependent upon its ability to raise additional equity capital to fund
its research and development activities and to ultimately achieve sustainable operating revenues and profits. The Company’s
consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
Because
the Company is currently engaged in research at a relatively early stage, it will likely take a significant amount of time to
develop any product or intellectual property capable of generating sustainable revenues. Accordingly, the Company’s business
is unlikely to generate any sustainable operating revenues in the next several years, and may never do so. In addition, to the
extent that the Company is able to generate revenues through licensing its technologies or through product sales, there can be
no assurance that the Company will be able to achieve positive earnings and operating cash flows.
At
March 31, 2017, the Company had cash of $870,936. Effective April 3, 2017, the Company sold 6,000,000 shares of common stock at
$0.25 per share price for an aggregate purchase price of $1,500,000. Accordingly, the Company believes that it has sufficient
working capital resources to fund the Company’s ongoing business activities, including maintaining its clinical trial program
and patent portfolio, through at least June 30, 2018.
The
amount and timing of future cash requirements in 2018 and thereafter will depend on the pace and design of the Company’s
clinical trial program. As market conditions present uncertainty as to the Company’s ability to secure additional funds,
there can be no assurances that the Company will be able to secure additional financing on acceptable terms, or at all, as and
when necessary to continue to conduct operations. If cash resources are insufficient to satisfy the Company’s ongoing cash
requirements, the Company would be required to scale back or discontinue its technology and product development programs and/or
clinical trials, or obtain funds, if available (although there can be no certainty), through strategic alliances that may require
the Company to relinquish rights to certain of its compounds, or to discontinue its operations entirely.
3.
Summary of Significant Accounting Policies
Principles
of Consolidation
The
accompanying condensed consolidated financial statements of the Company are prepared in accordance with United States generally
accepted accounting principles (“GAAP”) and include the financial statements of Holdings and its wholly-owned subsidiary,
Lixte. Intercompany balances and transactions have been eliminated in consolidation.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of expenses during
the reporting period. Significant estimates include the accounting for potential liabilities, the assumptions utilized in valuing
stock-based compensation issued for services, and the realization of deferred tax assets. Actual results could differ from those
estimates.
Cash
Concentrations
The
Company maintains cash balances with financial institutions in federally-insured accounts. The Company may periodically have cash
balances in banks in excess of FDIC insurance limits. The Company maintains its accounts with financial institutions with high
credit ratings. The Company has not experienced any losses to date resulting from this practice.
Research
and Development
Research
and development costs consist primarily of fees paid to consultants and outside service providers, patent fees and costs, and
other expenses relating to the acquisition, design, development and testing of the Company’s treatments and product candidates.
Research
and development costs are expensed ratably over the life of the underlying contracts, unless the achievement of milestones, the
completion of contracted work, or other information indicates that a different expensing schedule is more appropriate.
The
Company retained Theradex Systems, Inc. (“Theradex”), an international contract research organization (“CRO”)
that provides professional services for the clinical research and development of pharmaceutical compounds, to be responsible for
managing and administering the Company’s Phase 1 clinical trial of LB-100. The costs of the Phase 1 clinical trial of LB-100
that were paid through Theradex were recorded and expensed based upon the documentation provided by the CRO.
Payments
made pursuant to research and development contracts are initially recorded as advances on research and development contract services
in the Company’s balance sheet and then charged to research and development costs in the Company’s statement of operations
as those contract services are performed. Expenses incurred under research and development contracts in excess of amounts advanced
are recorded as research and development contract liabilities in the Company’s balance sheet, with a corresponding charge
to research and development costs in the Company’s statement of operations. The Company reviews the status of its research
and development contracts on a quarterly basis.
Patent
Costs
Due
to the significant uncertainty associated with the successful development of one or more commercially viable products based on
the Company’s research efforts and any related patent applications, all patent costs, including patent-related legal and
filing fees, are expensed as incurred. Patent costs were $159,611 and $101,956 for the three months ended March 31, 2017 and 2016,
respectively. Patent costs are included in research and development costs in the Company’s condensed consolidated statements
of operations.
Accounting
for Preferred Stock
The
Company accounts for preferred stock as either equity or debt, depending on the specific characteristics of the security issued.
The Series A Convertible Preferred Stock issued by the Company in January 2016 and March 2015 has been classified in stockholders’
equity, as described at Note 4.
Concentration
of Risk
The
Company periodically contracts with directors, including companies controlled by or associated with directors, to provide consulting
services related to the Company’s research and development and clinical trial activities. Agreements for these services
can be for a specific time period (typically one year) or for a specific project or task, and can include both cash and non-cash
compensation. The only such contract that represents 10% or more of general and administrative or research and development costs
is described below.
On
September 21, 2012, the Company entered into a work order agreement with Theradex, the CRO responsible for the clinical development
of the Company’s lead anti-cancer compound LB-100, to manage and administer the Phase 1 clinical trial of LB-100. The Phase
1 clinical trial of LB-100, which began during April 2013 with the entry of patients into the clinical trial, was carried out
by nationally recognized comprehensive cancer centers. The patient accrual goal was reached in April 2016 and the clinical trial
was closed to further patient enrollment at that time. All patients completed treatment with LB-100 and were off study by the
end of May 2016. The Company estimates that it will continue to incur costs through May 2017 to complete the analysis of the clinical
data, reconcile and pay the remaining costs owed to the participating clinical sites, and prepare and submit the required Clinical
Study Report to the United States Food and Drug Administration (“FDA”) on the completed Phase 1 clinical trial of
LB-100.
The
Phase 1 clinical trial was estimated to cost a total of approximately $2,200,000, with such payments expected to be allocated
approximately 60% for services provided by Theradex and approximately 40% for pass-through costs for clinical center laboratory
costs and investigator costs over the life of the clinical trial. Total costs charged to operations from 2013 through March 31,
2017 for services paid to or through Theradex pursuant to this arrangement aggregated $2,192,165.
During
the three months ended March 31, 2017 and 2016, the Company incurred $64,615 and $116,633, respectively, of such clinical trial
costs, representing approximately 22% and 44% of research and development costs for such periods. Costs pursuant to this agreement
are included in research and development costs in the Company’s condensed consolidated statements of operations.
Income
Taxes
The
Company accounts for income taxes under an asset and liability approach for financial accounting and reporting for income taxes.
Accordingly, the Company recognizes deferred tax assets and liabilities for the expected impact of differences between the financial
statements and the tax basis of assets and liabilities.
The
Company has elected to deduct research and development costs on a current basis for federal income tax purposes. For federal tax
purposes, start-up and organization costs were deferred until January 1, 2008 at which time the Company began to amortize such
costs over a 180-month period.
The
Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized.
In the event the Company was to determine that it would be able to realize its deferred tax assets in the future in excess of
its recorded amount, an adjustment to the deferred tax assets would be credited to operations in the period such determination
was made. Likewise, should the Company determine that it would not be able to realize all or part of its deferred tax assets in
the future, an adjustment to the deferred tax assets would be charged to operations in the period such determination was made.
The
Company is subject to U.S. federal income taxes and income taxes of various state tax jurisdictions. As the Company’s net
operating losses have yet to be utilized, all previous tax years remain open to examination by Federal authorities and other jurisdictions
in which the Company currently operates or has operated in the past. The Company had no unrecognized tax benefits as of March
31, 2017 and December 31, 2016 and does not anticipate any material amount of unrecognized tax benefits within the next 12 months.
The
Company accounts for uncertainties in income tax law under a comprehensive model for the financial statement recognition, measurement,
presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns as prescribed by GAAP.
The tax effects of a position are recognized only if it is “more-likely-than-not” to be sustained by the taxing authority
as of the reporting date. If the tax position is not considered “more-likely-than-not” to be sustained, then no benefits
of the position are recognized. As of March 31, 2017, the Company had not recorded any liability for uncertain tax positions.
In subsequent periods, any interest and penalties related to uncertain tax positions will be recognized as a component of income
tax expense.
Stock-Based
Compensation
The
Company periodically issues common stock and stock options to officers, directors, Scientific Advisory Committee members and consultants
for services rendered. Options vest and expire according to terms established at the issuance date of each grant.
The
Company accounts for stock-based payments to officers and directors by measuring the cost of services received in exchange for
equity awards based on the grant date fair value of the awards, with the cost recognized as compensation expense on the straight-line
basis in the Company’s financial statements over the vesting period of the awards. The Company accounts for stock-based
payments to Scientific Advisory Committee members and consultants by determining the value of the stock compensation based upon
the measurement date at either (a) the date at which a performance commitment is reached or (b) at the date at which the necessary
performance to earn the equity instruments is complete.
Stock
grants, which are generally time vested, are measured at the grant date fair value and charged to operations ratably over the
vesting period.
Stock
options granted to members of the Company’s Scientific Advisory Committee and to outside consultants are revalued each reporting
period to determine the amount to be recorded as an expense in the respective period. As the stock options vest, they are valued
on each vesting date and an adjustment is recorded for the difference between the value already recorded and the value on the
date of vesting.
The
fair value of common stock issued as stock-based compensation is determined by reference to the closing price of the Company’s
common stock on the date of issuance. The fair value of stock options granted as stock-based compensation is determined utilizing
the Black-Scholes option-pricing model, and is affected by several variables, the most significant of which are the life of the
equity award, the exercise price of the stock option as compared to the fair market value of the common stock on the grant date,
and the estimated volatility of the common stock over the term of the equity award. Estimated volatility is based on the historical
volatility of the Company’s common stock. The risk-free interest rate is based on the U.S. Treasury yield curve in effect
at the time of grant. The fair market value of common stock is determined by reference to the quoted market price of the Company’s
common stock.
The
Company recognizes the fair value of stock-based compensation awards in general and administrative costs and in research and development
costs, as appropriate, in the Company’s condensed consolidated statement of operations. The Company issues new shares of
common stock to satisfy stock option exercises.
Revenue
Recognition
The
Company recognizes revenue when all four of the following criteria are met: (i) persuasive evidence that an arrangement exists;
(ii) delivery of the products and/or services has occurred; (iii) the fees earned can be readily determined; and (iv) collectability
of the fees is reasonably assured.
Comprehensive
Income (Loss)
Components
of comprehensive income or loss, including net income or loss, are reported in the financial statements in the period in which
they are recognized. Comprehensive income or loss is defined as the change in equity during a period from transactions and other
events and circumstances from non-owner sources. Net income (loss) and other comprehensive income (loss) are reported net of any
related tax effect to arrive at comprehensive income (loss). The Company did not have any items of comprehensive income (loss)
for the three months ended March 31, 2017 and 2016.
Earnings
(Loss) Per Share
The
Company’s computation of earnings (loss) per share (“EPS”) includes basic and diluted EPS. Basic EPS is measured
as the income (loss) attributable to common stockholders divided by the weighted average common shares outstanding for the period.
Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., preferred
shares, warrants and stock options) as if they had been converted at the beginning of the periods presented, or issuance date,
if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss
per share) are excluded from the calculation of diluted EPS.
Loss
per common share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during
the respective periods. Basic and diluted loss per common share is the same for all periods presented because all preferred shares,
warrants and stock options outstanding are anti-dilutive.
At
March 31, 2017 and 2016, the Company excluded the outstanding securities summarized below, which entitle the holders thereof to
acquire shares of common stock, from its calculation of earnings per share, as their effect would have been anti-dilutive.
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Series A Convertible Preferred Stock
|
|
|
4,375,000
|
|
|
|
4,375,000
|
|
Common stock options
|
|
|
8,600,000
|
|
|
|
7,950,000
|
|
Total
|
|
|
12,975,000
|
|
|
|
12,325,000
|
|
Fair
Value of Financial Instruments
The
authoritative guidance with respect to fair value established a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value into three levels, and requires that assets and liabilities carried at fair value be classified
and disclosed in one of three categories, as presented below. Disclosure as to transfers in and out of Levels 1 and 2, and activity
in Level 3 fair value measurements, is also required.
Level
1. Observable inputs such as quoted prices in active markets for an identical asset or liability that the Company has the ability
to access as of the measurement date. Financial assets and liabilities utilizing Level 1 inputs include active-exchange traded
securities and exchange-based derivatives.
Level
2. Inputs, other than quoted prices included within Level 1, which are directly observable for the asset or liability or indirectly
observable through corroboration with observable market data. Financial assets and liabilities utilizing Level 2 inputs include
fixed income securities, non-exchange based derivatives, mutual funds, and fair-value hedges.
Level
3. Unobservable inputs in which there is little or no market data for the asset or liability which requires the reporting entity
to develop its own assumptions. Financial assets and liabilities utilizing Level 3 inputs include infrequently-traded non-exchange-based
derivatives and commingled investment funds, and are measured using present value pricing models.
The
Company determines the level in the fair value hierarchy within which each fair value measurement falls in its entirety, based
on the lowest level input that is significant to the fair value measurement in its entirety. In determining the appropriate levels,
the Company performs an analysis of the assets and liabilities at each reporting period end.
The
carrying value of financial instruments (consisting of cash and accounts payable and accrued expenses) is considered to be representative
of their respective fair values due to the short-term nature of those instruments.
Recent
Accounting Pronouncements
In
May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-09 (ASU 2014-09), Revenue from Contracts with Customers. ASU 2014-09 will eliminate transaction- and industry-specific
revenue recognition guidance under current GAAP and replace it with a principle based approach for determining revenue recognition.
ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in
the contract. ASU 2014-09 also will require additional disclosure about the nature, amount, timing and uncertainty of revenue
and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized
from costs incurred to obtain or fulfill a contract. The FASB has recently issued ASU 2016-08, ASU 2016-10, ASU 2016-11, ASU 2016-12,
and ASU 2016-20, all of which clarify certain implementation guidance within ASU 2014-09. ASU 2014-09 is effective for reporting
periods beginning after December 15, 2017, with early adoption permitted only as of annual reporting periods beginning after December
15, 2016, including interim reporting periods within that reporting period. Entities will be able to transition to the standard
either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The Company will adopt the provisions
of ASU 2014-09 in the quarter beginning January 1, 2018. The adoption of ASU 2014-09 is not expected to have any impact on the
Company’s financial statement presentation or disclosures.
In
February 2016, the FASB issued Accounting Standards Update No. 2016-02 (ASU 2016-02), Leases (Topic 842). ASU 2016-02 requires
a lessee to record a right-of-use asset and a corresponding lease liability, initially measured at the present value of the lease
payments, on the balance sheet for all leases with terms longer than 12 months, as well as the disclosure of key information about
leasing arrangements. ASU 2016-02 requires recognition in the statement of operations of a single lease cost, calculated so that
the cost of the lease is allocated over the lease term, generally on a straight-line basis. ASU 2016-02 requires classification
of all cash payments within operating activities in the statement of cash flows. Disclosures are required to provide the amount,
timing and uncertainty of cash flows arising from leases. A modified retrospective transition approach is required for lessees
for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented
in the financial statements, with certain practical expedients available. ASU 2016-02 is effective for fiscal years beginning
after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. The Company will
adopt the provisions of ASU 2016-02 in the quarter beginning January 1, 2019. The adoption of ASU 2016-02 is not expected to have
any impact on the Company’s financial statement presentation or disclosures.
Management
does not believe that any other recently issued, but not yet effective, authoritative guidance, if currently adopted, would have
a material impact on the Company’s financial statement presentation or disclosures.
4.
Stockholders’ Equity
Preferred
Stock
The
Company has authorized a total of 10,000,000 shares of preferred stock, par value $0.001 per share. On March 17, 2015, the Company
filed a Certificate of Designations, Preferences, Rights and Limitations (the “Certificate of Designations”) of its
Series A Convertible Preferred Stock with the Delaware Secretary of State to amend the Company’s certificate of incorporation.
The Company designated 175,000 shares as Series A Convertible Preferred Stock, which are non-voting and are not subject to increase
without the written consent of a majority of the holders of the Series A Convertible Preferred Stock or as otherwise set forth
in the Certificate of Designations. The holders of each 175,000 share tranche of the Series A Convertible Preferred Stock are
entitled to receive a per share dividend equal to 1% of the annual net revenue of the Company divided by 175,000, until converted
or redeemed.
Effective
January 28, 2016, the Series A Convertible Preferred Stock Certificate of Designations was amended to increase the authorized
shares of Series A Convertible Preferred Stock from 175,000 shares to 350,000 shares. Accordingly, as of March 31, 2017, 9,650,000
shares of preferred stock were undesignated and may be issued with such rights and powers as the Board of Directors may designate.
Effective
March 17, 2015, the Company entered into a Securities Purchase Agreement with a stockholder of the Company who owned 10.6% of
the Company’s issued and outstanding shares of common stock immediately prior to this transaction, pursuant to which such
stockholder purchased 175,000 shares of the Company’s Series A Convertible Preferred Stock at $10.00 per share for an aggregate
purchase price of $1,750,000.
Effective
January 21, 2016, the Company entered into a Securities Purchase Agreement with the holder of the Series A Convertible Preferred
Stock previously sold on March 17, 2015, pursuant to which the Company sold an additional 175,000 shares of Series A Convertible
Preferred Stock at $10.00 per share for an aggregate purchase price of $1,750,000.
Based
on the Company’s net revenues of $200,000 for the year ended December 31, 2015, the Company recorded a dividend of $2,000
on the shares of Series A Convertible Preferred Stock issued and outstanding at December 31, 2015. The dividend was paid in cash
on May 1, 2016.
Each
share of Series A Convertible Preferred Stock may be converted, at the option of the holder, into 12.5 shares of common stock
(subject to customary anti-dilution provisions) and the Series A Convertible Preferred Stock is subject to mandatory conversion
at the conversion rate in the event of a merger or sale transaction resulting in gross proceeds to the Company of at least $21,875,000.
The Series A Convertible Preferred Stock has a liquidation preference based on its assumed conversion into shares of common stock.
If
fully converted, the Series A Convertible Preferred Stock sold in the March 17, 2015 closing would convert into 2,187,500 shares
of common stock, representing an effective price per share of common stock of $0.80. On March 17, 2015, the closing price of the
Company’s common stock was $0.25 per share. If fully converted, the Series A Convertible Preferred Stock sold in the January
21, 2016 closing would also convert into 2,187,500 shares of common stock, representing an effective price per share of common
stock of $0.80. On January 21, 2016, the closing price of the Company’s common stock was $0.22 per share. The Company has
the right to redeem the Series A Convertible Preferred Stock up to the fifth anniversary of the respective closing dates at a
price per share equal to $50.00. The Series A Convertible Preferred Stock has no right to cash, except for the payment of the
aforementioned dividend based on the generation of revenues by the Company, and does not have any registration rights.
Based
on the attributes of the Series A Convertible Preferred Stock described above, the Company determined to account for the Series
A Convertible Preferred Stock as a permanent component of stockholders’ equity. Legal costs of $12,608 incurred with respect
to the issuance of the Series A Convertible Preferred Stock on March 17, 2015 were charged directly to additional paid-in capital.
The Company did not incur any material costs with respect to the sale of the Convertible Preferred Stock on January 21, 2016.
Common
Stock
Effective
February 24, 2017, the Company entered into a Securities Purchase Agreement with an accredited investor pursuant to which the
purchaser purchased 4,000,000 shares of the Company’s common stock at a price of $0.25 per share for an aggregate purchase
price of $1,000,000. The proceeds from the sale of the shares of common stock will be used for working capital and general corporate
purposes principally in connection with the Company’s ongoing clinical trials.
The
shares issued to the investor were not registered under the Securities Act of 1933, as amended (the “Act”), in reliance
upon the exemption from registration contained in Section 4(a)(2) of the Act. Such securities may not be re-offered or sold in
the United States in the absence of a registration statement or exemption from the registration requirements of the Act.
Information
with respect to the issuance of common stock in connection with various stock-based compensation arrangements is provided at Note
6.
Common
Stock Warrants
At
March 31, 2017 and December 31, 2016, there were no warrants outstanding to purchase common stock.
5.
Related Party Transactions
The
Company’s Chairman and major stockholder, Dr. John Kovach, was paid a salary of $15,000 for the three months ended March
31, 2017 and 2016, which amounts are included in general and administrative costs in the Company’s condensed consolidated
statements of operations. Beginning in late February 2017, Dr. Kovach began devoting 100% of his time to the Company’s business
activities.
The
Company’s principal office facilities are being provided without charge by Dr. Kovach. Such costs were not material to the
Company’s condensed consolidated financial statements and, accordingly, have not been reflected therein.
On
January 28, 2014, the Company approved a second amendment to the Company’s consulting agreement with Gil Schwartzberg, a
significant stockholder of and consultant to the Company, dated September 12, 2007 to extend it for an additional four years to
January 28, 2019.
Legal
and consulting fees charged to operations for services rendered by the Eric Forman Law Office were $12,000 for the three months
ended March 31, 2017 and 2016. Eric J. Forman is the son-in-law of Gil Schwartzberg, a significant stockholder of and consultant
to the Company, and is the son of Dr. Stephen J. Forman, who was elected to the Company’s Board of Directors on May 13,
2016. Julie Forman, the wife of Eric Forman and the daughter of Gil Schwartzberg, is Vice President of Morgan Stanley Wealth Management,
where the Company maintains a banking relationship.
Effective
January 1, 2014, the Company entered into an Advisory Agreement with Dr. Kathleen P. Mullinix, a member of the Board of Directors
of the Company at that time, effective for an initial term of one year through December 31, 2014 to advise on business development
matters. The Advisory Agreement provided for annual cash compensation of $25,000, to be paid in full at the beginning of each
year. The term of the Advisory Agreement was automatically extended for a term of one year annually unless a notice of intent
to terminate was given by either party at least 90 days before the end of the applicable term. Accordingly, the Advisory Agreement
was extended for additional terms of one year effective January 1, 2015 and 2016. Effective November 22, 2016, Dr. Mullinix resigned
from the Company’s Board of Directors. For the three months ended March 31, 2016, the Company recognized a charge to operations
of $6,250 as consulting and advisory fees pursuant to this Advisory Agreement, which is included in general and administrative
costs in the Company’s condensed consolidated statements of operations.
Stock-based
compensation arrangements involving members of the Company’s Board of Directors and affiliates are described at Note 6.
Total stock-based compensation expense relating to directors, officers, affiliates and related parties was $3,844 and $0 for the
three months ended March 31, 2017 and 2016, respectively.
6.
Stock-Based Compensation
The
Company issues common stock and stock options as incentive compensation to directors and as compensation for the services of independent
contractors and consultants of the Company.
On
June 20, 2007, the Board of Directors of the Company approved the 2007 Stock Compensation Plan (the “2007 Plan”),
which provides for the granting of awards, consisting of stock options, stock appreciation rights, performance shares, or restricted
shares of common stock, to employees and independent contractors, for up to 2,500,000 shares of the Company’s common stock,
under terms and conditions as determined by the Company’s Board of Directors, through June 19, 2017. As of March 31, 2017,
unexpired stock options for 1,700,000 shares were issued and outstanding under the 2007 Plan and stock options for 800,000 were
available for issuance under the 2007 Plan.
The
fair value of each stock option awarded is estimated on the date of grant and subsequent measurement dates using the Black-Scholes
option-pricing model. The expected dividend yield assumption is based on the Company’s expectation of dividend payouts.
The expected volatilities are based on historical volatility of the Company’s stock. The risk-free interest rate is based
on the U.S. treasury yield curve in effect as of the grant date. The expected life of the stock options is the average of the
vesting term and the full contractual term of the stock options.
For
stock options requiring an assessment of value during the three months ended March 31, 2017, the fair value of each stock option
award was estimated using the Black-Scholes option-pricing model with the following assumptions:
Risk-free interest rate
|
|
|
1.18
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
Expected volatility
|
|
|
311.11
|
%
|
Expected life
|
|
|
1.7 to 3.5 years
|
|
For
stock options requiring an assessment of value during the three months ended March 31, 2016, the fair value of each stock option
award was estimated using the Black-Scholes option-pricing model with the following assumptions:
Risk-free interest rate
|
|
|
0.74% to 1.23
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
Expected volatility
|
|
|
196.75
|
%
|
Expected life
|
|
|
2.7 to 4.7 years
|
|
On
December 24, 2013, the Company entered into an agreement with NDA Consulting Corp. (“NDA”) for consultation and advice
in the field of oncology research and drug development. As part of the agreement, NDA also agreed to cause its president, Dr.
Daniel D. Von Hoff, M.D., to become a member of the Company’s Scientific Advisory Committee. In connection with this agreement,
NDA was granted stock options to purchase 100,000 shares of the Company’s common stock, vesting 25,000 shares on June 24,
2014, and thereafter 25,000 shares annually on June 24, 2015, 2016 and 2017, exercisable for a period of five years from the date
of grant at $0.13 per share, which was the fair market value of the Company’s common stock on the grant date. The fair value
of these stock options, as calculated pursuant to the Black-Scholes option-pricing model, was initially determined to be $12,960
($0.13 per share). The Company re-measures the non-vested options to fair value at the end of each reporting period. At March
31, 2017, the fair value of non-vested options was determined to be $784 which will be charged to operations through June 24,
2017. During the three months ended March 31, 2017 and 2016, the Company recorded a charge (credit) to operations of $12,138 and
$(10,796), respectively, with respect to these stock options.
Effective
September 14, 2015, the Company entered into a Collaboration Agreement with BioPharmaWorks LLC (“BioPharmaWorks”),
pursuant to which the Company engaged BioPharmaWorks to perform certain services for the Company as described at Note 7. In connection
with the Collaboration Agreement, the Company agreed to issue to BioPharmaWorks 1,000,000 fully-vested shares of the Company’s
common stock, valued at $260,000, based upon the closing price of the Company’s common stock of $0.26 per share, on September
14, 2015. Additionally, the Company issued to BioPharmaWorks two options in the form of warrants to purchase 1,000,000 shares
(500,000 shares per warrant) of the Company’s common stock. The first warrant vested on September 14, 2016, and is exercisable
for a period of five years from the date of grant at $1.00 per share. The second warrant will vest on September 14, 2017, and
is exercisable for a period of five years from the date of grant at $2.00 per share. The fair value of the first and second warrants,
as calculated pursuant to the Black-Scholes option-pricing model, was determined to be $128,400 ($0.2568 per share) and $127,850
($0.2557 per share), respectively. The Company re-measures the non-vested options to fair value at the end of each reporting period.
At March 31, 2017, the fair value of non-vested options was determined to be $28,271 which will be charged to operations through
September 14, 2017. During the three months ended March 31, 2017 and 2016, the Company recorded a charge (credit) to operations
of $55,957 and $(20,733), respectively, with respect to these common shares and warrants.
On
November 28, 2015, the Company entered into a two-year advisory agreement with Dr. Fritz Henn, M.D., Ph.D., for consultation and
advice on the development of certain of the Company’s products for clinical neurological and neuropsychiatric applications.
Dr. Henn is an internationally recognized investigative neuroscientist and psychiatrist. In connection with the advisory agreement,
and as sole compensation, Dr. Henn was granted stock options to purchase 200,000 shares of the Company’s common stock, with
100,000 shares vesting on November 28, 2015, and 100,000 shares vesting on November 28, 2016. The stock options are exercisable
for a period of five years from the grant date at $0.50 per share. The fair value of these stock options, as calculated pursuant
to the Black-Scholes option-pricing model, was initially determined to be $103,360 ($0.5168 per share), of which $51,680 was attributable
to the stock options fully-vested on November 28, 2015 and was therefore charged to operations on that date. The remaining unvested
portion of the fair value of the stock options was charged to operations ratably from November 28, 2015 through November 28, 2016.
During the three months ended March 31, 2016, the Company recorded a charge to operations of $1,159 with respect to these stock
options.
Effective
April 25, 2016, in connection with her continuing role as a member of the Company’s Board of Directors, Dr. Kathleen P.
Mullinix was granted fully-vested stock options under the 2007 Plan to purchase 150,000 shares of the Company’s common stock.
The stock options are exercisable for a period of five years from the date of grant at $0.12 per share, which was the fair market
value of the Company’s common stock on such date. The fair value of these stock options, as calculated pursuant to the Black-Scholes
option-pricing model, was determined to be $17,535 ($0.1169 per share), which was charged to operations on the date of grant.
Effective November 22, 2016, Dr. Mullinix resigned as a Director of the Company. Consequently, pursuant to the stock option agreement,
Dr. Mullinix has twelve months from November 22, 2016 to exercise her stock options to acquire 150,000 shares of the Company’s
common stock.
Effective
April 25, 2016, in connection with his continuing role as a member of the Company’s Board of Directors, Dr. Philip F. Palmedo
was granted fully-vested stock options under the 2007 Plan to purchase 450,000 shares of the Company’s common stock. The
stock options are exercisable for a period of five years from the date of grant at $0.12 per share, which was the fair market
value of the Company’s common stock on such date. The fair value of these stock options, as calculated pursuant to the Black-Scholes
option-pricing model, was determined to be $52,604 ($0.1169 per share), which was charged to operations on the date of grant.
Effective
May 13, 2016, in conjunction with his appointment as a director of the Company, the Company granted to Dr. Stephen J. Forman stock
options to purchase an aggregate of 200,000 shares of common stock under the 2007 Plan, exercisable for a period of five years
from vesting date at $0.16 per share, which was the fair market value of the Company’s common stock on such date. One-half
of such shares (100,000 shares) vested on May 13, 2016 and the remaining one-half of such shares (100,000 shares) will vest on
May 13, 2017. The fair value of these stock options, as calculated pursuant to the Black-Scholes option-pricing model, was determined
to be $31,180 ($0.1559 per share), of which $15,590 was attributable to the stock options fully-vested on May 13, 2016 and was
therefore was charged to operations on that date. The Company re-measures the non-vested options to fair value at the end of each
reporting period. At March 31, 2017, the fair value of non-vested options was determined to be $1,837 which will be charged to
operations through May 13, 2017. During the three months ended March 31, 2017, the Company recorded a total charge to operations
of $3,844 with respect to these stock options.
Effective
June 7, 2016, in connection with his continuing role as a consultant to the Company, Eric Forman was granted fully-vested stock
options under the 2007 Plan to purchase 100,000 shares of the Company’s common stock. The stock options are exercisable
for a period of five years from the date of grant at $0.15 per share. The fair market value of the Company’s common stock
on the date of grant was $0.14 per share. The fair value of these stock options, as calculated pursuant to the Black-Scholes option-pricing
model, was determined to be $13,625 ($0.1363 per share), which was charged to operations on the date of grant.
Effective
September 12, 2016, in connection with his continuing role as a consultant to the Company, Francis Johnson was granted fully-vested
stock options under the 2007 Plan to purchase 500,000 shares of the Company’s common stock. The stock options are exercisable
for a period of five years from the date of grant at $0.25 per share. The fair market value of the Company’s common stock
on the date of grant was $0.25 per share. The fair value of these stock options, as calculated pursuant to the Black-Scholes option-pricing
model, was determined to be $98,901 ($0.1978 per share), which was charged to operations on the date of grant.
Total
stock-based compensation expense (credit) was $71,939 and $(30,370) for the three months ended March 31, 2017 and 2016, respectively.
A
summary of stock option activity during the three months ended March 31, 2017 is presented in the tables below.
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
Number
|
|
|
Average
|
|
|
Contractual
|
|
|
|
of
|
|
|
Exercise
|
|
|
Life
|
|
|
|
Shares
|
|
|
Price
|
|
|
(in Years)
|
|
|
|
|
|
|
|
|
|
|
|
Stock options outstanding at December 31, 2016
|
|
|
8,600,000
|
|
|
$
|
0.583
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Stock options outstanding at March 31, 2017
|
|
|
8,600,000
|
|
|
$
|
0.583
|
|
|
|
2.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercisable at December 31, 2016
|
|
|
7,975,000
|
|
|
$
|
0.501
|
|
|
|
|
|
Stock options exercisable at March 31, 2017
|
|
|
7,975,000
|
|
|
$
|
0.501
|
|
|
|
2.20
|
|
Total
deferred compensation expense for the outstanding value of unvested stock options was $31,522 at March 31, 2017, which is being
recognized subsequent to March 31, 2017 over a weighted-average period of approximately five months.
The
exercise prices of common stock options outstanding and exercisable are as follows at March 31, 2017:
|
|
|
Options
|
|
|
Options
|
|
Exercise
|
|
|
Outstanding
|
|
|
Exercisable
|
|
Prices
|
|
|
(Shares)
|
|
|
(Shares)
|
|
|
|
|
|
|
|
|
|
$
|
0.120
|
|
|
|
600,000
|
|
|
|
600,000
|
|
$
|
0.130
|
|
|
|
100,000
|
|
|
|
75,000
|
|
$
|
0.150
|
|
|
|
100,000
|
|
|
|
100,000
|
|
$
|
0.160
|
|
|
|
200,000
|
|
|
|
100,000
|
|
$
|
0.200
|
|
|
|
500,000
|
|
|
|
500,000
|
|
$
|
0.250
|
|
|
|
500,000
|
|
|
|
500,000
|
|
$
|
0.500
|
|
|
|
4,400,000
|
|
|
|
4,400,000
|
|
$
|
0.650
|
|
|
|
700,000
|
|
|
|
700,000
|
|
$
|
1.000
|
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
$
|
2.000
|
|
|
|
500,000
|
|
|
|
—
|
|
|
|
|
|
|
8,600,000
|
|
|
|
7,975,000
|
|
The
intrinsic value of exercisable but unexercised in-the-money stock options at March 31, 2017 was approximately $131,000, based
on a fair market value of $0.2500 per share on March 31, 2017.
The
intrinsic value of exercisable but unexercised in-the-money stock options at December 31, 2016 was approximately $12,800, based
on a fair market value of $0.1401 per share on December 31, 2016.
Outstanding
options to acquire 625,000 shares of the Company’s common stock had not vested at March 31, 2017.
The
Company expects to satisfy such stock obligations through the issuance of authorized but unissued shares of common stock.
7.
Commitments and Contingencies
The
Company is not currently subject to any pending or threatened legal actions or claims.
Significant
agreements and contracts are summarized as follows:
On
September 21, 2012, the Company entered into a work order agreement with Theradex, the CRO responsible for the clinical development
of the Company’s lead anti-cancer compound LB-100, to manage and administer the Phase 1 clinical trial of LB-100. The Phase
1 clinical trial of LB-100, which began during April 2013 with the entry of patients into the clinical trial, was carried out
by nationally recognized comprehensive cancer centers. The patient accrual goal was reached in April 2016 and the clinical trial
was closed to further patient enrollment at that time. All patients completed treatment with LB-100 and were off study by the
end of May 2016. The Company estimates that it will continue to incur costs through May 2017 to complete the analysis of the clinical
data, reconcile and pay the remaining costs owed to the participating clinical sites, and prepare and submit the required Clinical
Study Report to the FDA on the completed Phase 1 clinical trial of LB-100.
The
Phase 1 clinical trial was estimated to cost a total of approximately $2,200,000, with such payments expected to be allocated
approximately 60% for services provided by Theradex and approximately 40% for pass-through costs for clinical center laboratory
costs and investigator costs over the life of the clinical trial. Total costs charged to operations from 2013 through March 31,
2017 for services paid to or through Theradex pursuant to this arrangement aggregated $2,192,165.
On
December 24, 2013, the Company entered into an agreement with NDA Consulting Corp. (“NDA”) for consultation and advice
in the field of oncology research and drug development. As part of the agreement, NDA also agreed to cause its president, Dr.
Daniel D. Von Hoff, M.D., to become a member of the Company’s Scientific Advisory Committee. The term of the agreement was
for one year and provided for a quarterly cash fee of $4,000. In 2014, 2015 and 2016, the agreement has been automatically renewed
on its anniversary date for an additional one-year term. Consulting and advisory fees charged to operations pursuant to this agreement
were $4,000 during the three months ended March 31, 2017 and 2016.
Effective
January 1, 2014, the Company entered into an Advisory Agreement with Dr. Kathleen P. Mullinix, a member of the Board of Directors
of the Company at that time, effective for an initial term of one year through December 31, 2014 to advise on business development
matters. The Advisory Agreement provided for annual cash compensation of $25,000, to be paid in full at the beginning of each
year. The term of the Advisory Agreement was automatically extended for a term of one year annually unless a notice of intent
to terminate was given by either party at least 90 days before the end of the applicable term. Accordingly, the Advisory Agreement
was extended for additional terms of one year effective January 1, 2015 and 2016. Effective November 22, 2016, Dr. Mullinix resigned
from the Company’s Board of Directors. For the three months ended March 31, 2016, the Company recognized a charge to operations
of $6,250 as consulting and advisory fees pursuant to this Advisory Agreement, which is included in general and administrative
costs in the Company’s condensed consolidated statements of operations.
Effective
September 14, 2015, the Company entered into a Collaboration Agreement with BioPharmaWorks, pursuant to which the Company engaged
BioPharmaWorks to perform certain services for the Company. Those services include, among other things: (a) assisting the Company
to (i) commercialize its products and strengthen its patent portfolio, (ii) identify large pharmaceutical companies with potential
interest in the Company’s product pipeline, and (iii) prepare and deliver presentations concerning the Company’s products;
(b) at the request of the Board of Directors, serving as backup management for up to three months should the Company’s Chief
Executive Officer and scientific leader be temporarily unable to carry out his duties; (c) being available for consultation in
drug discovery and development; and (d) identifying providers and overseeing tasks relating to clinical use and commercialization
of new compounds.
BioPharmaWorks
was founded in 2015 by former Pfizer scientists with extensive multi-disciplinary research and development and drug development
experience. The Collaboration Agreement was for an initial term of two years and automatically renews for subsequent annual periods
unless terminated by a party not less than 60 days prior to the expiration of the applicable period. In connection with the Collaboration
Agreement, the Company agreed to pay BioPharmaWorks a monthly fee of $10,000, subject to the right of the Company to pay a negotiated
hourly rate in lieu of the monthly payment, and agreed to issue to BioPharmaWorks certain equity-based compensation as described
at Note 6. The Company recorded a charge to operations pursuant to this Collaboration Agreement of $0 and $30,000 during the three
months ended March 31, 2017 and 2016, respectively. In November 2016, it was mutually agreed to suspended services and payments
pursuant to this agreement, without extending the term of the agreement, for the period from November 1, 2016 through March 31,
2017. The agreement resumed as scheduled on April 1, 2017.
Summary
of Principal Cash Obligations and Commitments
The
following table sets forth the Company’s principal cash obligations and commitments for the next five fiscal years as of
March 31, 2017 aggregating $120,761, of which $42,233 is included in current liabilities in the Company’s condensed consolidated
balance sheet at March 31, 2017. Amounts included in the 2017 column represent amounts due at March 31, 2017 for the remainder
of the 2017 fiscal year ending December 31, 2017.
|
|
|
|
|
Payments Due By Year
|
|
|
|
Total
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development contracts
|
|
$
|
35,813
|
|
|
$
|
35,813
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Clinical trial agreements
|
|
|
17,948
|
|
|
|
17,948
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Consulting agreements
|
|
|
67,000
|
|
|
|
67,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
120,761
|
|
|
$
|
120,761
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
8.
Subsequent Events
Sale
of Common Stock
Effective
April 3, 2017, the Company entered into a Securities Purchase Agreement with an accredited investor pursuant to which the purchaser
purchased 6,000,000 shares of the Company’s common stock at a price of $0.25 per share for an aggregate purchase price of
$1,500,000. The proceeds from the sale of the shares of common stock will be used for working capital and general corporate purposes
principally in connection with the Company’s ongoing clinical trials.
The
shares issued to the investor were not registered under the Securities Act of 1933, as amended (the “Act”), in reliance
upon the exemption from registration contained in Section 4(a)(2) of the Act. Such securities may not be re-offered or sold in
the United States in the absence of a registration statement or exemption from the registration requirements of the Act.