NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
Note A.
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OVERVIEW OF BUSINESS
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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 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 had 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. 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 B below),
to develop Apo E mimetic peptide molecule AEM-28 and its analogs.
Our development activities represent a single operating segment as
they share 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. As described in Note F to the Financial Statements included
in this Quarterly Report on Form 10-Q, 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 C and transaction costs. As discussed in Note B to the Financial
Statements included in this Quarterly Report on Form 10-Q, 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. These funds will allow the joint venture to continue
its development activities, but 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 have been prepared on a going concern
basis and do not include any adjustments that might result the future success or lack thereof, of fundraising activities.
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% (62.2% on a Series B-1 and B-2 Preferred Stock as-converted basis) 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.
The Convertible Promissory Notes, as described in Note C to the Financial
Statements included in this Quarterly Report on Form 10-Q, were previously classified as a long-term payable due to their right
to be converted into either the Company’s common stock or preferred stock. As part of the July 14, 2017 sale of the Company’s
common stock and receipt of a secured loan, as described in Note F to the Financial Statements included in this Quarterly Report
on Form 10-Q, the Convertible Promissory Notes’ Lenders elected to have the Convertible Promissory Notes paid off and not
to convert the debt into either the Company’s Common Stock or Preferred Stock. Accordingly, the Convertible Promissory Notes
have been reclassified to current liabilities.
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. As discussed in Note B to the Financial
Statements included in this Quarterly Report on Form 10-Q, 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 June 30,2017, 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 C to the Financial Statements included in this Quarterly Report on Form 10-Q, 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.
Cash and Cash Equivalents
At June 30, 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-28-14, 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 F to the
Financial Statements included in this Quarterly Report on Form 10-Q, 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 C and transaction costs.
As discussed in Note B to the Financial Statements included in this Quarterly Report on Form 10-Q, in August 2017, the Company
purchased 93,458 shares of LipimetiX Development, Inc.’s Series B-2 Preferred Stock for $1,000,000. These funds will allow
the joint venture to continue its development activities, but 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 balance.
Note B.
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JOINT VENTURE FOR DEVELOPMENT OF APO E MIMETIC PEPTIDE MOLECULE AEM-28 AND ANALOGS
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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%.
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% or 30.6% on an “as converted” basis), 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 represented 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 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. 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. In August
2017 the Accounting Services Agreement monthly fee was increased to $20,000 and will thereafter be accrued but not payable, until
certain levels of joint venture funding are obtained from non-affiliated parties. In August 2017, a Management Fee of $150,000
payable in 2017 and $150,000 payable in 2018 was approved by the joint venture’s Board of Directors.
The joint venture formation was as follows ($000’s):
Patent license rights
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$
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1,045
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Noncontrolling interests
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(667
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)
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Cash paid at formation
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$
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378
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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 June 30, 2017, 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 toJuly 15, 2020, with early payment required upon certain additional funding of the joint venture by
non-affiliated parties. Subsequent to June 30, 2017, interest due on the revolving loan will be accrued and payable only upon certain
additional funding of the joint venture by non-affiliated parties. 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 June 30, 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 $409,000 in 2017 and $8,881,000 for the period from August 3, 2012 (inception) to June 30, 2017,
of which $409,000, and $7,269,000, 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 June 30, 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 June 30, 2017 the
Company would incur an additional loss of $667,000 for the joint venture losses allocated to the common stock noncontrolling interests.
Note C.
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CONVERTIBLE PROMISSORY NOTES PAYABLE
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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. The Convertible Promissory Notes bear interest at 5% and were due April 30, 2017, with
the due date subsequently extended to July 14, 2017. 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 F to this Quarterly Report on Form 10-Q, the
Convertible Promissory Notes and accrued interest thereon of $1,079,000 were paid off on July 14, 2017.
Note D.
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Australian Refundable Research & Development
Credit
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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. For the year ended December 31,
2016 a AUD$84,000 refundable research and development tax credit was received by Lipimetix Australia Pty Ltd. For the six months
ended June 30, 2017, an additional AUD$11,000 refundable research and development tax credit has been recorded by LipimetiX Australia
Pty Ltd.
Note E:
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Contingency – Non-Compliance with
Securities and Exchange Commission Reporting Requirements and OTCQB Market Requirements
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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 our Current Reports on Form 10-Q filed with the SEC in 2016 and 2017, 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 our Current Reports on Form 10-Q could have a material adverse effect on the Company and its Stockholders.
Note F:
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SUBSEQUENT EVENTS
– SALE OF COMMON
STOCK, SECURED LOAN AND PAY OFF OF CONVERTIBLE PROMISSORY NOTES
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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 B to this Quarterly Report on Form 10-Q, 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 Note C to this Quarterly Report on Form 10-Q) 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.