As of May 1, 2020, the issuer had 150,000,000 common shares,
$0.0001 par value, issued and outstanding.
PART I
We
urge you to read this entire Annual Report on Form 10-K, including the “Risk Factors” section and the financial statements
and related notes included herein. As used in this Annual Report, unless context otherwise requires, the words “we,”
“us”, “our,” “the Company,” “Inspyr Therapeutics, Inc.” and “Registrant”
refer to Inspyr Therapeutics, Inc., and our wholly owned subsidiary, Lewis & Clark Pharmaceuticals, Inc. Also, any reference
to “common shares,” or “common stock,” refers to our $.0001 par value common stock. Also, any reference
to “preferred stock” or “preferred shares” refers to our $0.0001 par value Series A preferred stock, our
$0.0001 par value series B preferred stock, our $0.0001 par value Series C preferred stock, and our $.0.0001 par value Series
D preferred stock. All references to common stock, share and per share amounts have been retroactively restated to reflect the
1:25 reverse stock split that became effective on September 30, 2019 as if it had taken place as of the beginning of the earliest
period presented
Reliance on Securities
and Exchange Commission Order
The Company is filing its Annual Report on
Form 10-K for the fiscal year ended December 31, 2019 (the “Report”) pursuant to the Securities and Exchange Commission
(the “SEC”) Order dated March 4, 2020 (Release No. 34-88318) under Section 36 of the Exchange Act Granting Exemptions
from Specified Provisions of the Exchange Act and Certain Rules Thereunder, as superseded by SEC Order Modifying Exemptions from
the Reporting and Proxy Delivery Requirements for Public Companies dated March 25, 2020 (Release No. 34-88465) (together, the
“Order”) to delay the filing of the Report due to circumstances related to the coronavirus pandemic (“COVID-19”).
On March 30, 2020, the Company filed a Current Report on Form 8-K stating that it is relying on the Order to delay the filing
of the Report by up to 45 days. As result of the global outbreak of the COVID-19 virus and out of an abundance of caution, members
of the Company’s outside consultants, lawyers, and certain other employees, including financial reporting staff, began working
remotely on or about March 15, 2020. The Company has been following the recommendations of local government and health authorities
to minimize exposure risk for its employees, including the temporary closures of some of its offices and having employees work
remotely. The Company’s operations and business have experienced disruption due to the unprecedented conditions surrounding
the COVID-19 pandemic that has spread throughout the United States and the world. The Company’s business was impacted by
the COVID-19 pandemic as the Company’s headquarters, property management operations and other services offices located in
Westlake Village, California, which were under stay-at-home orders resulting in staffing and work-from-home challenges which caused
disruptions in communications and delayed completion of the audit. These disruptions to the process of preparing the Company’s
financial statements as a result of the COVID-19 virus, are causing the Company’s Form 10-K for the 2019 fiscal year which
was due on March 30, 2020 to be delayed. Consequently, the Company was unable to timely file the Report without the extension
provided for by the Order.
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
Annual Report includes “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933,
as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These
statements relate to our business development plans, clinical trials, regulatory reviews, timing, strategies, expectations, anticipated
expense levels, business prospects and positioning with respect to the market for our proposed products, business outlook, technology
spending and various other matters (including contingent liabilities and obligations and changes in accounting policies, standards
and interpretations), express, our current intentions, beliefs, expectations, strategies or predictions, as well as historical
information. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause
our actual results, performance or achievements, to be materially different from anticipated results, performance or achievements
expressed or implied by such forward-looking statements. When used in this report, statements that are not statements of current
or historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “plan,”
“intend,” “may,” “will,” “expect,” “believe,” “could,”
“anticipate,” “estimate,” or “continue” or similar expressions or other variations or comparable
terminology are intended to identify such forward-looking statements. Although we believe that the assumptions on which the forward-looking
statements contained herein are based are reasonable, any of those assumptions could prove to be inaccurate given the inherent
uncertainties as to the occurrence or nonoccurrence of future events. These statements are not guarantees of future performance
and involve risks and uncertainties that are difficult to predict. Our future operating results are dependent upon many factors
which are outside our control. You should not place undue reliance on forward-looking statements. Forward-looking statements may
not be realized due to a variety of factors, including, without limitation, our ability to:
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Resume
our corporate operations that have been curtailed;
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attract,
build and retain a senior management team;
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manage
our business given continuing operating losses and negative cash flows;
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obtain
sufficient capital or a strategic business arrangement to fund our operations and expansion plans;
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build
the infrastructure necessary to support the growth of our business;
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manage
competitive factors and developments beyond our control;
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manage
scientific and medical developments which may be beyond our control;
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manage
the governmental regulation of our business including state, federal and international laws;
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maintain
and protect our intellectual property;
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obtain
patents based on our current and/or future patent applications;
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obtain
and maintain other rights to technology required or desirable to conduct or expand our business;
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achieve
any potential strategic benefits of licensing transactions, collaborations, acquisitions, or in-licensing of new technologies,
if any;
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successfully
integrate the business of our wholly owned subsidiary, Lewis & Clark Pharmaceuticals, Inc.; and
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manage
any other factors discussed in the “Risk Factors” section, and elsewhere in this Annual Report.
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All
forward-looking statements attributable to us are expressly qualified in their entirety by these and other factors. We undertake
no obligation to update or revise these forward-looking statements, whether to reflect events or circumstances after the date
initially filed or published, to reflect the occurrence of unanticipated events or otherwise, except to the extent required by
federal securities laws. The risks discussed in this report should be considered in evaluating our business and future prospects.
Overview
We
are a clinical-stage, pre-revenue, pharmaceutical company primarily focused on the development of therapeutics for the treatment
of diseases. Through our acquisition of Lewis and Clark Pharmaceuticals, Inc., we currently are focusing on a pipeline of small
molecule adenosine receptor modulators.
The
adenosine receptor modulators include A2B antagonists, dual A2A/A2B antagonists, and A2A
agonists that have broad development applicability including indications within immuno-oncology and inflammation. Adenosine
is implicated in immunosuppression in the tumor microenvironment. Adenosine receptor antagonists may boost the host immune response
against the tumor as a single-agent and in combination with other existing immuno-oncology agents leading to enhanced tumor killing
and inhibition of metastasis. Adenosine also has anti-inflammatory properties in the acute and chronic setting. Adenosine receptor
agonists may promote a decreased inflammatory response and can potentially treat a broad range of inflammatory and autoimmune
based diseases and conditions (e.g., rheumatoid arthritis, joint injury, Crohn’s disease, psoriasis) as well as improve
wound healing and decrease pain.
During
February 2018, due to a lack of capital, we curtailed substantially all our business operations. In the event that we are able
to raise sufficient capital, our major focus would be to: (i) further characterization, in conjunction with Ridgeway Therapeutics,
of anti-cancer activity of the current pipeline of A2B antagonists and dual A2A/A2B antagonists
leading to selection of a clinical candidate for an Investigative New Drug or IND enabling studies, (ii) further characterization
of the current pipeline of A2A agonists leading to selection of a clinical candidate for an Investigative New Drug
or IND enabling studies; (iii) licensing and/or partnering the A2B antagonists, dual A2A/A2B
antagonists, and/or A2A agonists for further development, (iv) through our newly acquired adenosine receptor chemistry
technology platform, continue to produce next generation adenosine receptor modulators, (v) pursue licensing and/or partnering
of mipsagargin, (vi) conduct a clinical study of mipsagargin in patients with advanced HCC, and (vii) explore collaborations utilizing
mipsagargin in new, non-clinical solid tumor models with leading researchers in the oncology field.
Our
ability to execute our business plan is dependent on the amount and timing of cash, if any, that we are able to raise. During
February of 2018, we curtailed our operations due to our lack of cash. During July 2018, we were able to raise approximately $500,000
through the sale of debt securities and we raised $25,000 in December 2018 through the sale of notes. During March 2020, we sold
$250,000 of debt securities. We are currently using such funds to maintain our SEC reporting requirements, pay outstanding invoices
to our independent registered accounting firm, legal fees, and other outstanding obligations, the payment of which we believe
to be vital to our future operations. Should we fail to further raise sufficient funds to execute our business plan, our priority
would be to maintain our intellectual property portfolio and continue, to the best of our ability, our public company reporting
requirements.
While
we believe that the data from our nonclinical studies appear promising, the outcome of our ongoing or future studies may ultimately
be unsuccessful. We are also currently in the process of looking for new clinical and pre-clinical assets to augment our current
pipeline.
Our
ability to execute our business plan is dependent on the amount and timing of cash, if any, that we are able to raise. Should
we not raise sufficient funds to execute our business plan, our priority is the continued production of adenosine receptor modulator
products for any existing material transfer agreements and continuing business development discussions with potential development
partners.
Pre-Revenue
We
are a pre-revenue, early stage company that has not achieved profitability, and has no product revenues. Additionally, we have
no approved products for sale.
Going
Concern
Our
auditors’ report on our December 31, 2019 financial statements expressed an opinion that our capital resources as of the
date of their Audit Report were not sufficient to sustain operations or complete our planned activities for the upcoming year
unless we raised additional funds. During February of 2018, we curtailed our operations due to our lack of cash. Notwithstanding
our financing in March 2020 where we raised $250,000, our current cash level raises substantial doubt about our ability to continue
as a going concern past the third quarter of 2019. If we do not obtain additional funds by such time, we may no longer be able
to continue as a going concern and will cease operation which means that our shareholders will lose their entire investment.
Recent
Developments
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On
March 6, 2020, we completed the private placement of $250,000 of non-interesting bearing senior convertible securities.
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On
September 30, 2019, we completed a 1-for-25 reverse stock split of our common stock.
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On
July 26, 2019, we appointed Michael Cain as our interim Chief Executive Officer and as a member of the Board of Directors.
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Product
Development of Mipsagargin
Mipsagargin
is a prodrug targeting the tumor vasculature that has therapeutic potential in a wide range of malignancies. We have currently
curtailed our development of mipsagargin. We cannot predict if or when we will recommence development of mipsagargin.
Product
Development of Adenosine Receptor Modulators
Adenosine
is an extracellular signaling molecule that regulates multiple aspects of tissue function and specifically plays a role in immunity
and inflammation. High levels of adenosine in the tumor microenvironment inhibits immune response mediated through the A2A
and A2B receptors. Adenosine also plays a role in non-malignant conditions where it is rapidly increased in response
to inflammation, hypoxia, ischemia, or trauma. Adenosine released in this setting has been shown to have a protective effect and
limits excessive inflammatory damage to tissues.
The
adenosine receptor antagonists have broad applicability as a potential immuno-oncology (IO) therapeutic agent in multiple tumor
types both as a single agent and in combination with other IO agents, in addition to traditional cytotoxic chemotherapy. We are
actively seeking licensing opportunities and/or partners to further development our A2B and dual A2A/A2B
receptor antagonists. Our current product development plan for adenosine receptor antagonists contemplates the following
major initiatives, subject to the Company receiving sufficient funds:
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Continue
development of anti-cancer agents with partner company, Ridgeway Therapeutics, Inc.
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Further
characterization of existing agents toward IND enabling studies and support ongoing licensing/partnership activities.
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Conduct
IND enabling studies.
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Conduct
clinical studies with one or more of the adenosine receptor antagonists.
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Continue
generating additional adenosine receptor antagonists to expand our portfolio.
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The
adenosine receptor agonists have applicability in a broad range of non-oncology conditions including inflammatory and autoimmune
diseases and conditions. We are actively seeking licensing opportunities and/or partners to further development our A2A
receptor agonists. Our current product development plan for adenosine receptor agonists contemplates the following major initiatives
subject to the Company receiving sufficient funds:
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License
and/or partner to companies with development expertise in the intended indication.
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Further
characterize existing agents to support licensing/partnership activities.
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Continue
generating additional adenosine receptor agonists to expand our portfolio.
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Asset
Acquisition Strategy
In
addition to the anticipated development of our current product candidates once we receive adequate capital to resume our operations,
we have initiated a search for suitable pre-clinical and clinical assets to further expand our product pipeline. We are looking
for assets with the potential to be complimentary to our current technologies or that could benefit from our development experience
with the goal of developing such candidates for commercialization. We believe that this element of our corporate strategy could
provide new opportunities for product development and diversify risks inherent in potentially focusing on a limited product portfolio
and therapeutic areas, thus potentially increasing our probability of commercial success.
Our
Technology
We
have what we believe to be a robust intellectual property portfolio covering proprietary A2A agonists (LNC-001, see
below), A2B antagonists (LNC-002, see below), and dual A2A/A2B antagonists (LNC-003, see below).
We also have a substantial catalog of synthesized compounds, specifically A2A agonists and A2B antagonists
that require further characterization and testing for potential clinical candidates. We believe that our proprietary dual A2A/A2B
antagonists have great potential and should be further explored.
Patents
and Proprietary Rights
Our
success will likely depend upon our ability to preserve our proprietary technologies and operate without infringing the proprietary
rights of other parties. However, we may rely on certain proprietary technologies and know-how that are not patentable or that
we determine to keep as trade secrets. We protect our proprietary information, in part, using confidentiality agreements with
our employees, consultants, significant scientific collaborators, and sponsored researchers that generally provide that all inventions
conceived by the individual in the course of rendering services to us shall be our exclusive property.
The
intellectual property underlying our technology is covered by certain patents and patent applications previously owned by Lewis
and Clark Pharmaceuticals, Inc. (LNC) and now fully owned by the Company. All of the LNC intellectual property has been assigned
to LNC, a fully owned subsidiary of the Company.
FILE NUMBER
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FIELD
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APPLICATION NO.
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FILING DATE
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ISSUE DATE
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PATENT NO.
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LNC-001-US
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A2A AGONISTS
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13956111
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Jul 31, 2013
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Jun 30, 2015
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9067963
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LNC-001-US-CNT1
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A2A AGONISTS
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14752861
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Jun 27, 2015
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Nov 21, 2017
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9822141
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LNC-002-AU
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A2B ANTAGONISTS
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2016246068
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Apr 8, 2016
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LNC-002-BR
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A2B ANTAGONISTS
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BR1120170213869
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Apr 8, 2016
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LNC-002-CN
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A2B ANTAGONISTS
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2016800268351
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Apr 8, 2016
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LNC-002-EA
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A2B ANTAGONISTS
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201792156
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Apr 8, 2016
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LNC-002-EP
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A2B ANTAGONISTS
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167774363
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Apr 8, 2016
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LNC-002-IL
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A2B ANTAGONISTS
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254902
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Apr 8, 2016
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LNC-002-IN
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A2B ANTAGONISTS
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201727039305
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Apr 8, 2016
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LNC-002-JP
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A2B ANTAGONISTS
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2018504080
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Apr 8, 2016
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LNC-002-KR
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A2B ANTAGONISTS
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1020177031978
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Apr 8, 2016
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LNC-002-MX
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A2B ANTAGONISTS
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MXa2017012783
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Apr 8, 2016
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LNC-002-NZ
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A2B ANTAGONISTS
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736705
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Apr 8, 2016
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LNC-002-SG
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A2B ANTAGONISTS
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11201707753X
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Apr 8, 2016
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LNC-002-US
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A2B ANTAGONISTS
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15094903
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Apr 8, 2016
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Feb 14, 2017
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9593118
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LNC-002-ZA
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A2B ANTAGONISTS
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201707248
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Apr 8, 2016
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Oct 31, 2018
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LNC-003-P2
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DUAL A2A-A2B ANTAGONISTS
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62791910
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Jan 14, 2019
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When
appropriate, we will continue to seek patent protection for inventions in our core technologies and in ancillary technologies
that support our core technologies or which we otherwise believe will provide us with a competitive advantage. We will accomplish
this by filing and maintaining patent applications for discoveries we make, either alone or in collaboration with scientific collaborators
and strategic partners. Typically, we plan to file patent applications in the United States and, for LNC-003, in the Patent Cooperation
Treaty (PCT). In addition, we plan to obtain licenses or options to acquire licenses to patent filings from other individuals
and organizations that we anticipate could be useful in advancing our research, development and commercialization initiatives
and our strategic business interest.
Development
Strategy
While
we curtailed our operations in February 2018 due to our cash position, in the event that we are able to raise sufficient capital
to execute our clinical and pre-clinical development strategy, we anticipate that under the planning and direction of key
personnel, we expect to outsource all our nonclinical development and manufacturing, and the majority of our clinical development
activities to contract research organizations (CROs) and contract manufacturing organizations (CMOs). Our contract CROs and CMOs
are required to comply with federal, state and United States Food and Drug Administration or FDA regulations including Good Manufacturing
Practices (cGMP), Good Clinical Practices (GCP), and Good Lab Practices (GLP).
In
the event that we are able to raise sufficient capital, we intend to conduct further characterization and testing of our A2B
antagonists to select a candidate for pre-clinical and clinical trials in an oncology indication. This oncology work is
expected to be run in conjunction with and oversight from Ridgeway Therapeutics, Inc. for the selection of an anti-cancer agent.
Ridgeway Therapeutics, Inc. is currently delinquent in their quarterly payments. We expect them to fulfill their obligations once
they have funding.
In-licensing
or Acquisition Strategy
In
addition to the development of our current product candidates, we have initiated an in-licensing or acquisition strategy to further
expand our product pipeline. Our in-licensing strategy consists of evaluating early clinical or late preclinical stage opportunities
in therapeutic areas that can benefit from our current product candidates or core expertise in drug development. We believe that
this element of our corporate strategy could diversify some of the risks inherent in focusing on limited therapeutic areas and
could increase our probability of commercial success.
Commercialization
Strategy
In
the event that we are able to raise sufficient capital to continue our currently curtailed operations, we intend to (i) license
or sell the underlying technology of our therapeutics to third parties during or after our clinical trials, (ii) seek a corporate
partner for further development, or (iii) continue developing our drug candidates ourselves. It is expected that such third parties
would then continue to develop, market, sell, and distribute any resulting products. As part of our overall strategic plan, we
are exploring our options and actively seeking to engage in a collaborative, strategic and/or licensing arrangement with another
pharmaceutical company. If we enter into any such transaction, we may be required to give up certain rights to our technology
and control over its future development.
Intellectual
Property
We
regard the protection of patents and other intellectual property rights that we own or license as critical to our business and
competitive position. To protect our intellectual property, we rely on patent, trade secret, and copyright law, as well as confidentiality,
nondisclosure, assignment of invention and other contractual arrangements with our officers, directors, employees, consultants,
investigators, clinical trial sites, contractors, collaborators and other third parties to whom we disclose confidential information.
Our policy is to pursue patent applications on inventions and discoveries that we believe are commercially important to the development
and growth of our business. We solely own or have exclusive licenses to our patents and patent applications.
Our
pipeline currently includes a substantial catalog of synthesized compounds, specifically A2A agonists and A2B
antagonists that require further characterization and testing for potential clinical candidates. Our proprietary dual A2A/A2B
antagonists have great potential and need to be further explored.
Our
intellectual property estate, shown above, has eight (8) issued patents in six (6) different jurisdictions and twenty-one (21)
currently pending applications. With appropriate funding and upon further research into our dual A2A/A2B
antagonists, we intend to file a regular US and a Patent Cooperation Treaty (PCT) applications to enable worldwide protection
of these antagonists.
When
appropriate and funding permitting, we plan to continue to seek patent protection for inventions in our core technologies and
in ancillary technologies that support our core technologies or which we otherwise believe would provide us with a competitive
advantage. We expect to be able to accomplish this by filing and maintaining patent applications for discoveries we make, either
alone or in collaboration with scientific collaborators and strategic partners. Typically, we plan to file patent applications
in the United States as well as foreign countries, where applicable. In addition, we may obtain licenses or options to acquire
licenses to patent filings from other individuals and organizations that we anticipate could be useful in advancing our research,
development and commercialization initiatives and our strategic business interest.
Manufacturing
and Supply
We
do not plan to develop company-owned or company-operated manufacturing facilities. We historically have and we plan to in the
future, outsource all drug manufacturing to contract manufacturers that are required to operate in compliance with cGMP. We may
also seek to refine the current manufacturing process in order to achieve improvements in efficiency, costs, purity and the like
as well as address different drug formulations to achieve improvements in stability and/or drug delivery.
Governmental
Regulations
FDA
Approval Process
Prior
to commencement of clinical studies involving humans, preclinical testing of new pharmaceutical products is generally conducted
on animals in the laboratory to evaluate the potential efficacy and safety of the product candidate. The results of these studies
are submitted to the FDA as part of an Investigational New Drug (IND) application, which must become effective before clinical
testing in humans can begin. Typically, human clinical evaluation involves a time-consuming and costly three-phase process. In
Phase I, clinical trials are conducted with a small number of people to assess safety, tolerability and to evaluate the pattern
of drug distribution within the body. In Phase II, clinical trials are conducted with groups of patients afflicted with a specific
disease in order to determine preliminary efficacy, optimal dosages and expanded evidence of safety. (In some cases, an initial
trial is conducted in diseased patients to assess both preliminary efficacy and preliminary safety, in which case it is referred
to as a Phase I/II trial.) In Phase III, large-scale, multi-center, comparative trials are conducted with patients afflicted with
a target disease in order to provide enough data to demonstrate the efficacy and safety required by the FDA. The FDA closely monitors
the progress of each of the three phases of clinical testing and may, at its discretion, re-evaluate, alter, suspend, or terminate
the testing based upon the data which have been accumulated to that point and its assessment of the risk/benefit ratio to the
patient. All adverse events must be reported to the FDA. Monitoring of all aspects of the study to minimize risks is a continuing
process.
The
results of the preclinical and clinical testing on non-biologic drugs and certain diagnostic drugs are submitted to the FDA in
the form of a New Drug Application (NDA) for approval prior to commencement of commercial sales. In responding to an NDA submission,
the FDA may grant marketing approval, may request additional information, may deny the application if it determines that the application
does not provide an adequate basis for approval, and may also refuse to review an application that has been submitted if it determines
that the application does not provide an adequate basis for filing and review. There can be no assurance that approvals would
be granted on a timely basis, if at all, for any of our proposed products.
Orphan
Drugs
Under
the Orphan Drug Act, the FDA may grant orphan drug designation to drugs intended to treat a rare disease or condition, which is
generally defined as a disease or condition that affects fewer than 200,000 individuals in the United States. Orphan drug designation
must be requested before submitting an NDA. After the FDA grants orphan drug designation, the generic identity of the drug and
its potential orphan use are disclosed publicly by the FDA. Orphan drug designation does not convey any advantage in, or shorten
the duration of, the regulatory review and approval process. The first NDA applicant to receive FDA approval for a particular
active ingredient to treat a particular disease with FDA orphan drug designation is entitled to a seven-year exclusive marketing
period in the United States for that product, for that indication. During the seven-year exclusivity period, the FDA may not approve
any other applications to market the same drug for the same orphan indication, except in limited circumstances, such as a showing
of clinical superiority to the product with orphan drug exclusivity in that it is shown to be safer, more effective or makes a
major contribution to patient care. Orphan drug exclusivity does not prevent the FDA from approving a different drug for the same
disease or condition, or the same drug for a different disease or condition. Among the other benefits of orphan drug designation
are tax credits for certain research and a waiver of the NDA application user fee.
European
and Other Regulatory Approval
Whether
or not FDA approval has been obtained, approval of a product by comparable regulatory authorities in Europe and other countries
is necessary prior to commencement of marketing the product in such countries. The regulatory authorities in each country may
impose their own requirements and may refuse to grant an approval, or may require additional data before granting it, even though
the relevant product has been approved by the FDA or another authority. As with the FDA, the regulatory authorities in the European
Union (EU), and other developed countries have lengthy approval processes for pharmaceutical products. The process for gaining
approval in particular countries varies, but generally follows a similar sequence to that described for FDA approval. In Europe,
the European Committee for Proprietary Medicinal Products provides a mechanism for EU-member states to exchange information on
all aspects of product licensing. The EU has established a European agency for the evaluation of medical products, with both a
centralized community procedure and a decentralized procedure, the latter being based on the principle of licensing within one
member country followed by mutual recognition by the other member countries.
Reimbursement
and Health Care Cost Control
Reimbursement
for the costs of treatments and products such as ours from government health administration authorities, private health insurers
and others, both in the United States and abroad, is a key element in the success of new health care products. Significant uncertainty
often exists as to the reimbursement status of newly approved health care products. The revenue and profitability of some health
care-related companies have been affected by the continuing efforts of governmental and third party payors to contain or reduce
the cost of health care through various means. Payors are increasingly attempting to limit both coverage and the levels of reimbursement
for new therapeutic products approved for marketing by the FDA, and are refusing, in some cases, to provide any coverage for uses
of approved products for disease indications for which the FDA has not granted marketing approval. In certain foreign markets,
pricing or profitability of prescription pharmaceuticals is subject to government control.
In
the United States, there have been a number of federal and state proposals to implement government control over health care costs.
The U.S. Patient Protection and Affordance Care Act and the Health Care and Education Reconciliation Act were signed into law
in March 2010. A number of provisions of those laws require further rulemaking action by governmental agencies to implement. The
laws change access to health care products and services and create new fees for the pharmaceutical and medical device industries.
Future rulemaking could increase rebates, reduce prices or the rate of price increases for health care products and services,
or require additional reporting and disclosure. The laws also include new authorization to the FDA to approve companies to market
biosimilar products within the United States, although to date FDA rulemaking under this legislation has been limited. We cannot
predict the timing or impact of any such future rulemaking on our business.
Other
Regulations
We
are also subject to various U.S. federal, state, local and international laws, regulations and recommendations relating to safe
working conditions, laboratory and manufacturing practices and the use and disposal of hazardous or potentially hazardous substances,
including radioactive compounds and infectious disease agents, used in connection with our business. Additionally, we are subject
to regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002,
and Securities and Exchange Commission regulations. We cannot accurately predict the extent of government regulation which might
result from future legislation or administrative action.
Employees
As
of December 31, 2019 we employed no full-time individuals. As of July 26, 2019, Mr. Cain, our newly appointed interim chief executive
officer, is our only remaining employee. In addition, we contract with a limited number of consultants to assist in activities
related to our operations.
Corporate
History
We
were incorporated in the State of Delaware in November 2003 and our principal office is located in Westlake Village, California.
On September 30, 2019, we completed a 1:25 reverse stock split of our common stock. Since our inception, we have invested a substantial
portion of our efforts and financial resources in the development of mipsagargin (G-202). As of February 2018, we have curtailed
our operations due to our cash position. In the event that we receive sufficient funding, we plan to focus our efforts on our
Adenosine Receptor Modulators. We have generated no revenues from the sale of our product candidates and have experienced substantial
net operating losses.
Where
to Find More Information
We
make our public filings with the SEC, including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K and all exhibits and amendments to these reports. These materials are available on the SEC’s web
site, http://www.sec.gov.
You
may also read and copy any materials you file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE., Washington,
DC 20549, on official business days during the hours of 10 a.m. to 3 p.m. You may obtain information on the operation of the Public
Reference Room by calling the SEC at 1–800–SEC–0330. Additionally, the SEC maintains an Internet site that contains
reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The
Internet site is located at http://www.sec.gov. Alternatively, you may obtain copies of these filings, including exhibits, by
writing or telephoning us at:
INSPYR
THERAPEUTICS
31200
Via Colinas Suite 200
Westlake
Village, CA 91362
Attn:
Chief Executive Officer
Tel:
(818) 597-7552
We
have described below a number of uncertainties and risks which, in addition to uncertainties and risks presented elsewhere in
this Annual Report, may adversely affect our business, operating results and financial condition. The uncertainties and
risks enumerated below as well as those presented elsewhere in this Annual Report should be considered carefully in evaluating
us, our business and the value of our securities. The following important factors, among others, could cause our actual business,
financial condition and future results to differ materially from those contained in forward-looking statements made in this Annual
Report or presented elsewhere by management from time to time.
Risks
Related to our Financial Position and Need to Raise Additional Capital
We
were forced to curtail our operations due to a lack of operating capital and we will not be able to continue as a going concern
if we do not obtain additional financing.
Since our inception, we have funded our operations
through the sale of our securities. Our cash and restricted cash balances at December 31, 2019 was approximately $23,000. In February
2018 we were forced to curtail our operations. Despite raising $250,000 in gross proceeds through the sale of convertible debentures
in March 2020, our ability to continue as a going concern is still wholly dependent upon obtaining sufficient capital to fund
our operations. We have no committed sources of additional capital and our access to capital funding is always uncertain. Accordingly,
despite our ability to secure capital in the past, we cannot assure you that we will be able to secure additional capital through
financing transactions, including issuance of debt, or through other means such as the licensing of our technology or grants.
In the event that we are not able to secure additional funding, we may be forced to curtail operations, delay or stop ongoing
clinical trials, cease operations altogether or file for bankruptcy.
Our
auditors have expressed substantial doubt about our ability to continue as a going concern.
Our
auditors’ report on our December 31, 2019 financial statements expressed an opinion that our capital resources as of the
date of their audit report were not sufficient to sustain operations or complete our planned activities for the upcoming year
unless we raised additional funds. Our current cash level raises substantial doubt about our ability to continue as a going concern
past the third quarter of 2020. If we do not obtain additional funds by such time, we may no longer be able to continue as a going
concern and will cease operation which means that our shareholders will lose their entire investment.
Risks
Relating to Our Stage of Development and Business
If
we are unable to successfully build a new management team and secure additional members and employees, our business could be harmed.
On
July 15, 2019, Christopher Lowe, our chief executive officer, president and principal accounting officer resigned. In February
2018, Ronald Shazer, MD, resigned as our chief medical officer. Effective July 26, 2019, we appointed Michael Cain as our interim
Chief Executive Officer and Chief Financial Officer. We will need to continue to augment senior management as well as additional
personnel to execute our business plan and grow our business. Our success depends largely on the development and execution of
our business strategy by our senior management team. The recent transitions in our executive team may be disruptive to our business,
and if we are unable to manage an orderly transition, our business may be adversely affected. Additionally, since our management
team consists of only one individual, Mr. Cain, the loss of Mr. Cain would likely harm our ability to implement our business strategy
and respond to the rapidly changing market conditions in which we operate. There may be a limited number of persons with the requisite
skills to serve in these positions, and we cannot assure you that we would be able to identify or employ such qualified personnel
on acceptable terms, if at all. Additionally, we cannot assure you that management will succeed in working together as a team.
In the event that we are unsuccessful, our business and prospects could be harmed.
We
are an early-stage company, have no product revenues, are not profitable and may never be profitable.
From
inception through December 31, 2019, we have raised approximately $37.2 million through the sale of our securities and exercise
of outstanding warrants. During this same period, we have recorded an accumulated deficit of approximately $60.7 million. Our
net losses for the two most recent fiscal years ended December 31, 2019 and 2018 were $934,000 and $12,000, respectively. Our
increase in net losses is primarily the result of decreases in gains from the change in fair value of our derivative instruments
and gains on conversions of debt, and increases in professional fees and interest expense, all partially offset by a decrease
in compensation expense. None of our products in development have received approval from the United States Food and Drug Administration
or FDA, or other regulatory authorities; we have no sales and have never generated revenues nor do we expect to for the foreseeable
future. We have currently curtailed our pre-clinical and clinical trials related to mipsagargin and are currently focusing our
efforts on the development of our adenosine receptor modulators. We expect to incur significant operating losses for the foreseeable
future as we continue the research, pre-clinical and clinical development of our product candidates as well as the possible in-licensing
of additional clinical and pre-clinical assets. Accordingly, we will need additional capital to fund our continuing operations
and any expansion plans. Since we do not generate any revenue, the most likely sources of such additional capital include the
sale of our securities, a strategic licensing collaboration transaction or joint venture involving the rights to one or more of
our product candidates, or from grants. To the extent that we raise additional capital by issuing equity securities, our stockholders
are likely to experience dilution with regard to their percentage ownership of the company, which may be significant. If we raise
additional funds through collaborations or licensing arrangements, we may be required to relinquish some or all the rights to
our technologies, product candidates, or grant licenses on terms that are not favorable to us. If we raise additional capital
by incurring debt, we could incur significant interest expense and become subject to covenants that could affect the manner in
which we conduct our business, including securing such debt obligations with our assets.
Our
product candidates are at various stages of early development and significant financial resources are required to develop commercially
viable products and obtain regulatory approval to market and sell such products. We will need to devote significantly more research
and development efforts, financial resources and personnel to develop commercially viable products and obtain regulatory approvals.
We may encounter hurdles and unexpected issues as we proceed in the development of our other product candidates. While initial
data from our research appear promising, the outcome of the pre-clinical and development work is uncertain and future trials may
ultimately be unsuccessful. If we fail to develop and successfully commercialize our product candidates, our business may be materially
harmed and could fail.
We
have a limited operating history as a company, and may not be able to effectively operate our business.
Our
limited staff and operating history means that there is a high degree of uncertainty regarding our ability to:
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develop
and commercialize our technologies and proposed products;
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obtain
regulatory approval to commence the marketing of our products;
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identify,
hire and retain the needed personnel to implement our business plan;
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achieve
market acceptance or insurance reimbursement for any of our proposed products, if successfully developed; or
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respond
to competition.
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No
assurances can be given as to exactly when, if at all, we will be able to fully develop, and take the necessary steps to derive
any revenues from our proposed product candidates.
Raising
capital may be difficult as a result of our history of losses and limited operating history in our current stage of development.
When
making investment decisions, investors typically look at a company’s management, earnings and historical performance in
evaluating the risks and operations of the business and the business’s future prospects. Our history of losses, new senior
management team and relatively limited operating history in our current stage of development makes such evaluation, as well as
any estimation of our future performance, substantially more difficult. As a result, investors may be unwilling to invest in us
or on terms or conditions which are acceptable. If we are unable to secure additional financing, we may need to materially scale
back our business plan and/or operations or cease operations altogether.
A
pandemic, epidemic or outbreak of an infectious disease in the markets in which we operate or that otherwise impacts our facilities
or advisors could adversely impact our business.
If
a pandemic, epidemic, or outbreak of an infectious disease including the recent outbreak of respiratory illness caused by a novel
coronavirus (COVID-19) or other public health crisis were to affect our facilities or those of our suppliers, our business could
be adversely affected. A pandemic typically results in social distancing, travel bans and quarantine, and this may limit access
to our facilities, management, support staff and professional advisors. These factors, in turn, may not only materially impact
our operations and financial condition, but our overall ability to react timely to mitigate the impact of this event. Also, it
may hamper our efforts to comply with our filing obligations with the Securities and Exchange Commission.
Business
or economic disruptions or global health concerns could seriously harm our development efforts and increase our costs and expenses.
Broad-based
business or economic disruptions could adversely affect our ongoing or planned research and development activities. For example,
in November 2019 an outbreak of a novel strain of coronavirus originated in Wuhan, China, and has since spread around the world,
including to the United States. To date, this outbreak has already resulted in extended shutdowns of many businesses around the
world, including in the United States. Global health concerns, such as coronavirus, could also result in social, economic, and
labor instability in the countries in which we or the third parties with whom we engage operate. We cannot presently predict the
scope, severity and longevity of any potential business shutdowns or disruptions, but if we or any of the third parties with whom
we engage or plan to engage, including the suppliers, clinical trial sites, regulators and other third parties with whom we conduct
business or plan to conduct business, were to experience shutdowns or other business disruptions, our ability to conduct our business
in the manner and on the timelines presently planned could be materially and negatively impacted. It is also possible that global
health concerns such as this one could disproportionately impact the hospitals and clinical sites in which we conduct or plan
to conduct any of our clinical trials, which could have a material adverse effect on our business and our results of operation
and financial condition.
Risks
Related to Commercialization
The
market for our proposed products is rapidly changing and competitive.
The
pharmaceutical and biotechnology industries are subject to rapid and substantial technological change and innovation. Developments
by others may render our proposed products noncompetitive or obsolete, or we may be unable to keep pace with technological developments
and other market factors. Competition from pharmaceutical and biotechnology companies, universities, governmental entities and
others diversifying into the field is intense and is expected to increase.
As
a pre-revenue company, our resources are limited and we may experience challenges inherent in the early development of novel therapeutics.
Competitors have developed or are in the process of developing technologies that are, or in the future may be, the basis for competition.
Some of these technologies may have an entirely different approach or means of accomplishing similar therapeutic efforts compared
to our proposed products. Our competitors may develop therapies that are safer, more effective and less costly than our proposed
products and therefore, present a serious competitive threat to us.
The
acceptance of therapies that are alternatives to ours may limit market acceptance of our proposed products, even if commercialized.
Many of our targeted diseases and conditions can also be treated by other medications and treatments. These treatments may be
widely accepted in medical communities and have a longer history of use. The established use of other competing therapies may
limit the potential for our proposed products, even if commercialized.
Our
proposed products may not be accepted by the healthcare community.
Our
proposed products, if approved for marketing, may not achieve market acceptance by the healthcare community since hospitals, physicians,
patients or the medical community in general may decide not to utilize them. We are attempting to develop products that are likely
to be first approved for marketing as a treatment for late stage cancer where there is no truly effective standard of care. If
approved for use in late stage cancer, our proposed products might then be evaluated in earlier stages where they could represent
a substantial departure from established treatment methods and would most likely compete with a number of more conventional drugs
and therapies which are manufactured and marketed by major pharmaceutical companies. It is too early in the development cycle
of our proposed products for us to predict our major competitors. The degree of market acceptance of our products, if developed,
will depend on a number of factors, including but not limited to:
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our
ability to demonstrate the clinical efficacy and safety of our proposed products to the medical community;
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our
ability to create products that are superior to alternative products;
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our
ability to establish in the medical community the potential advantage of our treatments over alternative treatment methods;
and
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the
reimbursement policies of government and third-party payors.
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If
the healthcare community does not accept our products, our business could be materially harmed.
Our
potential competitors in the biotechnology and pharmaceutical industries have significantly greater resources than we have.
We
compete against numerous companies, many of which have substantially greater resources than we have. Several such competitors
have research programs and/or efforts to treat the same diseases we target. Companies such as Roche, Novartis, Celgene, Merck
& Co., Inc., Johnson & Johnson, and Sanofi S.A., as well as others, have substantially greater financial, research, manufacturing
and marketing resources than we do. As a result, such competitors may find it easier to compete in our industry and bring competing
products to market.
Risks
Related to the Development and Manufacturing of Our Product Candidates
We
intend to rely exclusively upon third-party FDA-regulated manufacturers and suppliers for our proposed products.
We
currently have no internal manufacturing capability, and intend to rely exclusively on FDA-approved licensees, strategic partners
or third party contract manufacturers or suppliers for the foreseeable future. Because manufacturing facilities are subject to
regulatory oversight and inspection, the failure of any of our third-party FDA regulated manufactures or suppliers to comply with
regulatory requirements could result in material manufacturing delays and product shortages, which could delay or otherwise negatively
impact our clinical trials and product development plans. Should we be forced to manufacture our proposed products, we cannot
give any assurance that we would be able to develop internal manufacturing capabilities or secure third party suppliers for raw
materials. In the event that we seek third party suppliers or alternative manufacturers, they may require us to purchase a minimum
amount of materials or could require other unfavorable terms. Any such event could materially impact our business prospects and
could delay the development of our proposed products. Moreover, we cannot give any assurance that the contract manufacturers or
suppliers that we select will be able to supply our products in a timely or cost effective manner or in accordance with applicable
regulatory requirements or our own specifications.
We
may not be able to establish or maintain the third-party relationships that are necessary to develop or potentially commercialize
our product candidates.
As
needed, we plan to rely heavily on third party collaborators, partners, licensees, clinical research organizations, clinical investigators,
vendors or other third parties to support our research and development efforts and to conduct clinical trials for our product
candidates. We cannot guarantee that we will be able to successfully negotiate agreements for, or maintain relationships with,
these third parties on a commercially reasonable basis, if at all. Additionally, to commercialize our proposed products, we intend
to rely on third party licensees or the outright sale of our proposed products to pharmaceutical partner(s). If we fail to establish
or maintain such third-party relationships as anticipated, our business could be adversely effected.
We
are dependent upon third parties to develop our product candidates, and such parties are, to some extent, outside of our control.
We
depend and plan to depend upon independent contract research organizations, investigators and collaborators, such as universities
and medical institutions, to conduct our pre-clinical and clinical studies. These individuals and/or entities are not our employees
and we cannot control the amount or timing of resources that they devote to our programs. These third parties may not assign as
great a priority to our programs or pursue them as diligently as we would if we were undertaking such programs ourselves. If these
third parties fail to devote sufficient time and resources to our programs, or if their performance is substandard, the development
of our drug candidates and corresponding FDA approval could be delayed or fail entirely.
Our
therapeutic compounds may not be able to be manufactured profitably on a large enough scale to support commercialization.
To
date, prior to our curtailment of operations, our therapeutic compounds have only been manufactured at a scale which is adequate
to supply our research activities and early-stage clinical trials. There can be no assurance that the procedures currently used
to manufacture our therapeutic compounds will work at a scale which is adequate for commercial needs. In the event our therapeutic
compounds cannot be manufactured in sufficient quantities for commercialization, our future prospects could be significantly impacted
and our financial prospects would be materially harmed.
Risks
Relating to our Intellectual Property
Our
competitive position is dependent on our intellectual property and we may not be able to withstand challenges to our intellectual
property rights.
We
rely on our intellectual property, including our issued and applied for U.S. and foreign patents as well as our licenses, as the
foundation of our business. If our intellectual property rights are challenged, no assurances can be given that our patents or
licenses would survive claims alleging invalidity or infringement on other patents and/or licenses. In addition, disputes may
arise regarding inventorship of our intellectual property. It is possible that our intellectual property may be infringing upon
existing patents that we are not currently unaware of. As the number of participants in the marketplace grows, the possibility
of patent infringement claims against us increases. It is difficult, if not impossible, to determine how such disputes would be
resolved. Furthermore, because of the substantial amount of discovery required in connection with patent litigation, there is
a risk that some of our confidential information could be required to be publicly disclosed. Any litigation claims against us
may cause us to incur substantial costs and could place a significant strain upon our financial resources, divert the attention
of management or restrict our core business or result in the public disclosure of confidential information.
We
may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property
rights and we may be unable to protect our rights to, or use of, our technology.
Some
or all of our patent applications may not issue as patents, or the claims of any issued patents may not afford meaningful protection
for our technologies or products. In addition, patents issued to us or our licensors, if any, may be challenged and subsequently
narrowed, invalidated or circumvented. Patent litigation is widespread in the biotechnology industry and could harm our business.
Litigation might be necessary to protect our patent position or to determine the scope and validity of third-party proprietary
rights. If we choose to go to court to stop someone else from using the inventions claimed in our patents, that individual or
company would have the right to ask the court to rule that such patents are invalid and/or should not be enforced against that
third party. These lawsuits are expensive and we may not have the required resources to pursue such litigation or to protect our
patent rights. In addition, there is a risk that the court might decide that these patents are not valid and that we do not have
the right to stop the other party from using the inventions. There is also the risk that, even if the validity of these patents
is upheld, the court could refuse to stop the other party on the ground that such other party’s activities do not infringe
on our rights contained in these patents.
Furthermore,
a third party may claim that we are using inventions covered by their patent rights and may go to court to stop us from engaging
in our normal operations and activities, including making or selling our product candidates. These lawsuits are costly and could
materially increase our operating expenses and divert the attention of managerial and technical personnel. There is a risk that
a court would decide that we are infringing the third party’s patents and would order us to stop the activities covered
by the patents. In addition, there is a risk that a court would order us to pay the other party damages for having violated the
other party’s patents. The biotechnology industry has produced a proliferation of patents, and it is not always clear to
industry participants, including us, which patents cover various types of products or methods of use. The coverage of patents
is subject to interpretation by the courts, and the interpretation is not always uniform.
Because
some patent applications in the United States may be maintained in secrecy until the patents are issued, patent applications in
the United States and many foreign jurisdictions are typically not published until eighteen months after filing, and publications
in the scientific literature often lag behind actual discoveries, we cannot be certain that others have not filed patent applications
for technology covered by our issued patents or our pending applications or that we were the first to invent the technology. Our
competitors may have filed, and may in the future file, patent applications covering technology similar to ours. Any such patent
application may have priority over our patent applications and could further require us to obtain rights to issued patents covering
such technologies.
If
another party has filed a United States patent application on inventions similar to ours, we may have to participate in an interference
or other proceeding in the U.S. Patent and Trademark Office, or the PTO, or a court to determine priority of invention in the
United States. The costs of these proceedings could be substantial, and it is possible that such efforts would be unsuccessful,
resulting in a loss of our United States patent position with respect to such inventions.
Some
of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have
substantially greater resources. In addition, any uncertainties resulting from the initiation and continuation of any litigation
could have a material adverse effect on our ability to raise the capital necessary to continue our operations.
Obtaining
and maintaining our patent protection depends upon compliance with various procedural, documentary, fee payment and other requirements
imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these
requirements.
The
PTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment
and other provisions during the patent process. There are situations in which noncompliance can result in abandonment or lapse
of a patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such
an event, competitors might be able to enter the market earlier than would otherwise have been the case.
We
may not be able to adequately protect our intellectual property.
We
rely in part on trade secret protection in order to protect our proprietary trade secrets and unpatented know-how. However, trade
secrets are difficult to protect, and we cannot be certain that others do not develop the same or similar technologies on their
own. Additionally, research with regard to our technologies has been performed in countries outside of the United States, and
we also anticipate conducting joint ventures, collaborations and future clinical trials outside the US. The laws in some of these
countries may not provide protection for our trade secrets and intellectual property. We have taken steps, including entering
into confidentiality agreements with our employees, consultants, service providers, and potential strategic partners to protect
our trade secrets and unpatented know-how. These agreements generally require that the other party keep confidential and not disclose
to third parties all confidential information developed by the party or made known to the party by us during the course of the
party’s relationship with us. We also typically obtain agreements from these parties which provide that inventions conceived
by the party in the course of rendering services to us are our property. However, these agreements may not be honored, including
in foreign countries in which we conduct research, and may not effectively assign intellectual property rights to us. Enforcing
a claim that a party illegally obtained and is using our trade secrets or know-how is difficult, expensive and time consuming,
and the outcome is unpredictable. In addition, courts outside the United States may be less willing to protect trade secrets or
know-how. The failure to obtain or maintain trade secret protection could adversely affect our competitive position.
We
may be subject to claims that our employees or consultants have wrongfully used or disclosed alleged trade secrets of their former
employers.
As
is common in the biotechnology and pharmaceutical industries, we employ and hire individuals and/or entities who were previously
employed at other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although no claims
against us are currently pending, we may be subject to claims that these individuals, entities or that we have inadvertently or
otherwise used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary
to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial
costs and be a distraction to management.
Risks
Relating to Marketing Approval and Government Regulations
Data
obtained from clinical trials are susceptible to varying interpretations and may not be sufficient to support approval of our
proposed products by the FDA.
The
design of our potential clinical trials will be based on many assumptions about the expected effect of our product candidates
and if those assumptions are incorrect, our potential clinical trials may not produce statistically significant results. Preliminary
results may not be confirmed on full analysis of the detailed results of early clinical trials. Data already obtained, or in the
future obtained, from pre-clinical studies and clinical trials do not necessarily predict the results that may be obtained from
later trials. Moreover, pre-clinical and clinical data are susceptible to varying interpretations, which could delay, limit or
prevent regulatory approval. A number of companies in the pharmaceutical and biotechnology industries have suffered significant
setbacks in advanced clinical trials, even after promising results in earlier trials. The failure to adequately demonstrate the
safety and effectiveness of a proposed formulation or product under development could delay or prevent regulatory clearance of
the potential drug. Our products may not prove to be safe and effective in clinical trials and may not meet all regulatory requirements
needed to receive regulatory approval. While data from our completed trials appear promising, the outcome of the current trials
is uncertain and these trials or future trials may ultimately be unsuccessful. Our clinical trials may among other things, not
demonstrate sufficient levels of safety and efficacy necessary to obtain the requisite regulatory approvals for our drugs, and
thus our proposed drugs may not be approved for marketing.
Our
proposed products may not receive FDA or other regulatory approvals.
The
FDA and comparable government agencies in foreign countries impose substantial regulations on the manufacture and marketing of
pharmaceutical products through expensive, lengthy and detailed laboratory, pre-clinical and clinical testing procedures, sampling
activities and other costly and time-consuming procedures. Satisfaction of these regulations typically takes several years or
more and varies substantially based upon the type, complexity and novelty of the proposed product. Our proposed products are subject
to extensive regulation and/or acceptance by numerous governmental authorities in the United States, including the FDA, and authorities
in other countries. Most of our proposed products will require governmental approval before they can be commercialized. Our failure
to receive the regulatory approvals in the United States or foreign countries will materially impact our business.
Our
proposed products may not have favorable results in clinical trials or receive regulatory approval.
Encouraging
results from our studies to date should not be relied upon as evidence that our planned pre-clinical and clinical trials will
ultimately be successful or our products approved for marketing. Even though the results of our studies to date seem promising,
we will be required to demonstrate through further pre-clinical and clinical trials that our product candidates are safe and effective
for use in a diverse population before we can seek regulatory approvals for their commercial sale. There is typically an extremely
high rate of attrition from the failure of product candidates as they proceed through clinical trials. If any product candidate
fails to demonstrate sufficient safety and efficacy in any clinical trial, then we could experience potentially significant delays
in, or be required to abandon, development of that product candidate. While initial data from our preliminary studies appear promising,
the outcome of any clinical trials is uncertain and such trials or future trials may ultimately be unsuccessful.
If
users of our proposed products are unable to obtain adequate reimbursement from third-party payors, market acceptance of our proposed
products may be limited and we may not achieve revenues or profits.
The
continuing efforts of governments, insurance companies, health maintenance organizations and other payers of healthcare costs
to contain or reduce costs of health care may affect our future revenues and profitability as well as the future revenues and
profitability of our potential customers, suppliers and collaborative partners in addition to the availability of capital. In
other words, our ability to commercialize our proposed products depends in large part on the extent to which appropriate reimbursement
levels for the cost of our proposed formulations, products and related treatments are obtained by the health care providers of
these products and treatments. At this time, we cannot predict the precise impact that recently adopted or future laws will have
on these reimbursement levels.
We
may be unable to comply with our reporting and other requirements under federal securities laws.
The
Sarbanes-Oxley Act of 2002, as well as related new rules and regulations implemented by the United States Securities and Exchange
Commission, or SEC, and the Public Company Accounting Oversight Board, require changes in the corporate governance practices and
financial reporting standards for public companies. These laws, rules and regulations, including compliance with Section 404 of
the Sarbanes-Oxley Act of 2002 relating to internal control over financial reporting, would be expected to materially increase
the Company’s legal and financial compliance costs and make some activities more time-consuming and more burdensome. Presently
we qualify as a non-accelerated filer. Accordingly, we are exempt from the requirements of Section 404(b) and our independent
registered public accounting firm is not required to audit the design and operating effectiveness of our internal controls and
management’s assessment of the design and the operating effectiveness of such internal controls. In the event that we become
an accelerated filer, we will be required to expend substantial capital in connection with compliance.
We
do not have effective internal controls over our financial reporting.
Because
of our limited resources, management has concluded that our internal control over financial reporting may not be effective in
providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with U.S. generally accepted accounting principles. Effective internal controls over financial
reporting and disclosure controls and procedures are necessary for us to provide reliable financial and other reports and effectively
prevent fraud. If we cannot provide reliable financial or SEC reports or prevent fraud, investors may lose confidence in our SEC
reports, our operating results and the trading price of our common stock could suffer materially and we may become subject to
litigation.
Compliance
with changing regulation of corporate governance and public disclosure may result in additional expenses and will divert time
and attention away from revenue generating activities.
Changing
laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002
and related SEC regulations, have created uncertainty for public companies and significantly increased the costs and risks associated
with accessing the public markets and public reporting. Our management team invests significant time and financial resources to
comply with both existing and evolving standards for public companies, which will lead to increased general and administrative
expenses and a diversion of management time and attention from developing our business to compliance activities which could have
an adverse effect on our business.
Risks
Relating to our Securities
Our
common stock price may be particularly volatile because of our stage of development and business.
The
market prices for the securities of biotechnology and pharmaceutical companies in general, and early-stage drug development companies
in particular, such as ours, have been highly volatile and may continue to be highly volatile in the future. The following may
have a significant impact on the market price of our common stock:
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our
ability retain and augment our current management team and workforce, which currently consists of only one employee, our chief
executive officer;
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the
development status of our drug candidates, particularly the results of our clinical trials;
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market
conditions or trends related to the biotechnology and pharmaceutical industries, or the market in general;
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|
announcements
of technological innovations, new commercial products, or other material events by our competitors or us;
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disputes
or other developments concerning our proprietary rights;
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changes
in, or failure to meet, securities analysts’ or investors’ expectations of our financial and developmental performance;
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|
additions
or departures of key personnel;
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|
loss
of any strategic relationship;
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|
discussions
of our business, products, financial performance, prospects, or stock price by the financial and scientific press and online
investor communities such as chat rooms;
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|
industry
developments, including, without limitation, changes in healthcare policies or practices or third-party reimbursement policies;
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public
concern as to, and legislative action with respect to, testing or other research areas of biopharmaceutical and pharmaceutical
companies, the pricing and availability of prescription drugs, or the safety of drugs;
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|
regulatory
developments in the United States or foreign countries; and
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economic,
political and other external factors.
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Broad
market fluctuations may cause the market price of our common stock to decline substantially. Additionally, fluctuations in the
trading price or liquidity of our common stock may materially and adversely affect, among other things, the interest of investors
to purchase our common stock on the open market and, generally, our ability to raise capital.
Our
board of directors has broad discretion to issue additional securities, in the event that we have adequate authorized capital
to issue such securities.
We are authorized under our certificate of
incorporation to issue up to 150,000,000 shares of common stock and 30,000,000 “blank check” shares of preferred stock.
Shares of our blank check preferred stock provide the board of directors with broad authority to determine voting, dividend, conversion,
and other rights. As of May 1, 2020, we have issued and outstanding 150,000,000 shares of common stock and, accordingly, no additional
shares of common stock reserved for future grants under our equity compensation plans and for issuances upon the exercise or conversion
of currently outstanding shares of preferred stock, options, warrants and other convertible securities will be available until
such time as we complete a reverse stock split or authorize additional shares. As of May 1, 2020, we have issued 1,853 shares
of Series A 0% Convertible Preferred Stock, of which 133.8125 are outstanding, 1,000 shares of Series B 0% Convertible Preferred
Stock, of which 71 are outstanding, 290.43148 shares of Series C 0% Convertible Preferred Stock, that are all outstanding, and
5,000 shares of Series D 0% Convertible Preferred Stock, all of which are outstanding. Accordingly, we are entitled to issue no
additional shares of common stock, and 29,994,505 additional shares of “blank check” preferred stock. Our board may
generally issue those common and preferred shares, or convertible securities to purchase those shares, without further approval
by our shareholders. Any additional preferred shares we may issue could have such rights, preferences, privileges, and restrictions
as may be designated from time-to-time by our board, including preferential dividend rights, voting rights, conversion rights,
redemption rights and liquidation provisions.
It
is likely that we will issue a large amount of additional securities to raise capital in order to further our business plans.
It is also likely that we will issue a large amount of additional securities to directors, officers, employees and consultants
as compensatory grants in connection with their services, both in the form of stand-alone grants or under our various stock plans.
Any issuances could be made at a price that reflects a discount to, or a premium from, the then-current market price of our common
stock. These issuances would dilute the percentage ownership interest of our current shareholders, which would have the effect
of reducing your influence on matters on which our stockholders vote, and might dilute the net tangible book value per share of
our common stock.
We
currently do not have enough authorized shares of common stock for additional issuances. In order to authorize additional shares
the Company will be required to authorize additional common shares by obtaining votes from our shareholders sufficient to amend
our certificate of incorporation or effect a reverse stock split of our common shares.
Future
sales of our common stock could cause our stock price to fall.
Transactions
that result in a large amount of newly issued shares become readily tradable, or other events that cause current stockholders
to sell shares, could place downward pressure on the trading price of our common stock. In addition, the lack of a robust trading
market may require a stockholder who desires to sell a large number of shares of common stock to sell the shares in increments
over time to mitigate any adverse impact of the sales on the market price of our stock. If our stockholders sell, or the market
perceives that our stockholders intend to sell for various reasons, substantial amounts of our common stock in the public market,
including shares issued upon the exercise of outstanding options or warrants, the market price of our common stock could fall.
Sales of a substantial number of shares of our common stock may make it more difficult for us to sell equity or equity-related
securities in the future at a time and price that we deem reasonable or appropriate. We may become involved in securities class
action litigation that could divert management’s attention and harm our business.
As of May 1, 2020, we had 150,000,000 shares
of common stock, 1,853 shares of Series A 0% Convertible Preferred Stock issued and 133.8125 Series A 0% Convertible Preferred
Stock outstanding, 1,000 shares of Series B 0% Convertible Preferred Stock issued and 71 Series B 0% Convertible Preferred Stock
outstanding, 290.43148 shares of Series C 0% Convertible Preferred Stock issued and outstanding, and 5,000 shares of Series D
0% Convertible Preferred Stock issued and outstanding. We additionally have issued an aggregate of $3,891,048 of senior convertible
debentures and convertible notes that are convertible into common stock at any time, of which $2,624,346 is outstanding. Substantially
all of the common shares and common shares underlying the Series A 0% Convertible Preferred, Series B 0% Convertible Preferred,
Series C 0% Convertible Preferred, and Series D 0% Convertible Preferred are available for public sale, subject in some cases
to volume and other limitations or delivery of a prospectus. As of May 1, 2020, we were obligated to reserve for issuance (i)
13,129 shares of our common stock issuable upon the conversion of 133.8125 shares of Series A 0% Convertible Preferred Stock including
an additional number of common shares we are contractually obligated to reserve pursuant to our December 2015 offering; (ii) 14,200,000
shares of our common stock issuable upon the conversion of 71 shares of Series B 0% Convertible Preferred Stock including an additional
number of common shares we are contractually obligated to reserve pursuant to our December 2016 offering; (iii) 1,523,452 shares
of our common stock issuable upon the conversion of 290.43148 shares of Series C 0% Convertible Preferred Stock including an additional
number of common shares we are contractually obligated to reserve pursuant to our March 2017 offering, (iv) 40,000 shares of common
stock issuable upon the conversion of 5,000 shares of Series D 0% Convertible Preferred Stock, (v) 168,853 shares of our common
stock issuable upon exercise of outstanding warrants at a weighted average exercise price of $42.03 per share, including an additional
number of common shares we are contractually obligated to reserve pursuant to our December 2015 offering, December 2016 offering
and March 2017 offering, (vi) 6,598 shares of our common stock issuable upon exercise of outstanding stock options under our equity
compensation plans at a weighted average exercise price of $60.99 per share and (vii) 359,555,965 shares of our common stock issuable
upon conversion of our outstanding convertible notes/debentures. Subject to applicable vesting requirements and holding periods,
upon conversion or exercise of the outstanding convertible notes, warrants and options, the underlying shares may be resold into
the public market. Notwithstanding the foregoing, none of the shares of common stock underlying these convertible securities may
be converted or exercised given that we have no shares of common stock available under our certificate of incorporation. We cannot
predict if future issuances or sales of our common stock, or the availability of our common stock for sale, would harm the market
price of our common stock or our ability to raise capital. Notwithstanding the foregoing, we currently do not have adequate authorized
shares available for issuance pursuant to our convertible securities as of May 1, 2020.
The
market for our common stock has been illiquid and our investors may be unable to sell their shares.
Our
common stock trades with limited volume on the pink sheets of the OTC Markets Group Inc. Accordingly, although a limited public
market for our common stock exists, it is still relatively illiquid compared to that of a seasoned issuer. Prior to making an
investment in our securities, you should consider the limited market for our common stock. No assurances can be given that the
trading volume of our common stock will increase or that a liquid public market for our securities will ever materialize.
We
have not paid cash dividends in the past and do not expect to pay cash dividends in the foreseeable future.
We
have never paid cash dividends on our common stock and do not anticipate paying cash dividends on our common stock in the foreseeable
future. If we do not pay dividends, our common stock may be less valuable because a return on your investment will only occur
if the market price of our common stock appreciates.
Provisions
of Delaware law and executive employment agreements may prevent or delay a change of control, which could depress the trading
price of our common stock.
We
are subject to the Delaware anti-takeover laws regulating corporate takeovers. These anti-takeover laws prevent Delaware corporations
from engaging in a merger or sale of more than 10% of its assets with any stockholder, including all affiliates and associates
of the stockholder, who owns 15% or more of the corporation’s outstanding voting stock, for three years following the date
that the stockholder acquired 15% or more of the corporation’s assets unless:
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the
Board of Directors approved the transaction in which the stockholder acquired 15% or more of the corporation’s assets;
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after
the transaction in which the stockholder acquired 15% or more of the corporation’s assets, the stockholder owned at
least 85% of the corporation’s outstanding voting stock, excluding shares owned by directors, officers and employee
stock plans in which employee participants do not have the right to determine confidentially whether shares held under the
plan will be tendered in a tender or exchange offer; or
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on
or after this date, the merger or sale is approved by the Board of Directors and the holders of at least two-thirds of the
outstanding voting stock that is not owned by the stockholder.
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A
Delaware corporation may opt out of the Delaware anti-takeover laws if its certificate of incorporation or bylaws so provides.
We have not opted out of the provisions of the anti-takeover laws. As such, these laws could prohibit or delay mergers or other
takeover or change of control transactions and may discourage attempts by other companies to acquire us.
In
addition, employment agreements with certain executive officers provide for the payment of severance and accelerated vesting of
options and restricted stock in the event of termination following a change of control. These provisions could have the effect
of discouraging potential takeover attempts even if it would be beneficial to shareholders.
Our
certificate of incorporation and bylaws contain provisions that could discourage a third-party from acquiring us.
Our
certificate of incorporation and bylaws, as applicable, among other things (i) provide our board with the ability to alter the
bylaws without stockholder approval and (ii) provide that vacancies on our board of directors may be filled by a majority of directors
in office. These provisions, while designed to reduce vulnerability to an unsolicited acquisition proposal, and to discourage
certain tactics used in proxy fights, may negatively impact a third-party’s decision to acquire us even if it would be beneficial
to shareholders.
If
securities or industry analysts do not publish research or reports or if they publish unfavorable research or reports, an active
market for our common stock may not develop and the price of our common stock could decline.
We
are a small company which is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment
community that generate or influence sales volume. Even if we come to the attention of such persons, they may be reluctant to
follow or recommend an unproven company such as ours until such time as we became more seasoned and viable. Generally, the trading
market for a company’s securities depends in part on the research and reports that securities or industry analysts publish.
We currently have limited research coverage by securities and industry analysts. As a consequence, there may be periods of time
when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer with significant research coverage.
We cannot give you any assurance that a broader or more active public trading market for our common stock will develop or if developed,
will be sustained, or that current trading levels could be sustained or not diminish. In addition, in the event any analysts downgrades
our securities, the price of our shares would likely decline. If one or more of these analysts ceases to cover us or fails to
publish regular reports on us, interest in the purchase of our securities could decrease, which could cause the price of our common
stock and its trading volume, if any, to decline.
Our
common stock may be considered a “penny stock,” and may be subject to additional sale and trading regulations that
may make it more difficult to sell.
Our
common stock may be considered a “penny stock.” The principal result or effect of being designated a penny stock is
that securities broker-dealers participating in sales of our common stock may be subject to the penny stock regulations set forth
in Rules 15g-2 through 15g-9 promulgated under the Exchange Act. For example, Rule 15g-2 requires broker-dealers dealing in penny
stocks to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and
dated written receipt of the document at least two business days before effecting any transaction in a penny stock for the investor’s
account. Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve the account of any investor for transactions
in such stocks before selling any penny stock to that investor. This procedure requires the broker-dealer to (i) obtain from the
investor information concerning his or her financial situation, investment experience and investment objectives; (ii) reasonably
determine, based on that information, that transactions in penny stocks are suitable for the investor and that the investor has
sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions; (iii) provide
the investor with a written statement setting forth the basis on which the broker-dealer made the determination in (ii) above;
and (iv) receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investor’s
financial situation, investment experience and investment objectives. Compliance with these requirements may make it more difficult
and time consuming for holders of our common stock to resell their shares to third parties or to otherwise dispose of them in
the market or otherwise.
We
currently have no available common stock available for new securities issuances, or for the conversion / exercise of outstanding
securities, which may restrict us from accessing additional capital through the sale of new securities or the exercise of outstanding
convertible securities.
Our Certificate of Incorporation authorizes
us to issue up to 150,000,000 shares of common stock, all of which are issued and outstanding as of May 1, 2020. Accordingly,
we do not have sufficient authorized shares of common stock for additional issuances. Notwithstanding, the Board currently plans
to effect, upon the receipt of necessary shareholder approval, either (i) a reverse stock split or (ii) an increase in authorized
shares, in order to authorize additional capital for its future stock issuances, warrant exercises, and conversions of outstanding
preferred stock and convertible debentures. Our failure to complete a reverse stock split or an amendment to our certificate of
incorporation increasing our authorized shares may further subject us to penalties if we are unable to satisfy conversions of
our outstanding convertible debentures, or exercises of our outstanding warrants and options, which may harm our financial position
and business prospects.
If
our management team is not effective or if we fail to attract, hire or retain qualified personnel, we may not be able to design,
develop or commercialize our products successfully or manage our business.
While
we have been able to secure a chief executive officer, our anticipated growth and expansion may require the addition of new personnel
and the development of additional expertise by existing management. There is intense competition for qualified personnel in such
areas. Accordingly, there can be no assurances that we would be able to attract and retain the qualified personnel necessary for
the successful development of our business.
ITEM
1B.
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UNRESOLVED
STAFF COMMENTS
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None.
Our
executive offices are located at 31200 Via Colinas, Suite 200, Westlake Village, CA 91362. At present our employee and consultants
work virtually from around the country. We currently pay no money for these facilities. We anticipate that in the event we raise
capital sufficient to fund our operations, we will establish permanent offices and relocate to another facility. There is no affiliation
between us or any of our principals or agents and our landlords or any of their principals or agents.
ITEM
3.
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LEGAL
PROCEEDINGS
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None.
ITEM
4.
|
MINE
SAFETY DISCLOSURES
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Not
Applicable
PART
II
ITEM
5.
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
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Market
Information
Our
common shares are quoted on the pink sheets of the OCT Markets under the symbol NSPX. Although a market for our common stock exists,
it is relatively illiquid. Any over-the-counter market quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.
Holders
As of May 1, 2020, we had approximately 133 record holders of our
common stock.
Dividend
Policy
We
have never declared or paid any cash dividends on our capital stock and we do not currently anticipate declaring or paying cash
dividends on our capital stock in the foreseeable future. We currently intend to retain all of our future earnings, if any, to
finance the operation and expansion of our business. Any future determination relating to our dividend policy will be made at
the discretion of our board of directors and will depend on a number of factors, including future earnings, capital requirements,
financial conditions, future prospects, contractual restrictions and covenants, applicable law and other factors that our board
of directors may deem relevant. If we do not pay dividends, a return on your investment will occur only if the market price of
our common stock appreciates.
Equity
Compensation Plan Information
See
information contained in Part III, Item 12 of this Annual Report filed on Form 10-K.
Equity
Compensation Plans Not Approved by Security Holders
See
information contained in Part III, Item 12 of this this Annual Report filed on Form 10-K.
Recent
Sales of Unregistered Securities
The following information is given with regard
to unregistered securities sold since January 1, 2019. The following securities were issued in private offerings pursuant
to the exemption from registration contained in the Securities Act and the rules promulgated thereunder in reliance on Section
4(2) thereof, relating to offers of securities by an issuer not involving any public offering. All share amounts and prices reflect
the 1-for-25 reverse stock split that was effective September 30, 2019.
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During
January 2019, we issued 5,000 shares of Series D Convertible Preferred Stock for proceeds of $5,000. The Series D Convertible
Preferred Stock is convertible into common stock at a conversion price of $0.125 per share.
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Between
January 1, 2019 and March 31, 2019, Debenture holders converted an aggregate of $204,220.53 into 2,617,442 shares of common
stock at per share conversion prices ranging from $0.0525 to $0.115.
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In
July 2019, we issued an aggregate of $154,000 in senior convertible debentures (“July 2019 Debentures”) to certain
accredited investors in exchange for the extending the maturity dates of all of our existing debentures until September 30,
2019, and waiving certain potential defaults related to registration rights related to shares underlying such debentures.
The July 2019 Debentures are non-interest bearing, have a maturity date of July 16, 2020, and are convertible into shared
of common stock at any time at a conversion price equal to the lesser of (i) $8.25 and (ii) 85% of the lesser of (a) the volume
weighted average price on the trading day immediately preceding a conversion and (b) the volume weighted average price on
a conversion date. The July 2019 Debentures also contained provisions providing for an adjustment in the event of stock splits
or dividends, and fundamental transactions. The July 2019 Debentures also contain anti-dilution protection in the
event of subsequent equity sales at a price that is lower than the then applicable conversion price until such time that the
July 2019 Debentures are no longer outstanding. The July 2019 Debentures are further redeemable for cash upon twenty
(20) trading days’ notice provided that certain conditions are met. As a result of conversions of outstanding
debentures, the maximum conversion price of the July 2019 Debentures has been repriced to $0.01. The maturity date of the
July 2019 Debentures has been extended to July 16, 2020.
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On
October 1 2019, we issued an aggregate of $96,000 in senior convertible debentures (“October 2019 Debentures”)
to certain accredited investors in exchange for the extending the maturity dates of all of our existing debentures until March
31, 2019 (subsequently extended to July 16, 2020), and waiving certain potential defaults related to registration rights related
to shares underlying such debentures. The October 2019 Debentures are non-interest bearing, have a maturity date of October
1, 2020, and are convertible into shared of common stock at any time at a conversion price equal to the lesser of (i) $8.25
and (ii) 85% of the lesser of (a) the volume weighted average price on the trading day immediately preceding a conversion
and (b) the volume weighted average price on a conversion date. The October 2019 Debentures also contained provisions providing
for an adjustment in the event of stock splits or dividends, and fundamental transactions. The October 2019 Debentures
also contain anti-dilution protection in the event of subsequent equity sales at a price that is lower than the then applicable
conversion price until such time that the October 2019 Debentures are no longer outstanding. The October 2019 Debentures
are further redeemable for cash upon twenty (20) trading days’ notice provided that certain conditions are met. As a
result of conversions of outstanding debentures, the maximum conversion price of the October 2019 Debentures has been repriced
to $0.01. The maturity date of the October 2019 Debentures has been extended to July 16, 2020.
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In
November 2019, in exchange for the payment of a payable, we issued an aggregate of approximately $26,000 in senior convertible
debentures to an accredited investor. The terms of these debentures are the same as the October 2019 Debentures, except
that they have a maturity date of November 20, 2020. The maturity date of these debentures has been extended to July 16, 2020.
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Between
October 1, 2019 and December 31, 2019, debenture holders converted an aggregate of $127,193.24 into 12,648,025 shares of common
stock at per share conversion prices ranging from $0.0069 to $0.0526.
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Between
January 1, 2020 and March 31, 2020, debenture holders converted an aggregate of $451,662.03 into 131,351,247 shares of common
stock at per share conversion prices ranging from $0.0021 to $0.47.
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On
March 6, 2020, we issued an aggregate of $250,000 in senior convertible debentures (“March 2020 Debentures”) to
certain accredited investors for cash. The Debentures have a conversion price equal to the lesser of (i) $0.33
(subject to price protection) and (ii) 85% of the lesser of (a) the volume weighted average price on the trading day immediately
preceding a conversion and (b) the volume weighted average price on the conversion date. The March 2020 Debentures mature
on July 16, 2020, and except as specifically described herein, have the same terms as the July 2018 Debentures.
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On May 2, 2020, we sold 5,000 shares of Series E 0% Convertible Preferred Stock to an accredited investor at a price per share of $1.00 for aggregate gross proceeds of $5,000. The Series E Preferred Stock are convertible into shares of Common Stock at a conversion price of $0.01 per share.
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ITEM
6.
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SELECTED
FINANCIAL DATA
|
We
are not required to provide the information as to selected financial data as we are considered a smaller reporting company.
ITEM
7.
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
The
following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking
statements regarding our business development plans, pre-clinical and clinical studies, regulatory reviews, timing, strategies,
expectations, anticipated expenses levels, business prospects and positioning with respect to market, demographic and pricing
trends, business outlook, technology spending and various other matters (including contingent liabilities and obligations and
changes in accounting policies, standards and interpretations) and express our current intentions, beliefs, expectations, strategies
or predictions. These forward-looking statements are based on a number of assumptions and currently available information and
are subject to a number of risks and uncertainties. Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including those set forth under “Special Note Regarding Forward-Looking
Statements” and under “Risk Factors” and elsewhere in this annual report. The following discussion should be
read in conjunction with our financial statements and related notes thereto included elsewhere in this annual report.
Our
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is provided
in addition to the accompanying financial statements and notes to assist readers in understanding our results of operations, financial
condition, and cash flows. MD&A is organized as follows:
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Company
Overview - Discussion of our business plan and strategy in order to provide context for the remainder of MD&A.
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Critical
Accounting Policies - Accounting policies that we believe are important to understanding the assumptions and judgments incorporated
in our reported financial results and forecasts.
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Results
of Operations - Analysis of our financial results comparing the year ended December 31, 2019 to the year ended December 31,
2018.
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Liquidity
and Capital Resources - Liquidity discussion of our financial condition and potential sources of liquidity.
|
Company
Overview
Business
We
are a clinical-stage, pre-revenue, pharmaceutical company primarily focused on the development of therapeutics for the treatment
of diseases. Through our acquisition of Lewis and Clark Pharmaceuticals, Inc., we currently are focusing on a pipeline of small
molecule adenosine receptor modulators.
The
adenosine receptor modulators include A2B antagonists, dual A2A/A2B antagonists, and A2A
agonists that have broad development applicability including indications within immuno-oncology and inflammation. Adenosine
is implicated in immunosuppression in the tumor microenvironment. Adenosine receptor antagonists may boost the host immune response
against the tumor as a single-agent and in combination with other existing immuno-oncology agents leading to enhanced tumor killing
and inhibition of metastasis. Adenosine also has anti-inflammatory properties in the acute and chronic setting. Adenosine receptor
agonists may promote a decreased inflammatory response and can potentially treat a broad range of inflammatory and autoimmune
based diseases and conditions (e.g., rheumatoid arthritis, joint injury, Crohn’s disease, psoriasis) as well as improve
wound healing and decrease pain.
During
February 2018, due to a lack of capital, we curtailed substantially all our business operations. In the event that we are able
to raise sufficient capital, our major focus would be to: (i) further characterization, in conjunction with Ridgeway Therapeutics,
of anti-cancer activity of the current pipeline of A2B antagonists and dual A2A/A2B antagonists
leading to selection of a clinical candidate for an Investigative New Drug or IND enabling studies, (ii) further characterization
of the current pipeline of A2A agonists leading to selection of a clinical candidate for an Investigative New Drug
or IND enabling studies; (iii) licensing and/or partnering the A2B antagonists, dual A2A/A2B
antagonists, and/or A2A agonists for further development, (iv) through our newly acquired adenosine receptor chemistry
technology platform, continue to produce next generation adenosine receptor modulators, (v) pursue licensing and/or partnering
of mipsagargin, (vi) conduct a clinical study of mipsagargin in patients with advanced HCC, and (vii) explore collaborations utilizing
mipsagargin in new, non-clinical solid tumor models with leading researchers in the oncology field.
Our
ability to execute our business plan is dependent on the amount and timing of cash, if any, that we are able to raise. During
February of 2018, we curtailed our operations due to our lack of cash. During July 2018, we were able to raise approximately $500,000
through the sale of debt securities and we raised $25,000 in December 2018 through the sale of notes. During March 2020, we sold
approximately $250,000 of debt securities. We are currently using such funds to maintain our SEC reporting requirements, pay outstanding
invoices to our independent registered accounting firm, legal fees, and other outstanding obligations, the payment of which we
believe to be vital to our future operations. Should we fail to further raise sufficient funds to execute our business plan, our
priority would be to maintain our intellectual property portfolio and continue, to the best of our ability, our public company
reporting requirements.
While
we believe that the data from our nonclinical studies appear promising, the outcome of our ongoing or future studies may ultimately
be unsuccessful.
Our
ability to execute our business plan is dependent on the amount and timing of cash, if any, that we are able to raise. Should
we not raise sufficient funds to execute our business plan, our priority is the continued production of adenosine receptor modulator
products for any existing material transfer agreements and continuing business development discussions with potential development
partners.
Pre-Revenue
We
are a pre-revenue, early stage company that has not achieved profitability, and has no product revenues. Additionally, we have
no approved products for sale.
Recent
Developments
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On
March 6, 2020, we completed the private placement of $250,000 of non-interesting bearing senior convertible securities.
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On
September 30, 2019, we completed a 1-for-25 reverse stock split of our common stock.
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On
July 26, 2019, we appointed Michael Cain as our interim Chief Executive Officer and as a member of the Board of Directors.
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Product
Development of Adenosine Receptor Modulators
Adenosine
is an extracellular signaling molecule that regulates multiple aspects of tissue function and specifically plays a role in immunity
and inflammation. High levels of adenosine in the tumor microenvironment inhibits immune response mediated through the A2A
and A2B receptors. Adenosine also plays a role in non-malignant conditions where it is rapidly increased in response
to inflammation, hypoxia, ischemia, or trauma. Adenosine released in this setting has been shown to have a protective effect and
limits excessive inflammatory damage to tissues.
The
adenosine receptor antagonists have broad applicability as a potential immuno-oncology (IO) therapeutic agent in multiple tumor
types both as a single agent and in combination with other IO agents, in addition to traditional cytotoxic chemotherapy. We are
actively seeking licensing opportunities and/or partners to further development our A2B and dual A2A/A2B
receptor antagonists. Our current product development plan for adenosine receptor antagonists contemplates the following
major initiatives, subject to the Company receiving sufficient funds:
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Continue
development of anti-cancer agents with partner company, Ridgeway Therapeutics, Inc.
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Further
characterization of existing agents toward IND enabling studies and support ongoing licensing/partnership activities.
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|
Conduct
IND enabling studies.
|
|
|
|
|
●
|
Conduct
clinical studies with one or more of the adenosine receptor antagonists.
|
|
|
|
|
●
|
Continue
generating additional adenosine receptor antagonists to expand our portfolio.
|
The
adenosine receptor agonists have applicability in a broad range of non-oncology conditions including inflammatory and autoimmune
diseases and conditions. We are actively seeking licensing opportunities and/or partners to further development our A2A
receptor agonists. Our current product development plan for adenosine receptor agonists contemplates the following major initiatives
subject to the Company receiving sufficient funds:
|
●
|
License
and/or partner to companies with development expertise in the intended indication.
|
|
|
|
|
●
|
Further
characterize existing agents to support licensing/partnership activities.
|
|
|
|
|
●
|
Continue
generating additional adenosine receptor agonists to expand our portfolio.
|
Financial
To
date, we have devoted substantially all of our efforts and financial resources to the development of our proposed drug candidates.
Mipsagargin is the only product candidate for which we have conducted clinical trials, and we have not received FDA approval to
market, distribute or sell any products. We have currently curtailed our research on mipsagargin. We are also working on developing
IND approved studies for our adenosine receptor technology platform. Since our inception in 2003, we have generated no revenue
from product sales and have funded our operations principally through the private and public sales of our equity securities. We
have never been profitable and as of December 31, 2019 we had an accumulated deficit of approximately $61 million. We expect to
continue to incur significant operating losses for the foreseeable future as we continue the development of our product candidates
and advance them through clinical trials.
Our cash and restricted cash balances at December
31, 2019 was approximately $23,000 representing 100% of total assets. In March 2020, we completed a private placement of $250,000
of our debt securities. Based on our current expected level of operating expenditures and cash balance as of December 31, 2019,
and including the March 2020, private placement, we expect to be able to fund our operations into the third quarter of 2020. This
period could be shortened if there are any significant increases in spending that were not anticipated or other unforeseen events.
We
anticipate raising additional cash through the private or public sales of equity or debt securities, collaborative arrangements,
licensing agreements or a combination thereof, to continue to fund our operations and the development of our product candidates.
There is no assurance that any such collaborative arrangement will be entered into or that financing will be available to us when
needed in order to allow us to continue our operations, or if available, on terms acceptable to us. If we do not raise sufficient
funds in a timely manner, we may be forced to curtail operations, delay or stop our ongoing pre-clinical studies and potential
clinical trials, cease operations altogether, or file for bankruptcy. We currently do not have commitments for future funding
from any source.
Going
Concern
Our
auditors’ report on our December 31, 2019 financial statements expressed an opinion that our capital resources as of the
date of their Audit Report were not sufficient to sustain operations or complete our planned activities for the upcoming year
unless we raised additional funds. During February of 2018, we curtailed our operations due to our lack of cash. Notwithstanding
our recent financing in March 2020 whereby we raised $250,000, our current cash level raises substantial doubt about our ability
to continue as a going concern. If we do not obtain additional funds, we may no longer be able to continue as a going concern
and will cease operation which means that our shareholders will lose their entire investment.
Critical
Accounting Policies
We
have prepared our financial statements in conformity with accounting principles generally accepted in the United States, which
requires management to make significant judgments and estimates that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during
the reporting period. We base these significant judgments and estimates on historical experience and other applicable assumptions
we believe to be reasonable based upon information presently available. These estimates may change as new events occur, as additional
information is obtained and as our operating environment changes. These changes have historically been minor and have been included
in the financial statements as soon as they became known. Actual results could materially differ from our estimates under different
assumptions, judgments or conditions.
All
of our significant accounting policies are discussed in Note 3, Summary of Critical Accounting Policies and Use of Estimates,
to our financial statements, included elsewhere in this annual report. We have identified the following as our critical accounting
policies and estimates, which are defined as those that are reflective of significant judgments and uncertainties, are the most
pervasive and important to the presentation of our financial condition and results of operations and could potentially result
in materially different results under different assumptions, judgments or conditions.
We
believe the following critical accounting policies reflect our more significant estimates and assumptions used in the preparation
of our financial statements:
Use
of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying disclosures.
Significant estimates include the fair value of derivative instruments, stock-based compensation, recognition of clinical trial
costs and other accrued liabilities. Actual results may differ from those estimates.
Restricted
Cash - Restricted cash consists of funds held in trust for the Company. The use of these funds is restricted to: (i) the payment
of professional fees in connection with bringing the Company’s filings current, and (ii) the payment of vendors associated
with the issuance and trading of the Company’s securities, such as transfer agent fees and fees payable to the OTCQB and
FINRA.
Derivative
Liability - The Company has financial instruments that are considered derivatives or contain embedded features subject to
derivative accounting. Embedded derivatives are valued separately from the host instrument and are recognized as derivative liabilities
in the Company’s balance sheet. The Company measures these instruments at their estimated fair value and recognizes changes
in their estimated fair value in results of operations during the period of change. The Company values its derivative liabilities
using the Black-Scholes option valuation model. The resulting liability is valued at each reporting date and the change in the
liability is reflected as change in derivative liability in the statement of operations.
Fair
Value of Financial Instruments - Derivative liabilities consist of certain of our preferred stock and warrants with anti-dilution
provisions, and are valued using option pricing models which incorporate the Company’s stock price, volatility, U.S. risk-free
rate, dividend rate, and estimated life.
Recent
Accounting Pronouncements
With
the exception of those discussed below, there have not been any recent changes in accounting pronouncements and Accounting Standards
Update (ASU) issued by the Financial Accounting Standards Board (FASB) during the year ended December 31, 2019 that are of significance
or potential significance to the Company.
In
February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases. The new standard establishes a right-of-use (ROU)
model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer
than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense
recognition in the income statement.
The
new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.
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. The adoption of this standard did not have any impact on the Company’s consolidated financial statements.
In
January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
(“ASU No. 2017-04”). ASU No. 2017-04 simplifies the subsequent measurement of goodwill by eliminating Step 2 from
the goodwill impairment test. A public business entity that is a SEC filer should adopt the amendments of ASU No. 2017-04 for
its annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted
for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect
any impact from the adoption of this standard on its consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12,
“Simplifying the Accounting for Income Taxes.” This guidance, among other provisions, eliminates certain exceptions
to existing guidance related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an
interim period and the recognition of deferred tax liabilities for outside basis differences. This guidance also requires an entity
to reflect the effect of an enacted change in tax laws or rates in its effective income tax rate in the first interim period that
includes the enactment date of the new legislation, aligning the timing of recognition of the effects from enacted tax law changes
on the effective income tax rate with the effects on deferred income tax assets and liabilities. Under existing guidance, an entity
recognizes the effects of the enacted tax law change on the effective income tax rate in the period that includes the effective
date of the tax law. ASU 2019-12 is effective for interim and annual periods beginning after December 15, 2020, with early adoption
permitted. We are currently evaluating the impact of this guidance.
Result
of Operations
Year
Ended December 31, 2019 Compared to the Year Ended December 31, 2018
Our results of operations have varied significantly
from year to year and quarter to quarter and may vary significantly in the future. We did not have revenue during the years ending
December 31, 2019 and 2018. We do not anticipate generating any revenues during 2020. Net loss for 2019 and 2018 were $934,000
and $12,000, respectively, resulting from the operational activities described below.
Operating
Expenses
Operating
expense totaled $0.6 million and $0.7 million during 2019 and 2018, respectively. The decrease in operating expenses
is the result of the following factors.
|
|
Year Ended
|
|
|
Change in 2019
|
|
|
|
December 31,
|
|
|
Versus 2018
|
|
|
|
2019
|
|
|
2018
|
|
|
$
|
|
|
%
|
|
|
|
(amount in thousands)
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
44
|
|
|
$
|
208
|
|
|
$
|
(164
|
)
|
|
|
(79
|
)%
|
General and administrative
|
|
|
565
|
|
|
|
516
|
|
|
|
49
|
|
|
|
9
|
%
|
Total operating expense
|
|
$
|
609
|
|
|
$
|
724
|
|
|
$
|
(115
|
)
|
|
|
(16
|
)%
|
Research
and Development
Research
and development expenses totaled $44,000 and $208,000 for the years ended 2019 and 2018, respectively. The decrease of $164,000,
or 79%, in 2019 compared to 2018 was primarily due to the curtailment of business operations in February 2018, due to a lack of
capital.
Our
research and development expenses consist primarily of expenditures related to toxicology and other studies, manufacturing, clinical
trials, compensation and consulting costs.
General
and Administrative
General and administrative expenses totaled
$0.57 million and $0.52 million during 2019 and 2018, respectively. The increase of approximately $49,000, or 9%, in 2019 compared
to 2018 was primarily the result of an increase in professional fees partially offset by a decrease in compensation expense. We
had a curtailment of business operations in February 2018, due to a lack of capital.
Other
Income (Expense)
Other
income (expense) totaled approximately $0.3 million of expense and $0.7 million of income for 2019 and 2018, respectively.
|
|
Year Ended
|
|
|
Change in 2019
|
|
|
|
December 31,
|
|
|
Versus 2018
|
|
|
|
2019
|
|
|
2018
|
|
|
$
|
|
|
%
|
|
|
|
(amount in thousands)
|
|
|
|
|
|
|
|
Gain (loss) on change in fair value of derivative liability
|
|
$
|
327
|
|
|
$
|
1,052
|
|
|
$
|
(725
|
)
|
|
|
(69
|
)%
|
Gain on conversion of debt
|
|
|
125
|
|
|
|
210
|
|
|
|
(85
|
)
|
|
|
(40
|
)%
|
Interest income (expense), net
|
|
|
(777
|
)
|
|
|
(550
|
)
|
|
|
(227
|
)
|
|
|
(41
|
)%
|
Total other income (expense)
|
|
$
|
(325
|
)
|
|
$
|
712
|
|
|
$
|
(1,037
|
)
|
|
|
(146
|
)%
|
Loss
on change in fair value of derivative liability
As
a result of a change in the fair value of our derivative liability, we realized gains of $0.3 million and $1.1 million during
the years ended December 31, 2019 and 2018, respectively. The change in the fair value of our derivative liability was the result
of our convertible debentures and notes issued in September 2017, July 2018, December 2018, July 2019, October 2019 and November
2019, where we issued convertible notes with variable conversion rates. Refer to Note 7 in our Financial Statements for further
discussion on our derivative liability.
Gain
on conversion of debt
There
was a gain on conversion of debt of approximately $0.1 million during the year ended December 31, 2019, with a gain of approximately
$0.2 million during the year ended December 31, 2018. Gain on conversion of debt results from the difference between the fair
value of common stock issued upon conversion and the carrying amount of the debt converted.
Interest
income (expense)
We
had $0.8 million net interest expense in 2019, compared to $0.6 million of expense in 2018. The increase of $0.2 million was attributable
to the financial cost of waivers and extensions issued in connection with our debentures, partially offset by the cost associated
with derivative instruments issued with a value in excess of proceeds received.
Liquidity
and Capital Resources
We
have incurred losses since our inception in 2003 as a result of significant expenditures for operations and research and development
and the lack of any approved products to generate revenue. We have an accumulated deficit of approximately $61 million as of December
31, 2019 and anticipate that we will continue to incur additional losses for the foreseeable future. Through December 31, 2019,
we have funded our operations through the private sale of our equity securities, convertible debt and exercise of options and
warrants, resulting in gross proceeds of $37.2 million. Cash and restricted cash at December 31, 2019 was $23,000.
Our
auditors’ report on our December 31, 2019 financial statements expressed an opinion that our capital resources as of the
date of their Audit Report were not sufficient to sustain operations or complete our planned activities for the upcoming year
unless we raised additional funds. Based on our current level of expected operating expenditures, we expect to be able to fund
our operations into the third quarter of 2020. This assumes that we spend minimally on general operations and only continue conducting
our ongoing clinical trials, and that we do not encounter any unexpected events or other circumstances that could shorten this
time period. If we do not obtain additional funds by such time, we may no longer be able to continue as a going concern and will
cease operation which means that our shareholders will lose their entire investment.
We
are actively seeking sources of financing to fund our continued operations and research and development programs. To raise additional
capital, we may sell shares of equity or debt securities, or enter into collaborative, strategic and/or licensing transactions.
There can be no assurance that we will be able to complete any financing transaction in a timely manner or on acceptable terms
or otherwise. If we are not able to raise additional cash, we may be forced to further delay, curtail, or cease development of
our product candidates, or cease operations altogether.
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(amounts in thousands)
|
|
Cash and restricted cash at beginning of period
|
|
$
|
331
|
|
|
$
|
10
|
|
Net cash used in operating activities
|
|
|
(313
|
)
|
|
|
(204
|
)
|
Net cash provided by investing activities
|
|
|
—
|
|
|
|
—
|
|
Net cash provided by financing activities
|
|
|
5
|
|
|
|
525
|
|
Cash and restricted cash at end of period
|
|
$
|
23
|
|
|
$
|
331
|
|
Net
Cash Used in Operating Activities
Net
cash used in operating activities was $0.3 million and $0.2 million during 2019 and 2018, respectively. The decrease of $0.1 million
in cash used during 2019 compared to 2018 was primarily attributable to a decrease in accounts payable of approximately $0.1 million.
Net
Cash Used in Investing Activities
Cash
provided by investing activities was $0 for each of the years 2019 and 2018.
Net
Cash Provided by Financing Activities
During
2019, we received net proceeds of $5,000 from the sales of our securities and convertible debentures, compared to $0.5 million
during 2018 in net proceeds from the sales of our securities in a private placement. We are actively seeking sources of financing
to fund our continued operations and research and development programs.
ITEM
7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
|
We
are not required to provide the information as to selected financial data as we are considered a smaller reporting company.
ITEM
8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
The
information required by this Item is included in our Financial Statements and Supplementary Data listed in Item 15 of Part IV
of this Annual Report.
ITEM
9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|
None.
ITEM
9A.
|
CONTROLS
AND PROCEDURES
|
Evaluation
of Disclosure Controls and Procedures
Our
management, which consists only of our Principal Executive Officer and Principal Accounting Officer (who is also our Principal
Executive Officer), has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act) as of December 31, 2019. Based on that evaluation, management concluded that our disclosure
controls and procedures as of December 31, 2019 were ineffective in ensuring that information required to be disclosed by us in
reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission’s rules and forms.
Inherent
Limitations Over Internal Controls
The
Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted
accounting principles (“GAAP”). The Company’s internal control over financial reporting includes those policies
and procedures that:
(i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of the Company’s assets;
(ii)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with GAAP, and that the Company’s receipts and expenditures are being made only in accordance with authorizations of the
Company’s management and directors; and
(iii)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
Company’s assets that could have a material effect on the financial statements.
Management,
which consists only of our Principal Executive Officer and Principal Accounting Officer (who is also our Principal Executive Officer),
does not expect that the Company’s internal controls will prevent or detect all errors and all fraud. A control system,
no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control
system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits
of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation
of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.
Also, any evaluation of the effectiveness of controls in future periods are subject to the risk that those internal controls may
become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
Management’s
Annual Report on Internal Control Over Financial Reporting
The
Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting
(as defined in Rule 13a-15(f) under the Exchange Act). Management conducted an assessment of the effectiveness of the Company’s
internal control over financial reporting based on the criteria set forth in Internal Control – Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (2013). Based on the Company’s assessment, management
has concluded, that due to limited resources and limited number of employees, its internal control over financial reporting was
ineffective as of December 31, 2019 to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements in accordance with GAAP. To mitigate the current limited resources and employees, we rely heavily on direct
management oversight of transactions, along with the use of legal and accounting professionals. As we grow, we expect to increase
the number of employees, which would enable us to implement adequate segregation of duties within the internal control framework.
Changes
in Internal Control Over Financial Reporting
There
were no changes in the Company’s internal control over financial reporting during the fourth quarter of 2019, which were
identified in connection with management’s evaluation required by paragraph (d) of rules 13a-15 and 15d-15 under the Exchange
Act that has materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial
reporting.
This
annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding
internal control over financial reporting. Management’s report was not subject to attestation by the Company’s
independent registered public accounting firm pursuant to the rules of the SEC that permit smaller reporting companies to provide
only the management’s report in this annual report.
ITEM
9B.
|
OTHER
INFORMATION
|
On
May 2, 2020, we sold 5,000 shares of Series E 0% Convertible Preferred Stock to an accredited investor at a price per share of
$1.00 for aggregate gross proceeds of $5,000. Each share of Series E Preferred Stock has stated value of $1.00. The Series E Preferred
Stock is convertible, at any time after the Original Issue Date at the option of the Holder into that number of shares of Common
Stock (Subject to the limitations set forth in Section 6(d) of the certificate of designation of the Series E Preferred Stock),
determined by dividing the stated value by the then in effect conversion price. As of the date of issuance, the conversion price
is $0.01 per share.
With respect to a vote of stockholders to
approve a reverse split of the Common Stock to occur no later than December 31, 2022 only, each share of Series E Preferred Stock
held by a holder, as such, is entitled to 100,000 votes. On any matter presented to the stockholders of the Company for their
action or consideration at any meeting of stockholders of the Company (or by written consent of stockholders in lieu of meeting),
each holder of outstanding shares of Series E Preferred Stock shall be entitled to cast the number of votes equal to the number
of whole shares of Common Stock into which the shares of Series E Preferred Stock held by such holder are convertible as of the
record date for determining stockholders entitled to vote on such matter. Except as provided by law or by the other provisions
of the certificate of incorporation, holders of the Series E Preferred Stock shall vote together with the holders of Common Stock
as a single class.
PART III
ITEM
10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
Directors,
Executive Officers and Significant Employees
The
names of our directors and executive officers and their ages, positions, and biographies as of July 26, 2019, are set forth below.
Our executive officers are appointed by, and serve at the discretion of the Board. There are no family relationships among any
of our directors or executive officers. All directors hold office until the next annual meeting of shareholders or until their
respective successors are elected, except in the case of death, resignation, or removal. On February 28, 2017, Russell Richerson,
PhD, resigned as chief operating officer. On February 12, 2018, Dr. Shazer resigned as chief medical officer. On February 9, 2018,
Drs. Grebow and Buller resigned as members of the Board. On June 30, 2019, John Montgomery resigned as a member of the Board.
On June 15, 2019, Christopher Lowe resigned as chief executive officer and as a member of the Board. On July 26, 2019, we appointed
Michael Cain as our interim chief executive officer, chief financial officer, president, and as a member of the Board.
Name
|
|
Position
|
|
Age
|
|
Position Since
|
Executive Directors
|
|
|
|
|
|
|
Michael Cain*
|
|
Chief Executive Officer, Chief Financial Officer, President and Director
|
|
36
|
|
7/2019
|
|
|
|
|
|
|
|
Independent Directors
|
|
|
|
|
|
|
Scott V. Ogilvie
|
|
Director
|
|
65
|
|
03/2008
|
Claire Thom, Pharm.D.
|
|
Director
|
|
64
|
|
10/2016
|
*
Effective, July 26, 2019, we appointed Michael Cain as interim chief executive officer, chief financial officer, president,
and as a member of the Board.
Michael
Cain¸ serves as our interim Chief Executive Officer, Chief Financial Officer, President, and as a member of the
Board of Directors. Mr. Cain has over 15 years of experience in technology and consulting fields. Mr. Cain has served as the President
and as a Board member of Level 4 Services, Inc, a private information technology company since 2013. In evaluating Mr. Cain’s
specific experience, qualifications, attributes and skills in connection with his appointment to our Board, we took into account
his management experience in other organizations and business development background.
Scott
V. Ogilvie has served as a director on our board since February 2008. Mr. Ogilvie is currently the President of AFIN International,
Inc., a private equity/business advisory firm, which he founded in 2006. Prior to December 31, 2009, he was CEO of Gulf Enterprises
International, Ltd, a company that brings strategic partners, expertise and investment capital to the Middle East and North Africa.
He held this position since August 2006. Mr. Ogilvie previously served as Chief Operating Officer of CIC Group, Inc., an investment
manager, a position he held from 2001 to 2007. He began his career as a corporate and securities lawyer with Hill, Farrer &
Burrill, and has extensive public and private corporate management and board experience in finance, real estate, and technology
companies. Mr. Ogilvie currently serves on the board of directors of Neuralstem, Inc. (NASDAQ: CUR) and Research Solutions, Inc.
(OTCQB: RSSS). Mr. Ogilvie also served on the board of directors of Preferred Voice Inc. (OTCQB: PRFV), Innovative Card Technologies,
Inc. (OTCBB: INVC) and National Healthcare Exchange, Inc. (OTCBB: NHXS). In evaluating Mr. Ogilvie’s specific experience,
qualifications, attributes and skills in connection with his appointment to our board, we took into account his prior work in
both public and private organizations regarding corporate finance, securities and compliance and international business development.
Claire
Thom, PharmD has served as a director on our board since October 2016. Dr. Thom has two decades of experience
in the pharmaceutical industry, with responsibilities including drug development, new product planning, and marketing. Most
recently, from July 2013 until June 2016, Dr. Thom was the Senior Vice President Global Therapeutic Head for Oncology at Astellas
Pharma (TOKYO: ALPMY). At Astellas, she developed and supervised the implementation of the company’s oncology strategy. In
addition, she was appointed to serve on the Board of Directors for Agensys, a fully-owned subsidiary of Astellas. Prior to
her roles at Astellas, Dr. Thom served as Senior Vice President of Portfolio Management, Drug Development Management and Strategic
Business Operations at Millennium Pharmaceuticals, the Takeda Oncology Company, (TOKYO: TKPYY) from August 2008 until January
2013. Prior to her assignment at Millennium, she held several positions of increasing responsibility at Takeda to become the company’s
Oncology Franchise Leader. Earlier, she worked at G.D. Searle and began her career as a clinical pharmacist. Ms. Thom was awarded
a Doctor of Pharmacy and a Bachelor of Pharmacy, both with honors, from the University of Illinois. In evaluating Dr. Thom’s
specific experience, qualifications, attributes and skills in connection with her appointment to our board, we took into account
her knowledge of scientific matters affecting our business and her understanding of our industry.
Family
Relationships
There
are no family relationships between any director, executive officer, or person nominated or chosen by the registrant to become
a director or executive officer.
Diversity
of Board of Directors
We
do not have a formal policy with regard to the consideration of diversity in identifying director nominees, but the Nominating
and Corporate Governance Committee strives to nominate Directors with a variety of complementary skills so that, as a group, the
board of directors will possess the appropriate talent, skills, and expertise to oversee our businesses.
Code
of Ethics
We
have adopted a “Code of Ethics” that applies to our principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions. A copy of our code is attached to this Annual Report
as Exhibit 14.01.
Independent
Directors
For
purposes of determining independence, the Company has adopted the definition of independence as contained in NASDAQ Market Place
Rule 5605(a)(2). Pursuant to the definition, the Company has determined that Dr. Thom and Mr. Ogilvie qualify as independent.
Committees
The
board of directors has established three standing committees: (1) an Audit Committee, (2) a Nominating and Corporate Governance
Committee, and (3) a Leadership Development and Compensation Committee. Each of the committees operates under a written charter
adopted by the board of directors. A copy of each respective committee’s charter can be viewed as Exhibits 99.01, 99.02
and 99.03 to this Annual Report.
The table below identifies the Board’s standing committees
and committee membership as of May 1, 2020:
Director
|
|
Independent
|
|
Audit Committee
|
|
Nominating
and
Corporate
Governance
Committee
|
|
Leadership
Development
and
Compensation
Committee
|
Scott Ogilvie
|
|
Yes
|
|
Chair
|
|
Chair
|
|
—
|
Claire Thom, PharmD
|
|
Yes
|
|
Member
|
|
—
|
|
Chair
|
Each
member of the Audit Committee, the Compensation Committee, and the Nominating and Corporate Governance Committee is considered
independent under the NASDAQ Market Place Rules.
Audit
Committee
The
main function of our Audit Committee, which was established in accordance with Section 3(a)(58)(A) of the Exchange Act, is to
oversee our accounting and financial reporting processes, internal systems of control, independent auditor relationships and the
audits of our financial statements. This committee’s responsibilities include:
|
●
|
Selecting
and hiring our independent auditors.
|
|
●
|
Evaluating
the qualifications, independence and performance of our independent auditors.
|
|
●
|
Approving
the audit and non-audit services to be performed by our independent auditors.
|
|
●
|
Reviewing
the design, implementation, adequacy and effectiveness of our internal controls and our critical accounting policies.
|
|
●
|
Overseeing
and monitoring the integrity of our financial statements and our compliance with legal and regulatory requirements as they
relate to financial statements or accounting matters.
|
|
●
|
Reviewing
with management any earnings announcements and other public announcements regarding our results of operations.
|
|
●
|
Reviewing
regulatory filings with management and our auditors.
|
|
●
|
Preparing
any report the SEC requires for inclusion in our annual proxy statement.
|
|
●
|
The
Audit Committee will review and approve all related party transactions.
|
Our
Audit Committee is currently comprised of Scott V. Ogilvie and Claire Thom, each of whom is a non-employee member of our board
of directors. Our board of directors has determined that each of the directors serving on our Audit Committee is independent within
the meaning of the rules of the SEC and rule 5605(a)(2) of the Marketplace Rules of NASDAQ. Additionally, our board has determined
that Scott V. Ogilvie is an audit committee financial expert as defined under the rules of the SEC. A copy of the charter is contained
in Exhibit 99.01 to this Annual Report
Nominating
and Corporate Governance Committee
Our
Nominating and Corporate Governance Committee’s purpose is to assist our board of directors in identifying individuals qualified
to become members of our board of directors consistent with criteria set by our board of directors and to develop our corporate
governance principles. This committee’s responsibilities include:
|
●
|
Evaluating
the composition, size, organization and governance of our board of directors and its committees, determining future requirements,
and making recommendations regarding future planning, the appointment of directors to our committees and selection of chairs
of these committees.
|
|
●
|
Reviewing
and recommending to our board of directors, director independence determinations made with respect to continuing and prospective
directors.
|
|
●
|
Establishing
a policy for considering stockholder nominees for election to our board of directors.
|
|
●
|
Recommending
ways to enhance communications and relations with our stockholders.
|
|
●
|
Evaluating
and recommending candidates for election to our board of directors.
|
|
●
|
Overseeing
our board of directors’ performance and self-evaluation process and developing continuing education programs for our
directors.
|
|
●
|
Evaluating
and recommending to the board of directors termination of service of individual members of the board of directors as appropriate,
in accordance with governance principles, for cause or for other proper reasons.
|
|
●
|
Making
regular written reports to the board of directors.
|
|
●
|
Reviewing
and reexamining the committee’s charter and making recommendations to the board of directors regarding any proposed
changes.
|
|
●
|
Reviewing
annually the committee’s own performance against responsibilities outlined in its charter and as otherwise established
by the board of directors.
|
Our
Nominating and Corporate Governance Committee is currently comprised of Scott V. Ogilvie, a non-employee member of our board of
directors. Our board of directors has determined that Mr. Ogilvie is independent as defined in rule 5605(a)(2) of the Marketplace
Rules of NASDAQ. The charter of the Nominating and Corporate Governance Committee is contained in Exhibit 99.03 of this Annual
Report
Leadership
Development and Compensation Committee
The
purpose of our Leadership Development and Compensation Committee is to oversee our compensation programs. The committee may form
and delegate authority to subcommittees or, with respect to compensation for employees and consultants who are not executive officers
for purposes of Section 16 of the Exchange Act, to our officers, in either instance as the committee determines appropriate. The
committee’s responsibilities include:
|
●
|
Reviewing
and approving our general compensation strategy.
|
|
●
|
Establishing
annual and long-term performance goals for our CEO and other executive officers.
|
|
●
|
Conducting
and reviewing with the board of directors an annual evaluation of the performance of the CEO and other executive officers.
|
|
●
|
Evaluating
the competitiveness of the compensation of the CEO and the other executive officers.
|
|
●
|
Reviewing
and making recommendations to the board of directors regarding the salary, bonuses, equity awards, perquisites and other compensation
and benefit plans for the CEO.
|
|
●
|
Reviewing
and approving all salaries, bonuses, equity awards, perquisites and other compensation and benefit plans for our other executive
officers.
|
|
●
|
Reviewing
and approving the terms of any offer letters, employment agreements, termination agreements or arrangements, change-in-control
agreements, indemnification agreements and other material agreements between the company and our executive officers.
|
|
●
|
Acting
as the administering committee for our stock and bonus plans and for any equity or cash compensation arrangements that we
may adopt from time to time.
|
|
●
|
Providing
oversight for our overall compensation plans and benefit programs, monitoring trends in executive and overall compensation
and making recommendations to the board of directors with respect to improvements to such plans and programs or the adoption
of new plans and programs.
|
|
●
|
Reviewing
and approving compensation programs as well as salaries, fees, bonuses and equity awards for non-employee members of the board
of directors.
|
|
●
|
Reviewing
plans for the development, retention and succession of our executive officers.
|
|
●
|
Reviewing
executive education and development programs.
|
|
●
|
Monitoring
total equity usage for compensation and establishing appropriate equity dilution levels.
|
|
●
|
Reporting
regularly to the board of directors on the committee’s activities.
|
|
●
|
Reviewing
and discussing with management the required annual compensation discussion and analysis disclosure, if any, regarding named
executive officer compensation and, based on this review and discussions, making a recommendation to include in our annual
public filings.
|
|
●
|
Preparing
and approving any required committee report to be included in our annual public filings.
|
|
●
|
Performing
a review, at least annually, of the performance of the committee and its members and reporting to the board of directors on
the results of this review.
|
|
●
|
Investigating
any matter brought to its attention, with full access to all our books, records, facilities and employees and obtaining advice,
reports or opinions from internal or external counsel and expert advisors in order to help it perform its responsibilities.
|
Our
Leadership Development and Compensation Committee is currently comprised of Claire Thom, who is a non-employee member of our board
of directors. Dr. Thom is an “outside” director as defined in Section 162(m) of the Internal Revenue Code of 1986,
as amended (the “Code”), and a “non-employee” director within the meaning of Rule 16b-3 of the Exchange
Act. Our board of directors has determined that Dr. Thom is independent as defined in rule 5605(a)(2) of the Marketplace Rules
of NASDAQ. A copy of the charter is contained in Exhibit 99.02 to this Annual Report.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Exchange Act requires the Company’s officers and directors, and persons who own more than ten percent of a
registered class of the Company’s equity securities, to file reports of securities ownership and changes in such ownership
with the SEC. Officers, directors and greater than ten percent shareholders also are required by SEC rules to furnish the Company
with copies of all Section 16(a) forms they file.
Based
solely upon a review of the copies of such forms furnished to the Company, and on written representations from the reporting persons,
the Company believes that all Section 16(a) filing requirements applicable to the Company’s directors and officers were
timely met during 2019.
Name of Reporting Person
|
|
Type of Report and Number Filed Late
|
|
No. of Transactions
Reported Late
|
None
|
|
None
|
|
None
|
ITEM
11.
|
EXECUTIVE
COMPENSATION
|
Summary
Compensation
The
following table provides disclosure concerning all compensation paid for services to us in all capacities for our fiscal years
ended December 31, 2019 and 2018 provided by (i) each person serving as our principal executive officer, or PEO, or acting in
a similar capacity during our fiscal year ended December 31, 2019; (ii) our most highly compensated executive officers other than
our PEO who were serving as executive officers on December 31, 2019 and whose total compensation exceeded $100,000 (collectively
with the PEO referred to as the “named executive officers” in this Executive Compensation section); and (iii) our
Principal Financial Officer.
Name & Principal Position
|
|
Year
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock
Awards
($)
|
|
|
Option
Awards
($)
|
|
|
Non-Equity
Incentive Plan
Compensation
($)
|
|
|
Nonqualified
Deferred
Compensation
Earnings
($)
|
|
|
All Other
Compensation
($)
|
|
|
Total
($)
|
|
Christopher Lowe,
|
|
2019
|
|
|
—
|
(1)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Chief Executive Officer and Chief Financial Officer
|
|
2018
|
|
|
22,917
|
(2)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
22,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael Cain,
|
|
2019
|
|
|
—
|
(3)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Chief Executive Officer and Chief Financial Officer
|
|
2018
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
(1)
|
No
salary was paid or accrued for Mr. Lowe in 2019. Effective July 15, 2019, Mr. Lowe resigned as chief executive officer and
as a member of the Board.
|
|
|
(2)
|
Of
Mr. Lowe’s salary listed, none was actually paid and $22,917 was accrued in 2018 but remains unpaid.
|
|
|
(3)
|
Mr.
Cain became our chief executive officer and principal accounting officer effective July 26, 2019. Mr. Cain currently has not
received any compensation for his services.
|
Outstanding
Executive Equity Awards at Fiscal Year-End 2019
None.
Employment
Agreements and Change in Control
Michael
Cain
Michael
Cain was appointed chief executive officer and chief financial officer / principal accounting officer of the Company effective
July 26, 2020. We currently do not have any employment agreement covering Mr. Cain’s services and he is not currently receiving
any compensation as our chief executive officer or chief financial officer. Mr. Cain is not subject to any compensation in the
event that he is terminated or resigns for any reason.
Christopher
Lowe
Employment
Agreement
We
employed Christopher Lowe as our Chief Executive Officer and Chief Financial Officer pursuant to a written contract that until
such time that either the Company or Mr. Lowe terminates the agreement. Mr. Lowe resigned his employment with the Company effective
July 15, 2019. Mr. Lowe received a base salary of $316,250, of which we deducted $41,250 during the first year and pay such amount
to a third party as a placement fee for Mr. Lowe’s employment. As a result, Mr. Lowe received a net base salary of $275,000
for his first year of employment.
Mr.
Lowe’s employment agreement provided for severance in the event Company terminates Mr. Lowe’s employment without Cause
or Mr. Lowe resigned with Good Reason, as each term is defined in the employment agreement, provided certain company funding requirements
were met. Pursuant to Mr. Lowe’s resignation, no severance was paid pursuant to the terms of his employment agreement.
Equity
Compensation Plans
For
information related to our equity compensation plans for which our officers and directors are issued securities from, please see
Equity Compensation Plan Information contained in Part III, Item 12 of this Annual Report.
Director
Compensation
Name
|
|
Fees
Earned
or Paid in
Cash
($)
|
|
|
Stock
Awards
($)
|
|
|
Option
Awards
($)
|
|
|
Non-Equity Incentive
Plan Compensation
($)
|
|
|
Non-Qualified
Deferred
Compensation Earnings
($)
|
|
|
All Other
Compensation
($)
|
|
|
Total
($)
|
|
Scott Ogilvie
|
|
|
54,000
|
(1)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
54,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claire Thom
|
|
|
49,000
|
(1)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
49,000
|
|
(4)
|
No director fees were paid in 2019. All fees have been accrued at December 31, 2019.
|
Outside
Director Compensation Plan
On
October 12, 2016, the Company’s board of directors, upon the recommendation of the Leadership Development and Compensation
Committee, amended the Company’s non-executive Board compensation policy. The terms of the amended policy are as follows:
Inducement/First
Year Grant. Upon joining the Board, a director receives an option to purchase 100 shares of the Company’s common stock.
The option vests on the first year anniversary of the first day of the month after the director’s service on the Board begins,
provided the director has continuously provided services to the Company during that time.
Annual
Grant. Subject to the shareholder’s rights to elect any individual director, starting on the first year anniversary
of service, and each subsequent anniversary thereafter, each eligible director will be granted options to purchase 67 shares of
common stock or restricted stock units of equivalent value. The annual grants vest quarterly during the grant year provided the
director has continuously provided services to the Company during that time.
Committee
and Committee Chairperson Grant. Each director will receive options to purchase an additional 7 shares of common stock, or
restricted stock units of equivalent value, for each committee on which he or she serves. Chairpersons of each committee will
receive options to purchase an additional 7 shares of common stock, or restricted stock units of equivalent value. The
committee grants vest quarterly during the grant year provided the director has continuously provided services to the Company
during that time.
Special
Committee Grants. From time to time, individual directors may be requested by the Board to provide extraordinary services. These
services may include such items as the negotiation of key contracts, assistance with scientific issues, or such other items as
the Board deems necessary and in the best interest of the company and its shareholders. In such instances, the board
shall have the flexibility to issue special committee grants. The amount of such grants and terms will vary based
on the tasks of the special committee.
Exercise
Price and Term. All options issued pursuant to the non-executive director compensation policy will have an exercise price
equal to the fair market value of our common stock at close of market on the grant date and will have a term of five years.
All restricted stock unit and option grants and issuance of shares are subject to satisfaction of all applicable state and federal
securities laws. The determination with regard to whether awards will be made in options or restricted stock units will be at
the sole discretion of the director.
Cash
Compensation. Each director will also receive cash compensation equal to: (i) an annual cash retainer of $40,000, and (ii)
quarterly payments of $1,000 per committee for non-chairperson committee members. In addition, committee chairpersons receive
an additional: (a) $10,000 for chairing the audit committee, (b) $5,000 for chairing the leadership development and compensation
committee, and (c) $5,000 for chairing the nomination and corporate governance committee.
Expenses.
The Company will reimburse directors for all reasonable travel expenses incurred in connection with their attendance at meetings
of the Board, in accordance with the Company’s expense reimbursement policy as is in effect from time to time. Moreover,
certain directors will be reimbursed for expenses related to education or the attendance at industry conferences, including travel,
lodging and meals, up to a maximum of $10,000 per calendar year.
Indemnification.
The Company shall indemnify all directors to the fullest extent permitted by law if the director was or is or becomes a party
to or witness or other participant in, or is threatened to be made a party to or witness or other participant in, any threatened,
pending or completed action, suit, proceeding or alternative dispute resolution mechanism, or any hearing, inquiry or investigation
that indemnitee in good faith believes might lead to the institution of any such action, suit, proceeding or alternative dispute
resolution mechanism, whether civil, criminal, administrative, investigative or other as a result of their service on the Board
as provided for in the Company’s bylaws and standard indemnification agreement.
ITEM
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|
Securities
authorized for issuance under equity compensation plans
The
following table sets forth information as of December 31, 2019 with respect to our compensation plans under which equity securities
may be issued.
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
|
Number of Securities
to be Issued
upon Exercise of
Outstanding
Options, Warrants
and Rights
|
|
|
Weighted-Average
Exercise Price of
Outstanding
Options,
Warrants and
Rights
|
|
|
Number of Securities
Remaining Available for
Future Issuance under
Equity Compensation Plans
(Excluding Securities
Reflected in Column (a))
|
|
Equity compensation plans approved by security holders:
|
|
|
|
|
|
|
|
|
|
2007 Stock Plan, as amended (1)
|
|
|
1,165
|
|
|
$
|
337.55
|
|
|
|
6,608
|
|
Equity compensation plans not approved by security holders:
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 Executive Compensation Plan
|
|
|
1,963
|
|
|
|
162.40
|
|
|
|
6,037
|
|
Inducement Stock Option Plan
|
|
|
4,558
|
|
|
$
|
28.20
|
|
|
|
7,442
|
|
2017 Equity Compensation Plan
|
|
|
0
|
|
|
$
|
0.00
|
|
|
|
80,000
|
|
Total
|
|
|
7,686
|
|
|
$
|
109.37
|
|
|
|
100,087
|
|
(1)
|
Our
2007 Stock Plan, as amended, provides for the issuance of up to 2,000 common shares during any calendar year. The plan provides
for the issuance of up to 8,000 common shares in the aggregate.
|
2007
Equity Compensation Plan
Our
2007 Equity Compensation Plan (“2007 Plan”) is administered by our board or any of its committees. The purposes of
the 2007 Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional
incentive to Employees, Directors and Consultants, and to promote the success of our business. The issuance of awards under our
2007 Plan is at the discretion of the administrator, which has the authority to determine the persons to whom any awards shall
be granted and the terms, conditions and restrictions applicable to any award. Under our 2007 Plan, we may grant stock options,
restricted stock, stock appreciation rights, restricted stock units, performance units, performance shares and other stock based
awards. Our 2007 Plan authorizes the issuance of up to 2,000 shares of common stock for the foregoing awards per fiscal year with
an aggregate of 8,000 shares of common stock available for issuance under the 2007 Plan. As of December 31, 2019, we have granted
awards under the 2007 Plan equal to approximately 7,228 shares of our common stock, and 5,836 shares have been cancelled or forfeited.
Accordingly, there are 6,608 shares of common stock available for future awards under the 2007 Plan. In the event of a change
in control, awards under the 2007 Plan will become fully vested unless such awards are assumed or substituted by the successor
corporation.
2009
Executive Compensation Plan
Our
2009 Executive Compensation Plan, as amended (“2009 Plan”) is administered by our Board or any of its committees.
The purpose of our 2009 Plan is to advance the interests of the Company and our stockholders by attracting, retaining and rewarding
persons performing services for us and to motivate such persons to contribute to our growth and profitability. The issuance of
awards under our 2009 Plan is at the discretion of the administrator, which has the authority to determine the persons to whom
any awards shall be granted and the terms, conditions and restrictions applicable to any award. Under our 2009 Plan, we may grant
stock options, restricted stock, stock appreciation rights, restricted stock units, performance units, performance shares and
other stock-based awards. As of December 31, 2019, our 2009 Plan authorizes the issuance of up to 8,000 shares of our common stock
for the foregoing awards, and we have granted awards under the plan equal to approximately 6,595 common shares, and 4,632 shares
have been cancelled or forfeited. Accordingly, there are 6,037 shares of common stock available for future awards under the 2009
Plan.
Inducement
Award Stock Option Plan
Our
Inducement Award Stock Option Plan (“Inducement Plan”) is administered by our board or our compensation committee.
The Plan is intended to be used in connection with the recruiting and inducement of senior management and employees. The issuance
of wards under the Inducement Plan is at the discretion of the administrator which has the authority to determine the persons
to whom any awards shall be granted and the terms, conditions and restrictions applicable to any award. The Company did not seek
approval of the Plan by our stockholders. Pursuant to the Inducement Plan, the Company may grant stock options for up to a total
of 12,000 shares of common stock to new employees of the Company. As of December 31, 2019, 8,454 grants have been made pursuant
to the Plan, and 3,896 shares have been cancelled or forfeited. Accordingly, there are 7,442 shares of common stock available
for future issuance under the Inducement Plan.
Inspyr
Therapeutics 2017 Equity Compensation Plan
Our
2017 Equity Compensation Plan (“2017 Plan”) is administered by our board or any of its committees. The purposes of
the 2017 Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional
incentive to Employees, Directors and Consultants, and to promote the success of our business. The issuance of awards under our
2017 Plan is at the discretion of the administrator, which has the authority to determine the persons to whom any awards shall
be granted and the terms, conditions and restrictions applicable to any award. Under our 2017 Plan, we may grant stock options,
restricted stock, stock appreciation rights, restricted stock units, performance units, performance shares and other stock based
awards. Our 2017 Plan authorizes the issuance of up to 80,000 shares of common stock for the foregoing awards. As of December
31, 2019, we have granted no awards under the 2017 Plan, and no shares have been cancelled or forfeited. Accordingly, there are
80,000 shares of common stock available for future awards under the 2017 Plan. In the event of a change in control, awards under
the 2017 Plan will become fully vested unless such awards are assumed or substituted by the successor corporation.
Deferred
Compensation Plan
In
July of 2011, we adopted the Executive Deferred Compensation Plan (the “Deferred Plan”). The Deferred Plan is intended
to comply with the requirements of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”). The
Deferred Plan is intended to be an unfunded “top hat” plan which is maintained primarily to provide deferred compensation
benefits for a select group of our “management or highly compensated employees” within the meaning of Sections 201,
301, and 401 of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and to therefore be exempt
from the provisions of Parts 2, 3, and 4 of Title I of ERISA. The Deferred Plan is intended to help build a supplemental source
of savings and retirement income through pre-tax deferrals of eligible compensation, which may include cash, option and stock
bonus awards, discretionary cash, option and stock awards and/or any other payments which may be designated by the Deferred Plan
administrator, as eligible, for deferral under the Deferred Plan from time to time. As administered, the Deferred Plan is used
to defer compensation of stock awards granted under our other equity compensation plans and does not by its terms approve any
grants or awards.
Security
Ownership of Certain Beneficial Owners and Management
The
following table sets forth, as of May 1, 2020, information regarding beneficial ownership of our capital stock by:
|
●
|
each
person, or group of affiliated persons, known by us to be the beneficial owner of 5% or more of any class of our voting securities;
|
|
|
|
|
●
|
each
of our current directors and nominees;
|
|
|
|
|
●
|
each
of our current named executive officers; and
|
|
|
|
|
●
|
all
current directors and named executive officers as a group.
|
Beneficial
ownership is determined according to the rules of the SEC. Beneficial ownership means that a person has or shares voting or investment
power of a security and includes any securities that person or group has the right to acquire within 60 days after the measurement
date. This table is based on information supplied by officers, directors and principal stockholders. Except as otherwise indicated,
we believe that each of the beneficial owners of the common stock listed below, based on the information such beneficial owner
has given to us, has sole investment and voting power with respect to such beneficial owner’s shares, except where community
property laws may apply.
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
Name and Address of Beneficial Owner(1)
|
|
Shares
|
|
|
Shares
Underlying
Convertible
Securities (2)
|
|
|
Total
|
|
|
Percent of
Class (2)
|
|
Directors and named Executive Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael Cain
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
*
|
|
Christopher Lowe
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
*
|
|
Scott Ogilvie
|
|
|
—
|
|
|
|
164
|
|
|
|
164
|
|
|
|
*
|
|
Claire Thom
|
|
|
—
|
|
|
|
100
|
|
|
|
100
|
|
|
|
*
|
|
All directors and executive officers as a group (4 persons)
|
|
|
—
|
|
|
|
264
|
|
|
|
264
|
|
|
|
*
|
%
|
5% Shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sabby Healthcare Master Fund, Ltd. (3)
|
|
|
—
|
|
|
|
16,666,550
|
|
|
|
16,666,550
|
|
|
|
9.99
|
%
|
Sabby Volatility Warrant Master Fund, Ltd. (4)
|
|
|
—
|
|
|
|
16,666,550
|
|
|
|
16,666,550
|
|
|
|
9.99
|
%
|
(1)
|
Except
as otherwise indicated, the persons named in this table have sole voting and investment power with respect to all shares of
common stock shown as beneficially owned by them, subject to community property laws where applicable and to the information
contained in the footnotes to this table. Unless otherwise indicated, the address of the beneficial owner is 31200 Via Colinas
#200, Westlake Village, CA 91362.
|
(2)
|
Pursuant
to Rules 13d-3 and 13d-5 of the Exchange Act, beneficial ownership includes any shares as to which a shareholder has sole
or shared voting power or investment power, and also any shares which the shareholder has the right to acquire within 60 days,
including upon exercise of common shares purchase options or warrants. There were 150,000,000 shares of common stock issued
and outstanding as of May 1, 2020.
|
(3)
|
89 Nexus Way, Camana Bay, Grand Cayman Ky1-9007, Cayman Islands. Does not include 180,741,032 shares underlying warrants and debentures convertible into common stock securities subject to exercise conditions based on percentage ownership limitations.
|
(4)
|
89 Nexus Way, Camana Bay, Grand Cayman Ky1-9007, Cayman Islands. Does not include 131,922,700 shares underlying warrants and debentures convertible into common stock securities subject to exercise conditions based on percentage ownership limitations.
|
ITEM
13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
|
Information
regarding disclosure of an employment relationship or transaction involving an executive officer and any related compensation
solely resulting from that employment relationship or transaction is incorporated by reference from the section of this annual
report entitled “Executive Compensation.”
Information
regarding disclosure of compensation to a director is incorporated by reference from the section of this annual report entitled
“Director Compensation.”
Related
Party Transactions
|
●
|
We
have entered into an indemnification agreement with each of our directors and executive officers. The indemnification agreements
and our certificate of incorporation and bylaws require us to indemnify our directors and executive officers to the fullest
extent permitted by Delaware law. The indemnification agreements are substantially similar to those entered into with our
executive officers and as a more fully described in the section of this annual report entitled “Employment Agreements
and Change in Control.”
|
|
●
|
On
July 3, 2018, we sold an aggregate of $515,000 of non-interest bearing senior convertible debentures to Sabby Volatility Warrant
Master Fund and Sabby Healthcare Master Fund, previously greater than 5% beneficial owners of our securities. Pursuant to
certain waivers of defaults and extensions, these debentures mature on July 16, 2020.
|
|
|
|
|
●
|
On
March 6, 2020, we sold an aggregate of $250,000 of non-interest bearing senior convertible debentures to Sabby Volatility
Warrant Master Fund and Sabby Healthcare Master Fund, previously greater than 5% beneficial owners of our securities. The
debentures mature on July 16, 2020.
|
ITEM
14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
The
following table summarizes the approximate aggregate fees billed to us or expected to be billed to us by our independent auditors
for our 2019 and 2018 fiscal years:
Type of Fees
|
|
2018
|
|
|
2018
|
|
|
|
|
|
|
|
|
Audit Fees
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
Audit Related Fees
|
|
|
—
|
|
|
|
--
|
|
Tax Fees
|
|
|
—
|
|
|
|
3,500
|
|
All Other Fees
|
|
|
—
|
|
|
|
—
|
|
Total Fees
|
|
$
|
50,000
|
|
|
$
|
53,500
|
|
Pre-Approval
of Independent Auditor Services and Fees
Our
board of directors reviewed and pre-approved all audit and non-audit fees for services provided by independent registered accounting
firm and has determined that the provision of such services to us during fiscal 2019 is compatible with and did not impair independence.
It is the practice of the audit committee to consider and approve in advance all auditing and non-auditing services provided to
us by our independent auditors in accordance with the applicable requirements of the SEC. The firm we engaged during 2019 provided
no other services, other than those listed above.
The accompanying notes are an integral part of these audited
consolidated financial statements.
The accompanying notes are an integral part of these audited
consolidated financial statements.
The accompanying notes are an integral part of these audited
consolidated financial statements.
The accompanying notes are an integral part of these audited
consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – BACKGROUND
Inspyr Therapeutics, Inc. (“we”,
“us”, “our company”, “our”, “Inspyr” or the “Company”) was formed under
the laws of the State of Delaware in November 2003, and has its principal office in Westlake Village, California. We
are a clinical-stage, pre-revenue, pharmaceutical company primarily focused on the development of therapeutics for the treatment
of diseases. Through our acquisition of Lewis and Clark Pharmaceuticals, Inc., we currently are focusing on a pipeline of small
molecule adenosine receptor modulators.
The adenosine receptor modulators include
A 2B antagonists, dual A 2A /A 2B antagonists, and A 2A agonists that have broad development applicability including indications
within immuno-oncology and inflammation. Adenosine is implicated in immunosuppression in the tumor microenvironment. Adenosine
receptor antagonists may boost the host immune response against the tumor as a single-agent and in combination with other existing
immuno-oncology agents leading to enhanced tumor killing and inhibition of metastasis. Adenosine also has anti-inflammatory properties
in the acute and chronic setting. Adenosine receptor agonists may promote a decreased inflammatory response and can potentially
treat a broad range of inflammatory and autoimmune based diseases and conditions (e.g., rheumatoid arthritis, joint injury, Crohn’s
disease, psoriasis) as well as improve wound healing and decrease pain.
During February 2018, due to a lack of
capital, we curtailed substantially all our business operations. In the event that we are able to raise sufficient capital, our
major focus would be to: (i) further characterization, in conjunction with Ridgeway Therapeutics, of anti-cancer activity of the
current pipeline of A2B antagonists and dual A2A/A2B antagonists leading to selection of a clinical
candidate for an Investigative New Drug or IND enabling studies, (ii) further characterization of the current pipeline of A2A
agonists leading to selection of a clinical candidate for an Investigative New Drug or IND enabling studies; (iii) licensing and/or
partnering the A2B antagonists, dual A2A/A2B antagonists, and/or A2A agonists for further
development, (iv) through our newly acquired adenosine receptor chemistry technology platform, continue to produce next generation
adenosine receptor modulators, (v) pursue licensing and/or partnering of mipsagargin, (vi) conduct a clinical study of mipsagargin
in patients with advanced HCC, and (vii) explore collaborations utilizing mipsagargin in new, non-clinical solid tumor models with
leading researchers in the oncology field.
Our ability to execute our business plan is
dependent on the amount and timing of cash, if any, that we are able to raise. During February of 2018, we curtailed our operations
due to our lack of cash. We are currently using funds raised to maintain our SEC reporting requirements, pay outstanding invoices
to our independent registered accounting firm, and other outstanding obligations, the payment of which we believe to be vital to
our future operations. Should we fail to further raise sufficient funds to execute our business plan, our priority would be to
maintain our intellectual property portfolio and continue, to the best of our ability, our public company reporting requirements.
NOTE 2 – MANAGEMENT’S PLANS
TO CONTINUE AS A GOING CONCERN
Basis of Presentation
The opinion of our independent registered accounting
firm on our financial statements contains explanatory going concern language. We have prepared our consolidated financial statements
on the basis that we will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities
in the normal course of business. We have incurred losses since inception and have an accumulated deficit of $61 million as of
December 31, 2019. We anticipate incurring additional losses for the foreseeable future until such time, if ever, that we can generate
significant sales from our therapeutic product candidates which are currently in development or we enter into cash flow positive
business development transactions.
To date, we have generated no sales or
revenues, have incurred significant losses and expect to incur significant additional losses as we advance mipsagargin through
clinical studies. Consequently, our operations are subject to all the risks inherent in the establishment of a pre-revenue business
enterprise as well as those risks associated with a company engaged in the research and development of pharmaceutical compounds.
Our cash and cash equivalents and restricted
cash balances at December 31, 2019 were approximately $23,000, representing 100% of our total assets. We curtailed substantially
all operations in February 2018. Based on our current expected level of operating expenditures, and including approximately $250,000,
we raised in March 2020, pursuant to the sale of our senior convertible debentures, we expect to be able to fund our operations
into the third quarter of 2020. We will require additional cash to fund and continue our operations beyond that point. This period
could be shortened if there are any unanticipated increases in planned spending on development programs or other unforeseen events.
We anticipate raising additional funds through collaborative arrangements, licensing agreements, public or private sales of debt
or equity securities, or some combination thereof. There is no assurance that any such arrangement will be entered into or that
financing will be available when needed in order to allow us to continue our operations, or if available, on terms favorable or
acceptable to us.
In the event additional financing is not
obtained, we may pursue cost cutting measures as well as explore the sale of selected assets to generate additional funds. If we
are required to significantly reduce operating expenses and delay, reduce the scope of, or eliminate any of our development programs
or clinical trials, these events could have a material adverse effect on: our business, results of operations, and financial condition.
These factors raise significant doubt about our ability to continue as a going concern. The financial statements do not include
any adjustments relating to recoverability and classification of recorded asset amounts or the amounts and classification of liabilities
that might be necessary should we be unable to continue as a going concern.
Our auditors’ report issued in connection
with our December 31, 2019 consolidated financial statements expressed an opinion that our capital resources as of the date of
their audit report were not sufficient to sustain operations or complete our planned activities for the upcoming year unless we
raised additional funds. Accordingly, our current cash level raises substantial doubt about our ability to continue as a going
concern past the third quarter of 2020. If we do not obtain additional funds by such time, we may no longer be able to continue
as a going concern and will cease operation which means that our shareholders will lose their entire investment.
NOTE 3 – SUMMARY OF CRITICAL ACCOUNTING
POLICIES AND USE OF ESTIMATES
Reverse Stock Split
On September 17, 2019, the Company’s
Board of Directors approved a one-for-twenty five (1-for-25) reverse stock split of the Company’s common stock (“Reverse
Stock Split”). In furtherance of the Reverse Stock Split, the Company has filed an amended and restated certificate of incorporation
with the Secretary of State of Delaware to effect the Reverse Stock Split effective as of 5:00 p.m. Eastern Time on September 30,
2019 (“Effective Time”). Accordingly, at the Effective Time, each of the Company’s common stock shareholders
received one new share of common stock for every twenty-five shares such shareholder held immediately prior to the Effective Time.
The Reverse Stock Split will also affect the Company’s outstanding stock options, warrants and other exercisable or convertible
instruments and will result in the shares underlying such instruments being reduced and the exercise/conversion price being increased
proportionately to the Reverse Stock Split ratio. All share and per share data has been retroactively restated in the accompanying
consolidated financial statements and footnotes for all periods presented to reflect the effects of the September 30, 2019 amendment.
Use of Estimates
The preparation of financial statements
in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying disclosures. Significant estimates include the fair value of derivative
instruments, stock-based compensation, recognition of clinical trial costs and other accrued liabilities. Actual results may differ
from those estimates.
Research and Development
Research and development costs are charged
to expense as incurred. Our research and development expenses consist primarily of expenditures for toxicology and other studies,
manufacturing, clinical trials, compensation and consulting costs.
We incurred research and development expenses
of $0.04 million and $0.2 million for the years ended December 31, 2019 and 2018, respectively.
Cash Equivalents
For purposes of the statements of cash
flows, we consider all highly liquid debt instruments purchased with a maturity date of three months or less to be cash equivalents.
We maintain our cash in bank deposit accounts which, at times, may exceed applicable government mandate insurance limits. We have
not experienced any losses in our accounts. We did not have any cash equivalents at December 31, 2019 or 2018.
Restricted Cash
Restricted cash consists of funds held
in trust for the Company. The use of these funds is restricted to: (i) the payment of professional fees in connection with bringing
the Company’s filings current, and (ii) the payment of vendors associated with the issuance and trading of the Company’s
securities, such as transfer agent fees and fees payable to the OTCQB and FINRA.
Concentrations of Credit Risk
Financial instruments and related items,
which potentially subject the Company to concentrations of credit risk, consist primarily of cash and cash equivalents. The Company
places its cash and temporary cash investments with credit quality institutions. At times, such investments may exceed applicable
government mandated insurance limits. Cash and restricted cash was $0.02 million and $0.3 million at December 31, 2019 and 2018,
respectively. As of December 31, 2019 and 2018, there was no cash over the federally insured limit.
Intangible Assets
Intangible assets consist of licensed technology,
patents, and patent applications (see Note 5). The assets associated with licensed technology are recorded at cost and are being
amortized on the straight line basis over their estimated useful lives of twelve to seventeen years.
Office and Lab Equipment
Equipment is stated at cost less accumulated
depreciation. Depreciation is calculated on the straight line basis over the estimated useful lives of the assets of three to seven
years. Expenditures for repair and maintenance which do not materially extend the useful lives of property and equipment are charged
to expense. When property or equipment is sold or otherwise disposed of, the cost and related accumulated depreciation are removed
from the respective accounts with the resulting gain or loss reflected in operations. Management periodically reviews the carrying
value of its equipment for impairment.
Depreciation expense was approximately $2,000 and $2,000 for
the years ended December 31, 2019 and 2018, respectively.
Loss per Share
Basic loss per share is calculated by dividing
net loss and net loss attributable to common shareholders by the weighted average number of common shares outstanding for the period.
Basic and diluted loss per share are the same, in that any potential common stock equivalents would have the effect of being anti-dilutive
in the computation of net loss per share.
The following potentially dilutive securities
have been excluded from the computations of weighted average shares outstanding as of December 31, 2019 and 2018, as they would
be anti-dilutive:
|
|
Year Ended December 31,
|
|
|
2019
|
|
2018
|
Shares underlying options outstanding
|
|
|
7,686
|
|
|
|
12,941
|
|
Shares underlying warrants outstanding
|
|
|
96,330
|
|
|
|
100,517
|
|
Shares underlying convertible notes outstanding
|
|
|
641,119,669
|
|
|
|
33,133,513
|
|
Shares underlying convertible preferred stock outstanding
|
|
|
7,911,825
|
|
|
|
1,055,825
|
|
|
|
|
649,135,510
|
|
|
|
34,302,796
|
|
Derivative Liability
The Company has financial instruments that
are considered derivatives or contain embedded features subject to derivative accounting. Embedded derivatives are valued separately
from the host instrument and are recognized as derivative liabilities in the Company’s balance sheet. The Company measures
these instruments at their estimated fair value and recognizes changes in their estimated fair value in results of operations during
the period of change. The Company values its derivative liabilities using the Black-Scholes option valuation model. The resulting
liability is valued at each reporting date and the change in the liability is reflected as change in derivative liability in the
statement of operations.
Fair Value of Financial Instruments
Our short-term financial instruments, including
cash, accounts payable and other liabilities, consist primarily of instruments with maturities of three months or less when acquired.
We believe that the fair values of our current assets and current liabilities approximate their reported carrying amounts.
The derivative liability consists of our
convertible notes with a variable conversion feature. The Company uses the Black-Scholes option-pricing model to value its derivative
liability which incorporate the Company’s stock price, volatility, U.S. risk-free interest rate, dividend rate, and estimated
life.
Fair Value Measurements
The U.S. GAAP Valuation Hierarchy establishes
a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs
into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset
or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.
Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. A financial
asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant
to the fair value measurement.
The Company has recorded a derivative liability
for its convertible notes with a variable conversion feature as of December 31, 2019. The tables below summarize the fair values
of our financial liabilities as of December 31, 2019 (in thousands):
|
|
Fair Value at
December 31,
|
|
Fair Value Measurement Using
|
|
|
2019
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability
|
|
$
|
1,785
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,785
|
|
The reconciliation of the derivative liability
measured at fair value on a recurring basis using unobservable inputs (Level 3) is as follows (in thousands):
|
|
Year ended December 31,
|
|
|
2019
|
|
2018
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
2,134
|
|
|
$
|
2,934
|
|
Additions to derivative instruments
|
|
|
243
|
|
|
|
604
|
|
Reclassification on conversion
|
|
|
(265
|
)
|
|
|
(352
|
)
|
Loss (gain) on change in fair value of derivative liability
|
|
|
(327
|
)
|
|
|
(1,052
|
)
|
Balance at end of year
|
|
$
|
1,785
|
|
|
$
|
2,134
|
|
Income Taxes
Income taxes are accounted for under the
asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases
and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment
date. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not
be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the
reversal of deferred tax liabilities during the period in which the related temporary difference becomes deductible.
Stock-Based Compensation
We account for our stock-based compensation
under ASC 718 “Compensation – Stock Compensation” using the fair value based method. Under this method, compensation
cost is measured at the grant date based on the value of the award and is recognized over the shorter of the service period or
the vesting period of the stock-based compensation. This guidance establishes standards for the accounting for transactions in
which an entity exchanges it equity instruments for goods or services. It also addresses transactions in which an entity incurs
liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that
may be settled by the issuance of those equity instruments. The Company estimates the fair value of each stock option at the grant
date by using the Black-Scholes option pricing model. Determining the fair value of stock-based compensation at the grant date
under this model requires judgment, including estimating volatility, employee stock option exercise behaviors and forfeiture rates.
The assumptions used in calculating the fair value of stock-based compensation represent the Company’s best estimates, but these
estimates involve inherent uncertainties and the application of management judgment.
Through December 31, 2018 we used the fair
value method for equity instruments granted to non-employees and used the Black-Scholes model for measuring the fair value of options.
The stock based fair value compensation is determined as of the date of the grant or the date at which the performance of the services
is completed (measurement date) and is recognized over the vesting periods.
On January 1, 2019, the Company adopted
ASU 2018-07, which substantially aligns stock-based compensation for employees and non-employees and accounts for non-employee
share-based awards in accordance with the measurement and recognition criteria of ASC 718. The Company used the modified prospective
method of adoption. There was no cumulative effect of the adoption of ASC 718.
Recent Accounting Pronouncements
With the exception of those discussed below,
there have not been any recent changes in accounting pronouncements and Accounting Standards Update (ASU) issued by the Financial
Accounting Standards Board (FASB) during the year ended December 31, 2019 that are of significance or potential significance to
the Company.
In February 2016, the FASB issued Accounting
Standards Update No. 2016-02, Leases. The new standard establishes a right-of-use (ROU) model that requires a lessee to record
a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified
as either finance or operating, with classification affecting the pattern of expense recognition in the income statement.
The new standard is effective for fiscal
years beginning after December 15, 2018, including interim periods within those fiscal years. 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. The adoption of this standard
did not have any impact on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU No.
2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU No. 2017-04”).
ASU No. 2017-04 simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. A public
business entity that is a SEC filer should adopt the amendments of ASU No. 2017-04 for its annual and interim goodwill impairment
tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment
tests performed on testing dates after January 1, 2017. The Company does not expect any impact from the adoption of this standard
on its consolidated financial statements.
In December 2019, the FASB issued ASU
2019-12, “Simplifying the Accounting for Income Taxes.” This guidance, among other provisions, eliminates certain
exceptions to existing guidance related to the approach for intraperiod tax allocation, the methodology for calculating income
taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. This guidance also requires
an entity to reflect the effect of an enacted change in tax laws or rates in its effective income tax rate in the first interim
period that includes the enactment date of the new legislation, aligning the timing of recognition of the effects from enacted
tax law changes on the effective income tax rate with the effects on deferred income tax assets and liabilities. Under existing
guidance, an entity recognizes the effects of the enacted tax law change on the effective income tax rate in the period that includes
the effective date of the tax law. ASU 2019-12 is effective for interim and annual periods beginning after December 15, 2020,
with early adoption permitted. We are currently evaluating the impact of this guidance.
NOTE 4 – SUPPLEMENTAL CASH FLOW INFORMATION
The following table contains additional
information for the periods reported (in thousands).
|
|
Year Ended December 31,
|
|
|
2019
|
|
2018
|
Non-cash financial activities:
|
|
|
|
|
Common stock issued on conversion of notes payable and derivative liability
|
|
$
|
473
|
|
|
$
|
503
|
|
Debentures converted to common stock
|
|
|
331
|
|
|
|
361
|
|
Derivative liability extinguished upon conversion of notes payable
|
|
|
265
|
|
|
|
352
|
|
Derivative liability issued
|
|
|
243
|
|
|
|
604
|
|
Accounts payable paid through issuance of debentures
|
|
|
—
|
|
|
|
15
|
|
There was no cash paid for interest and income taxes for the
years ended December 31, 2019 and 2018.
NOTE 5 – INTELLECTUAL PROPERTY
We solely own or have exclusive licenses
to all of our patents and patent applications. Between 2008 and 2011, we entered into license and assignment agreements with Johns
Hopkins University (JHU), the University of Copenhagen (UC) and certain co-inventors (Assignee Co-Founders), in which we paid $212,000
in cash and common stock. As a result of these payments and pursuant to the agreements, we acquired worldwide, exclusive, fully
paid up rights in know-how, pre-clinical data, development data and certain patent portfolios that relate to, and form the basis
of, our technology. Under these agreements, we are not required to make any other future payments, including fees or other reimbursements,
milestones, or royalties, to JHU, UC, or the Assignee Co-Founders.
Amortization expense recorded during the years
ended December 31, 2019 and 2018 was approximately $33,000 and $17,000 for the years ended December 31, 2019 and 2018, respectively.
Intangibles have been fully amortized at December 31, 2019.
NOTE 6 – ACCRUED EXPENSES
Accrued expenses consist of the following
(in thousands):
|
|
December 31,
|
|
|
2019
|
|
2018
|
|
|
|
|
|
Accrued compensation and benefits
|
|
$
|
1,326
|
|
|
$
|
1,326
|
|
Accrued research and development
|
|
|
233
|
|
|
|
188
|
|
Accrued other
|
|
|
307
|
|
|
|
300
|
|
Total accrued expenses
|
|
$
|
1,866
|
|
|
$
|
1,814
|
|
NOTE 7 – DERIVATIVE LIABILITY
We account for equity-linked financial
instruments, such as our convertible preferred stock, convertible debentures and our common stock warrants as either equity instruments
or derivative liabilities depending on the specific terms of the respective agreement. Equity-linked financial instruments are
accounted for as derivative liabilities, in accordance with ASC Topic 815 – Derivatives and Hedging, if the instrument allows
for cash settlement or issuance of a variable number of shares. We classify derivative liabilities on the balance sheet at fair
value, and changes in fair value during the periods presented in the statement of operations, which is revalued at each balance
sheet date subsequent to the initial issuance of the stock warrant.
We have issued convertible debentures which
contain a variable conversion feature, anti-dilution protection and other conversion price adjustment provisions. As a result,
the Company assessed its outstanding equity-linked financial instruments and concluded that the convertible notes are subject to
derivative accounting. The fair value of the conversion feature is classified as a liability in the financial statements, with
the change in fair value during the periods presented recorded in the statement of operations.
During the years ended December 31, 2019
and 2018, we recorded gains of approximately $0.3 million and $1.1 million, respectively, related to the change in fair value of
the derivative liabilities during the periods. For purpose of determining the fair market value of the derivative liability, the
Company used Black Scholes option valuation model. The significant assumptions used in the Black Scholes valuations of the derivatives
at December 31, 2019 are as follows:
|
|
2019
|
|
Volatility
|
|
|
238% - 264
|
%
|
Expected term (years)
|
|
|
3 - 11 months
|
|
Risk-free interest rate
|
|
|
1.55% – 1.6
|
%
|
Dividend yield
|
|
|
None
|
|
As of December 31, 2019 and 2018, the derivative
liability recognized in the financial statements was approximately $1.8 million and $2.1 million, respectively.
NOTE 8 – COMMITMENTS AND CONTINGENCIES
Operating Leases
Inspyr currently does not have any ongoing
leases for office space. It has availability to office space on an as needed basis. Its employees work on a remote basis.
There was no rent expense for the years
ended December 31, 2019 and 2018, respectively.
Legal Matters
The Company is subject at times to legal
proceedings and claims, which arise in the ordinary course of its business. Although occasional adverse decisions or settlements
may occur, the Company believes that the final disposition of such matters should not have a material adverse effect on its financial
position, results of operations or liquidity.
NOTE 9 – CAPITAL STOCK AND STOCKHOLDERS’
EQUITY
Preferred Stock
As of December 31, 2019, there were outstanding
133.8 shares of Series A Preferred Stock, 71 shares of Series B Preferred Stock, 290.4 shares of Series C Preferred Stock and 5,000
shares of Series D Preferred Stock.
During December 2018, we designated 5,000
shares of preferred stock as Series D 0% Convertible Preferred Stock (the “Series D Preferred Stock”). Each share of
Preferred Stock has a par value of $0.0001 per share and a stated value equal to $1.00 (the “Stated Value”).
With respect to a vote of stockholders
to approve a reverse split of the Common Stock to occur no later than December 31, 2019, only, each share of Series D Preferred
Stock held by a Holder, as such, was entitled to 30,001 votes. On any matter presented to the stockholders of the Corporation for
their action or consideration at any meeting of stockholders of the Corporation (or by written consent of stockholders in lieu
of meeting), each holder of outstanding shares of Series D Preferred Stock shall be entitled to cast the number of votes equal
to the number of whole shares of Common Stock into which the shares of Series D Preferred Stock held by such holder are convertible
as of the record date for determining stockholders entitled to vote on such matter. Except as provided by law or by the other provisions
of the certificate of incorporation, holders of the Series D Preferred Stock shall vote together with the holders of Common Stock
as a single class.
Each share of Series D Preferred Stock
shall be convertible, at any time and from time to time from and after the Original Issue Date at the option of the Holder thereof,
into that number of shares of Common Stock (subject to the limitations set forth in Section 6(d)) determined by dividing the Stated
Value of such share of Series D Preferred Stock by the Conversion Price. As of December 31, 2019, the Conversion Price is $0.125
per share of Series D Preferred Stock.
In December 2015, we issued 1,853 shares
of our Series A 0% Convertible Preferred Stock (the “Series A Preferred Stock”), with a stated value of $1,000 per
share and the common shares are issuable pursuant to conversion of the Series A Preferred Stock at a conversion price of $112.50
per share as of December 31, 2019, subject to a 9.99% beneficial ownership limitation and subject to adjustment pursuant to stock
splits and dividends. The Series A Preferred Stock was subject to adjustment pursuant to anti-dilution protection for subsequent
equity sales for a period of 18 months from the effective date of the registration statement registering the shares underlying
the Series A Preferred Stock, or until July 29, 2017.
In December 2016, we issued 1,000 shares
of our Series B 0% Convertible Preferred Stock (the “Series B Preferred Stock”), with a stated value of $1,000 per
share and the common shares are issuable pursuant to conversion of the Series B Preferred Stock at a conversion price of $18.75
per share as of December 31, 2019, subject to beneficial ownership limitations and subject to adjustment pursuant to stock splits
and dividends, and subject to adjustment pursuant to anti-dilution protection for subsequent equity sales and other conversion
price adjustments.
In March and April 2017, issued 290.43148
shares of Series C 0% Convertible Preferred Stock (the “Series C Preferred Stock”). The Series C Preferred Stock has
a stated value of $1,000 and the common shares issuable pursuant to conversion of the Series C Preferred Stock at a conversion
price of $18.75 per share as of December 31, 2019, subject to certain beneficial ownership limitations and subject to adjustment
pursuant to stock splits and dividends, and pursuant to anti-dilution protection for subsequent equity sales for a period of twelve
(12) months from the issuance of the Series C Preferred Stock.
During January 2019, we issued the 5,000
shares of Series D Convertible Preferred Stock for proceeds of $5,000.
As a result past equity financings and
conversions of debentures, the conversion prices of (i) our Series A Preferred Stock has been reduced to $13.25 per share at December
31, 2019, (ii) our Series B Preferred Stock has been reduced to $0.01 per share at December 31, 2019, (iii) 200 shares of our Series
C preferred stock has been reduced to $0.50 per share at December 31, 2019, (iv) 90.43418 shares of our Series C Preferred Stock
has been reduced to $0.25 per share at December 31, 2019, and (v) our Series D Preferred stock has been reduced to $0.125 per share
at December 31, 2019.
Equity
Financings
March
2017 Offering
In
March, 2017, we sold $200,000 of the Company’s securities consisting of 200 shares of Series C Preferred Stock and an aggregate
of 32,001 common stock purchase warrants as described below. The Series C Preferred Stock has a stated value of $1,000 and as
of December 31, 2019, is convertible into 400,000 shares of the Company’s common stock, subject to certain beneficial ownership
limitations, at a conversion price equal to $0.50 per share for 200 shares of Series C Preferred stock and $0.25 per share for
90.43418 shares of Series C Preferred stock, subject to adjustment. The Conversion Price is subject to adjustment pursuant to
stock splits and dividends. The Series C Preferred Stock has anti-dilution protection until the twelve (12) month anniversary
of the issuance of the Series C Preferred Stock.
The
Investors also received an aggregate of approximately: (i) 10,667 Series M common stock purchase warrants (“Series M Warrants”),
(ii) 10,667 Series N common stock purchase warrants (“Series N Warrants”) and (iii) 10,667 Series O common stock purchase
warrants (“Series O Warrants”) (collectively, the “Warrants”). The Series M Warrants have an exercise
price of $0.50 per share (as of December 31, 2019), subject to adjustment, and a term of five (5) years from the date of issuance,
the Series N Warrants had an exercise price of $18.75 per share upon issuance, subject to adjustment, and a term of six (6) months
from the date of issuance and the Series O warrants had an exercise price of $18.75 upon issuance, subject to adjustment, and
a term of twelve (12) months from the date of issuance. The Series N and Series O Warrants have both expired. The Warrants are
immediately exercisable and separately transferable from the Series C Preferred Stock. In the event that the shares underlying
the Warrants are not subject to a registration statement at the time of exercise, the Warrants may be exercised on a cashless
basis after 6 months from the issuance date. The Warrants also contain provisions providing for an adjustment in the underlying
number of shares and exercise price in the event of stock splits or dividends and fundamental transactions. Additionally, the
Warrants contain anti-dilution protection until the twelve (12) month anniversary of the issuance date.
April
2017 Offering
In
April 2017, we sold $90,431 of the Company’s securities consisting of 90.43148 shares of Series Preferred Stock and an aggregate
of 14,469 common stock purchase warrants as described below. The Series C Preferred Stock has a stated value of $1,000 and as
of December 31, 2019, is convertible into approximately 361,737 shares of the Company’s common stock, subject to certain
beneficial ownership limitations, at a conversion price equal to $0.25, subject to adjustment. The Conversion Price is subject
to adjustment pursuant to stock splits and dividends. The Series C Preferred Stock has anti-dilution protection until the twelve
(12) month anniversary of the issuance of the Series C Preferred Stock.
The
Investors also received an aggregate of approximately: (i) 4,823 Series M Warrants, (ii) 4,823 Series N Warrants and (iii) 4,823
Series O Warrants. The Series M Warrants have an exercise price of $0.25 per share (as of December 31, 2019), subject to adjustment,
and a term of five (5) years from the date of issuance, the Series N Warrants had an exercise price of $18.75 per share upon issuance,
subject to adjustment, and a term of six (6) months from the date of issuance and the Series O warrants had an exercise price
of $18.75, upon issuance subject to adjustment, and a term of twelve (12) months from the date of issuance. The Series N and Series
O Warrants have both expired. The Warrants are immediately exercisable and separately transferable from the Series C Preferred
Stock. In the event that the shares underlying the Warrants are not subject to a registration statement at the time of exercise,
the Warrants may be exercised on a cashless basis after 6 months from the issuance date. The Warrants also contain provisions
providing for an adjustment in the underlying number of shares and exercise price in the event of stock splits or dividends and
fundamental transactions. Additionally, the Warrants contain anti-dilution protection until the twelve (12) month anniversary
of the issuance date.
Conversion
and exercise price resets
As
a result past equity financings and conversions of debentures, the conversion prices of (i) our Series A Preferred Stock has been
reduced to $13.25 per share at December 31, 2019, (ii) 200 shares of our Series C preferred stock has been reduced to $0.50 per
share at December 31, 2019, (iii) 90.43418 shares of our Series C Preferred Stock has been reduced to $0.25 per share at December
31, 2019, (iv) our Series D Preferred stock has been reduced to $0.125 per share at December 31, 2019, and (v) our Series B Preferred
Stock has been reduced to $0.01 per share at December 31, 2019. The exercise prices of the outstanding warrants issued in conjunction
with (i) the Series B Preferred Stock have been reduced to $0.01 per share, (ii) 200 shares of Series C Preferred Stock have been
reduced to $0.50 per share, and (iii) 91.43418 shares of Series C preferred Stock have been reduced to $0.25 per share, respectively,
as of December 31, 2019.
As
a result of the reductions of the conversion prices of our preferred stock and warrants, we have recorded deemed dividends of
approximately $54,000 and $196,000 during the years ended December 31, 2019 and 2018, respectively.
Common
Stock
On
September 17, 2019, the Company’s Board of Directors approved a one-for-twenty five (1-for-25) reverse stock split of the
Company’s common stock (“Reverse Stock Split”). In furtherance of the Reverse Stock Split, the Company has filed
an amended and restated certificate of incorporation with the Secretary of State of Delaware to effect the Reverse Stock Split
effective as of 5:00 p.m. Eastern Time on September 30, 2019 (“Effective Time”). Accordingly, at the Effective Time,
each of the Company’s common stock shareholders will receive one new share of common stock for every twenty five shares
such shareholder held immediately prior to the Effective Time. The Reverse Stock Split will also affect the Company’s outstanding
stock options, warrants and other exercisable or convertible instruments and will result in the shares underlying such instruments
being reduced and the exercise price being increased proportionately to the Reverse Stock Split ratio. All share and per
share data has been retroactively restated in the accompanying consolidated financial statements and footnotes for all periods
presented to reflect the effects of the September 30, 2019 amendment.
During
the year ended December 31, 2019, we issued a total of 15,265,468 shares of common stock, valued at $471,583, upon the conversion
of $331,415 principal amount of our convertible debentures
During
the year ended December 31, 2018, we issued a total of 2,947,000 shares of common stock, valued at $503,308, upon the conversion
of $361,255 principal amount of our convertible debentures.
NOTE
10 – STOCK OPTIONS
Deferred
Compensation Plan
In
July of 2011, we adopted Executive Deferred Compensation Plan (the Deferred Plan). The Deferred Plan is intended to comply with
the requirements of Section 409A of the Internal Revenue Code of 1986, as amended (the Code). The Deferred Plan is intended
to be an unfunded “top hat” plan which is maintained primarily to provide deferred compensation benefits for a select
group of our “management or highly compensated employees” within the meaning of Sections 201, 301, and 401 of the
Employee Retirement Income Security Act of 1974, as amended (ERISA), and to therefore be exempt from the provisions of Parts 2,
3, and 4 of Title I of ERISA. The Deferred Plan is intended to help build a supplemental source of savings and retirement income
through pre-tax deferrals of eligible compensation, which may include cash, option and stock bonus awards, discretionary cash,
option and stock awards and/or any other payments which may be designated by the Deferred Plan administrator, as eligible, for
deferral under the Deferred Plan from time to time. As administered, the Deferred Plan is used to defer compensation of stock
awards granted under our other equity compensation plans and does not by its terms approve any grants or awards.
Inspyr’s
Compensation Plans
The
Company’s 2007 Equity Compensation Plan (2007 Plan), 2009 Executive Compensation Plan (2009 Plan), 2017 Equity Compensation
Plan (2017 Plan), and the Inducement Award Stock Option Plan (Inducement Plan) (together, the Plans) provide for the awarding
of stock grants, nonqualified and incentive stock options, restricted stock units, performance units or other stock-based awards
to officers, directors, employees and consultants of the Company. The purpose of the Plans is to advance the interests of Inspyr
and our stockholders by attracting, retaining and rewarding persons performing services for us and to motivate such persons to
contribute to our growth and profitability. Our Plans are administered by a committee of non-employee directors (the Committee).
The Committee determines: who shall be granted awards; the vesting periods; the exercise price; and any other terms deemed appropriate
for any award.
Our
2007 Plan is administered by our board or any of its committees. The purposes of the 2007 Plan are to attract and retain the best
available personnel for positions of substantial responsibility, to provide additional incentive to Employees, Directors and Consultants,
and to promote the success of our business. The issuance of awards under our 2007 Plan is at the discretion of the administrator,
which has the authority to determine the persons to whom any awards shall be granted and the terms, conditions and restrictions
applicable to any award. Under our 2007 Plan, we may grant stock options, restricted stock, stock appreciation rights, restricted
stock units, performance units, performance shares and other stock based awards. Our 2007 Plan authorizes the issuance of up to
2,000 shares of common stock for the foregoing awards per fiscal year with an aggregate of 8,000 shares of common stock available
for issuance under the 2007 Plan. As of December 31, 2019, we have granted awards under the 2007 Plan equal to approximately 7,228
shares of our common stock, and 5,595 shares have been cancelled or forfeited. Accordingly, there are 6,367 shares of common stock
available for future awards under the 2007 Plan. In the event of a change in control, awards under the 2007 Plan will become fully
vested unless such awards are assumed or substituted by the successor corporation.
Our
2009 Plan, as amended is administered by our Board or any of its committees. The purpose of our 2009 Plan is to advance the interests
of the Company and our stockholders by attracting, retaining and rewarding persons performing services for us and to motivate
such persons to contribute to our growth and profitability. The issuance of awards under our 2009 Plan is at the discretion of
the administrator, which has the authority to determine the persons to whom any awards shall be granted and the terms, conditions
and restrictions applicable to any award. Under our 2009 Plan, we may grant stock options, restricted stock, stock appreciation
rights, restricted stock units, performance units, performance shares and other stock-based awards. As of December 31, 2019, our
2009 Plan authorizes the issuance of up to 8,000 shares of our common stock for the foregoing awards, and we have granted awards
under the plan equal to approximately 6,595 common shares, and 4,631 shares have been cancelled or forfeited. Accordingly, there
are 6,036 shares of common stock available for future awards under the 2009 Plan.
Our
Inducement Plan is administered by our board or our compensation committee. The Plan is intended to be used in connection with
the recruiting and inducement of senior management and employees. The issuance of wards under the Inducement Plan is at the discretion
of the administrator which has the authority to determine the persons to whom any awards shall be granted and the terms, conditions
and restrictions applicable to any award. The Company did not seek approval of the Plan by our stockholders. Pursuant to the Inducement
Plan, the Company may grant stock options for up to a total of 12,000 shares of common stock to new employees of the Company.
As of December 31, 2019, 8,454 grants have been made pursuant to the Plan.
Our
2017 Plan is administered by our Board or any of its committees. The purpose of our 2017 Plan is to attract and retain the best
available personnel for positions of substantial responsibility, to provide additional incentive to employees, directors and consultants,
and to promote the success of the Company’s business. The issuance of awards under our 2017 Plan is at the discretion of
the administrator, which has the authority to determine the persons to whom any awards shall be granted and the terms, conditions
and restrictions applicable to any award. Under our 2017 Plan, we may grant stock options, restricted stock, stock appreciation
rights, restricted stock units, performance units, performance shares and other stock-based awards. As of December 31, 2019, our
2017 Plan authorizes the issuance of up to 80,000 shares of our common stock for the foregoing awards, and we have not granted
any awards under the plan. Accordingly, there are 80,000 shares of common stock available for future awards under the 2017 Plan.
The
Company has recorded aggregate stock-based compensation expense related to the issuance of stock option awards in the following
line items in the accompanying consolidated statement of losses (in thousands):
|
|
Years Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Research and development
|
|
$
|
—
|
|
|
$
|
62
|
|
General and administrative
|
|
|
—
|
|
|
|
28
|
|
Total stock-based compensation expense
|
|
$
|
—
|
|
|
$
|
90
|
|
During
the year ended December 31, 2018, we accelerated the vesting of all unvested employee options. As of December 31, 2019, there
was no unrecognized compensation cost related to non-vested stock options.
The
following table summarizes stock option activity for the years ended December 31, 2019 and 2018:
|
|
Number of
shares
|
|
|
Weighted-
average
exercise
price
|
|
|
Weighted-
average
remaining
contractual term
(in years)
|
|
|
Aggregate
intrinsic
value
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2017
|
|
|
14,252
|
|
|
$
|
186.25
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(1,311
|
)
|
|
$
|
474.75
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
12,941
|
|
|
$
|
157.00
|
|
|
|
3.8
|
|
|
$
|
—
|
|
Granted
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(5,255
|
)
|
|
$
|
226.90
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2019
|
|
|
7,686
|
|
|
$
|
109.37
|
|
|
|
2.9
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2019
|
|
|
7,686
|
|
|
$
|
109.37
|
|
|
|
2.9
|
|
|
$
|
—
|
|
No
options were issued or exercised during the years ended December 31, 2019 and 2018.
NOTE
11 – WARRANTS
Transactions
involving our warrants are summarized as follows:
|
|
Number of
shares
|
|
|
Weighted-
average
exercise
price
|
|
|
Weighted-
average
remaining
contractual term
(in years)
|
|
|
Aggregate
intrinsic
value
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2017
|
|
|
121,829
|
|
|
$
|
134.75
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(21,312
|
)
|
|
$
|
396.75
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
100,517
|
|
|
$
|
79.00
|
|
|
|
2.7
|
|
|
$
|
-
|
|
Granted
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(4,187
|
)
|
|
$
|
904.91
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2019
|
|
|
96,330
|
|
|
$
|
42.95
|
|
|
|
1.8
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2019
|
|
|
96,330
|
|
|
$
|
42.95
|
|
|
|
1.8
|
|
|
$
|
-
|
|
No
warrants were issued or exercised during the years ended December 31, 2019 and 2018.
As
a result of recent equity financings and conversions of debentures, the exercise prices of the warrants issued in conjunction
with our Series B preferred stock have been reduced to $0.01 and the warrants issued in conjunction with our Series C preferred
stock have also been reduced to $0.25 - $0.50 at December 31, 2019.
The
following table summarizes outstanding common stock purchase warrants as of December 31, 2019:
|
|
Number of
shares
|
|
|
Weighted-
average
exercise
price
|
|
|
Expiration
|
Issued to consultants
|
|
|
3,758
|
|
|
$
|
69.57
|
|
|
January 2020 through August 2023
|
Issued pursuant to 2015 financings
|
|
|
18,415
|
|
|
$
|
210.00
|
|
|
July 2020 through December 2020
|
Issued pursuant to 2016 financings
|
|
|
58,667
|
|
|
$
|
0.01
|
|
|
December 2021
|
Issued pursuant to 2017 financings
|
|
|
15,490
|
|
|
$
|
0.42
|
|
|
March 2022 through April 2022
|
|
|
|
96,330
|
|
|
|
|
|
|
|
NOTE
12 – CONVERTIBLE DEBENTURES AND NOTES
Effective
September 30 2019, Sabby Healthcare Master Fund, Ltd and Sabby Volatility Warrant Master Fund, Ltd. waived certain events of default
under debentures and notes issued in our December 2018 note offering, July 2018 debenture offering and September 2017 debenture
offering (collectively, the “Debenture Offerings”) and extended the maturity date of such debentures until March 31,
2020 in exchange for the issuance of $96,000 in new debentures with substantially the same terms as those issued in our Debenture
Offerings. The debentures were issued in October 2019. The debentures mature on October 1, 2020. These maturity dates of these
instruments were extended until July 16, 2020 (see Note 14 – Subsequent Events).
Sabby
Volatility Warrant Master Fund, Ltd. has paid certain of our accounts payable in the amount of $26,235. We issued $26,235 in new
debentures with substantially the same terms as those issued in our Debenture Offerings. The debentures were issued in November
2019. The debentures mature November 20, 2020.
On
July 16, 2019, we entered into securities purchase agreements (“Securities Purchase Agreement”) with certain institutional
investors (the “Investors”). Pursuant to the Securities Purchase Agreement, we issued an aggregate of $154,000 of
senior convertible debentures (“Debentures”) in exchange for the extension of the maturity date of our December 2018
convertible notes and certain of our July 2018 and September 2017 convertible debentures, and the waiver of certain default provisions
of our July 2018 and September 2017 convertible debentures. We have charged $154,000 to finance cost at the date of issuance.
The
Debentures (i) are non-interest bearing, (ii) have a maturity date one (1) year from the date of issuance and (iii) are convertible
into shares of our common stock at the election of the Investor at any time, subject to a beneficial ownership limitation of 4.99%
which may be increased to 9.99% by the Investor upon 61 days’ notice. The Debentures will have a conversion price equal
to the lesser of (i) $8.25 and (ii) 85% of the lesser of (a) the volume weighted average price on the trading day immediately
preceding a conversion date and (b) the volume weighted average price on a conversion date. The Debentures also contain provisions
providing for an adjustment in the event of stock splits or dividends, and fundamental transactions. The Investors will also have
the right to participate in subsequent rights offerings and pro rata distributions. Additionally, the Debentures contain anti-dilution
protection in the event of subsequent equity sales at a price that is lower than the then applicable conversion price until such
time that the Debentures are no longer outstanding. Additionally, the Company has the option to redeem some or all of the Debentures
for cash upon notice of twenty (20) trading days provided certain conditions are met by the Company as more fully described in
the Debentures.
Furthermore,
without the approval of the Investors holding at least 67% of the then outstanding principal amount of the Debentures, the Company
may not (i) amend its charter documents in any manner that adversely affects the rights of any Investor, (ii) repay or repurchase
or acquire shares of its Common Stock, (iii) repay, repurchase, or acquire certain indebtedness, or (iv) pay cash dividends or
distributions on any equity securities of the Company. The Company is also required under the Securities Purchase Agreement to
hold a shareholder meeting by January 3, 2019 in order to increase the number of authorized shares of Common Stock of the Company
such that there are sufficient shares of Common Stock available for issuance underlying the Debentures upon their conversion in
full. The Company is also obligated under the Securities Purchase Agreement to pay Investors, as partial liquidated damages, a
fee of 2.0% of each Investor’s initial principal amount of such Investor’s Debenture in cash upon our failure to have
current public information available beginning six (6) months after the issuance date of the Debentures.
The
Investors were additionally given a right of participation in future offerings for a period of up to eighteen (18) months from
the date on which the shares underlying the Debentures are registered. The Securities Purchase Agreement also prohibits us from
issuing any common stock, subject to certain exemptions, for a period of 60 days following the closing of the Offering, without
the written approval of the Investors owning at least 50.1% of the securities issued in the Offering. Additionally, until the
twelve month anniversary of the registration of the shares underlying the Debentures, we are prohibited from entering into any
agreement to effect any issuance of common stock in a variable rate transaction.
On
December 13, 2018 we issued an aggregate of $25,000 in convertible promissory notes (“Notes”) for cash proceeds of
$25,000. The Notes will mature on the earlier of (i) June 30, 2019 or (ii) such time as we raise capital in exchange for the sale
of securities (“Maturity Date”) and bear interest at 10% per year, payable on the Maturity Date. Pursuant to the terms
of the Notes, the Notes may be converted into shares of common stock upon an Event of Default (as such term is defined in the
Notes) or upon the Maturity Date at the election of the holder at a price per share equal to 75% of the lowest trade price of
our common stock on the trading day immediately prior to the date such exchange is exercised by the holder. The maturity date
of the debentures has been extended to July 16, 2020 (see Note 14).
On
July 3, 2018, we entered into securities purchase agreements (“Securities Purchase Agreement”) with certain institutional
investors (the “Investors”). Pursuant to the Securities Purchase Agreement, we sold an aggregate of $515,000 of senior
convertible debentures (“Debentures”) consisting of $500,000 in cash and the cancellation of $15,000 of obligations
of the Company (the “Offering”). Pursuant to the terms of the Securities Purchase Agreement, we will issue $515,000
in principal amount of Debentures.
The
Debentures (i) are non-interest bearing, (ii) have a maturity date one (1) year from the date of issuance and (iii) are convertible
into shares of our common stock at the election of the Investor at any time, subject to a beneficial ownership limitation of 4.99%
which may be increased to 9.99% by the Investor upon 61 days’ notice. The Debentures will have a conversion price equal
to the lesser of (i) $8.25 and (ii) 85% of the lesser of (a) the volume weighted average price on the trading day immediately
preceding a conversion date and (b) the volume weighted average price on a conversion date. The Debentures also contain provisions
providing for an adjustment in the event of stock splits or dividends, and fundamental transactions. The Investors will also have
the right to participate in subsequent rights offerings and pro rata distributions. Additionally, the Debentures contain anti-dilution
protection in the event of subsequent equity sales at a price that is lower than the then applicable conversion price until such
time that the Debentures are no longer outstanding. Additionally, the Company has the option to redeem some or all of the Debentures
for cash upon notice of twenty (20) trading days provided certain conditions are met by the Company as more fully described in
the Debentures. The maturity date of the debentures has been extended to July 16, 2020 (see Note 14).
Furthermore,
without the approval of the Investors holding at least 67% of the then outstanding principal amount of the Debentures, the Company
may not (i) amend its charter documents in any manner that adversely affects the rights of any Investor, (ii) repay or repurchase
or acquire shares of its Common Stock, (iii) repay, repurchase, or acquire certain indebtedness, or (iv) pay cash dividends or
distributions on any equity securities of the Company. The Company is also required under the Securities Purchase Agreement to
hold a shareholder meeting by January 3, 2019 in order to increase the number of authorized shares of Common Stock of the Company
such that there are sufficient shares of Common Stock available for issuance underlying the Debentures upon their conversion in
full. The Company is also obligated under the Securities Purchase Agreement to pay Investors, as partial liquidated damages, a
fee of 2.0% of each Investor’s initial principal amount of such Investor’s Debenture in cash upon our failure to have
current public information available beginning six (6) months after the issuance date of the Debentures.
The
Investors were additionally given a right of participation in future offerings for a period of up to eighteen (18) months from
the date on which the shares underlying the Debentures are registered. The Securities Purchase Agreement also prohibits us from
issuing any common stock, subject to certain exemptions, for a period of 60 days following the closing of the Offering, without
the written approval of the Investors owning at least 50.1% of the securities issued in the Offering. Additionally, until the
twelve month anniversary of the registration of the shares underlying the Debentures, we are prohibited from entering into any
agreement to effect any issuance of common stock in a variable rate transaction.
On
September 12, 2017 we entered into an exchange agreement (“Exchange Agreement”) with certain holders (the “Investors”)
of our Series A 0% Convertible Preferred Stock (“Series A Shares”) and Series B 0% Convertible Preferred Stock (“Series
B Shares”). Pursuant to the terms of the Exchange Agreement, we issued to the investors approximately $2.5 million in principal
amount of senior convertible debentures (“Debentures”) in exchange for 1,614.8125 Series A Shares with a stated value
of approximately $1.6 million and 890 Series B Shares with a stated value of approximately $0.9 million.
On
September 12, 2017, we sold an aggregate of $320,000 of our Debentures. The sale consisted of $250,000 in cash and the cancellation
of $70,000 of obligations of the Company.
The
Debentures to be issued to the Investors (i) are non-interest bearing, (ii) have a maturity date of September 12, 2018 and (iii)
are convertible into shares of common stock (“Common Stock”) of the Company at the election of the Investor at any
time, subject to a beneficial ownership limitation of 4.99% which may be increased to 9.99% by the Investor upon 61 days’
notice. The Debentures will have a conversion price equal to the lesser of (i) $8.25 and (ii) 85% of the lesser of (a) the volume
weighted average price on the trading day immediately preceding a conversion date and (b) the volume weighted average price on
a conversion date. The maturity date of the debentures has been extended to July 16, 2020 (see Note 14).
The
Debentures also contain provisions providing for an adjustment in the event of stock splits or dividends, and fundamental transactions.
The Investors will also have the right to participate in subsequent rights offerings and pro rata distributions. Additionally,
the Debentures contain anti-dilution protection in the event of subsequent equity sales at a price that is lower than the then
applicable conversion price until such time that the Debentures are no longer outstanding. Additionally, the Company has the option
to redeem some or all of the Debentures for cash upon notice of twenty (20) trading days provided certain conditions are met by
the Company as more fully described in the Debentures.
Furthermore,
without the approval of the Investors holding at least 67% of the then outstanding principal amount of the Debentures, the Company
may not (i) amend its charter documents in any manner that adversely affects the rights of any Investor, (ii) repay or repurchase
or acquire shares of its Common Stock, (iii) repay, repurchase, or acquire certain indebtedness, or (iv) pay cash dividends or
distributions on any equity securities of the Company.
The
Company is also obligated pay Investors, as partial liquidated damages, a fee of 2.0% of each Investor’s initial principal
amount of such Investor’s Debenture in cash upon our failure to have current public information available. This requirement
has been waived by the Investors through July 16, 2020 (see Note 14).
In
connection with the Offering, the Investors also entered in a registration rights agreement (“Registration Rights Agreement”).
Pursuant to the Registration Rights Agreement, the Company agreed to file a registration statement with the Securities and Exchange
Commission (“the Commission”) within 45 days from the date of the Registration Rights Agreement to register the resale
of 100% of the shares of Common Stock underlying the Debentures and to maintain the effectiveness thereunder. The Company also
agreed to have the registration statement declared effective within 75 days from the date of the Registration Rights Agreement
and keep the registration statement continuously effective until the earlier of (i) the date after which all of the securities
to be registered thereunder have been sold, or (ii) the date on which all the securities to be registered thereunder may be sold
without volume or manner-of-sale restrictions and without current public information pursuant to Rule 144 under the Securities
Act of 1933, as amended. We are also obligated to pay the Investors, as partial liquidated damages, a fee of 1.5% of each Investor’s
subscription amount per month in cash upon the occurrence of certain events, including our failure to file and / or have the registration
statement declared effective within the time periods provided. This requirement has been waived by the Investors through July
16, 2020 (see Note 14).
The
Investors were additionally given a right of participation in future offerings for a period of up to eighteen months from the
date in which the shares underlying the Debentures are registered as contemplated in the Registration Rights Agreement. The Securities
Purchase Agreement also prohibits the Company from issuing any Common Stock, subject to certain exemptions, for a period of 60
days following the closing of the Offering, without the written approval of the Investors owning at least 50.1% of the securities
issued in the Offering. Additionally, until the twelve (12) month anniversary of such effectiveness of the registration statement
as contemplated in the Registration Rights Agreement, the Company is prohibited from entering into any agreement to effect any
issuance of Common Stock in a variable rate transaction.
NOTE
13 — INCOME TAXES
The Company had, subject to limitation, $41.2
million of net operating loss carryforwards at December 31, 2019, of which $39.9 million will expire at various dates through
2037. In addition, the Company has research and development tax credits of approximately $458,000 at December 31, 2019 available
to offset future taxable income, which will expire from 2028 through 2037. We have provided a 100% valuation allowance for the
deferred tax benefits resulting from the net operating loss carryover and our tax credits due to our lack of earnings history.
In addressing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion
or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary differences are deductible. The valuation allowance
increased by approximately $241,000 and $178,000 for the years ended December 31, 2019 and 2018, respectively. Significant components
of deferred tax assets and liabilities are as follows (in thousands):
|
|
2019
|
|
|
2018
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Net operating loss carryover
|
|
$
|
8,838
|
|
|
$
|
8,597
|
|
Stock-based compensation
|
|
|
1,920
|
|
|
|
1,920
|
|
Accrued compensation
|
|
|
334
|
|
|
|
334
|
|
Other
|
|
|
30
|
|
|
|
30
|
|
Tax credits
|
|
|
458
|
|
|
|
458
|
|
Total deferred tax assets
|
|
|
11,580
|
|
|
|
11,339
|
|
Less: valuation allowance
|
|
|
(11,580
|
)
|
|
|
(11,339
|
)
|
Net deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
The
actual tax benefit differs from the expected tax benefit for the years ended December 31, 2019 and 2018 (computed by applying
the U.S. Federal Corporate tax rate of 21% to income before taxes) are as follows:
|
|
2019
|
|
|
2018
|
|
Statutory federal income tax rate
|
|
|
(21.0
|
)%
|
|
|
(21.0
|
)%
|
State income taxes, net of federal benefits
|
|
|
(7.0
|
)%
|
|
|
(7.0
|
)%
|
Non-deductible items
|
|
|
2.2
|
%
|
|
|
(1,418.0
|
)%
|
Valuation allowance
|
|
|
25.8
|
%
|
|
|
1,446.0
|
%
|
Effective income tax rate
|
|
|
—
|
%
|
|
|
—
|
%
|
The
Company’s tax returns for the previous three years remain open for audit by the respective tax jurisdictions.
NOTE
14 – SUBSEQUENT EVENTS
On March 11, 2020, the World Health Organization
declared a pandemic related to the rapidly spreading coronavirus (COVID-19) outbreak, which has led to a global health emergency.
The extent of the public-health impact of the outbreak is currently unknown and rapidly evolving, and the related health crisis
could adversely affect the global economy, resulting in an economic downturn. Any disruption of the Company’s facilities
or those of our suppliers could likely adversely impact the Company’s operations. At this time, there is significant uncertainty
relating to the potential effect of the novel coronavirus on our business.
Between January 1, 2020 and March 31,
2020, the Company issued an aggregate of 131,351,247 shares of common stock upon the conversion of $451,662 principal amount of
debentures.
On
March 6, 2020, the Company sold an aggregate of $250,000 of senior convertible debentures (“Debentures”) for cash
to existing accredited institutional investors of the Company (the “Offering”). The Debentures issued (i) are non-interest
bearing, (ii) have a maturity date of July 16, 2020 and (iii) are convertible into shares of common stock (“Common Stock”)
of the Company at the election of the Investor at any time, subject to a beneficial ownership limitation of 4.99% which may be
increased to 9.99% by the holder upon 61 days’ notice. The Debentures will have a conversion price equal to the lesser of
(i) $0.33 and (ii) 85% of the lesser of (a) the volume weighted average price on the trading day immediately preceding a conversion
date and (b) the volume weighted average price on a conversion date.
The
Debentures also contain provisions providing for an adjustment in the event of stock splits or dividends, and fundamental transactions.
The Investors will also have the right to participate in subsequent rights offerings and pro rata distributions. Additionally,
the Debentures contain anti-dilution protection in the event of subsequent equity sales at a price that is lower than the then
applicable conversion price until such time that the Debentures are no longer outstanding. Additionally, the Company has the option
to redeem some or all of the Debentures for cash upon notice of twenty (20) trading days provided certain conditions are met by
the Company as more fully described in the Debentures.
Furthermore,
without the approval of the Debenture holders holding at least 67% of the then outstanding principal amount of the Debentures,
the Company may not (i) amend its charter documents in any manner that adversely affects the rights of any Investor, (ii) repay
or repurchase or acquire shares of its Common Stock, (iii) repay, repurchase, or acquire certain indebtedness, or (iv) pay cash
dividends or distributions on any equity securities of the Company.
Effective
March 6, 2020, Sabby Healthcare Master Fund, Ltd and Sabby Volatility Warrant Master Fund, Ltd. waived certain events of default
under debentures and notes issued in our December 2018 note offering, July 2018 debenture offering and September 2017 debenture
offering (collectively, the “Debenture Offerings”) and extended the maturity date of such debentures until July 16,
2020.
On May 2, 2020, we sold 5,000 shares of Series
E 0% Convertible Preferred Stock to an accredited investor at a price per share of $1.00 for aggregate gross proceeds of $5,000.
Each share of Series E Preferred Stock has stated value of $1.00. The Series E Preferred Stock is convertible, at any time after
the Original Issue Date at the option of the Holder into that number of shares of Common Stock (Subject to the limitations set
forth in Section 6(d) of the certificate of designation of the Series E Preferred Stock), determined by dividing the stated value
by the then in effect conversion price. As of the date of issuance, the conversion price is $0.01 per share.
With respect to a vote of stockholders to
approve a reverse split of the Common Stock to occur no later than December 31, 2022 only, each share of Series E Preferred Stock
held by a holder, as such, is entitled to 100,000 votes. On any matter presented to the stockholders of the Company for their
action or consideration at any meeting of stockholders of the Company (or by written consent of stockholders in lieu of meeting),
each holder of outstanding shares of Series E Preferred Stock shall be entitled to cast the number of votes equal to the number
of whole shares of Common Stock into which the shares of Series E Preferred Stock held by such holder are convertible as of the
record date for determining stockholders entitled to vote on such matter. Except as provided by law or by the other provisions
of the certificate of incorporation, holders of the Series E Preferred Stock shall vote together with the holders of Common Stock
as a single class.