Annual Report (10-k)

Date : 08/06/2019 @ 8:49PM
Source : Edgar (US Regulatory)
Stock : Inspyr Therapeutics, Inc. (QB) (NSPX)
Quote : 0.009  0.0 (0.00%) @ 9:00PM

Annual Report (10-k)

 

 

UNITED STATES
  SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-K

 

 

 

(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2018

 

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                      to                      .

 

Commission File Number 000-55331

 

INSPYR THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   20-0438951

State or other jurisdiction of

incorporation or organization

 

(I.R.S. Employer 

Identification No.) 

     

31200 Via Colinas Suite 200 

Westlake Village, CA  

  91365
(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code: (818) 597-7552

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Class   Trading Symbol   Name of Each Exchange on Which Registered
N/A   N/A   N/A

 

Securities registered pursuant to Section 12(g) of the Act:

 

Common Stock, $0.0001 par value

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐  Yes  ☒  No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐  Yes  ☒   No

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒  Yes  ☐   No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒  Yes  ☐   No

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☒ Smaller reporting company ☒

Emerging Growth Company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes   ☒  No

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed using the price at which the common equity was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter was $166,389 based on a closing price of $0.01 per share on such date. As of June 30, 2019, there were 150,000,000 shares of the registrant’s common stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE 

None

 

 

 

 

 

INSPYR THERAPEUTICS, INC. 

FORM 10-K  

FOR THE YEAR ENDED DECEMBER 31, 2018  

 

INDEX

 

    Page
  PART I  
Item 1. Business 2
Item 1A. Risk Factors 7
Item 1B. Unresolved Staff Comments 17
Item 2. Properties 17
Item 3. Legal Proceedings 17
Item 4. Mine Safety Disclosure 17
     
  PART II  
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 18
Item 6. Selected Financial Data 22
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 31
Item 8. Financial Statements and Supplementary Data 31
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 31
Item 9A. Controls and Procedures 31
Item 9B. Other Information  32
     
  PART III  
Item 10. Directors, Executive Officers and Corporate Governance 33
Item 11. Executive Compensation 40
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 46
Item 13. Certain Relationships and Related Transactions, and Director Independence 47
Item 14. Principal Accounting Fees and Services 49
     
  PART IV  
Item 15. Exhibits, Financial Statement Schedules 50

 

i

 

  

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 1:30 reverse stock split that became effective on November 17, 2016 as if it had taken place as of the beginning of the earliest period presented

 

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:

 

Resume our corporate operations that have been curtailed;

 

attract, build and retain a senior management team;

 

manage our business given continuing operating losses and negative cash flows;

 

obtain sufficient capital or a strategic business arrangement to fund our operations and expansion plans;

 

build the infrastructure necessary to support the growth of our business;

 

manage competitive factors and developments beyond our control;

 

manage scientific and medical developments which may be beyond our control;

 

manage the governmental regulation of our business including state, federal and international laws;

 

maintain and protect our intellectual property;

 

obtain patents based on our current and/or future patent applications;

 

obtain and maintain other rights to technology required or desirable to conduct or expand our business;

 

achieve any potential strategic benefits of licensing transactions, collaborations, acquisitions, or in-licensing of new technologies, if any;

 

successfully integrate the business of with our wholly owned subsidiary, Lewis & Clark Pharmaceuticals, Inc.; and

 

manage any other factors discussed in the “Risk Factors” section, and elsewhere in this annual report.

 

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. 

 

1

 

 

ITEM 1. BUSINESS

 

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 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 our business operations. In the event that we are able to raise sufficient capital, our major focus would be: (i) further characterization, in conjunction with Ridgeway Therapeutics, of anti-cancer activity of the current pipeline of A 2B antagonists and dual A 2A /A 2B 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 A 2A agonists leading to selection of a clinical candidate for an Investigative New Drug or IND enabling studies; (iii) licensing and/or partnering the A 2B antagonists, dual A 2A /A 2B antagonists, and/or A 2A 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, (vii) explore collaborations utilizing mipsagargin in new, non-clinical solid tumor models with leading researchers in the oncology field and (viii) 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 interests.  

 

Our ability to execute our business plan is dependent on the amount and timing of capital, if any, that we are able to raise. 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. We are currently using such funds to attempt to become current in our SEC reporting requirements, pay outstanding invoices to our independent registered accounting firm, and other outstanding obligations directly related to our SEC reporting requirements, 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.

 

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, 2018 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 financings in July 2018, whereby we raised $500,000, and December 2018 whereby we raised $25,000, 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

 

  On August 3, 2018, we entered into an agreement with Ridgeway Therapeutics, Inc. to develop A 2B antagonists, dual A 2A /A 2B antagonists, initially as anti-cancer agents.  
     
  On July 5, 2018, we completed the private placement of $515,000 of non-interest bearing senior convertible debentures.
     
  Between October 2, 2017 and October 23, 2017, we announced three (3) separate collaborations for preclinical studies of our proprietary adenosine receptor modulator based compounds.  The collaborations are with the University of Virginia School of Medicine, NYU Winthrop Hospital, and the National Institutes of Health.
     
  On September 12, 2017, we completed (i) the private placement of approximately $320,000 non-interest bearing senior convertible debentures and (ii) the exchange of approximately $2.5 million in stated value Series A and Series B Preferred stock for non-interest bearing senior convertible debentures.

 

2

 

 

  On July 31, 2017, we completed a share exchange agreement whereby we acquired 100% of the capital stock of Lewis & Clark Pharmaceuticals, Inc. in exchange for 7,122,172 shares of our common stock (50% of our issued and outstanding common stock, including common shares issuable upon conversion of our preferred stock). We have subsequently determined that the goodwill assigned to the as Lewis & Clark acquisition had become fully impaired as of December 31, 2017. 

 

  On April 24, 2017, April 18, 2017 and March 17, 2017, we completed the private placement of an aggregate of approximately $290,000 of our securities.

    

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 A 2A and A 2B 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 A 2B and dual A 2A /A 2B receptor antagonists. Our current product development plan for adenosine receptor antagonists contemplates the following major initiatives, subject to the Company receiving sufficient funds:

 

  Continue development of anti-cancer agents with partner company, Ridgeway Therapeutics, Inc.

 

  Further characterization of existing agents toward IND enabling studies and support ongoing licensing/partnership activities.

 

  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 A 2A 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.

 

Our Technology

 

We have what we believe to be a robust intellectual property portfolio covering proprietary A 2A agonists (LNC-001, see below), A 2B antagonists (LNC-002, see below), and dual A 2A /A 2B antagonists (LNC-003, see below). We also have a substantial catalog of synthesized compounds, specifically A 2A agonists and A 2B antagonists that require further characterization and testing for potential clinical candidates. We believe that our proprietary dual A 2A /A 2B antagonists have great potential and should be further explored.

 

3

 

 

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   FIELD   APPLICATION NO.   FILING DATE   ISSUE DATE   PATENT NO.  
LNC-001-AU   A 2A AGONISTS   2013296420   Jul 31, 2013   Mar 22, 2018   2013296420  
LNC-001-BR   A 2A AGONISTS   BR112015022499   Jul 31, 2013          
LNC-001-CA   A 2A AGONISTS   2880040   Jul 31, 2013          
LNC-001-EA   A 2A AGONISTS   201590205   Jul 31, 2013   Jun 30, 2017   027174  
LNC-001-EP   A 2A AGONISTS   138259858   Jul 31, 2013          
LNC-001-IL   A 2A AGONISTS   236986   Jul 31, 2013   Sep 30, 2017   236986  
LNC-001-IN   A 2A AGONISTS   538DELNP2015   Jul 31, 2013          
LNC-001-JP   A 2A AGONISTS   2015525562   Jul 31, 2013          
LNC-001-KR   A 2A AGONISTS   1020157004901   Jul 31, 2013          
LNC-001-MX   A 2A AGONISTS   MXa2015001370   Jul 31, 2013          
LNC-001-NZ   A 2A AGONISTS   703992   Jul 31, 2013   Jan 15, 2019   703992  
LNC-001-US   A 2A AGONISTS   13956111   Jul 31, 2013   Jun 30, 2015   9067963  
LNC-001-US-CNT1   A 2A AGONISTS   14752861   Jun 27, 2015   Nov 21, 2017   9822141  
LNC-001-US-CNT2   A 2A AGONISTS   15818661   Nov 20, 2017          
LNC-001-ZA   A 2A AGONISTS   201501350   Jul 31, 2013   Dec 21, 2016   2015/01350  
LNC-002-AU   A 2B ANTAGONISTS   2016246068   Apr 8, 2016          
LNC-002-BR   A 2B ANTAGONISTS   BR1120170213869   Apr 8, 2016          
LNC-002-CN   A 2B ANTAGONISTS   2016800268351   Apr 8, 2016          
LNC-002-EA   A 2B ANTAGONISTS   201792156   Apr 8, 2016          
LNC-002-EP   A 2B ANTAGONISTS   167774363   Apr 8, 2016          
LNC-002-IL   A 2B ANTAGONISTS   254902   Apr 8, 2016          
LNC-002-IN   A 2B ANTAGONISTS   201727039305   Apr 8, 2016          
LNC-002-JP   A 2B ANTAGONISTS   2018504080   Apr 8, 2016          
LNC-002-KR   A 2B ANTAGONISTS   1020177031978   Apr 8, 2016          
LNC-002-MX   A 2B ANTAGONISTS   MXa2017012783   Apr 8, 2016          
LNC-002-NZ   A 2B ANTAGONISTS   736705   Apr 8, 2016          
LNC-002-SG   A 2B ANTAGONISTS   11201707753X   Apr 8, 2016          
LNC-002-US   A 2B ANTAGONISTS   15094903   Apr 8, 2016   Feb 14, 2017   9593118  
LNC-002-ZA   A 2B ANTAGONISTS   201707248   Apr 8, 2016   Oct 31, 2018      
LNC-003-P2   DUAL A 2A -A 2B ANTAGONISTS   62791910   Jan 14, 2019          

 

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.   

 

4

 

 

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 A 2B 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 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 A 2A agonists and A 2B antagonists that require further characterization and testing for potential clinical candidates. Our proprietary dual A 2A /A 2B 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 A 2A /A 2B 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 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.

 

5

 

 

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.

 

6

 

 

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, 2018 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 November 17, 2016, we completed a 1:30 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 

 

ITEM 1A. RISK FACTORS

 

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.

 

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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, 2018 was $331,000. In February 2018 we were forced to curtail our operations. Despite raising $500,000 in gross proceeds through the sale of convertible debentures in July 2018 and $25,000 in December 2018 through the sale of notes, 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, 2018 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 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.

 

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 24, 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, 2018, we have raised approximately $36.9 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 million. Our net losses for the two most recent fiscal years ended December 31, 2018 and 2017 were $12,000 and $11.1 million, respectively. Our decrease in net losses is a result of our curtailment of operations beginning February 2018. 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.

 

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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:

 

  develop and commercialize our technologies and proposed products;

 

  obtain regulatory approval to commence the marketing of our products;

 

  identify, hire and retain the needed personnel to implement our business plan;

 

  manage growth;

 

  achieve market acceptance or insurance reimbursement for any of our proposed products, if successfully developed; or

 

  respond to competition.

 

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. 

 

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.

 

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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:

 

  our ability to demonstrate the clinical efficacy and safety of our proposed products to the medical community;

 

  our ability to create products that are superior to alternative products;

 

  our ability to establish in the medical community the potential advantage of our treatments over alternative treatment methods; and

 

  the reimbursement policies of government and third-party payors.

 

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 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, 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.  

 

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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.

 

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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.

 

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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:  

 

  our ability retain and augment our current management team and workforce, which currently consists of only one employee, our interim chief executive officer;

 

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  the development status of our drug candidates, particularly the results of our clinical trials;

 

  market conditions or trends related to the biotechnology and pharmaceutical industries, or the market in general;

 

  announcements of technological innovations, new commercial products, or other material events by our competitors or us;

 

  disputes or other developments concerning our proprietary rights;

 

  changes in, or failure to meet, securities analysts’ or investors’ expectations of our financial and developmental performance;

 

  additions or departures of key personnel;

 

  loss of any strategic relationship;

 

  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;

 

  industry developments, including, without limitation, changes in healthcare policies or practices or third-party reimbursement policies;

 

  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;

 

  regulatory developments in the United States or foreign countries; and

 

  economic, political and other external factors.

 

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 June 30, 2019, 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 June 30, 2019, 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 29,991,856 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. The shareholders have approved a reverse stock split in amount not less than 1-for-2 and not more than 1-for-500 at the discretion of the Board until December 31, 2019. The Board currently plans to effect a reverse stock split in order to authorize additional capital for its future sale of securities stock issuances to service providers, warrant exercises, and conversions of outstanding preferred stock and convertible debentures.

 

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.   

 

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As of June 30, 2019, 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 $3,364,813 of senior convertible debentures and convertible notes that are convertible into common stock at any time, of which $2,676,967 is outstanding. Substantially all of the common shares and common shares underlying the Series A 0% Convertible Preferred, Series B 0% Convertible Preferred, and Series C 0% Convertible shares are available for public sale, subject in some cases to volume and other limitations or delivery of a prospectus. As of June 30, 2019, we were obligated to reserve for issuance (i) 328,221 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) 38,086,296 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) 1,000,000 shares of common stock issuable upon the conversion of 5,000 shares of Series D 0% Convertible Preferred Stock, (v) 4,231,391 shares of our common stock issuable upon exercise of outstanding warrants at a weighted average exercise price of $1.79 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) 298,748 shares of our common stock issuable upon exercise of outstanding stock options under our equity compensation plans at a weighted average exercise price of $5.07 per share and (vii) 799,989,916 shares of our common stock issuable upon conversion of our outstanding convertible notes. 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 June 30, 2019.

 

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:

 

  the Board of Directors approved the transaction in which the stockholder acquired 15% or more of the corporation’s assets;

 

  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

 

  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.

 

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.

 

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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 June 30, 2019. Accordingly, we do not have sufficient authorized shares of common stock for additional issuances. While our shareholders have approved a reverse stock split in amount not less than 1-for-2 and not more than 1-for-500 at the discretion of the Board until December 31, 2019, no such additional reverse stock split has taken place. Notwithstanding, the Board currently plans to effect a reverse stock split 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 the reverse stock split 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.    

 

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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 an interim 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. UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2. PROPERTIES

 

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. LEGAL PROCEEDINGS

 

On March 16, 2016, Dr. Craig Dionne provided us his notice of termination as the company’s Chief Executive Officer and Chief Financial Officer. Dr. Dionne’s notice of termination alleges that such termination was for “Good Reason” as a result of a purported material change in his authority, functions, duties and responsibilities as chief executive officer. In the event that termination was for “Good Reason”, Dr. Dionne would be entitled to certain severance payments as well as other benefits. His notice of termination, in additional to requesting such severance, also requests the payment of Dr. Dionne’s annual and long term bonus for 2014 and 2015. On April 11, 2016, we received a letter from Dr. Dionne demanding approximately $2.3 million as a result of the foregoing.

 

The Company vigorously disputes that the termination of his employment was for “Good Reason,” as that term is defined in his employment agreement and under applicable law. This matter is at the early stages. While no litigation is pending at this time, there can be no assurance that this matter will be resolved in such a manner as to avoid litigation. Accordingly, the Company is unable at this time to predict the outcome of this matter, and any views formed as to the viability of these claims or the costs to the Company which could result may change from time to time as the matter proceeds through its course.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not Applicable

 

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PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

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 June 30, 2019, 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

 

The following table sets forth information as of December 31, 2018 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)     63,068     $ 18.34       131,264  
Equity compensation plans not approved by security holders:                        
2009 Executive Compensation Plan     49,086       6.50       150,914  
Inducement Stock Option Plan     211,360     $ 2.64       88,640  
2017 Equity Compensation Plan     0     $ 0.00       2,000,000  
Total     323,514     $ 6.28       2,370,818  

 

(1) Our 2007 Stock Plan, as amended, provides for the issuance of up to 50,000 common shares during any calendar year. The plan provides for the issuance of up to 200,000 common shares in the aggregate.

 

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GenSpera 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 50,000 shares of common stock for the foregoing awards per fiscal year with an aggregate of 200,000 shares of common stock available for issuance under the 2007 Plan. As of December 31, 2018, we have granted awards under the 2007 Plan equal to approximately 180,699 shares of our common stock, and 111,963 shares have been cancelled or forfeited. Accordingly, there are 131,264 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.

  

GenSpera 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, 2018, our 2009 Plan authorizes the issuance of up to 200,000 shares of our common stock for the foregoing awards, and we have granted awards under the plan equal to approximately 164,868 common shares, and 115,782 shares have been cancelled or forfeited. Accordingly, there are 150,914 shares of common stock available for future awards under the 2009 Plan.   

 

GenSpera 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 300,000 shares of common stock to new employees of the Company. As of December 31, 2018, 211,360 grants have been made pursuant to the Plan. Accordingly, there are 88,640 shares of common stock available for future issuance under the Inducement Plan.

  

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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 2,000,000 shares of common stock for the foregoing awards. As of December 31, 2018, we have granted no awards under the 2017 Plan, and no shares have been cancelled or forfeited. Accordingly, there are 2,000,000 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.

 

Recent Sales of Unregistered Securities

 

The following information is given with regard to unregistered securities sold since January 1, 2017.  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.

 

  In January 2017, as an inducement to employment for two new employees, we granted two inducement options, each to purchase 47,955 shares of Common Stock (an aggregate of 95,910 shares).  Both options have a term of seven (7) years, an exercise price of $0.55 per share and vest as follows: (i) 25% of the options vest monthly over a one year period and (ii) 75% vest monthly over the following thirty-six (36) months.  The options were both issued pursuant to our Inducement Award Stock Option Plan.
     
  In February 2017, we issued an aggregate of 60,000 shares of Common Stock to shareholders pursuant to the conversion of 31.8 shares of Series A 0% Convertible Preferred Stock at a conversion price of $0.53 per share.
     
 

On February 28, 2017, we issued Dr. Richerson, our former chief operating officer, a warrant to purchase 76,726 shares of Common Stock in connection with his release of claims and separation agreement. The warrant has an exercise price of $0.75 per share and a term of three and a half (3.5) years.

 

On February 28, 2017, in connection with Dr. Richerson’s release of claims and separation agreement, we agreed to make any vested portion of Dr. Richerson’s outstanding options to purchase an aggregate of 64,155 shares of Common Stock, exercisable at any time during their remaining term regardless of any termination provisions contained in the equity compensation plans to which such awards were made as well as reduce the exercise price of such options to $0.75 per share.

 

  In March through April 2017, we offered and sold 290.43148 units, in a private placement to certain accredited investors for gross proceeds of approximately $290,000. The Series C preferred stock has a stated value of $1,000 per share and the common shares are issuable pursuant to conversion of the preferred stock at a conversion price of $0.75 per share, subject to a 9.99% beneficial ownership limitation and subject to adjustment pursuant to stock splits and dividends, and subject to adjustment pursuant to customary anti-dilution protection for subsequent equity sales for a period of 12 months from the date of issuance. The warrants include (i) 387,251 Series M common stock purchase warrants with a price per share of $0.90 and a term of five years from the date of issuance, (ii) 387,251 Series N common stock purchase warrants with a price per share of $0.75 and a term of six months from the date of issuance and (iii) 387,251 Series O common stock purchase with a price per share of $0.75 and a term of six months from the date of issuance. The common shares underlying the Series C preferred stock are subject to adjustment in the in the event of stock splits and dividends, subsequent equity sales, pro rata distributions and fundamental transactions. In the event that the shares underlying all of the warrants issued in the March through April 2017 Offering 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, fundamental transactions, and pro rata distributions. The warrants also contain anti-dilution protection for a period of 12 months from the date of issuance.  

 

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In April 2017, we issued an aggregate of 50,000 shares of Common Stock to shareholders pursuant to the conversion of 26.5 shares of Series A 0% Convertible Preferred Stock at a conversion price of $0.53 per share.

 

  In May 2017, we issued an aggregate of 20,000 shares of Common Stock to shareholders pursuant to the conversion of 10.6 shares of Series A 0% Convertible Preferred Stock at a conversion price of $0.53 per share.
     
  In June 2017, we issued an aggregate of 20,000 shares of Common Stock to shareholders pursuant to the conversion of 10.6 shares of Series A 0% Convertible Preferred Stock at a conversion price of $0.53 per share.
     
  On July 31, 2017, we completed a share exchange agreement whereby we acquired 100% of the capital stock of Lewis & Clark Pharmaceuticals, Inc. in exchange for 7,122,172 shares of our common stock (50% of our issued and outstanding common stock, including common shares issuable upon conversion of our preferred stock
     
  On September 12, 2017, we issued $320,000 in senior convertible debentures (“Debentures”) for (i) $250,000 in cash and (ii) the cancellation of $70,000 of obligations.  The Debentures are non-interest bearing, have a maturity date of September 12, 2018 and are convertible into shares of common stock at any time at 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 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 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 Debentures are no longer outstanding.  The Debentures are further redeemable for cash upon twenty (20) trading days’ notice provided that certain conditions are met.  As a result of the sale of our Series D 0% convertible preferred stock in January 2019, which are convertible into common stock at a conversion price of $0.005 per share, the maximum conversion price of the Debentures was repriced to $0.01.
     
  On September 12, 2017, we issued $2,504,812.50 in Debentures in exchange for the cancellation of (i) $1,615.812 in stated value of Series A 0% Convertible Preferred Stock and (ii) $890,000 of in stated value of Series B 0% Convertible Preferred Stock.  The Debentures contain the same terms as described above.
     
  Between September 14, 2017 and December 31, 2017, Debenture holders converted an aggregate of $122,369.95 into 2,144,340 shares of common stock at per share conversion prices ranging from $0.212 to $.022.
     
 

Between January 1, 2018 and March 31, 2018, Debenture holders converted an aggregate of $40,760.80 into 1,445,000 shares of common stock at per share conversion prices ranging from $0.033 to $0.025.

 

  Between April 1, 2018 and June 30, 2018, Debenture holders converted an aggregate of $55,029.43 into 4,305,000 shares of common stock at per share conversion prices ranging from $0.017 to $0.007
     
   Between July 1, 2018 and September 30, 2018, Debenture holders converted an aggregate of $28,087.83 into 4,750,000 shares of common stock at per share conversion prices ranging from $0.007 to $0.005

 

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  In July 2018, we issued an aggregate of $515,000 of senior convertible debentures (“Debentures”) for (i) $500,000 in cash and (ii) the cancellation of $15,000 in obligations.  The Debentures are non-interest bearing, have a maturity date of July 5, 2019 and are convertible into common stock at any time at 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 and (b) the volume weighted average price on the conversion date.  The Debentures also contain provisions providing for an adjustment in the event of stock splits or dividends, and fundamental transactions.  The Debentures also contain anti-dilution protection in the event of subsequent equity sales that is lower than the then applicable conversion price until such time that the Debentures are no longer outstanding.  The Debentures are further redeemable for cash upon twenty (20) trading days’ notice provided that certain conditions are met.  The Debentures are further redeemable for cash upon twenty (20) trading days’ notice provided that certain conditions are met.  As a result of the sale of our Series D 0% convertible preferred stock in January 2019, which are convertible into common stock at a conversion price of $0.005 per share, the maximum conversion price of the Debentures was repriced to $0.01.
     
 

Between October 1, 2018 and December 31, 2018, Debenture holders converted an aggregate of $237,337.39 into 63,175,000 shares of common stock at per share conversion prices ranging from $0.0028 to $0.0047.

     
 

Between January 1, 2019 and March 31, 2019, Debenture holders converted an aggregate of $204,220.53 into 65,436,071 shares of common stock at per share conversion prices ranging from $0.0021 to $0.0046.

 

Use of Proceeds

 

On May 23, 2014, our registration statement on Form S-1 (File No. 333-194687) was declared effective by the Securities and Exchange Commission for our initial public offering pursuant to which we sold an aggregate of 4,163,961 units at a public offering price of $0.80 per unit. The information contained in the registration statement was amended pursuant to a post-effective amendment that was declared effective the By the Securities Exchange Commission on January 27, 2015. After giving effect to the reverse stock split, the units are convertible into 138,807 shares of common stock at the public offering price of $24.00 per unit. There has been no material change in the planned use of proceeds from our public offering as described in our final prospectus filed with the Securities and Exchange Commission on May 30, 2014 pursuant to Rule 424(b).

 

ITEM 6. 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. 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.

 

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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:

 

  Company Overview - Discussion of our business plan and strategy in order to provide context for the remainder of MD&A.

 

  Critical Accounting Policies - Accounting policies that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results and forecasts.

 

  Results of Operations - Analysis of our financial results comparing the year ended December 31, 2018 to the year ended December 31, 2017.

 

  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 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 A 2B antagonists and dual A 2A /A 2B 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 A 2A agonists leading to selection of a clinical candidate for an Investigative New Drug or IND enabling studies; (iii) licensing and/or partnering the A 2B antagonists, dual A 2A /A 2B antagonists, and/or A 2A 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.  

  

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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. We are currently using such funds to attempt to become current in 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.  

 

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.

  

Recent Developments

 

  On July 5, 2018, we completed the private placement of approximately $515,000 non-interest bearing senior convertible debentures.
     
  On August 3, 2018, we entered into an agreement with Ridgeway Therapeutics, Inc. to develop A 2B antagonists, dual A 2A /A 2B antagonists, initially as anti-cancer agents.  
     
  Between October 2, 2017 and October 23, 2017, we announced three (3) separate collaborations for preclinical studies of our proprietary adenosine receptor modulator based compounds.  The collaborations are with the University of Virginia School of Medicine, NYU Winthrop Hospital, and the National Institutes of Health.
     
  On September 12, 2017, we completed (i) the private placement of approximately $320,000 non-interest bearing senior convertible debentures and (ii) the exchange of approximately $2.5 million in stated value Series A and Series B Preferred stock for non-interest bearing senior convertible debentures.
     
 

On July 31, 2017, we completed a share exchange agreement whereby we acquired 100% of the capital stock of Lewis & Clark Pharmaceuticals, Inc. in exchange for 7,122,172 shares of our common stock (50% of our issued and outstanding common stock, including common shares issuable upon conversion of our preferred stock). We have subsequently determined that the goodwill assigned to the as Lewis & Clark acquisition had become fully impaired as of December 31, 2017.

 

  On April 24, 2017, April 18, 2017 and March 17, 2017, we completed the private placement of an aggregate of approximately $290,000 of our securities.
     
  Effective July 26, 2019, we appointed Michael Cain as our interim chief executive officer.

 

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 A 2A and A 2B 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 A 2B and dual A 2A /A 2B receptor antagonists. Our current product development plan for adenosine receptor antagonists contemplates the following major initiatives, subject to the Company receiving sufficient funds:

 

  Continue development of anti-cancer agents with partner company, Ridgeway Therapeutics, Inc.

 

  Further characterization of existing agents toward IND enabling studies and support ongoing licensing/partnership activities.

 

  Conduct IND enabling studies.

 

  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.

 

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 A 2A 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, 2018 we had an accumulated deficit of approximately $60 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.

 

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Our cash and restricted cash balances at December 31, 2018 was approximately $331,000 representing 90.4% of total assets. In July 2018 we completed private placements of approximately $515,000 of our securities and we raised $25,000 in December 2018 through the sale of notes. Based on our current expected level of operating expenditures and cash balance as of December 31, 2018, we expect to be able to fund our operations into the third quarter of 2019. 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, 2018 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 financings, in July 2018 whereby we raised $500,000, and December 2018, whereby we raised $25,000, 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. Actual results may differ from those estimates.

   

Cash and Equivalents - Cash equivalents are comprised of certain highly liquid investments with maturity of three months or less when purchased. We maintain our cash in bank deposit accounts which, at times, may exceed federally insured limits. We have not experienced any losses in such accounts.

 

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.

 

Research and Development Costs - 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.

 

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Stock-based Compensation - The Company measures the cost of employee services received in exchange for an equity award based on the grant-date fair value of the award. All grants under our stock-based compensation programs are accounted for at fair value and that cost is recognized over the period during which an employee is required to provide service in exchange for the award (the vesting period).

 

Compensation expense for options granted to non-employees is determined in accordance with the standard as the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measured. Compensation expense for awards granted to non-employees is re-measured each period. Determining the appropriate fair value of the stock-based compensation requires the input of subjective assumptions, including the expected life of the stock-based payment and stock price volatility. The Company uses the Black-Scholes option-pricing option model to value its stock option awards which incorporate the Company’s stock price, volatility, U.S. risk-free rate, dividend rate, and estimated life.

 

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 without extended maturities. We believe that the fair values of our current assets and current liabilities approximate their reported carrying amounts.

 

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, 2018 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 Company does not expect any impact from the adoption of this standard on its 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.

   

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In May 2017, the FASB issued ASU 2017-09, “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting”, which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award changes as a result of the change in terms or conditions. If an award is not probable of vesting at the time a change is made, the new guidance clarifies that no new measurement date will be required if there is no change to the fair value, vesting conditions, and classification. This ASU will be applied prospectively and is effective for fiscal years beginning after December 15, 2017, and interim periods within those years, with early adoption permitted. The adoption of this standard did not have a material impact on its consolidated financial statements. 

 

In July 2017, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): Part 1 – Accounting for Certain Financial Instruments with Down Round Features and Part 2 – Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with Scope Exception (“ASU No. 2017-11”). Part 1 of ASU No. 2017-11 addresses the complexity of accounting for certain financial instruments with down round features. Down round features are provisions in certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of ASU No. 2017-11 addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification®. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. For public business entities, the amendments in Part I of this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company has early adopted the guidance under ASU 2017-11 for the year end December 31, 2017.

 

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Result of Operations

 

Year Ended December 31, 2018 Compared to the Year Ended December 31, 2017

 

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, 2018 and 2017. We do not anticipate generating any revenues during 2019. Net loss for 2018 and 2017 were $12,000 and $11.1 million, respectively, resulting from the operational activities described below.

 

Operating Expenses

 

Operating expense totaled $0.7 million and $5.9 million during 2018 and 2017, respectively.  The increase in operating expenses is the result of the following factors.

 

    Year Ended     Change in 2018  
    December 31,     Versus 2017  
    2018     2017     $     %  
    (amount in thousands)              
Operating Expenses                                
Research and development   $ 208     $ 1,695     $ (1,487 )     (88 )%
General and administrative     516       1,665       (1,149 )     (69 )
Impairment of goodwill           2,159       (2,159 )     (100 )
Impairment of equipment           332       (332 )     (100 )
Total operating expense   $ 724     $ 5,851     $ (5,127 )     (88 )%

 

Research and Development

 

Research and development expenses totaled $0.2 million and $1.7 million for the years ended 2018 and 2017, respectively. The decrease of $1.5 million, or 88%, in 2018 compared to 2017 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 $0.5 million and $1.7 million during 2018 and 2017, respectively. The decrease of approximately $1.2 million, or 69%, in 2018 compared to 2017 was primarily the result of the curtailment of business operations in February 2018, due to a lack of capital.

 

Impairment Expense

 

Due to the curtailment of business activity in February 2018, we determined that the goodwill assigned to the Lewis & Clark, Pharmaceuticals, Inc. acquisition had become fully impaired as of December 31, 2017. Accordingly, we recorded a goodwill impairment charge of $2.2 million during the year ended December 31, 2017. The Company also determined that the office and lab equipment acquired pursuant to the Lewis & Clark, Pharmaceuticals, Inc. acquisition had become fully impaired as of December 31, 2017. Accordingly, we recorded an impairment charge of $0.3 million during the year ended December 31, 2017. We had no impairment charges during the year ended December 31, 2018.

 

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Other Income (Expense)

 

Other income (expense) totaled approximately $0.7 million of income and $5.2 million of expense for 2018 and 2017, respectively.

 

    Year Ended     Change in 2018  
    December 31,     Versus 2017  
    2018     2017     $     %  
    (amount in thousands)              
Gain (loss) on change in fair value of derivative liability   $ 1,052     $ (103 )   $ 1,155       1,121 %
Gain on conversion of debt     210       88       122       139  
Interest income (expense), net     (550 )     (5,234 )     4,684       89 %
Total other income (expense)   $ 712     $ (5,249 )   $ 5,961       (114 )%

 

Loss on change in fair value of derivative liability

 

There was a gain on change in fair value of our derivative liability of approximately $1.1 million during the year ended December 31, 2018, with a loss of approximately $0.1 million during the year ended December 31, 2017. The change in the fair value of our derivative liability was the result of our sale of convertible debentures in September 2017 and July 2018, 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 debentures of approximately $0.2 million during the year ended December 31, 2018, with a gain of approximately $0.1 million during the year ended December 31, 2017. 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 $0.6 million net interest expense in 2018, compared to $5.2 million of expense in 2017. The decrease of $4.7 million was attributable to derivative instruments with a value in excess of proceeds received in the 2017 period.

 

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 $60 million as of December 31, 2018 and anticipate that we will continue to incur additional losses for the foreseeable future. Through December 31, 2018, 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 $36.9 million. Cash and restricted cash at December 31, 2018 was $0.3 million.

 

Our auditors’ report on our December 31, 2018 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. In 2018, we completed financings resulting in gross proceeds of approximately $0.5 million. Based on our current level of expected operating expenditures, we expect to be able to fund our operations into the third quarter of 2019. 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,  
    2018     2017  
    (amounts in thousands)  
Cash and restricted cash at beginning of period   $ 10     $ 547  
Net cash used in operating activities     (204 )     (1,092 )
Net cash provided by investing activities           20  
Net cash provided by financing activities     525       535  
Cash and restricted cash at end of period   $ 331     $ 10  

 

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Net Cash Used in Operating Activities

 

Net cash used in operating activities was $0.2 million and $1.1 million during 2018 and 2017, respectively. The decrease of $0.9 million in cash used during 2018 compared to 2017 was primarily attributable to a decrease in our net loss (after adjusting for noncash items) of approximately $2.5 million partially offset by a decrease in prepaid expenses of approximately $0.1 million and a decrease in accounts payable of approximately $1.5 million.

 

Net Cash Used in Investing Activities

 

Cash provided by investing activities was $0 and $0.02 million for 2018 and 2017, respectively. The cash provided by investing activities in 2017 was due to cash acquired in the acquisition of Lewis & Clark Pharmaceuticals, Inc.

 

Net Cash Provided by Financing Activities

 

During 2018, we received net proceeds of $0.5 million from the sales of our securities and convertible debentures, compared to $0.5 million during 2017 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(a)(1) 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, 2018. Based on that evaluation, management concluded that our disclosure controls and procedures as of December 31, 2018 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.

 

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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, 2018 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 2018, 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

 

None.

 

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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 July 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   35   7/2019
             
Independent Directors            
Scott V. Ogilvie   Director   64   03/2008
Claire Thom, Pharm.D.   Director   63   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.

 

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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.

 

Christopher Lowe , served as our Chief Executive Officer, Chief Financial Officer, President and a member of the Board of Directors until his resignation in July 2019. Mr. Lowe has over 15 years of senior management experience as President, Chief Business Officer and Chief Financial Officer of various private and public life sciences, medical technology and technology companies. Mr. Lowe has served as a partner of FLG Partners, LLC, a CFO consulting, services and board advisory firm since January 2014. Prior to that, Mr. Lowe was an independent consultant to life science companies. From February 2014 to until May 2014, Mr. Lowe served as interim Chief Executive Officer of Hansen Medical, Inc. (Nasdaq - HNSN). Mr. Lowe also served as Chief Financial Officer of Hansen Medical from June 2014 until its sale to Auris Surgical Robotics, Inc. in July 2016. Prior to that, Mr. Lowe served as Vice President, Administration and Chief Financial Officer of Anthera Pharmaceuticals, Inc. (Nasdaq – ANTH), a drug development company, from November 2007 through June 2013, and additionally served as its Chief Business Officer from January 2011 until June 2013. Mr. Lowe served as Vice President, Finance and Administration of Asthmatx, Inc., a medical device company, from September 2005 to December 2005 and as its Chief Financial Officer from January 2006 to November 2007. Mr. Lowe served as a member of the board of directors of Hansen Medical, Inc. (HNSN) from September 2006 until its sale in July 2016. Mr. Lowe also has served as a member of the board of directors of Pacific Pharmaceuticals, Inc., a private company from 2010 until 2014 and Career Closet, Inc., a non-profit private corporation from 2009 until 2014. Mr. Lowe holds a B.S. from California Polytechnic State University, San Luis Obispo and an M.B.A. from Saint Mary’s University, Texas. In evaluating Mr. Lowe’s specific experience, qualifications, attributes and skills in connection with his appointment to our board, we took into account his prior work with both public and private organizations, including his experience in building biopharmaceutical organizations, his strong business development background and his past experience and relationships in life sciences companies. 

 

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, Pharm.D.  joined our board in 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.

 

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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. and Thom and Mr. Ogilvie qualify as independent. 

 

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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 June 30, 2019:

 

Director   Independent   Audit Committee   Nominating
and
Corporate
Governance
Committee
  Leadership
Development
and
Compensation
Committee
Scott Ogilvie   Yes   Chair   Chair  
Claire Thom, Pharm.D.   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.

 

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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.

  

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  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.

 

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  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.

 

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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 2018.

 

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, 2018 and 2017 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, 2018; (ii) our most highly compensated executive officers other than our PEO who were serving as executive officers on December 31, 2018 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,   2018       22,917 (1)                                 22,917  
Chief Executive Officer And Chief Financial Officer   2017       275,000 (4)                                 275,000  
                                                               
Ronald Shazer, M.D.,   2018       29,167 (2)                                 29,167  
Chief Medical And Senior Vice President   2017       350,000 (5)                                 350,000  
                                                               
Russell Richerson, PhD   2018                                            
Chief Operating Officer   2017       54,114               50,786 (3)                   104,900  

  

(1) Of Mr. Lowe’s salary listed, none was actually paid and $22,917 was accrued in 2018 but remains unpaid. Effective July 15, 2019, Mr. Lowe resigned as chief executive officer and as a member of the Board.
   
(2) Of Mr. Shazer’s salary listed, none was actually paid and $29,167 was accrued in 2018 but remains unpaid.

 

(3) On February 28, 2017, Dr. Richerson resigned as Chief Operating Officer.  In connection with Dr. Richerson’s release of claims and separation agreement, all of his 64,155 outstanding vested options become exercisable at any time during their remaining term regardless of any termination provisions in the equity compensation plans and the exercise price of all such options were reduced to $0.75 per share.
   
(4) Of Mr. Lowe’s salary listed, $91,667 was actually paid and $183,333 was accrued as of December 31, 2017 but remains unpaid.
   
(5) Of Dr. Shazer’s salary listed, $121,676 was actually paid and $228,324 was accrued as of December 31, 2017 but remains unpaid.

 

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Outstanding Executive Equity Awards at Fiscal Year-End 2018

 

The following table sets forth information concerning stock options held on December 31, 2018, the last day of our 2018 fiscal year, for each named executive officer.

 

    Number of Securities Underlying     Option     Option
    Unexercised Options (#)     Exercise     Expiration
Name and Principal Position   Exercisable     Unexercisable     Price ($)     Date
                       
Christopher Lowe,     64,940             4.35     8/3/2023
Chief Executive Officer and                            
Chief Financial Officer(1)                            
                             
Ronald Shazer, M.D.     32,470             4.50     8/9/2023
Chief Medical Officer and                            
Senior Vices President (2)                            
                             
Russell Richerson, Ph.D     9,765               0.75     1/2/2019
Chief Operating Officer (3)     1,553             0.75      1/2/2019
      11,438             0.75     3/25/2020
      5,773             0.75     3/25/2020
      7,017             0.75     1/7/2021
      20,049             0.75     1/7/2021
      76,726             0.75     8/28/2020

 

(1)

On August 2, 2016, Mr. Lowe was appointed Chief Executive Officer and Chief Financial Officer. Mr. Lowe resigned his employment with the Company effective July 15, 2019.

 

(2) On August 8, 2016, Dr. Shazer was appointed Chief Medical Officer and Senior Vice President. On February 8, 2018, Dr. Shazer Resigned.

 

(3) On February 28, 2017, Dr. Richerson resigned as Chief Operating Officer.

 

Employment Agreements and Change in Control

 

Christopher Lowe

 

In connection with Mr. Lowe’s employment, we entered into: (i) an employment agreement; (ii) a confidential information and invention assignment agreement; and (iii) an indemnification agreement.  

 

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 base salary may be adjusted on a periodic basis at the sole discretion of the board of directors pursuant to the Company’s review of the compensation of other senior executives. Notwithstanding the foregoing, in the event that the Company receives $25,000,000 in proceeds from one or more series of transactions (“Funding Requirement”), Mr. Lowe’s base salary will be adjusted to no less than the 50 th percentile of base compensation for a similar executive at a comparable Company as determined by the compensation committee in consultation with a nationally recognized compensation consultant. Commencing the year after the Funding Requirement is achieved, Mr. Lowe will also be eligible to receive an annual cash bonus based on achievement of certain performance goals with a target cash bonus being no less than the 50 th percentile of compensation for a similar executive at a comparable Company as determined by the compensation committee. Also, commencing one year after the date of his employment, Mr. Lowe was be eligible to receive an annual market based stock option grant at the discretion of the board. In addition, as an inducement to Mr. Lowe’s employment, we issued him an inducement option to purchase 72,156 shares of common stock, of which, Mr. Lowe received 64,940 options and we issued the balance of 7,216 options, in the form of a warrant, to a third party as a placement fee for Mr. Lowes employment. The Inducement Option has an exercise price of $4.35 per share, a term of seven (7) years, and vests as follows: (i) 25% vests monthly over a one-year period commencing on the date employment began and (ii) 75% vests upon time and milestones to be mutually agreed upon by Mr. Lowe and the board (or a committee thereof). Notwithstanding the foregoing, if the Company receives gross proceeds of $10,000,000 in the initial 12 month period from the date Mr. Lowe’s employment began (“Qualifying Financing”) and the securities are sold in such Qualifying Financing at a price per share less than the exercise price of Mr. Lowe’s inducement option, then the number of shares underlying such inducement option will be increased by such number of shares as required to make such inducement option equal to the same percentage of ownership of the Company that it represented immediately prior to such Qualifying Financing. In addition, pursuant Mr. Lowe’s employment agreement, upon the Funding Requirement being met, Mr. Lowe will be eligible to earn a funding bonus. Such Funding Bonus will be a one-time payment equal to two percent (2%) of the net funding received by the Company to be paid (i) 25% in cash and (ii) 75% in equity securities (to be mutually agreed upon by Mr. Lowe and the Company).

 

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In the event that Mr. Lowe was terminated without Cause or Mr. Lowe resigns with Good Reason, as each term is defined in the employment agreement, Mr. Lowe was eligible to receive: the payment of his accrued but unpaid base salary, any unpaid or unreimbursed expenses and any accrued but unused vacation through the date of termination. In the event that the Company terminates Mr. Lowe’s employment without Cause or Mr. Lowe resigns Good Reason, as each term is defined in the employment agreement, and the Funding Requirement has been met and Mr. Lowe has been employed for at least six (6) months, he will be eligible to receive the continued payment of his base salary for (i) 6 months following the termination date if termination occurs within 12 months of the date his employment began, (ii) 12 months following the termination date if termination occurs within between 12 and 24 months of the date his employment began, or (iii) 18 months following the termination date if termination occurs after 24 months after the date his employment began. Further, if within 12 months following a Sale Event (as defined in Inspyr Therapeutics Inducement Award Stock Plan) Mr. Lowe’s employment is (a) terminated by the Company for any reason (other than as a result of his death or disability or a with Cause termination) or (b) terminated by Mr. Lowe with Good Reason, then Mr. Lowe will be eligible to receive, in lieu of such severance benefits: (i) 18 months of base salary, (ii) acceleration of the vesting of 100% of Mr. Lowe’s then outstanding unvested equity awards and (iii) payment of a pro rata portion of Mr. Lowe’s target annual bonus for the year in which the termination of employment occurs.

 

Confidential Information and Invention Assignment Agreement

 

The confidential information and invention assignment agreement requires Mr. Lowe to maintain the confidentiality of the Company’s intellectual property as well as the assignment of any inventions made by Mr. Lowe during his employment. The agreement also limits Mr. Lowe’s ability to solicit certain employees, consultants, and other personnel of the Company for a period of 24 months following the end of his employment.

 

Indemnification Agreement

 

The indemnification agreement provides for the indemnification and defense of Mr. Lowe, in the event of litigation, to the fullest extent permitted by law.

 

The foregoing summaries of Mr. Lowe’s: (i) employment agreement; (ii) confidential information and inventions assignment agreement; and (iii) indemnification agreement are qualified in their entirety by reference to the full text of the agreements which have been filed with the SEC as exhibits to our public filings.

 

Ronald Shazer, M.D.

 

Employment Agreement

 

We employed Ronald Shazer, M.D. as our Chief Medical Officer and Executive Vice President pursuant to a written contract until his resignation in February 2018. Pursuant to the written contract, Dr. Shazer received a base salary of $350,000, which may be adjusted on a periodic basis at the sole discretion of the board of directors pursuant to the Company’s review of the compensation of other senior executives. Dr. Shazer was also eligible, upon the Company achieving the Funding Requirement, to receive an annual bonus of up to 30% of his base salary, in cash or securities at the discretion of the Company’s board of directors, based on the Company’s and Dr. Shazer’s performance. Also, commencing a year after the date his employment began, Dr. Shazer was eligible to receive an annual market based stock option grant at the discretion of the Board. In addition, as an inducement to Dr. Shazer’s employment, we issued him an inducement option to purchase 32,470 shares of Common Stock on August 9, 2016. The Inducement Option has an exercise price of $4.50 per share, a term of seven (7) years, and vests as follows: (i) 25% vests monthly over a one-year period commencing on the date employment began and (ii) 75% vests upon time and milestones to be mutually agreed upon by Dr. Shazer and the board (or a committee thereof).

 

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Confidential Information and Invention Assignment Agreement

 

The confidential information and invention assignment agreement required Dr. Shazer to maintain the confidentiality of the Company’s intellectual property as well as the assignment of any inventions made by Dr. Shazer during his employment. The agreement also limits Dr. Shazer’s ability to solicit certain employees, consultants, and other personnel of the Company for a period of 24 months following the end of his employment.

 

Indemnification Agreement

 

The indemnification agreement provides for the indemnification and defense of Dr. Shazer, in the event of litigation, to the fullest extent permitted by law.

 

The foregoing summaries of Dr. Shazer’s: (i) employment agreement; (ii) confidential information and inventions assignment agreement; and (iii) indemnification agreement are qualified in their entirety by reference to the full text of the agreements which have been filed with the SEC as exhibits to our public filings.

 

Russell Richerson

 

In connection with Dr. Richerson’s employment, we have entered into: (i) an employment agreement; (ii) a proprietary information, inventions and competition agreement; and (iii) an indemnification agreement.   

 

Employment Agreement

 

Dr. Richerson was employed by the Company until February 28, 2017 when he resigned as Chief Operating Officer. During his employment as our Chief Operating Officer, Dr. Richerson had a written contract that automatically extended for successive one year terms on September 2, of each year. Such base salary was reviewed yearly with regard to possible increase. In addition, Dr. Richerson was eligible to receive annual discretionary and long term incentive bonuses as determined by the board. Dr. Richerson was also entitled to receive certain payments and acceleration of outstanding equity awards in the event his employment is terminated. In the event that Dr. Richerson was terminated without cause or if he resigns for good reason, he will be entitled to eighteen (18) months of salary continuation (payable in monthly installments), eighteen (18) months of continued medical insurance coverage for Dr. Richerson and his family at a cost no less favorable than the premium co-pay charged to active employees, the acceleration of outstanding equity awards and any accrued obligations. In the event that Dr. Richerson is terminated as a result of his disability, he will be entitled to twelve (12) months of salary continuation plus any accrued obligations. Any termination payments that may become due to Dr. Richerson were contingent upon his execution of a timely separation agreement in a form acceptable to us, which shall include a release of claims against us and his resignation from the board, if applicable. On February 28, 2017, Dr. Richerson entered into a release of claims and separation agreement with the Company whereby Dr. Richerson (i) received a warrant to purchase 76,726 shares of Common Stock at an exercise price of $0.75, with a term of three and a half (3.5) years and (ii) received a modification to his outstanding options whereby all vested portions were made exercisable at any time during their remaining terms and all exercises prices were reduced to $0.75 per share.  

 

Proprietary Information, Inventions and Competition Agreement

 

The proprietary information, inventions and competition agreement requires Dr. Richerson to maintain the confidentiality of the Company’s intellectual property as well as the assignment of any inventions made by Dr. Richerson during his employment. The agreement also limits Dr. Richerson’s ability to compete within certain fields of interest, as defined in the agreement, for a period of 18 months following end of his employment.

 

Indemnification Agreement

 

The indemnification agreement provides for the indemnification and defense of Dr. Richerson, in the event of litigation, to the fullest extent permitted by law.

 

The foregoing summaries of Mr. Richerson’s: (i) employment agreement; (ii) proprietary information, inventions and competition agreement; and (iii) indemnification agreement are qualified in their entirety by reference to the full text of the agreements which have been filed with the SEC as exhibits to our public filings.  

 

Potential Payments Upon Termination or Change- in-Control

 

On February 28, 2017, Dr. Richerson provided us with his resignation as the Company’s Chief Operating Officer and Dr. Richerson and the Company entered into a separation agreement and release of claims.  

  

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The following table sets forth the payments that would be made to Christopher Lowe if his employment in accordance with his employment agreement had been terminated by us without cause or by the employee with good reason, or upon a sale event on December 31, 2018, as applicable.  

 

Name   Terminated
without
cause / Resign for Good
Reason
    Terminated, within 12 months
of a Sale Event
 
Christopher Lowe                
Salary  (1)   $      0 (1)   $       0 (2)
Bonus  (1)     0 (1)     0 (2)
Health  (1)     0 (1)     0 (2)
Total:   $ 0 (1)   $ 0 (2)
                 
Ronald Shazer, M.D.                
Salary     0 (1)   $ 0 (2)
Bonus (1)     0 (1)     0 (2)
Health     0 (1)     0 (2)
Total:   $ 0 (1)   $ 0 (2)

 

(1)

Severance Provisions are not applicable to employee’s employment agreement until such time as he has been employed for at least 6 months and the Company has raised $25 million in gross proceeds from capital raising transactions.

   
(2) Severance Provisions pursuant to a termination within 12 months of a Sale Event occurring are not applicable as of December 31, 2018, as no Sale Event has occurred prior to such date.

 

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 Item 5 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
($)
 
Peter E. Grebow(1)     5,444 (4)                                   5,444  
                                                         
Scott Ogilvie     54,000 (4)                                   54,000  
                                                         
Claire Thom     49,000 (4)                                   49,000  
                                                         
Richard Buller (2)     5,333 (4)                                   50,000  
                                                         
John Montgomery(3)                                          

 

(1)

 

(2)

 

(3)

On February 9, 2018 Mr. Grebow resigned as a member of the Board.

 

On February 9, 2018 Mr. Buller resigned as a member of the Board.

 

On June 30, 2018, Mr. Montgomery resigned as a member of the Board.

   
(4) No director fees were paid in 2018. All fees have been accrued at December 31, 2018.

 

44

 

 

Amended 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 Gran t. Upon joining the Board, a director receives an option to purchase 2,500 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 1,667 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 167 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 167 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.

 

45

 

 

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

 

Information regarding shares authorized for issuance under equity compensation plans approved and not approved by stockholders required by this Item are incorporated by reference from Item 5 of this Annual Report from the section entitled “ Equity Compensation Plan Information

 

Security Ownership of Certain Beneficial Owners and Management

 

The following table sets forth, as of June 30, 2019, 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.  

 

46

 

 

          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                                
Christopher Lowe           64,940       64,940       *  
Ronald Shazer           32,470       32,470       *  
Russell B. Richerson, PhD           121,003       121,003       *  
Bo Jesper Hansen, MD, PhD                       *  
Scott Ogilvie           5,869       5,869       *  
Peter E. Grebow, PhD           3,534       3,534       *  
Claire Thom           2,500       2,500       *  
Richard Buller           2,500       2,500       *  
                                 
All directors and executive officers as a group (8 persons)           232,816       232,816       * %
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 %

 

* Less than one percent.

 

(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 April 30, 2019. 

 

(3) 89 Nexus Way, Camana Bay, Grand Cayman Ky1-9007, Cayman Islands. Does not include 352,994,879 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 238,065,882 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.”

 

47

 

   

 

On February 28, 2017, we issued Dr. Richerson, our former chief operating officer, a warrant to purchase 76,726 shares of Common Stock in connection with his release of claims and separation agreement. The warrant has an exercise price of $0.75 per share and a term of three and a half (3.5) years.

 

On February 28, 2017, in connection with Dr. Richerson’s release of claims and separation agreement, we also agreed to make any vested portion of Dr. Richerson’s outstanding options to purchase an aggregate of 64,155 shares of Common Stock, exercisable at any time during their remaining term regardless of any termination provisions contained in the equity compensation plans to which such awards were made as well as reduce the exercise price of such options to $0.75 per share. 

     
  On March 3, 2017, we granted Scott V. Ogilvie, one of our outside directors, options to purchase 2,335 shares of common stock.  The options were granted pursuant to our amended director compensation plan as compensation for Mr. Ogilvie’s service on our board and related committees.  The options have an exercise price of $0.54 per share.  The options vest quarterly over the grant year.
     
  On May 23, 2017, we granted Peter Grebow, one of our outside directors, options to purchase 2,335 shares of common stock. The options were granted pursuant to our amended director compensation plan as compensation for Dr. Grebow’s service on our board and related committees.  The options have an exercise price of $0.41 per share. The options vest quarterly over the grant year.
     
  On July 31, 2017, we granted John Montgomery one of our outside directors, options to purchase 2,500 shares of common stock. The options were granted pursuant to our amended director compensation plan as compensation for Mr. Montgomery joining the board.  The options have an exercise price of $0.348 per share. The options vest quarterly over the grant year.
     
  On July 31, 2017, pursuant to our acquisition of 100% of the capital stock of Lewis & Clark Pharmaceuticals, Inc., John Montgomery was granted 236,163 shares of common stock in exchange for his ownership in Lewis and Clark Pharmaceuticals.  The shares issued to Mr. Montgomery had an aggregate value of $82,657.05 on the date of issuance based on the closing price of our common stock on July 31, 2017.
     
  On August 14, 2017, we granted Bo Jesper Hansen, one of our outside directors, options to purchase 1,667 shares of common stock. The options were granted pursuant to our amended director compensation plan as compensation for Dr. Hansen’s service on our board and related committees.  The options have an exercise price of $0.35 per share. The options vest quarterly over the grant year.

 

On September 12, 2017, (i) we entered into an exchange agreement whereby we issued $2,504,812.50 in senior convertible debentures in exchange for 1,614.8125 shares of Series A Convertible Preferred Stock and 890 shares of Series B Convertible Preferred Stock and (ii) we entered into securities purchase agreements to sell an aggregate of $320,000 of convertible debentures in cash and the cancellation of obligations of the Company. Of these amounts, Sabby Healthcare Master Fund and Sabby Volatility Warrant Master Fund, previously greater than 5% beneficial owner of our securities, exchanged an aggregate of $2,464,812.50 in stated value of preferred shares for convertible debentures and purchased $250,000 in convertible debentures. Sabby has waived a default under these debentures.

 

On July 3, 2018, we sold an aggregate of $515,000 of senior convertible debentures to Sabby Volatility Warrant Master Fund and Sabby Healthcare Master Fund, previously greater than 5% beneficial owners of our securities. Sabby has waived a default under these debentures.

 

 

48

 

 

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 2018 and 2017 fiscal years:

 

Type of Fees   2018     2017  
             
Audit Fees   $

50,000

    $ 62,500  
Audit Related Fees           --  
Tax Fees    

3,500

      4,500  
All Other Fees            
Total Fees   $

53,500

    $ 67,000  

 

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 2018 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 2018 provided no other services, other than those listed above.

 

49

 

 

PART IV

 

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

  1. Financial Statements: See “Index to Financial Statements” in Part II, Item 8 of this Form 10-K.

 

  2. Exhibits: The exhibits listed in the accompanying index to exhibits are filed or incorporated by reference as part of this Form 10-K.

 

Certain of the agreements filed as exhibits to this Form 10-K contain representations and warranties by the parties to the agreements that have been made solely for the benefit of the parties to the agreement. These representations and warranties:

 

  may have been qualified by disclosures that were made to the other parties in connection with the negotiation of the agreements, which disclosures are not necessarily reflected in the agreements;

 

  may apply standards of materiality that differ from those of a reasonable investor;

 

  and were made only as of specified dates contained in the agreements and are subject to later developments.

 

Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time, and investors should not rely on them as statements of fact.

 

50

 

 

SIGNATURES

 

In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed by the undersigned hereunto duly authorized.

 

  INSPYR THERAPEUTICS, INC.
   
Date: August 6, 2019 /s/ Michael Cain
  Chief Executive Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the following capacities and on the dates indicated.

 

Name   Title   Date
         
/s/ Michael Cain   Principal Executive Officer, Principal Accounting Officer   August 6, 2019
Michael Cain   (Principal Executive Officer and Principal Accounting Officer)    
         
/s/ Scott Ogilvie   Director   August 6, 2019
Scott Ogilvie        
         
/s/ Claire Thom, Pharm.D   Director   August 6, 2019
Claire Thom, Pharm.D        

 

51

 

 

INSPYR THERAPEUTICS, INC.  

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

  Page
   
Report of Liggett & Webb, P.A., Independent Registered Public Accounting Firm F-2
   
Consolidated Balance Sheets F-3
   
Consolidated Statements of Losses F-4
   
Consolidated Statement of Stockholders’ Deficit F-5
   
Consolidated Statements of Cash Flows F-6
   
Notes to Consolidated Financial Statements F-7

 

F- 1

 

 

  REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

  

To the Board of Directors and Shareholders of

Inspyr Therapeutics, Inc.

  

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Inspyr Therapeutics, Inc. (the "Company") as of December 31, 2018 and 2017, the related statements of operations, stockholders’ deficit, and cash flows for the years then ended, and the related notes (collectively referred to as the "financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

The Company’s Ability to Continue as a Going Concern

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 2 to the financial statements, the Company does not generate revenue and has negative cash flows from operations.  This raises substantial doubt about the Company’s ability to continue as a going concern.  Management’s plans in regard to these matters are also described in Note 2.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting in accordance with the standards of the PCAOB. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion in accordance with the standards of the PCAOB.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Liggett & Webb, P.A.

 

We have served as the Company’s auditor since 2014.

 

New York, NY

August 6, 2019

 

F- 2

 

 

INSPYR THERAPEUTICS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

       

    December 31,  
    2018     2017  
             
ASSETS                
                 
Current assets:                
Cash   $ 4     $ 10  
Restricted cash     327       -  
Prepaid expenses     -       5  
Total current assets     331       15  
Office and lab equipment, net of accumulated depreciation of $5 and $2     2       4  
Intangible assets, net of accumulated amortization of $179 and $162     33       50  
Total assets   $ 366     $ 69  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT                
                 
Current liabilities:                
Accounts payable   $ 2,085     $ 1,968  
Accrued expenses     1,814       1,539  
Convertible debentures, net of unamortized discount of $281 and $227     2,600       2,476  
Derivative liability     2,134       2,934  
Total current liabilities     8,633       8,917  
Total liabilities     8,633       8,917  
                 
Commitments and contingencies (Note 8)     -       -  
                 
Stockholders’ deficit:                
Convertible preferred stock, par value $.0001 per share; 30,000,000 shares authorized, 495 and 495 shares issued and outstanding, respectively     -       -  
Common stock, par value $.0001 per share; 150,000,000 shares authorized, 84,563,929 and 10,888,929 shares issued and outstanding, respectively     8       1  
Additional paid-in capital     51,471       50,885  
Accumulated deficit     (59,746 )     (59,734 )
                 
Total stockholders’ deficit     (8,267 )     (8,848 )
                 
Total liabilities and stockholders’ deficit   $ 366     $ 69  

 

The accompanying notes are an integral part of these audited consolidated financial statements.      

 

F- 3

 

 

INSPYR THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF LOSSES

(in thousands, except share and per share data)

       

    Years Ended December 31,  
    2018     2017  
             
Operating expenses:                
Research and development   $ 208     $ 1,695  
General and administrative     516       1,665  
Impairment of goodwill     -       2,159  
Impairment of equipment     -       332  
Total operating expenses     724       5,851  
                 
Loss from operations     (724 )     (5,851 )
                 
Other income (expense):                
Gain (loss) on change in fair value of derivative liability     1,052       (103 )
Gain on conversion of debt     210       88  
Interest (expense), net     (550 )     (5,234 )
                 
Loss before provision for income taxes     (12 )     (11,100 )
                 
Provision for income taxes     -       -  
                 
Net loss     (12 )     (11,100 )
Deemed dividend     (196 )     (2,204 )
                 
Net loss attributable to common shareholders   $ (208 )   $ (13,304 )
                 
Net loss per common share, basic and diluted   $ (0.01 )   $ (2.74 )
                 
Weighted average shares outstanding     23,242,710       4,855,784  

 

The accompanying notes are an integral part of these audited consolidated financial statements.      

 

F- 4

 

 

INSPYR THERAPEUTICS, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT

FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017

(in thousands, except share and per share data)

 

    Convertible                       Additional              
    Preferred Stock           Common Stock           Paid-in     Accumulated     Stockholders’  
    Shares     Amount     Shares     Amount     Capital     Deficit     Deficit  
                                           
Balance, December 31, 2016     2,828     $ -       1,398,832     $        -     $ 47,746     $ (48,634 )   $ (888 )
                                                                 
Stock-based compensation     -       -       -       -       202       -       202  
                                                         
Conversion of preferred stock to common stock     (118 )     -       223,585       -       -       -       -  
                                                         
Preferred stock exchanged for convertible notes payable     (2,505 )     -       -       -       -       -       -  
                                                         
Conversion of notes     -       -       2,144,340       -       155       -       155  
                                                         
Common stock issued for acquisition     -       -       7,122,172       1       2,492       -       2,493  
                                                         
Sale of preferred stock and warrants at $1.00 per share     285       -       -       -       285       -       285  
                                                         
Preferred stock and warrants issued for services     5       -       -       -       5       -       5  
                                                         
Net loss     -       -       -       -       -       (11,100 )     (11,100 )
                                                         
Balance, Decemberr 31, 2017     495       -       10,888,929       1       50,885       (59,734 )     (8,848 )
                                                         
Stock-based compensation     -       -       -       -       90       -       90  
                                                         
Conversion of notes     -       -       73,675,000       7       496       -       503  
                                                         
Net loss     -       -       -       -       -       (12 )     (12 )
                                                         
Balance, Decemberr 31, 2018     495     $ -       84,563,929     $ 8     $ 51,471     $ (59,746 )   $ (8,267 )

 

The accompanying notes are an integral part of these audited consolidated financial statements.            

  

F- 5

 

 

INSPYR THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

    Year Ended
December  31,
 
    2018     2017  
             
Cash flows from operating activities:                
Net loss   $ (12 )   $ (11,100 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation and amortization     19       40  
Stock-based compensation     90       207  
(Gain) loss on change in fair value of derivative liability     (1,052 )     103  
Gain on conversion of debt     (210 )     (88 )
Amortization of debt discount     486       93  
Finance cost     64       5,137  
Impairment of goodwill     -       2,159  
Impairment of equipment     -       332  
Decrease in operating assets:                
Prepaid expenses and other assets     4       114  
Increase in operating liabilities:                
Accounts payable and accrued expenses     407       1,911  
Cash used in operating activities     (204 )     (1,092 )
                 
Cash flows from investing activities:                
Cash from acquisition     -       23  
Acquisition of office equipment     -       (3 )
Cash provided by investing activities     -       20  
                 
Cash flows from financing activities:                
Proceeds from convertible notes     525       250  
Proceeds from sale of stock and warrants     -       285  
Cash provided by financing activities     525       535  
                 
Net increase (decrease) in cash and restricted cash     321       (537 )
Cash and restricted cash, beginning of year     10       547  
                 
Cash and restricted cash, end of year   $ 331     $ 10  

 

The accompanying notes are an integral part of these audited consolidated financial statements.    

 

F- 6

 

  

INSPYR THERAPEUTICS, INC.

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 an early-stage, pre-revenue, pharmaceutical company focused on the discovery and development of prodrug cancer therapeutics for the treatment of solid tumors, including brain, liver, prostate and other cancers. We plan to develop a series of therapies based on our target-activated prodrug technology platform.

 

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 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 A 2B antagonists and dual A 2A /A 2B 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 A 2A agonists leading to selection of a clinical candidate for an Investigative New Drug or IND enabling studies; (iii) licensing and/or partnering the A 2B antagonists, dual A 2A /A 2B antagonists, and/or A 2A 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. We are currently using such funds to attempt to become current in 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 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 $60 million as of December 31, 2018. 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 restricted cash balances at December 31, 2018 was approximately $331,000, representing 90.4% of our total assets. Based on our current expected level of operating expenditures, we expect to be able to fund our operations into the third quarter of 2019. We curtailed operations in February 2018. 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. We raised approximately $500,000 in July 2018 and $25,000 in December 2018, which we expect will enable us to bring our required annual and quarterly filings current, which will enable us to seek additional financing.

 

F- 7

 

 

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, 2018 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 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.

 

NOTE 3 – SUMMARY OF CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES

 

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 $0.2 million and $1.7 million for the years ended December 31, 2018 and 2017, 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, 2018 or 2017.

 

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 $0.3 million and $0.01 million at December 31, 2018 and 2017, respectively. As of December 31, 2018 and 2017, 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.

 

F- 8

 

 

Due to the suspension of business activity in February 2018, the Company determined that the office and lab equipment acquired pursuant to the Lewis & Clark, Pharmaceuticals, Inc. acquisition had become fully impaired as of December 31, 2017. Accordingly, we recorded an impairment charge of $0.3 million during the year ended December 31, 2017.

 

Depreciation expense was approximately $2,000 and $23,000 for the years ended December 31, 2018 and 2017, 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, 2018 and 2017, as they would be anti-dilutive:

 

    Year Ended December 31,  
    2018     2017  
Shares underlying options outstanding     323,514       356,280  
Shares underlying warrants outstanding     2,512,930       3,045,740  
Shares underlying convertible notes outstanding     828,337,812       135,122,128  
Shares underlying convertible preferred stock outstanding     26,395,624       18,324,050  
      857,569,880       156,848,198