See notes to unaudited condensed consolidated financial statements
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
Note A.
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OVERVIEW OF BUSINESS
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D
escription
of the Business
Capstone Therapeutics Corp. (the “Company”,
“we”, “our” or “us”) is a biotechnology company committed to developing a pipeline of novel
peptides and other molecules aimed at helping patients with under-served medical conditions. Previously, we were focused on the
development and commercialization of two product platforms: AZX100 and Chrysalin (TP508). In 2012, we terminated the license for
Chrysalin (targeting orthopedic indications). In 2014, we terminated the license for AZX100 (targeting dermal scar reduction).
Capstone no longer has any rights to or interest in Chrysalin or AZX100.
On August 3, 2012, we entered into a joint
venture, LipimetiX Development, LLC, (now LipimetiX Development, Inc.), (the “JV”), to develop Apo E mimetic peptide
molecule AEM-28 and its analogs. The JV has a development plan to pursue regulatory approval of one or more analogs of AEM-28 as
treatment for Homozygous Familial Hypercholesterolemia, other hyperlipidemic indications, and acute coronary syndrome/atherosclerosis
regression. The initial AEM-28 development plan extended through Phase 1a and 1b/2a clinical trials and was completed in the fourth
quarter of 2014. The clinical trials had a safety primary endpoint and an efficacy endpoint targeting reduction of cholesterol
and triglycerides.
In early 2014, the JV received allowance
from regulatory authorities in Australia permitting the JV to proceed with the planned clinical trials. The Phase 1a clinical trial
commenced in Australia in April 2014 and the Phase 1b/2a clinical trial commenced in Australia in June 2014. The clinical trials
for AEM-28 were randomized, double-blinded, placebo-controlled studies to evaluate the safety, tolerability, pharmacokinetics and
pharmacodynamics of six escalating single doses (Phase 1a in healthy patients with elevated cholesterol) and multiple ascending
doses of the three highest doses from Phase 1a (Phase 1b/2a in patients with hypercholesterolemia and healthy volunteers with elevated
cholesterol and high Body Mass Index). The Phase 1a clinical trial consisted of 36 patients and the Phase 1b/2a consisted of 15
patients. Both clinical trials were completed in 2014 and the Medical Safety Committee, reviewing all safety-related aspects of
the clinical trials, observed a generally acceptable safety profile. As first-in-man studies, the primary endpoint was safety;
yet efficacy measurements analyzing pharmacodynamics yielded statistical significance in the pooled dataset favoring AEM-28 versus
placebo in multiple lipid biomarker endpoints.
Concurrent with the clinical development
activities of AEM-28, the JV has performed pre-clinical studies that have identified analogs of AEM-28, and new formulations, that
have the potential of increased efficacy, higher human dose toleration and an extended composition of matter patent life (application
filed with the U.S. Patent and Trademark Office in 2014).
The JV and the Company are exploring fundraising,
partnering or licensing, to obtain additional funding to continue development activities and operations.
The
JV and the Company do not have sufficient funding at this time to continue additional material development activities. The JV may
conduct future clinical trials in Australia, the USA, and other regulatory jurisdictions if regulatory approvals, additional funding,
and other conditions permit.
The Company, funding permitting, intends
to continue limiting its internal operations to a virtual operating model while monitoring and participating in the management
of JV’s development activities.
Description of Current Peptide Drug Candidates.
Apo E Mimetic Peptide Molecule –
AEM-28 and its analogs
Apolipoprotein E is a 299 amino acid protein
that plays an important role in lipoprotein metabolism. Apolipoprotein E (Apo E) is in a class of protein that occurs throughout
the body. Apo E is essential for the normal metabolism of cholesterol and triglycerides. After a meal, the postprandial (or post-meal)
lipid load is packaged in lipoproteins and secreted into the blood stream. Apo E targets cholesterol and triglyceride rich lipoproteins
to specific receptors in the liver, decreasing the levels in the blood. Elevated plasma cholesterol and triglycerides are independent
risk factors for atherosclerosis, the buildup of cholesterol rich lesions and plaques in the arteries. AEM-28 is a 28 amino acid
mimetic of Apo E and AEM-28 analogs are also 28 amino acid mimetics of Apo E (with an aminohexanoic acid group and a phospholipid).
Both contain a domain that anchors into a lipoprotein surface while also providing the Apo E receptor binding domain, which allows
clearance through the heparan sulfate proteoglycan (HSPG) receptors (Syndecan-1) in the liver. AEM-28 and its analogs, as Apo E
mimetics, have the potential to restore the ability of these atherogenic lipoproteins to be cleared from the plasma, completing
the reverse cholesterol transport pathway, and thereby reducing cardiovascular risk. This is an important mechanism of action for
AEM-28 and its analogs. Atherosclerosis is the major cause of cardiovascular disease, peripheral artery disease and cerebral artery
disease, and can cause heart attack, loss of limbs and stroke. Defective lipid metabolism also plays an important role in the development
of adult onset diabetes mellitus (Type 2 diabetes), and diabetics are particularly vulnerable to atherosclerosis, heart and peripheral
artery diseases. Our joint venture has an Exclusive License Agreement with the University of Alabama at Birmingham Research Foundation
for a broad domain of Apo E mimetic peptides, including AEM-28 and its analogs.
Company History
Prior to November 2003, we developed, manufactured
and marketed proprietary, technologically advanced orthopedic products designed to promote the healing of musculoskeletal bone
and tissue, with particular emphasis on fracture healing and spine repair. Our product lines, which included bone growth stimulation
and fracture fixation devices, are referred to as our “Bone Device Business.” In November 2003, we sold our Bone Device
Business.
In August 2004, we purchased substantially
all of the assets and intellectual property of Chrysalis Biotechnology, Inc., including its exclusive worldwide license for Chrysalin,
a peptide, for all medical indications. Subsequently, our efforts were focused on research and development of Chrysalin with the
goal of commercializing our products in fresh fracture healing. (In March 2012, we returned all rights to the Chrysalin intellectual
property and no longer have any interest in, or rights to, Chrysalin.)
In February 2006, we purchased certain assets
and assumed certain liabilities of AzERx, Inc. Under the terms of the transaction, we acquired an exclusive license for the core
intellectual property relating to AZX100, an anti-fibrotic peptide. In 2014, we terminated the License Agreement with AzTE (Licensor)
for the core intellectual property relating to AZX100 and returned all interest in and rights to the AZX100 intellectual property
to the Licensor.
On August 3, 2012, we entered into a joint
venture (As described in Note B below) to develop Apo E mimetic peptide molecule AEM-28 and its analogs.
Our development activities represent a single
operating segment as they shared the same product development path and utilized the same Company resources. As a result, we determined
that it is appropriate to reflect our operations as one reportable segment.
OrthoLogic Corp. commenced doing business
under the trade name of Capstone Therapeutics on October 1, 2008, and we formally changed our name from OrthoLogic Corp. to Capstone
Therapeutics Corp. on May 21, 2010.
In these notes, references to “we”,
“our”, “us”, the “Company”, “Capstone Therapeutics”, “Capstone”, and
“OrthoLogic” refer to Capstone Therapeutics Corp. References to our joint venture or “JV”, refer to LipimetiX
Development, Inc. (formerly LipimetiX Development, LLC).
Basis of presentation, Going Concern,
and Management’s Plans.
The accompanying financials statements have been prepared assuming the Company will continue
as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.
Management
has determined that the Company will require additional capital above its current cash and working capital balances to further
develop AEM-28 and its analogs or to continue operations. Accordingly, the Company has significantly reduced its development activities.
The Company’s corporate strategy is to raise funds by possibly engaging in a strategic/merger transaction or conducting a
private or public offering of debt or equity securities for capital. As described in Note E below, the Company, on July 14, 2017,
raised $3,440,000, with net proceeds of approximately $2,074,000, after paying off the Convertible Promissory Notes described in
Note D below, and transaction costs of $287,000. As discussed in Note B below, in August 2017, the Company used $1,000,000 of the
net proceeds to purchase 93,458 shares of LipimetiX Development, Inc.’s Series B-2 Preferred Stock.
The additional
funds, as well as a commitment of additional funding from the same investor on an as needed basis of approximately $275,000 through
an increase in its outstanding long-term debt, alleviated the substantial doubt about the entity’s ability to continue as
a going concern; however, additional funds will be required for the joint venture to reach its development goals and for the Company
to continue its planned operations
In the opinion of management, the unaudited
condensed interim financial statements include all adjustments necessary for the fair presentation of our financial position, results
of operations, and cash flows, and all adjustments were of a normal recurring nature. The results of operations for the interim
periods are not necessarily indicative of the results to be expected for the complete fiscal year. The financial statements include
the consolidated results of Capstone Therapeutics Corp. and our approximately 60% owned subsidiary, LipimetiX Development, Inc.
Intercompany transactions have been eliminated.
Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed
or omitted pursuant to Securities and Exchange Commission rules and regulations, although we believe that the disclosures herein
are adequate to make the information presented not misleading. These unaudited condensed financial statements should be read in
conjunction with the financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December
31, 2017. Information presented as of December 31, 2017 is derived from audited financial statements.
Use of estimates.
The preparation
of financial statements in accordance with accounting principles generally accepted in the United States of America requires that
management make a number of assumptions and estimates that affect the reported amounts of assets, liabilities, and expenses in
our financial statements and accompanying notes. Management bases its estimates on historical experience and various other assumptions
believed to be reasonable. Although these estimates are based on management’s assumptions regarding current events and actions
that may impact the Company in the future, actual results may differ from these estimates and assumptions.
The valuation
of our patent license rights is considered to be a significant estimate
.
Legal and Other Contingencies
The Company is subject to legal proceedings
and claims, as well as potential inquires and action by the Securities and Exchange Commission, that arise in the course of business.
The Company records a liability when it is probable that a loss has been incurred and the amount is reasonably estimable. There
is significant judgment required in both the probability determination and as to whether an exposure can be reasonably estimated.
In the opinion of management, there was not at least a reasonable possibility the Company may have incurred a material loss with
respect to loss contingencies. However, the outcome of legal proceedings and claims brought against the Company are subject to
significant uncertainty.
Legal costs related to contingencies are
expensed as incurred and were not material in either 2018 or 2017.
Joint Venture Accounting.
The Company
entered into a joint venture in which it has contributed $6,000,000, and the noncontrolling interests have contributed certain
patent license rights. As discussed in Note B below, in August 2017, the Company purchased 93,458 shares of LipimetiX Development,
Inc.’s Series B-2 Preferred Stock for $1,000,000. Neither the Company nor the noncontrolling interests have an obligation
to contribute additional funds to the joint venture or to assume any joint venture liabilities or to provide a guarantee of either
joint venture performance or any joint venture liability. The financial position and results of operations of the joint venture
are presented on a consolidated basis with the financial position and results of operations of the Company. Intercompany transactions
have been eliminated. Joint venture losses were recorded on the basis of common ownership equity interests until common ownership
equity was reduced to $0. Subsequent joint venture losses were allocated to the Series A preferred ownership. Subsequent to March
31, 2013, all joint venture losses had been allocated to the Company. On August 25, 2016, the JV raised $1,012,000 ($946,000 net
of issuance costs) in a Series B-1 Preferred Stock and Warrant offering and in 2016, $946,000 in losses were allocated to the Series
B-1 Preferred Stock ownership interests. As of September 30, 2018, losses incurred by the JV exceeded the capital accounts of the
JV. The Company has a revolving loan agreement with the joint venture and advanced the joint venture funds for operations, with
the net amount due December 31, 2016. As described in Note B below, the due date of the revolving loan has been extended to July
15, 2020, with early payment required upon certain additional funding of the joint venture by non-affiliated parties. Losses incurred
by the joint venture in excess of the capital accounts of the joint venture will be allocated to the Company to the extent of net
outstanding advances.
Cash and cash equivalents.
Cash and cash equivalents consist of highly
liquid investments with an original maturity of three months or less.
Revenue Recognition
In May 2014, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update (“ASC 606”) No. 2014-09 “Revenue from Contracts
from Customers”. Pursuant to ASC 606, revenue is recognized by the Company when a customer obtains control of promised goods
or services. The amount of revenue that is recorded reflects the consideration that the Company expects to receive in exchange
for those goods or services. The Company applies the following five-step model in order to determine this amount: (i) identification
of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance
obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including
the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition
of revenue when (or as) the Company satisfies each performance obligation.
Upfront License Fees
: If a license to the Company’s
intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company
recognizes revenues from nonrefundable, upfront license fees based on the relative value prescribed to the license compared to
the total value of the arrangement. The revenue is recognized when the license is transferred to the collaborator and the collaborator
is able to use and benefit from the license. For licenses that are not distinct from other obligations identified in the arrangement,
the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance
obligation is satisfied over time or at a point in time. If the combined performance obligation is satisfied over time, the Company
applies an appropriate method of measuring progress for purposes of recognizing revenue from nonrefundable, upfront license fees.
The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related
revenue recognition.
Note B.
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JOINT VENTURE FOR DEVELOPMENT OF APO E MIMETIC PEPTIDE MOLECULE AEM-28
AND ANALOGS
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On August 3, 2012, we entered into a Contribution
Agreement with LipimetiX, LLC to form a joint venture, LipimetiX Development, LLC (“JV”), to develop Apo E mimetic
molecules, including AEM-28 and its analogs. In June 2015, the JV converted from a limited liability company to a corporation,
LipimetiX Development, Inc. The Company contributed $6 million, which included $1 million for 600,000 voting common ownership units
(now common stock), representing 60% ownership in the JV, and $5 million for 5,000,000 non-voting preferred ownership units (now
Series A Preferred Stock), which have preferential distribution rights. On March 31, 2016, the Company converted 1,500,000 shares
of its preferred stock into 120,000 shares of common stock, increasing its common stock ownership from 60% to 64%. On August 11,
2017, the remaining $3,500,000 (3,500,000 shares) of Series A preferred stock became convertible, at the Company’s option,
into common stock, at the lower of the Series B Preferred Stock Conversion Price, as may be adjusted for certain events, or the
price of the next LipimetiX Development, Inc. financing, exceeding $1,000,000 on independently set valuation and terms. On August
11, 2017, the Company purchased 93,458 shares of LipimetiX Development, Inc.’s Series B-2 Preferred Stock for $1,000,000
(LipimetiX Development, Inc. incurred $15,000 in transaction costs as part of the Series B-2 Preferred Stock issuance, which was
been shown in our Annual Report on Form 10-K for the year ended December 31, 2017 filed with the Securities and Exchange Commission
on February 28, 2018, as a reduction of Additional Paid in Capital on the Consolidated Statements of Changes in Equity and a cash
flow provided by financing activities in the Consolidated Statements of Cash Flows at December 31, 2017). As discussed below, the
JV Series B-1 and B-2 Preferred Stock issuances, because of the participating and conversion features of the preferred stock, effectively
changes the Company’s ownership in the JV to 62.2%. With the Series B-1 and B-2 Preferred Stock on an as-converted basis,
and the Company converting its Series A Preferred Stock to common stock, the Company’s ownership would change to 69.75%.
The JV 2016 Equity Incentive Plan has 83,480 shares of the JV’s common stock available to grant, of which, at September 30,
2018, options to purchase JV common stock shares totaling 81,479 have been granted. All options were granted with an exercise price
of $1.07, vest 50% on the date of grant and monthly thereafter in equal amounts over a twenty-four-month period and are exercisable
for ten years from the date of grant. If all stock available to grant in the JV 2016 Equity Incentive Plan were granted and exercised,
and the Series B-1 Preferred Stock Warrants were exercised, the Company’s fully diluted ownership (on an as-converted basis)
would be approximately 65.11%. On October 27, 2017 the Board granted Mr. Holliman an option to purchase14,126 shares of the LipimetiX
Development, Inc. Series B-2 Preferred Stock it currently owns, at an exercise price of $10.70 per share, subject to adjustment
and other terms consistent with the Series B-2 Preferred Stock. The option is exercisable for a five-year period from the date
of grant. If exercised, this option would reduce the Company’s fully diluted ownership (on an as-converted basis including
assumed exercise of other options and warrants) to approximately 64.31%.
LipimetiX, LLC was formed by the principals
of Benu BioPharma, Inc. (“Benu”) and UABRF to commercialize UABRF’s intellectual property related to Apo E mimetic
molecules, including AEM-28 and analogs. Benu is currently composed of Dennis I. Goldberg, Ph.D. and Eric M. Morrel, Ph.D. LipimetiX,
LLC contributed all intellectual property rights for Apo E mimetic molecules it owned and assigned its Exclusive License Agreement
between The University of Alabama at Birmingham Research Foundation (“UABRF”) and LipimetiX, LLC, for the UABRF intellectual
property related to Apo E mimetic molecules AEM-28 and its analogs to the JV, in return for 400,000 voting common ownership units
(now common stock), representing a 40% ownership interest in the JV at formation, and $378,000 in cash (for certain initial patent-related
costs and legal expenses).
On August 25, 2016, LipimetiX Development,
Inc. closed a Series B-1 Preferred Stock offering, raising funds of $1,012,000 ($946,000 net of issuance costs of approximately
$66,000). Individual accredited investors and management participated in the financing. This initial closing of the Series B-1
Preferred Stock offering resulted in the issuance of 94,537 shares of preferred stock, convertible to an equal number of the JV’s
common stock at the election of the holders and warrants to purchase an additional 33,088 shares of JV preferred stock, at an exercise
price of $10.70, with a ten-year term.
As disclosed above, on August 11, 2017,
the Company purchased 93,458 shares of LipimetiX Development, Inc.’s Series B-2 Preferred Stock for $1,000,000.
Series B (B-1 and B-2) Preferred Stock is
a participating preferred stock. As a participating preferred, the preferred stock will earn a 5% dividend, payable only upon the
election by the JV or in liquidation. Prior to the JV common stock holders receiving distributions, the participating preferred
stockholders will receive their earned dividends and payback of their original investment. Subsequently, the participating preferred
will participate in future distributions on an equal “as-converted” share basis with common stock holders. The Series
B Preferred Stock has “as-converted” voting rights and other terms standard to a security of this nature.
The Exclusive License Agreement assigned
by LipimetiX, LLC to the JV on formation of the JV, as amended, calls for payment of patent filing, maintenance and other related
patent fees, as well as a royalty of 3% on Net Sales of Licensed Products during the Term of the Agreement. The Agreement terminates
upon the expiration of all Valid Patent Claims within the Licensed Patents, which are currently estimated to expire between 2019
and 2035. The Agreement, as amended, also calls for annual maintenance payments of $25,000, various milestone payments of $50,000
to $500,000 and minimum royalty payments of $500,000 to $1,000,000 per year commencing on January 1 of the first calendar year
following the year in which the First Commercial Sale occurs. UABRF will also be paid 5% of Non-Royalty Income received.
Concurrent with entering into the Contribution
Agreement and the First Amendment and Consent to Assignment of Exclusive License Agreement between LipimetiX, LLC, UABRF and the
Company, the Company and LipimetiX, LLC entered into a Limited Liability Company Agreement for JV which established a Joint Development
Committee (“JDC”) to manage JV development activities. Upon conversion by the JV from a limited liability company to
a corporation, the parties entered into a Stockholders Agreement for the JV, and the JDC was replaced by a Board of Directors (JV
Board). The JV Board is composed of three members appointed by the non-Company common stock ownership group, three members appointed
by the Company and one member appointed by the Series B-1 Preferred Stockholders. Non-development JV decisions, including the issuance
of new equity, incurrence of debt, entry into strategic transactions, licenses or development agreements, sales of assets and liquidation,
and approval of annual budgets, will be decided by a majority vote of the common and Series B Preferred Stock (voting on an “as
-converted” basis) stockholders.
The JV, on August 3, 2012, entered into
a Management Agreement with Benu to manage JV development activities for a monthly fee of approximately $63,000 during the twenty-seven-month
development period, and an Accounting Services Agreement with the Company to manage JV accounting and administrative functions.
The services related to these agreements have been completed. New Management and Accounting Services Agreements were entered into
effective June 1, 2016. The monthly management fee in the new Management Agreement was set at $80,000 and the monthly accounting
services fee in the new Accounting Services Agreement was set at $10,000. However, no Management or Accounting Services fees are
due or payable except to the extent funding is available, as unanimously approved by members of the JV Board of Directors and as
reflected in the approved operating budget in effect at that time. In connection with the Series B-1 Preferred Stock issuance,
Management Fees totaling $300,000, of which $250,000 was charged to expense in 2016 and $50,000 was charged to expense in the first
quarter of 2017, and Accounting Fees totaling $60,000, charged to expense in 2016, were paid in 2016. In August 2017 the Accounting
Services Agreement monthly fee was increased to $20,000 and will thereafter be accrued but not payable, until certain levels of
joint venture funding are obtained from non-affiliated parties. At September 30, 2018, accounting fees of $280,000 were earned
but unpaid. In August 2017, a Management Fee of $300,000 was approved by the joint venture’s Board of Directors with $150,000
paid and charged to expense in the third quarter of 2017 and $150,000 paid and expensed in the first quarter of 2018. Commencing
April 2018, a monthly Management Fee of $50,000 is being paid.
The joint venture formation was as follows
($000’s):
Patent license rights
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$
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1,045
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Noncontrolling interests
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(667
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)
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Cash paid at formation
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$
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378
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Patent license rights were recorded at their
estimated fair value and are being amortized on a straight-line basis over the key patent life of eighty months.
The financial position and results of operations
of the joint venture are presented on a consolidated basis with the financial position and results of operations of the Company.
Intercompany transactions have been eliminated. In the Company’s consolidated financial statements, joint venture losses
were recorded on the basis of common ownership equity interests until common ownership equity was reduced to $0. Subsequent joint
venture losses were being allocated to the Series A preferred ownership equity (100% Company). Subsequent to March 31, 2013, all
joint venture losses had been allocated to the Company. On August 25, 2016 the JV raised $1,012,000, ($946,000 net of issuance
costs) in a Series B-1 Preferred Stock and Warrant offering and in 2016, $946,000 of losses were allocated to the Series B-1 Preferred
Stock ownership interests. As of September 30, 2018, losses incurred by the JV exceeded the capital accounts of the JV. The Company
has a revolving loan agreement with the joint venture, with the loan due December 31, 2016. In August 2017, the due date of the
revolving loan was extended to July 15, 2020, with early payment required upon certain additional funding of the joint venture
by non-affiliated parties. Subsequent to June 30, 2017, interest due on the revolving loan will be accrued and payable only upon
certain additional funding of the joint venture by non-affiliated parties. Until repayment, the outstanding revolving loan and
interest balance is convertible, at the Company’s option, into Series B Preferred Stock at the Series B-1 conversion price.
Losses incurred by the joint venture in excess of the capital accounts of the joint venture will be allocated to the Company to
the extent of the unpaid loan and accrued interest balance. At September 30, 2018, the revolving loan agreement balance, including
accrued interest subsequent to June 30, 2017 of $100,000, was $1,700,000.
The joint venture incurred net operating
income (expenses), prior to the elimination of intercompany transactions, of $381,000 in 2018 and ($9,269,000) for the period from
August 3, 2012 (inception) to September 30, 2018, of which $381,000, and ($7,658,000), respectively, have been recorded by the
Company. The joint venture operating expenses are included in research and development expenses in the condensed consolidated statements
of operations.
Neither the Company nor the noncontrolling
interests have an obligation to contribute additional funds to the joint venture or to assume any joint venture liabilities or
to provide a guarantee of either joint venture performance or any joint venture liability. Losses allocated to the common stock
noncontrolling interests represent an additional potential loss for the Company as the common stock noncontrolling interests are
not obligated to contribute assets to the joint venture and, depending on the ultimate outcome of the joint venture, the Company
could potentially absorb all losses associated with the joint venture. From formation of the joint venture, August 3, 2012, through
September 30, 2018, losses totaling $667,000 have been allocated to the common stock noncontrolling interests. If the joint venture
or Company is unable to obtain additional funding, the ability of the joint venture to continue development of AEM-28 and its analogs
would be impaired as would the joint venture’s ability to continue operations. If the joint venture does not continue as
a going concern, at September 30, 2018, the Company would incur an additional loss of $667,000 for the joint venture losses allocated
to the common stock noncontrolling interests.
Note C.
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Australian Refundable Research &
Development Credit
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In March 2014, LipimetiX Development LLC, (Now LipimetiX Development,
Inc. - see Note B above) formed a wholly-owned Australian subsidiary, Lipimetix Australia Pty Ltd, to conduct Phase 1a and Phase1b/2a
clinical trials in Australia. Currently Australian tax regulations provide for a refundable research and development tax credit
equal to either 43.5% or 45% (depending on the tax period) of qualified expenditures. Subsequent to the end of its Australian tax
years, LipimetiX Australia Pty Ltd submits claims for a refundable research and development tax credit. At September 30, 2018 and
December 31, 2017, expected refundable research and development tax credits of AUD$4,000 and AUD$42,000, respectively, are included
in Other current assets in the Condensed Consolidated Balance Sheets. The expected refundable research and development tax credits
for the nine-month periods ended September 30, 2018 and 2017 were AUD$4,000 and AUD$18,000, respectively and are included in the
Condensed Consolidated Statements of Operations in Income tax benefit.
Note D.
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CONVERTIBLE PROMISSORY NOTES
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On December 11, 2015, we entered into a
Securities Purchase Agreement with Biotechnology Value Fund affiliated entities Biotechnology Value Fund, L.P., Biotechnology Value
Fund II, L.P., Biotechnology Value Trading Fund OS, L.P., Investment 10, LLC, and MSI BVF SPV,), which provided $1,000,000 in funding
for our operations in the form of Convertible Promissory Notes (“Notes”). The Notes bear interest at 5% and were due
April 30, 2017, with the due date subsequently extended to July 14, 2017. The Notes were secured by all intangible and tangible
assets of the Company and convertible, either at the election of the Lenders or mandatory on certain future funding events, into
either the Company’s Common or Preferred Stock. A portion of the funds were advanced to JV to initiate preclinical development
activities. As described in Note E below, the Convertible Promissory Notes and accrued interest thereon of $79,000 were paid off
on July 14, 2017. Prior to the July 14, 2017 transaction, the Biotechnology Value Fund affiliated entities owned approximately
19% of our outstanding common stock.
Note E.
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SALE OF COMMON STOCK AND ISSUANCE OF
SECURED debT
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As described in our Current Report on Form 8-K filed with the
Securities and Exchange Commission on July 17, 2017, on July 14, 2017, the Company entered into a Securities Purchase, Loan and
Security Agreement (the “Agreement”) with BP Peptides, LLC (“Brookstone"). The net proceeds will be used
to fund our operations, infuse new capital into our joint venture, LipimetiX Development, Inc. ("JV") (As described
in Note B above, in August 2017, the Company used $1,000,000 of the net proceeds to purchase 93,458 shares of LipimetiX Development,
Inc.’s Series B-2 Preferred Stock.), to continue its development activities, and pay off the Convertible Promissory Notes
(as described in Note D above) totaling $1,000,000, plus $79,000 in accrued interest.
Pursuant to the Agreement, Brookstone funded
an aggregate of $3,440,000, with net proceeds of approximately $2,074,000, after paying off the Convertible Promissory Notes and
transaction costs, of which $1,012,500 was for the purchase of 13,500,000 newly issued shares of our Common Stock, and $2,427,500
was in the form of a secured loan, due October 15, 2020. On July 14, 2017 Brookstone also purchased 5,041,197 shares of the Company’s
Common Stock directly from Biotechnology Value Fund affiliated entities, resulting in ownership of 18,541,197 shares of the Company’s
Common Stock, representing approximately 34.1% of outstanding shares of the Company’s Common Stock at September 30, 2018.
Transaction costs of $287,000 have been deferred and will be written off over the life of the secured loan, thirty-nine months
from July 14, 2017 to October 20, 2020, on the straight-line basis. Additional transaction costs of $12,000 were incurred with
the Amendment (see Note F) and will be written off over the period of the date of the Amendment, January 30, 2018, to October 15,
2020. At September 30, 2018 transaction costs of $110,000 ($69,000 in 2018 and $41,000 in the second half of 2017), have been amortized
and included in the Condensed Consolidated Statements of Operations in Interest and Other Expenses. At September 30, 2018 and December
31, 2017, unamortized transaction costs of $189,000 and $246,000, respectively, have been netted against the outstanding Secured
Debt balance on the Condensed Consolidated Balance Sheets. As discussed in Note F below, interest payable on the Secured Debt is
now due at loan maturity, October 15, 2020, and, at September 30, 2018 and December 31, 2017, accrued interest of $177,000 and
$68,000, respectively, has been included in the Secured Debt balance on the Condensed Consolidated Balance Sheets. The interest
on the secured debt ($109,000 in 2018 and $68,000 in the second half of 2017) has been included in the Condensed Consolidated Statements
of Operations in Interest and other income (expense), net.
A summary of the Secured Debt activity is as follows (000’s):
|
|
September 30, 2018
|
|
December 31, 2017
|
|
|
|
|
|
Secured Debt
|
|
$
|
2,427
|
|
|
$
|
2,427
|
|
Transaction costs
|
|
|
(299
|
)
|
|
|
(287
|
)
|
|
|
$
|
2,128
|
|
|
$
|
2,140
|
|
Amortization
|
|
|
110
|
|
|
|
41
|
|
|
|
$
|
2,238
|
|
|
$
|
2,181
|
|
Accrued interest
|
|
|
177
|
|
|
|
68
|
|
|
|
$
|
2,415
|
|
|
$
|
2,249
|
|
The secured loan bears interest at 6% per
annum, with interest payable quarterly (now due at loan maturity see Note F below) and is secured by a security interest in all
of our assets. As part of the Agreement, the Company and Brookstone entered into a Registration Rights Agreement granting Brookstone
certain demand and piggyback registration rights.
A provision in the Agreement entered into
with Brookstone also requires the Company to nominate two candidates for a director position that have been recommended by Brookstone
as long as Brookstone beneficially owns over 20% of the Company’s outstanding common stock and to nominate one candidate
for a director position that has been recommended by Brookstone as long as Brookstone beneficially owns over 5% but less than 20%
of the Company’s outstanding common stock.
On April 18, 2017,
the Company and Computershare Trust Company, N.A., as Rights Agent (the “Rights Agent”) entered into Tax Benefit Preservation
Plan Agreement (the “Plan”), dated as of April 18, 2017, between the Company and the Rights Agent, as described in
the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 19, 2017. The Plan is
intended to act as a deterrent to any person (together with all affiliates and associates of such person) acquiring “beneficial
ownership” (as defined in the Plan) of 4.99% or more of the outstanding shares of Common Stock without the approval of the
Board (an “Acquiring Person”), in an effort to protect against a possible limitation on the Company’s ability
to use its net operating loss carryforwards. The Board, in accordance with the Plan, granted an Exemption to Brookstone with respect
to the share acquisition described above, and Brookstone’s acquisition of 5,041,197 shares of the Company’s Common
Stock from Biotechnology Value Fund affiliated entities, making Brookstone an Exempt Person in respect of such transactions.
Note F.
|
|
RELATED PARTY TRANSACTION - DEFERRAL OF SECURED DEBT INTEREST PAYMENTS AND ISSUANCE
OF WARRANTS TO PURCHASE SHARES OF THE COMPANY’S COMMON STOCK
|
As described in
our Current Report on Form 8-K filed with the Securities and Exchange Commission on February 1, 2018, on January 30, 2018, the
Company entered into the First Amendment to Securities Purchase, Loan and Security Agreement (the “Amendment”) with
BP Peptides, LLC (“Brookstone"). Brookstone currently owns approximately 34.1% of our outstanding common stock. Under
the original Agreement (see Note E above), interest on the Secured Debt was payable quarterly. The Amendment defers the payment
of interest until the Secured Debt’s maturity, October 15, 2020. In consideration for the deferral, the Company issued a
Warrant to Brookstone to purchase up to 6,321,930 shares of the Company’s Common Stock with an exercise price of $.075 per
share. The warrant expires October 15, 2025 and provides for quarterly vesting of shares in amounts approximately equal to the
amount of quarterly interest payable that would have been payable under the Agreement, converted into shares at $0.75. At September
30, 2018, 1,947,321 shares are fully vested and exercisable.
The fair value
of the Warrants was determined to be $43,000. The fair value of the Warrants will be amortized over the deferral period, January
30, 2018 to October 15, 2020, on the straight-line basis, as additional interest expense. Amortization expense totaled $11,000
for the nine-month period ended September 30, 2018 and is included in Interest and other expenses, net, in the Condensed Consolidated
Statements of Operations.
Note G.
|
|
LIPIMETIX DEVELOPMENT, INC. LICENSE AGREEMENT
|
As described in our Current Report on Form
8-K filed with the Securities and Exchange Commission on May 7, 2018, on May 2, 2018, our JV, LipimetiX Development, Inc., entered
into a License Agreement (the “Sub-License”) with Anji Pharmaceuticals Inc. (“ANJI") to sublicense, under
its Exclusive License Agreement with the UAB Research Foundation, the use of the JV’s AEM-28 and analogs intellectual property
in the Territory of the People’s Republic of China, Taiwan and Hong Kong (the “Territory”). The Sub-License calls
for an initial payment of $2,000,000, payment of a royalty on future Net Sales in the Territory and cash milestone payments based
on future clinical/regulatory events. ANJI will perform all development activities allowed under the Sub-License in the Territory
at its sole cost and expense. The JV recorded the receipt of the $2,000,000 payment as revenue in the second quarter of 2018. Transaction
costs related to the revenue totaled $254,000 and consisted of a $100,000 payment to the UAB Research Foundation, as required by
the UAB Research Foundation Exclusive License Agreement, a $100,000 advisory fee and $54,000 in legal fees. As described in Note
B above, at September 30, 2018, JV net losses exceeded the JV capital accounts and all losses were being allocated to the Company.
Revenue recorded for the $2,000,000 payment reduced the amount of JV net losses previously allocated to the Company.
A copy of the UAB Research Foundation Exclusive
License Agreement was attached as Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the period ending June
30, 2012 filed with Securities and Exchange Commission (‘SEC”) on August 10, 2012. A copy of the First Amendment and
Consent to Assignment of the Exclusive License Agreement was attached as Exhibit 10.3 to the Company’s Quarterly Report on
Form 10-Q for the period ending June 30, 2012 filed with the SEC on August 10, 2012. The Second Amendment to the Exclusive License
Agreement was attached as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on January 30, 2015.