UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.20549

 

 

 

FORM 10-Q

 

(Mark one)

 

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

 

For the Quarterly Period Ended September 30, 2017

 

Or

 

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

 

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   (I.R.S. Employer
incorporation or organization   Identification No.)

 

31200 Via Colinas, Suite 200    
Westlake Village, CA   91362
(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code (818) 661-6302

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). ☒  Yes ☐  No

 

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

 

Large accelerated filer ☐ Accelerated filer ☐
   
Non-accelerated filer ☐ (Do not check if a small reporting company) Smaller reporting 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 Exchange Act) ☐ Yes ☒  No

 

As of November 7, 2017, the issuer had 9,578,929 common shares, $0.0001 par value, issued and outstanding.

 

 

 

  

Table of Contents

 

      Page
PART I FINANCIAL INFORMATION   5
       
Item 1. Condensed Consolidated Financial Statements (unaudited)   5
       
  Condensed Consolidated Balance Sheets as of September 30, 2017 (unaudited) and December 31, 2016   5
       
  Condensed Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2017 and 2016   6
       
  Condensed Consolidated Statement of Changes in Stockholders’ Deficit (unaudited) for the nine months ended September 30, 2017   7
       
  Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2017 and 2016   8
       
  Notes to Unaudited Condensed Consolidated Financial Statements.   9
       
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.   20
       
Item 3. Quantitative and Qualitative Disclosures about Market Risk.   27
       
Item 4. Controls and Procedures.   28
       
PART II OTHER INFORMATION   28
       
Item 1. Legal Proceedings.   28
       
Item 1A. Risk Factors.   28
       
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.    43
       
Item 3. Defaults Upon Senior Securities.   44
       
Item 4. Mine Safety Disclosure.   44
       
Item 5. Other Information.   44
       
Item 6. Exhibits.   44

 

2 

 

 

ADVISEMENT

 

We urge you to read this entire Quarterly Report, including the financial statements and related notes included herein as well as our 2016 Annual Report on Form 10-K for the year ended December 31, 2016, which also includes “Risk Factors,” filed with the United States Securities and Exchange Commission or SEC on April 17, 2017. As used in this Quarterly Report, unless the context otherwise requires, the words “we,” “us,” “our,” “the Company,” “Inspyr Therapeutics” and “registrant” refer to Inspyr Therapeutics, Inc. and our wholly owned subsidiary, Lewis & Clark Pharmaceuticals, Inc. Also, any reference to “common stock “or “common shares” refers to our $0.0001 par value common stock. The information contained herein is current as of the date of this Quarterly Report (September 30, 2017), unless another date is specified. 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 and our $.0.0001 par value Series C preferred stock unless specified. 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.

 

We prepare our interim financial statements in accordance with United States generally accepted accounting principles. Our financials and results of operation for the three and nine month periods ended September 30, 2017 is not necessarily indicative of our prospective financial condition and results of operations for the pending full fiscal year ending December 31, 2017. The interim financial statements and other information presented in this Quarterly Report should be read together with the reports, statements and information filed by us with the United States Securities and Exchange Commission or SEC.

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly 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, pre-clinical studies and potential 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 our ability to, without limitation:

 

  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;

 

3 

 

 

  successfully complete our anticipated clinical trials and pre-clinical studies of our proposed drug candidates and gain regulatory approval to market such product;
  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 recently acquired wholly owned subsidiary, Lewis & Clark Pharmaceuticals, Inc.; and
  manage any other factors discussed in the “Risk Factors” section, and elsewhere in this Quarterly 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. 

 

4 

 

 

PART I

FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

INSPYR THERAPEUTICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)

 

   September 30,   December 31, 
   2017   2016 
   (Unaudited)     
ASSETS          
           
Current assets:          
Cash and cash equivalents  $18   $547 
Prepaid expenses   16    112 
Total current assets   34    659 
Office and lab equipment, net of accumulated depreciation of $10 and $0   350    4 
Intangible assets, net of accumulated amortization of $158 and $144   54    68 
Goodwill   2,159     
Other assets   3    3 
Total assets  $2,600   $734 
           
LIABILITIES AND STOCKHOLDERS’ DEFICIT          
           
Current liabilities:          
Accounts payable  $1,724   $1,238 
Accrued expenses   1,093    384 
Convertible debentures, net of unamortized discount of $307   2,480     
Derivative liability   3,338    2,541 
Total current liabilities   8,635    4,163 
Total liabilities   8,635    4,163 
           
Commitments and contingencies        
           
Stockholders’ deficit:          
Convertible preferred stock, par value $.0001 per share; 30,000,000 shares authorized, 495 and 2,828 shares issued and outstanding, respectively        
Common stock, par value $.0001 per share; 150,000,000 shares authorized, 9,075,589 and 1,398,832 shares issued and outstanding, respectively   1     
Additional paid-in capital   48,425    45,391 
Accumulated deficit   (54,461)   (48,820)
           
Total stockholders’ deficit   (6,035)   (3,429)
           
Total liabilities and stockholders’ deficit  $2,600   $734 

 

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

 

5 

 

   

INSPYR THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF LOSSES
(unaudited)
(in thousands, except share and per share data)

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2017   2016   2017   2016 
                 
Operating expenses:                    
Research and development  $384   $379   $1,349   $1,025 
General and administrative   474    509    1,255    1,600 
Total operating expenses   858    888    2,604    2,625 
                     
Loss from operations   (858)   (888)   (2,604)   (2,625)
                     
Other income (expense):                    
Gain on change in fair value of derivative liability   1,405    (334)   3,403    421 
Gain on conversion of debt   39        39     
Interest income (expense), net   (5,017)   1    (6,479)   3 
                     
Loss before provision for income taxes   (4,431)   (1,221)   (5,641)   (2,201)
                     
Provision for income taxes                
                     
Net loss  $(4,431)  $(1,221)  $(5,641)  $(2,201)
                     
Net loss per common share, basic and diluted  $(0.69)  $(0.88)  $(1.77)  $(1.58)
                     
Weighted average shares outstanding   6,440,802    1,392,079    3,183,289    1,392,079 

 

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

 

6 

 

 

INSPYR THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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   $   $45,391   $(48,820)  $(3,429)
                                    
Stock-based compensation                   174        174 
                                    
Conversion of preferred stock to common stock   (118)       223,585                 
                                    
Preferred stock exchanged for convertible notes payable   (2,505)                        
                                    
Conversion of notes           331,000        44        44 
                                    
Common stock issued for acquisition           7,122,172    1    2,492        2,493 
                                    
Reclasification of derivative liability                   324        324 
                                    
Sale of preferred stock and warrants at $1.00 per share   285                285        285 
                                    
Preferred stock and warrants issued for services   5                5        5 
                                    
Derivative liability                   (290)       (290)
                                    
Net loss                       (5,641)   (5,641)
                                    
Balance, September 30, 2017 (unaudited)   495   $    9,075,589   $1   $48,425   $(54,461)  $(6,035)

  

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

 

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INSPYR THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)

 

   Nine Months Ended September 30, 
   2017   2016 
Cash flows from operating activities:          
Net loss  $(5,641)  $(2,201)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   23    16 
Stock-based compensation   179    70 
Gain on change in fair value of derivative liability   (3,403)   (421)
Loss on sale of assets       4 
Gain on conversion of debt   (39)    
Amortization of debt discount   13     
Finance cost   6,463     
Increase in operating assets:          
Prepaid expenses   100    (17)
Increase in operating liabilities:          
Accounts payable and accrued expenses   1,221    414 
Cash used in operating activities   (1,084)   (2,135)
           
Cash flows from investing activities:          
Cash from acquisition   23     
Proceeds from sale of assets       4 
Acquisition of office equipment   (3)   (4)
Cash provided by investing activities   20     
           
Cash flows from financing activities:          
Proceeds from convertible notes   250     
Proceeds from sale of stock and warrants   285     
Cash provided by financing activities   535     
           
Net decrease in cash   (529)   (2,135)
Cash, beginning of period   547    2,465 
           
Cash, end of period  $18   $330 

 

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

 

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INSPYR THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED 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.

 

Effective August 1, 2016, pursuant to a certificate of amendment to our amended and restated certificate of incorporation, we changed our corporate name from GenSpera, Inc. to Inspyr Therapeutics, Inc. Effective August 1, 2016, our common stock ceased trading under the symbol “GNSZ” and began trading under the symbol NSPX on August 2, 2016.

 

Effective November 17, 2016 at 5:00 p.m. Eastern Time, we effected a one (1) for thirty (30) reverse stock split of our common stock. Accordingly, each of our shareholders received one (1) new share of common stock for every thirty (30) shares of common stock such shareholder held immediately prior to the effective time of the reverse split. The reverse stock split affected all of our issued and outstanding shares of common stock as well as the number of shares of common stock underlying stock options, warrants and other exercisable or convertible instruments outstanding at the effective time of the reverse split. The reverse split also has the effect of proportionately increasing the applicable conversion or exercise price of such convertible securities. The shareholders received no fractional shares and instead had every fractional share rounded up to the next whole number.

 

All references to common stock, share and per share amounts have been retroactively restated to reflect the 1:30 reverse stock split as if it had taken place as of the beginning of the earliest period presented.

 

We are a clinical-stage, pre-revenue, pharmaceutical company primarily focused on the development of therapeutics for the treatment of patients with cancer. Our therapeutics include a prodrug, mipsagargin and, through our acquisition of Lewis and Clark Pharmaceuticals, Inc., a pipeline of small molecule adenosine receptor modulators.

 

A prodrug is an inactive precursor of a drug that is converted into its active form only at the site of the tumor. The prodrug technology platform combines a powerful cytotoxin with a patented prodrug delivery system that targets the release of the drug within the tumor. We believe our cancer prodrugs have the potential to provide a targeted therapeutic approach to a broad range of solid tumors with fewer side effects than those related to current cytotoxic chemotherapy treatments. Our lead drug candidate, mipsagargin, has completed an open label single arm Phase II clinical trial in patients with advanced hepatocellular carcinoma (HCC) or liver cancer.

 

The adenosine receptor modulators include A2B antagonists, A2A antagonists, dual A2A/A2B antagonists, and A2A agonists that have broad development applicability including indications within immuno-oncology and inflammation. Adenosine is implicated in immunosuppression in the tumor microenvironment. Adenosine receptor antagonists may boost the host immune response against the tumor as a single-agent and in combination with other existing immuno-oncology agents leading to enhanced tumor killing and inhibition of metastasis. Adenosine also has anti-inflammatory properties in the acute and chronic setting. Adenosine receptor agonists may promote a decreased inflammatory response and can potentially treat a broad range of inflammatory and autoimmune based diseases and conditions (e.g., rheumatoid arthritis, joint injury, Crohn’s disease, psoriasis) as well as improve wound healing and decrease pain.  

 

Our major focus for the next twelve to eighteen months is the (i) further characterization of the current pipeline of A2B antagonists and dual A2A/A2B antagonists leading to an Investigative New Drug or IND enabling studies, (ii) further characterization of the A2A agonists, (iii) licensing and/or partnering the A2B antagonists, A2A antagonists, dual A2A/A2B antagonists, and A2A agonists for further development, (iv) through our newly acquired adenosine receptor chemistry technology platform, continue to produce next generation adenosine receptor modulators, (v) pursue licensing and/or partnering of mipsagargin, (vi) conduct a clinical study of mipsagargin in patients with advanced HCC, and (vii) explore collaborations utilizing mipsagargin in new, non-clinical solid tumor models with leading researchers in the oncology field.

  

While we believe that the data from our nonclinical and completed clinical 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.

 

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NOTE 2 – MANAGEMENT’S PLANS TO CONTINUE AS A GOING CONCERN 

 

The opinion of our independent registered accounting firm on our December 31, 2016 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. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although we believe that the disclosures made are adequate to make the information not misleading. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. We have incurred losses since inception and have an accumulated deficit of $54 million as of September 30, 2017. We anticipate incurring additional losses for the foreseeable future until such time, if ever, that we can generate significant sales from our therapeutic product candidates which are currently in development or we enter into cash flow positive business development transactions.

 

To date, we have generated no sales or revenues, have incurred significant losses and expect to incur significant additional losses as we advance mipsagargin through clinical studies. Consequently, our operations are subject to all the risks inherent in the establishment of a pre-revenue business enterprise as well as those risks associated with a company engaged in the research and development of pharmaceutical compounds. 

 

Our cash and cash equivalents balance at September 30, 2017 was $18,000, representing 1% of our total assets. Based on our current expected level of operating expenditures, and financings completed in the first, second and third quarters of 2017, we expect to be able to fund our operations into the fourth quarter of 2017. We will require additional cash to fund and continue our operations beyond that point. This period could be shortened if there are any unanticipated increases in planned spending on development programs or other unforeseen events. We anticipate raising additional funds through collaborative arrangements, licensing agreements, public or private sales of debt or equity securities, or some combination thereof. There is no assurance that any such arrangement will be entered into or that financing will be available when needed in order to allow us to continue our operations, or if available, on terms favorable or acceptable to us.

 

In the event 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, 2016 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 2017. 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 operations which means that our shareholders will lose their entire investment.

 

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

 

Basis of Presentation

 

The accompanying condensed consolidated financial statements are unaudited. The unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading.

 

These interim financial statements as of and for the three and nine months ended September 30, 2017 and 2016 are unaudited; however, in the opinion of management, such statements include all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position, results of operations and cash flows of the Company for the periods presented. The results for the nine months ended September 30, 2017 are not necessarily indicative of the results to be expected for the year ending December 31, 2017 or for any future period. All references to September 30, 2017 and 2016 in these footnotes are unaudited.

 

Fair Value of Financial Instruments

 

Our short-term financial instruments, including cash, accounts payable and other liabilities, consist primarily of instruments with maturities of three months or less when acquired. We believe that the fair values of our current assets and current liabilities approximate their reported carrying amounts.

 

The derivative liability consists of our convertible preferred stock with anti-dilution provisions, and related warrants. The Company uses the Black-Scholes option pricing model to value its derivative liability which incorporate the Company’s stock price, volatility, U.S. risk-free interest rate, dividend rate, and estimated life.

 

These unaudited condensed financial statements should be read in conjunction with our audited financial statements and the notes thereto for the year ended December 31, 2016, included in the Company’s annual report on Form 10-K filed with the SEC on April 17, 2017.

 

The condensed balance sheet as of December 31, 2016 has been derived from the audited financial statements at that date but do not include all disclosures required by the accounting principles generally accepted in the United States of America.

 

10 

 

 

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.

 

Research and Development

 

Research and development costs are charged to expense as incurred. Our research and development expenses consist primarily of expenditures for manufacturing, clinical trials, employee compensation and consulting costs and expenses.

 

We incurred research and development expenses of approximately $0.4 million and $0.4 million for the three months ended September 30, 2017 and 2016, respectively. We incurred research and development expenses of approximately $1.3 million and $1.0 million for the nine months ended September 30, 2017 and 2016, 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 September 30, 2017 and 2016, as they would be anti-dilutive:

 

   Nine months ended September 30, 
   2017   2016 
Shares underlying options outstanding   364,516    265,863 
Shares underlying warrants outstanding   4,511,914    1,335,466 
Shares underlying convertible preferred stock outstanding   4,770,370    411,806 
Shares underlying convertible notes outstanding   34,835,228     
    44,482,028    2,013,135 

 

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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. Based upon ASC 840-15-25 (EITF Issue 00-19, paragraph 11) the Company has adopted a sequencing approach regarding the application of ASC 815-40 to its outstanding preferred stock.

 

Pursuant to the sequencing approach, the Company evaluates its contracts based upon earliest issuance date wherein instruments with the earliest issuance date would be settled first. The sequencing policy also considers contingently issuable additional shares, such as those issuable upon a stock split, to have an issuance date to coincide with the event giving rise to the additional shares. Using this sequencing policy, all instruments convertible into common stock, including warrants and the conversion feature of notes payable, issued subsequent to December 25, 2015 are derivative liabilities. The Company values these 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 Measurements

 

Valuation Hierarchy - GAAP establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows:

 

Level 1:Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2:Quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.
Level 3:Unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value.

 

A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The Company has recorded a derivative liability for convertible preferred stock with anti-dilution provisions, and related warrants, as of September 30, 2017. The table below summarizes the fair values of our financial liabilities as of September 30, 2017 (in thousands):

                
  Fair Value at
September 30,
   Fair Value Measurement Using 
   2017   Level 1   Level 2   Level 3 
Derivative liability  $3,338   $   $   $3,338 

 

The reconciliation of the derivative liability measured at fair value on a recurring basis using unobservable inputs (Level 3) is as follows for the nine months ended September 30, 2017 (in thousands): 

     
Balance at beginning of period  $2,541 
Additions to derivative instruments, net   4,568 
Reclassification on conversions and expiration   (368)
Gain on change in fair value of derivative liability   (3,403)
Balance at end of period  $3,338 

 

Stock-Based Compensation

 

We measure the cost of employee services received in exchange for equity awards based on the grant-date fair value of the awards. All awards 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 fair value of the consideration received or the fair value of the equity instruments issued, whichever is a more reliable measurement. Compensation expense for awards granted to non-employees is re-measured on each accounting period.

 

Determining the appropriate fair value of stock-based compensation requires the input of subjective assumptions, including the expected life of the stock-based compensation and the volatility of our stock price. We use the Black-Scholes option-pricing model to value our stock option awards which incorporates our stock price, volatility, U.S. risk-free interest rate, dividend rate, and estimated life.

 

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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 nine months ended September 30, 2017 that are of significance or potential significance to the Company.

 

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 Company does not expect this standard to have a material impact on its financial statements.

 

NOTE 4 – SUPPLEMENTAL CASH FLOW INFORMATION

 

The following table contains additional information for the periods reported (in thousands).

 

   Nine Months Ended September 30, 
   2017   2016 
Non-cash financial activities:          
Derivative liability issued   4,604     
Preferred stock and warrants issued for fees   5     
Net assets and liabilities recognized with the acquisition of Lewis and Clark Pharmaceuticals, Inc.   2,493     
Accounts payable paid through issuance of debentures   70     
Debentures issued to retire preferred stock   2,504     
Debentures converted to common stock   38     

 

There was no cash paid for interest and income taxes for the nine months ended September 30, 2017 and 2016.

 

NOTE 5 – ACCRUED EXPENSES

 

Accrued expenses consist of the following (in thousands):

 

   September     
   30,   December 31, 
   2017   2016 
Accrued compensation and benefits  $707   $62 
Accrued research and development   133    126 
Accrued other   253    196 
Total accrued expenses  $1,093   $384 

 

NOTE 6 – DERIVATIVE LIABILITY

 

We account for equity-linked financial instruments, such as our convertible preferred stock, convertible debentures and our common stock warrants as either equity instruments or derivative liabilities depending on the specific terms of the respective agreement. Equity-linked financial instruments are accounted for as derivative liabilities, in accordance with ASC Topic 815 – Derivatives and Hedging, if the instrument allows for cash settlement or provide for modification of the exercise price in the event subsequent sales of common stock are at a lower price per share than the then-current warrant exercise price. Additionally, financial instruments are classified as derivative liabilities if, as a result of the anti-dilution protection, there is no limit on the number of shares that may be subsequently issued and we conclude there are not adequate authorized shares available to provide for subsequent issuances. We classify derivative liabilities on the balance sheet at fair value, and changes in fair value during the periods presented in the statement of operations, which is revalued at each balance sheet date subsequent to the initial issuance of the stock warrant.

 

In March and April 2017, we issued shares of Series C convertible preferred stock which contain anti-dilution protection and other conversion price adjustment provisions, and related warrants which contain anti-dilution protection and other exercise price adjustment provisions. As a result, the Company assessed its outstanding equity-linked financial instruments and concluded that this series of preferred stock, and related warrants, is subject to derivative accounting. The fair value of these shares is classified as a liability in the financial statements, with the change in fair value during the periods presented recorded in the statement of operations. We have recorded a finance cost of approximately $0.2 million due to the excess of the liability over the proceeds received.

 

In September, we issued convertible debentures which contain anti-dilution protection and other conversion price adjustment provisions. As a result, the Company assessed its outstanding equity-linked financial instruments and concluded that the convertible notes are subject to derivative accounting. The fair value of the conversion feature is classified as a liability in the financial statements, with the change in fair value during the periods presented recorded in the statement of operations. We have recorded a finance cost of approximately $4.6 million due to the excess of the liability over the proceeds received.

 

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As a result of recent equity financings, the conversion prices of our Series A Preferred Stock has been reduced to $0.53 per share and the conversion price of our Series B Preferred Stock and our Series C preferred stock has been reduced to $0.08 per share. The exercise prices of the warrants issued in conjunction with the Series B and Series C preferred stock have also been reduced to $0.08 per share. As a result, we have recorded a finance cost of approximately $1.7 million due to the repricing during the nine months ended September 30, 2017.

 

During the nine months ended September 30, 2017, we recorded a gain of approximately $3.4 million related to the change in fair value of the derivative liabilities during the period. For purpose of determining the fair market value of the derivative liability, the Company used Black Scholes option valuation model. The significant assumptions used in the Black Scholes valuations of the derivatives at September 30, 2017 are as follows:

 

    2017 
Volatility   124%-401% 
Expected term (years)   1 - 55 months 
Risk-free interest rate   0.99% -1.92% 
Dividend yield   None 

 

During the nine months ended September 30, 2016, we recorded a gain of approximately $0.4 million related to the change in fair value of the derivative liability during the period. For purpose of determining the fair market value of the derivative liability, the Company used Black Scholes option valuation model. The significant assumptions used in the Black Scholes valuation of the derivative are as follows:

 

   2016 
Volatility   85% 
Expected term (years)   10 months 
Risk-free interest rate   0.64% 
Dividend yield   None 

 

As of September 30, 2017 and December 31, 2016, the derivative liability recognized in the financial statements was approximately $3.3 million and $2.5 million, respectively.

 

NOTE 7 – COMMITMENTS AND CONTINGENCIES

 

Operating Leases

 

Inspyr currently does not have any ongoing leases for office space. It has availability to office space on an as needed basis. Its employees work on a remote basis. The lease for the L&C facility expires at the end of each calendar year and we have the right to renew the lease on an annual basis.

 

Rent expense amounted to approximately $19,000 and approximately $44,000 for the nine months ended September 30, 2017 and 2016, respectively.

 

Employment Agreements

 

We employ our Chief Executive Officer, our Chief Operating Officer and our Chief Medical Officer pursuant to written employment agreements. The employment agreements contain severance provisions and indemnification clauses. The indemnification agreement provides for the indemnification and defense of the executive officers, in the event of litigation, to the fullest extent permitted by law.

 

On February 28, 2017, Russell Richerson, PhD, resigned as chief operating officer of the Company, effective immediately. Dr. Richerson entered into a separation release of claims agreement (“Separation Agreement”) pursuant to which the Company: (i) issued Dr. Richerson a warrant to purchase 76,726 shares of Common Stock with an exercise price of $0.75 per share and a term of three and a half (3.5) years, (ii) agreed to make the vested portion of any options held by Dr. Richerson, exercisable at any time during their remaining term regardless of any termination provisions contained in the applicable equity compensation plans pursuant to which such awards were made (collectively, the “Awards”) and (iii) agreed to reduce the exercise prices of such Awards to $0.75 per share for the duration of their respective terms. In consideration of the foregoing, Dr. Richerson agreed to release the Company from any and all claims, including any rights or obligations as contained in his prior employment agreement, as amended.

 

Severance provisions are not applicable to any other executive officer employment agreements until such time as they have each been employed for at least 6 months and the Company has raised $25 million in gross proceeds from capital raising transactions. Severance provisions pursuant to a termination within 12 months of a Sale Event occurring are not applicable as of September 30, 2017, as no Sale Event has occurred prior to such date.

 

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Legal Matters

 

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 states that such termination was for “Good Reason” as a result of a 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. The 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. While the Company disputes that the termination was for “Good Reason,” as well as the amount of the bonuses due Dr. Dionne, if any, at this time the Company is unable to predict the financial outcome of this matter, and any views formed as to the viability of these claims or the financial liability which could result may change from time to time as the matter proceeds through its course. The Company is uncertain whether any litigation may result from the foregoing and the outcome of any such litigation is uncertain.

 

The Company is subject at times to other legal proceedings and claims, which arise in the ordinary course of its business. Although occasional adverse decisions or settlements may occur, the Company believes that the final disposition of such matters should not have a material adverse effect on its financial position, results of operations or liquidity.

 

NOTE 8 – CAPITAL STOCK AND STOCKHOLDERS’ EQUITY

 

Preferred Stock

 

In March and April, 2017, we sold 290.4 shares of Series C 0% Convertible Preferred Stock. The Series C Preferred Stock has a stated value of $1,000 and is immediately convertible into 387,251 shares of the Company’s common stock, subject to certain beneficial ownership limitations, at a conversion price equal to $0.75, subject to adjustment. The Conversion Price is subject to certain reset adjustments as more fully described in the Certificate of Designation (as defined below), including (a) the date of any future amendment to the Company’s certificate of incorporation with respect to a reverse stock split. The Series C Preferred Stock has anti-dilution protection until such the twelve (12) month anniversary of the issuance of the Series C Preferred Stock. See “March 2017 Offering” and “April 2017 Offering” below for further discussion.

 

Between January 1 and September 30, 2017, 79.5 shares of Series A Preferred Stock and 39 shares of Series B Preferred Stock were converted into a total of 223,585 shares of common stock.

 

On September 12, 2017 we entered into an exchange agreement (“Exchange Agreement”) with certain holders (the “Investors”) of our Series A 0% Convertible Preferred Stock (“Series A Shares”) and Series B 0% Convertible Preferred Stock (“Series B Shares”). Pursuant to the terms of the Exchange Agreement, we issued to the investors approximately $2.5 million in principal amount of senior convertible debentures in exchange for 1,614.8125 Series A Shares with a stated value of approximately $1.6 million and 890 Series B Shares with a stated value of approximately $0.9 million (collectively, the “Exchange”). In connection with the Exchange, such Series A Shares and Series B Shares have been cancelled and terminated.

 

Common Stock

 

Between January 1 and September 30, 2017, we issued a total of 223,585 shares of common stock upon the conversion of 79.5 shares of Series A Preferred Stock and 39 shares of Series B Preferred Stock.

 

During September 2017, we issued a total of 331,000 shares of common stock upon the conversion of $37,995 principal amount of our convertible debentures.

 

Effective July 31, 2017 we issued 7,122,172 shares of common stock to acquire 100% of the capital stock of Lewis & Clark, Pharmaceuticals, Inc., a Virginia Corporation, pursuant to the terms of a share exchange agreement dated July 31, 2017.

 

Equity Financings

 

March 2017 Offering

 

In March, 2017, we sold $200,000 of the Company’s securities consisting of 200 shares of Series C 0% Convertible Preferred Stock and an aggregate of 800,019 common stock purchase warrants as described below. The Series C Preferred Stock has a stated value of $1,000 and is immediately convertible into 266,673 shares of the Company’s common stock, subject to certain beneficial ownership limitations, at a conversion price equal to $0.75, subject to adjustment. The Conversion Price is subject to certain reset adjustments including the date of any future amendment to the Company’s certificate of incorporation with respect to a reverse stock split. The Series C Preferred Stock has anti-dilution protection until the twelve month anniversary of the issuance of the Series C Preferred Stock.

 

The Investors also received an aggregate of approximately: (i) 266,673 Series M common stock purchase warrants (“Series M Warrants”), (ii) 266,673 Series N common stock purchase warrants (“Series N Warrants”) and (iii) 266,673 Series O common stock purchase warrants (“Series O Warrants”) (collectively, the “Warrants”). The Series M Warrants have an exercise price of $0.90 per share, subject to adjustment, and a term of five (5) years from the date of issuance, the Series N Warrants have an exercise price of $0.75 per share, subject to adjustment, and a term of six (6) months from the date of issuance and the Series O warrants have an exercise price of $0.75, subject to adjustment, and a term of twelve (12) months from the date of issuance. The Warrants are immediately exercisable and separately transferable from the Series C Preferred Stock. In the event that the shares underlying the Warrants are not subject to a registration statement at the time of exercise, the Warrants may be exercised on a cashless basis after 6 months from the issuance date. The Warrants also contain provisions providing for an adjustment in the underlying number of shares and exercise price in the event of stock splits or dividends and fundamental transactions. Additionally, the Warrants contain anti-dilution protection until the twelve (12) month anniversary of the issuance date.

 

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April 2017 Offering

 

In April, 2017, we sold $90,431 of the Company’s securities consisting of 90.4 shares of Series C 0% Convertible Preferred Stock and an aggregate of 361,734 common stock purchase warrants as described below. The Series C Preferred Stock has a stated value of $1,000 and is immediately convertible into 120,578 shares of the Company’s common stock, subject to certain beneficial ownership limitations, at a conversion price equal to $0.75, subject to adjustment. The Conversion Price is subject to certain reset adjustments including the date of any future amendment to the Company’s certificate of incorporation with respect to a reverse stock split. The Series C Preferred Stock has anti-dilution protection until the twelve month anniversary of the issuance of the Series C Preferred Stock.

 

The Investors also received an aggregate of approximately: (i) 120,578 Series M common stock purchase warrants (“Series M Warrants”), (ii) 120,578 Series N common stock purchase warrants (“Series N Warrants”) and (iii) 120,578 Series O common stock purchase warrants (“Series O Warrants”) (collectively, the “Warrants”). The Series M Warrants have an exercise price of $0.90 per share, subject to adjustment, and a term of five (5) years from the date of issuance, the Series N Warrants have an exercise price of $0.75 per share, subject to adjustment, and a term of six (6) months from the date of issuance and the Series O warrants have an exercise price of $0.75, subject to adjustment, and a term of twelve (12) months from the date of issuance. The Warrants are immediately exercisable and separately transferable from the Series C Preferred Stock. In the event that the shares underlying the Warrants are not subject to a registration statement at the time of exercise, the Warrants may be exercised on a cashless basis after 6 months from the issuance date. The Warrants also contain provisions providing for an adjustment in the underlying number of shares and exercise price in the event of stock splits or dividends and fundamental transactions. Additionally, the Warrants contain anti-dilution protection until the twelve (12) month anniversary of the issuance date.

 

NOTE 9 – STOCK OPTIONS

 

Total stock-based compensation expense recognized for stock options issued using the straight-line method in the statement of operations for the nine months ended September 30, 2017 and 2016 was as follows:

 

   Nine months ended September 30, 
   2017   2016 
         
Research and development  $111   $21 
General and administrative   63    49 
   $174   $70 

 

The following table summarizes stock option activity for the nine months ended September 30, 2017:

 

    Number of
shares
   Weighted-
average
exercise
price
   Weighted-average
remaining
contractual term
(in years)
   Aggregate
intrinsic
value (in
thousands)
 
Outstanding at December 31, 2016    268,877   $24.15           
Granted    104,747   $0.54           
Forfeited    (9,108)  $62.05           
Outstanding at September 30, 2017    364,516   $7.71    4.6   $ 
                      
Exercisable at September 30, 2017    184,296   $12.76    3.3   $ 

 

As of September 30, 2017, there was approximately $121,000 of total unrecognized compensation cost related to non-vested stock options which vest which vest over time, and is estimated to be recognized $29,000 in 2017, $68,000 in 2018, $12,000 in 2019 and $12,000 in 2020. 

 

During the nine months ended September 30, 2017, we issued options to purchase 8,837 shares of common stock to non-employee directors. Additionally, we issued options to purchase 95,910 shares of common stock to employees. During the nine months ended September 30, 2016, we issued options to purchase 5,300 shares of common stock to non-employee directors under the Plans pursuant to our non-employee director compensation policy. We also issued options to purchase 104,626 shares of common stock to employees. Additionally, we issued options to purchase 11,833 shares of common stock to consultants and advisors. The weighted-average fair value of the options granted during 2017 and 2016 was estimated at $0.59 and $2.10 per share, respectively, on the date of grant. During the nine months ended September 30, 2017 and 2016, no options were exercised.

 

16 

 

 

The following table summarizes weighted-average assumptions using the Black-Scholes option-pricing model used on the date of the grants issued during the nine months ended September 30, 2017 and 2016:

 

    Nine months ended September 30,  
    2017     2016  
Volatility     128.5 %     90.9 %
Expected term (years)     3.2       1.9  
Risk-free interest rate     1.41 %     1.0 %
Dividend yield     0 %     0 %

 

NOTE 10 – WARRANTS

 

On February 28, 2017, Russell Richerson, PhD, resigned as chief operating officer of the Company, effective immediately. Dr. Richerson entered into a separation release of claims agreement (“Separation Agreement”) pursuant to which we issued Dr. Richerson a warrant to purchase 76,726 shares of Common Stock with an exercise price of $0.75 per share and a term of 3.5 years.

 

In connection with the sale of our Series C Preferred Stock in March and April 2017, we issued an aggregate of: (i) 387,251 Series M common stock purchase warrants (“Series M Warrants”), (ii) 387,251Series N common stock purchase warrants (“Series N Warrants”) and (iii) 387,251 Series O common stock purchase warrants (“Series O Warrants”) (collectively, the “Warrants”). The Series M Warrants have an exercise price of $0.90 per share, subject to adjustment, and a term of five (5) years from the date of issuance, the Series N Warrants have an exercise price of $0.75 per share, subject to adjustment, and a term of six (6) months from the date of issuance and the Series O warrants have an exercise price of $0.75, subject to adjustment, and a term of twelve (12) months from the date of issuance. The Warrants are immediately exercisable and separately transferable from the Series C Preferred Stock. In the event that the shares underlying the Warrants are not subject to a registration statement at the time of exercise, the Warrants may be exercised on a cashless basis after 6 months from the issuance date. The Warrants also contain provisions providing for an adjustment in the underlying number of shares and exercise price in the event of stock splits or dividends and fundamental transactions. Additionally, the Warrants contain anti-dilution protection until the twelve (12) month anniversary of the issuance date.

 

Transactions involving our warrants are summarized as follows:

 

    Number of
shares
   Weighted-
average exercise
price
   Weighted-average
remaining contractual
term (in years)
   Aggregate
intrinsic
value (in
thousands)
 
Outstanding at December 31, 2016    5,203,436   $4.56           
Issued    1,238,479    0.12           
Expired    (1,930,001)  $1.93           
Outstanding at September 30, 2017    4,511,914   $3.94    2.3   $74 
                      
Exercisable at September 30, 2017    4,506,503   $3.94    2.3   $74 

 

The following table summarizes outstanding common stock purchase warrants as of September 30, 2017: 

 

    Number of
shares
    Weighted-
average
exercise
price
    Expiration  
Issued to consultants     104,213     $ 7.24       January 2018 through August 2023  
Issued pursuant to 2013 financings     155,819     $ 61.11       December 2017 through August 2018  
Issued pursuant to 2014 financings     96,412     $ 34.50       June 2019  
Issued pursuant to 2015 financings     460,384     $ 8.40       July 2020 through December 2020  
Issued pursuant to 2016 financings     2,800,006     $ 0.08       December 2017 through December 2021  
Issued pursuant to 2017 financings     895,080     $ 0.08       March 2018 through April 2022  
      4,511,914                  

 

Total stock-based compensation expense of approximately $30,000 and $0 was recognized for warrants and included in the statement of operations for the nine months ended September 30, 2017 and 2016, respectively.

 

NOTE 11 – CONVERTIBLE DEBENTURES

 

On September 12, 2017 we entered into an exchange agreement (“Exchange Agreement”) with certain holders (the “Investors”) of our Series A 0% Convertible Preferred Stock (“Series A Shares”) and Series B 0% Convertible Preferred Stock (“Series B Shares”). Pursuant to the terms of the Exchange Agreement, we issued to the investors approximately $2.5 million in principal amount of senior convertible debentures (“Debentures”) in exchange for 1,614.8125 Series A Shares with a stated value of approximately $1.6 million and 890 Series B Shares with a stated value of approximately $0.9 million.

 

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On September 12, 2017, we sold an aggregate of $320,000 of our Debentures. The sale consisted of $250,000 in cash and the cancellation of $70,000 of obligations of the Company.

 

The Debentures to be issued to the Investors (i) are non-interest bearing, (ii) have a maturity date of September 12, 2018 and (iii) are convertible into shares of common stock (“Common Stock”) of the Company at the election of the Investor at any time, subject to a beneficial ownership limitation of 4.99% which may be increased to 9.99% by the Investor upon 61 days’ notice. The Debentures will have a conversion price equal to the lesser of (i) $0.33 and (ii) 85% of the lesser of (a) the volume weighted average price on the trading day immediately preceding a conversion date and (b) the volume weighted average price on a conversion date.

 

The Debentures also contain provisions providing for an adjustment in the event of stock splits or dividends, and fundamental transactions. The Investors will also have the right to participate in subsequent rights offerings and pro rata distributions. Additionally, the Debentures contain anti-dilution protection in the event of subsequent equity sales at a price that is lower than the then applicable conversion price until such time that the Debentures are no longer outstanding. Additionally, the Company has the option to redeem some or all of the Debentures for cash upon notice of twenty (20) trading days provided certain conditions are met by the Company as more fully described in the Debentures.

 

Furthermore, without the approval of the Investors holding at least 67% of the then outstanding principal amount of the Debentures, the Company may not (i) amend its charter documents in any manner that adversely affects the rights of any Investor, (ii) repay or repurchase or acquire shares of its Common Stock, (iii) repay, repurchase, or acquire certain indebtedness, or (iv) pay cash dividends or distributions on any equity securities of the Company.

 

The Company is also obligated pay Investors, as partial liquidated damages, a fee of 2.0% of each Investor’s initial principal amount of such Investor’s Debenture in cash upon our failure to have current public information available.

 

In connection with the Offering, the Investors also entered in a registration rights agreement (“Registration Rights Agreement”). Pursuant to the Registration Rights Agreement, the Company agreed to file a registration statement with the Securities and Exchange Commission (“the Commission”) within 45 days from the date of the Registration Rights Agreement to register the resale of 100% of the shares of Common Stock underlying the Debentures and to maintain the effectiveness thereunder. The Company also agreed to have the registration statement declared effective within 75 days from the date of the Registration Rights Agreement and keep the registration statement continuously effective until the earlier of (i) the date after which all of the securities to be registered thereunder have been sold, or (ii) the date on which all the securities to be registered thereunder may be sold without volume or manner-of-sale restrictions and without current public information pursuant to Rule 144 under the Securities Act of 1933, as amended. We are also obligated to pay the Investors, as partial liquidated damages, a fee of 1.5% of each Investor’s subscription amount per month in cash upon the occurrence of certain events, including our failure to file and / or have the registration statement declared effective within the time periods provided.

 

The Investors were additionally given a right of participation in future offerings for a period of up to eighteen months from the date in which the shares underlying the Debentures are registered as contemplated in the Registration Rights Agreement. The Securities Purchase Agreement also prohibits the Company from issuing any Common Stock, subject to certain exemptions, for a period of 60 days following the closing of the Offering, without the written approval of the Investors owning at least 50.1% of the securities issued in the Offering. Additionally, until the twelve (12) month anniversary of such effectiveness of the registration statement as contemplated in the Registration Rights Agreement, the Company is prohibited from entering into any agreement to effect any issuance of Common Stock in a variable rate transaction.

 

NOTE 12 – ACQUISITION

 

On July 31, 2017, we acquired 100% of the capital stock of Lewis & Clark, Pharmaceuticals, Inc., a Virginia Corporation (“L&C”), pursuant to the terms of a share exchange agreement (“Agreement”) dated July 31, 2017 (“Closing Date”), by and among, the Company, L&C, certain principals of L&C (the “Principals”) and all of the existing shareholders of L&C (“Shareholders”). As consideration for the acquisition of L&C, the Company agreed to issue an aggregate of 7,122,172 shares of the Company’s common stock (“Payment Shares”) to the Shareholders, accounting for, subsequent to the closing of the transaction, the Shareholders owning 50% of the issue and outstanding capital stock of the Company (including common shares issuable upon conversion of the Company’s outstanding preferred stock). The shares issued for the acquisition of L&C have been valued at $2,492,760.

 

The Principals have agreed to establish escrow accounts with respect to an aggregate of 973,251 of the Payment Shares pursuant to a share escrow agreement (“Escrow Agreement”) in order to satisfy certain indemnification obligations to the extent such may arise under the Agreement for the benefit of the Company, its shareholders, and its personnel. The Agreement contains certain customary indemnification provisions with respect to the Company one on hand and L&C and the Principals, on the other hand.

 

Additionally, pursuant to the Agreement, all Shareholders that receive at least 5% of the Payment Shares (at least 356,109 shares) (including any shares held in escrow) agree to vote such shares in accordance with the recommendation of the Company’s board of directors (“Board”) with respect to any matter to be voted upon by shareholders of the Company for a period of eighteen (18) months from the Closing Date.

 

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Furthermore, each Shareholder agrees that for a period of eighteen (18) months from the Closing Date, it will not sell or transfer any of the Payment Shares it receives pursuant to the Agreement, except that if a Shareholder is employed by the Company, it may sell up to five percent (5%) of Payment Shares it receives on each ninety (90) day period following the one (1) year anniversary of the Closing Date.

 

The preliminary allocation of the purchase price to the assets acquired and liabilities assumed based on the estimated fair values is as follows (in thousands): 

     
Cash  $23 
Prepaid expenses   3 
Equipment   353 
Goodwill   2,159 
Total assets acquired   2,538 
Accounts payable and other liabilities   (45)
Total  $2,493 

 

The above estimated fair value of the intangible assets of L&C is based on a preliminary purchase price allocation prepared by management. As a result, during the preliminary purchase price allocation period, which may be up to one year from the business combination date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. After the preliminary purchase price allocation period, we record adjustments to assets acquired or liabilities assumed subsequent to the purchase price allocation period in our operating results in the period in which the adjustments were determined.

 

Pro forma results

 

The following tables set forth the unaudited pro forma results of the Company as if the acquisition of L&C had taken place on the first day of the periods presented. These combined results are not necessarily indicative of the results that may have been achieved had the companies been combined as of the first day of the periods presented.

         
   September 30, 
   2017   2016 
         
Revenue  $   $ 
Net loss   (6,179)   (2,828)
Net loss per share   (0.71)   (0.33)

 

The amounts of revenue and loss of L&C since the acquisition date included in the consolidated statement of operations for the nine months ended September 30, 2017 are approximately $0 and ($149,000), respectively.

 

NOTE 13 – SUBSEQUENT EVENTS

 

Subsequent to September 30, 2017:

 

We issued 503,340 shares of common stock upon the conversion of debentures aggregating $38,692.

Our board of directors (“Board”) approved the 2017 Equity Compensation Plan (“Plan).  The Plan permits the granting of up to 2,000,000 shares of our common stock through the issuance of Incentive Stock Options, Nonstatutory Stock Options, Restricted Stock, Stock Appreciation Rights, Restricted Stock Units, Performance Units, Performance Shares, and Other Stock Based Awards to our employees, directors, officers, and consultants.

 

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ITEM 2.   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, capital raising, pre-clinical studies and clinical trials, regulatory reviews, timing, strategies, expectations, anticipated expense levels, business prospects and positioning with respect to the market, 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 several assumptions and currently available information and are subject to several risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements because of various factors, including those set forth under “Cautionary Note Regarding Forward-Looking Statements” and elsewhere in this Quarterly Report. The following discussion should be read in conjunction with Part I, Item 1 of this Quarterly Report as well as the financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2016, filed with the SEC on April 17, 2017.

 

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 three and nine months ended September 30, 2017 to the comparable periods of 2016.

 

  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 patients with cancer. Our therapeutics include a prodrug, mipsagargin, and through our acquisition of Lewis and Clark Pharmaceuticals, Inc., a pipeline of small molecule adenosine receptor modulators.

 

A prodrug is an inactive precursor of a drug that is converted into its active form only at the site of the tumor. The prodrug technology platform combines a powerful cytotoxin with a patented prodrug delivery system that targets the release of the drug within the tumor. We believe our cancer prodrugs have the potential to provide a targeted therapeutic approach to a broad range of solid tumors with fewer side effects than those related to current cytotoxic chemotherapy treatments. Our lead drug candidate, mipsagargin, has completed an open label single arm Phase II clinical trial in patients with advanced hepatocellular carcinoma (HCC) or liver cancer.

 

The adenosine receptor modulators include A2B antagonists, A2A antagonists, dual A2A/A2B antagonists, and A2A agonists that have broad development applicability including indications within immuno-oncology and inflammation. Adenosine is implicated in immunosuppression in the tumor microenvironment. Adenosine receptor antagonists may boost the host immune response against the tumor as a single-agent and in combination with other existing immuno-oncology agents leading to enhanced tumor killing and inhibition of metastasis. Adenosine also has anti-inflammatory properties in the acute and chronic setting. Adenosine receptor agonists may promote a decreased inflammatory response and can potentially treat a broad range of inflammatory and autoimmune based diseases and conditions (e.g., rheumatoid arthritis, joint injury, Crohn’s disease, psoriasis) as well as improve wound healing and decrease pain.  

 

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Our major focus for the next twelve to eighteen months is the (i) further characterization of the current pipeline of A2B antagonists and dual A2A/A2B antagonists leading to an Investigative New Drug or IND enabling studies, (ii) further characterization of the A2A agonists, (iii) licensing and/or partnering the A2B antagonists, A2A antagonists, dual A2A/A2B antagonists, and A2A agonists for further development, (iv) through our newly acquired adenosine receptor chemistry technology platform, continue to produce next generation adenosine receptor modulators, (v) pursue licensing and/or partnering of mipsagargin, (vi) conduct a clinical study of mipsagargin in patients with advanced HCC, and (vii) explore collaborations utilizing mipsagargin in new, non-clinical solid tumor models with leading researchers in the oncology field.

 

While we believe that the data from our nonclinical and completed clinical 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

 

  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).
     
  In July 2017, we further enhanced our management team with the appointments of Larry E. Rodman and Robert D. Thompson, both of whom will serve as vice president of pre-clinical development.
     
  In July 2017, we strengthened our board of directors with the appointment of John Montgomery.  Mr. Montgomery, a former director of Lewis & Clark Pharmaceuticals, has considerable experience in finance and capital markets.
     
  Effective June 1, 2017, we reconstituted the committees of our board of directors whereby; (i) the Audit Committee consists of Scott Ogilvie (Chair), Peter Grebow, PhD, and Claire Thom, Pharm.D, (ii) the Leadership Development and Compensation Committee consists of Peter Grebow, PhD (Chair), Scott Ogilvie and Richard Buller, PhD, MD, and (iii) the Nominating and Corporate Governance Committee consists of Claire Thom, Pharm.D (Chair), and Richard Buller, PhD, MD.
     
  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.
     
  In January 2017, we further enhanced our management team with the appointments of David J. Maloney and Matthew Boxer, both of whom will serve as vice president & co-head of translational medicine.

 

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Product Development of Mipsagargin

 

Mipsagargin is a prodrug targeting the tumor vasculature that has therapeutic potential in a wide range of malignancies. However, hepatocellular carcinoma, with promising Phase II study results, is our most advanced indication and our initial continued clinical focus. We are actively seeking a potential development and commercialization partner at both multi-national and regional levels to assist with the development of mipsagargin through clinical trials in liver cancer. Our current product development plan of mipsagargin contemplates the following major initiatives:

 

  Initiation of our next clinical trial in patients with advanced HCC which includes clinical dose optimization.

 

  Continuation of ongoing business development discussions with potential development partners.

 

  Continued evaluation of single agent mipsagargin and mipsagargin combinations in nonclinical studies of other PSMA expressing tumors through collaboration with leading researchers in oncology.

 

Product Development of Adenosine Receptor Modulators

 

Adenosine is an extracellular signaling molecule that regulates multiple aspects of tissue function and specifically plays a role in immunity and inflammation. High levels of adenosine in the tumor microenvironment inhibits immune response mediated through the A2A and A2B receptors. Adenosine also plays a role in non-malignant conditions where it is rapidly increased in response to inflammation, hypoxia, ischemia, or trauma. Adenosine released in this setting has been shown to have a protective effect and limits excessive inflammatory damage to tissues.

 

The adenosine receptor antagonists have broad applicability as a potential immuno-oncology (IO) therapeutic agent in multiple tumor types both as a single agent and in combination with other IO agents, in addition to traditional cytotoxic chemotherapy. We are actively seeking licensing opportunities and/or partners to further development our A2A, A2B and dual A2A/A2B receptor antagonists. Our current product development plan for adenosine receptor antagonists contemplates the following major initiatives:

 

License and/or partner to companies intending to further the develop the A2A, A2B and/or dual A2A/A2B receptor antagonists.

 

Further characterization of existing agents, specifically the A2B and dual A2A/A2B receptor antagonists, 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 A2A receptor agonists. Our current product development plan for adenosine receptor agonists contemplates the following major initiatives:

 

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.

 

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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 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 September 30, 2017 we had an accumulated deficit of approximately $54 million. We expect to continue to incur significant operating losses for the foreseeable future as we continue the development of our product candidates and advance them through clinical trials.

 

Our cash and cash equivalents balance at September 30, 2017 was approximately $18,000, representing 1% of total assets. In March and April of 2017 we completed additional private placements of an aggregate of $290,000 of our securities and in September 2017 we completed additional private placements of an aggregate of $250,000 of our securities. Based on our current expected level of operating expenditures and cash balance as of September 30, 2017, we expect to be able to fund our operations into the fourth quarter of 2017. 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, 2016 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 fourth quarter of 2017. 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.

 

Critical Accounting Policies and Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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. Management bases these significant judgments and estimates on historical experience and other assumptions it believes to be reasonable based upon information presently available. Actual results could differ from those estimates under different assumptions, judgments or conditions. There were no material changes to our critical accounting policies and use of estimates previously disclosed in our 2016 Annual Report on Form 10-K.

 

Result of Operations

 

Three Months Ended September 30, 2017 Compared to Three Months Ended September 30, 2016

 

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 three months ended September 30, 2017 and 2016, and we do not anticipate generating any revenues during 2017. Net losses for the three months ending September 30, 2017 and 2016 were approximately $4.4 million and $1.2 million, respectively, resulting from the operational activities described below. 

 

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Operating Expenses

 

Operating expense totaled approximately $0.9 million and $0.9 million during the three months ended September 30, 2017 and 2016, respectively. The increase in operating expenses is the result of the following factors.

 

   Three months ended
September 30,
   Change in 2017 versus
2016
 
   2017   2016   $   % 
   (amount in thousands)         
Operating Expenses                    
Research and development  $384   $379   $5    1%
General and administrative   474    509    (35)   (7)%
Total operating expenses  $858   $888   $(30)   (3)%

 

Research and Development Expenses

 

Research and development expenses totaled approximately $0.4 million and $0.4 million for the three months ended September 30, 2017 and 2016, respectively. A decrease in research spending and legal expense was partially offset by an increase in compensation cost related to the employment of new personnel.

 

Our research and development expenses consist primarily of expenditures related to manufacturing, pre-clinical studies, employee compensation, consulting, and patent related costs.

 

General and Administrative

 

General and administrative expenses totaled approximately $0.5 million and $0.5 million for the three months ended September 30, 2017 and 2016, respectively. A decrease from prior year spending related to corporate communication and business development costs and professional and consulting fees was partially offset by an increase in compensation and an increase in expenses incurred by our subsidiary during the third quarter of 2017.

 

Our general and administrative expenses consist primarily of expenditures related to employee compensation, legal, accounting and tax, other professional services, and general operating expenses.

 

Other Income (Expense)

 

Other income (expense) totaled approximately $3.6 million and $0.3 million for the three months ended September 30, 2017 and 2016, respectively.

 

   Three Months Ended
September 30,
   Change in 2017 Versus
2016
 
   2017   2016   $   % 
   (amount in thousands)         
Gain on change in fair value of derivative liability  $1,405   $(334)  $1,739    520%
Gain on conversion of debt   39        39    100%
Interest income (expense), net   (5,017)   1    (5,018)   (100)%
Total other income (expense)  $(3,573)  $(333)  $(3,240)   (972)%

 

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Gain on change in fair value of derivative liability

 

As a result of a change in the fair value of our derivative liability, we realized a gain of $1.4 million during the three months ended September 30, 2017 compared to a loss in the fair value of our derivative liability of $0.3 million during the three months ended September 30, 2016. The change in the fair value of our derivative liability results from our private placements in March 2017 and December 2015 and 2016, when we issued convertible preferred stock and warrants with anti-dilutive features, and from the issuance of convertible debentures in September 2017. Refer to Note 6 in our financial statements for further discussion on our derivative liability.

 

Gain on conversion of debt

 

We had gain on conversion of debt of $39,000 during the three month period ended September 30, 2017, related to the conversion of debentures which were issued in September 2017.

 

Interest income (expense)

 

We had net interest expense of $5 million in the three months ended September 30, 2017 compared to no net interest expense for the three months ended September 30, 2016. The increase of $5 million was attributable to new derivative instruments with a value in excess of proceeds received and the repricing of our convertible instruments and warrants.

 

Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016

 

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 nine months ended September 30, 2017 and 2016, and we do not anticipate generating any revenues during 2017. Net losses for the nine months ending September 30, 2017 and 2016 were approximately $5.6 million and $2.2 million, respectively, resulting from the operational activities described below. 

 

Operating Expenses

 

Operating expense totaled approximately $2.6 million and $2.6 million during the nine months ended September 30, 2017 and 2016, respectively. Operating expenses are comprised of the following factors.

 

   Nine months ended
September 30,
   Change in 2017 versus
2016
 
   2017   2016   $   % 
   (amount in thousands)         
Operating Expenses                    
Research and development  $1,349   $1,025   $324    32%
General and administrative   1,255    1,600    (345)   (22)%
Total operating expenses  $2,604   $2,625   $(21)   (1)%

 

Research and Development Expenses

 

Research and development expenses totaled approximately $1.3 million and $1 million for the nine months ended September 30, 2017 and 2016, respectively. The increase of approximately $0.3 million, or 32%, for the nine months ended September 30, 2017 compared to the same period in 2016 was primarily due to an increase in compensation cost related to the employment of new personnel and an increase in research activities, partially offset by a decrease in legal expense.

 

Our research and development expenses consist primarily of expenditures related to manufacturing, pre-clinical studies, employee compensation, consulting, and patent related costs.

 

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General and Administrative

 

General and administrative expenses totaled approximately $1.3 million and $1.6 million for the nine months ended September 30, 2017 and 2016, respectively. The decrease of approximately $0.3 million, or 22%, for the nine months ended September 30, 2017 compared to the same period in 2016, was primarily as a result of a decrease from prior year spending related to corporate communication and business development costs and professional and consulting fees, partially offset by an increase in compensation.

 

Our general and administrative expenses consist primarily of expenditures related to employee compensation, legal, accounting and tax, other professional services, and general operating expenses.

 

Other Income (Expense)

 

Other income (expense) totaled approximately $3 million of expense and $0.4 million of income for the nine months ended September 30, 2017 and 2016, respectively.

 

   Nine Months Ended
September 30,
   Change in 2017 Versus
2016
 
   2017   2016   $   % 
   (amount in thousands)         
Gain on change in fair value of derivative liability  $3,403   $421   $2,982    708%
Gain on conversion of debt   39        39    100%
Interest income (expense), net   (6,479)   3    (6,482)   (100)%
Total other income (expense)  $(3,037)  $424   $(3,461)   (816)%

 

Gain on change in fair value of derivative liability

 

As a result of a change in the fair value of our derivative liability, we realized a gain of $3.4 million during the nine months ended September 30, 2017 compared to a gain in the fair value of our derivative liability of $0.4 million during the nine months ended September 30, 2016. The change in the fair value of our derivative liability results from our private placements in March 2017 and December 2015 and 2016, when we issued convertible preferred stock and warrants with anti-dilutive features, and from the issuance of convertible debentures in September 2017. Refer to Note 6 in our financial statements for further discussion on our derivative liability.

 

Gain on conversion of debt

 

We had gain on conversion of debt of $39,000 during the nine month period ended September 30, 2017, related to the conversion of debentures which were issued in September 2017.

 

Interest income (expense)

 

We had net interest expense of $6.5 million in the nine months ended September 30, 2017 compared to a net interest income of approximately $3,000 for the nine months ended September 30, 2016. The increase of $6.5 million was attributable to changes in the value of our derivative instruments due to modifications as well as new derivative instruments with a value in excess of proceeds received. 

 

Liquidity and Capital Resources

 

We have incurred losses since our inception in 2003 as a result of significant expenditures on operations, research and development and the lack of any approved products to generate revenue. We have an accumulated deficit of 54 million as of September 30, 2017 and anticipate that we will continue to incur additional losses for the foreseeable future. To date, we have funded our operations through the private sale of our equity securities and exercise of options and warrants, resulting in gross proceeds of $36.4 million. Cash and cash equivalents at September 30, 2017 were $0.02 million.

 

Our auditors’ report on our December 31, 2016 financial statements expressed an opinion that our capital resources as of the date of their audit report were not sufficient to sustain operations or complete our planned activities for the upcoming year unless we raised additional funds. Based on our current level of expected operating expenditures, we expect to be able to fund our operations into the fourth quarter of 2017. This assumes that we spend minimally on general operations and only continue conducting our ongoing pre-clinical studies, 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.

 

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We are actively seeking sources of financing to fund our continued operations and research and development programs. To raise additional capital, we may sell 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.

 

  

Nine months ended

September 30,

   Change in 2017 versus
2016
 
   2017   2016   $   % 
   (amount in thousands)         
Cash at beginning of period  $547   $2,465   $(1,918)   (78)%
Net cash used in operating activities   (1,084)   (2,135)   1,051    49%
Net cash Provided by investing activities   20        20    100%
Net cash provided by financing activities   535        535    100%
Cash at end of period  $18   $330   $(312)   (95)%

 

Cash totaled approximately $0.02 million and $0.3 million as of September 30, 2017 and 2016, respectively. The decrease of approximately $0.3 million at September 30, 2017 compared to the same period in 2016 was primarily attributable to a reduction in cash raised through private placements, which resulted in less cash available to offset operating losses.  

 

Net Cash Used in Operating Activities

 

Net cash used in operating activities was approximately $1.1 million and $2.1 million for the nine months ended September 30, 2017 and 2016, respectively. Cash used for operations declined by approximately $1.1 million, or 49%, during the nine months ended September 30, 2017, compared to the same period in 2016. The decrease in cash used was primarily attributable to a decrease in our net loss (after adjusting for noncash items) of approximately $0.1 million and to an increase in accounts payable and accrued expenses of approximately $0.9 million.

 

Net Cash Provided by Investing Activities

 

There was $20,000 provided by investing activities for the nine months ended September 30, 2017 compared to no cash used in investing activities for the nine months ended September 30, 2016. The cash provided by investing activities was due to cash acquired in the acquisition of our subsidiary of $23,000, partially offset by purchases of office equipment in 2017.

 

Net Cash Provided by Financing Activities

 

There was $535,000 provided by financing activities for the nine months ended September 30, 2017 compared to no cash provided by financing activities for the nine months ended September 30, 2016. The increase of $535,000 million, or 100%, in cash provided by financing activities for the nine months ended September 30, 2017 compared to 2016 is attributable to a 2017 private placement in which we raised approximately $0.3 million in net proceeds and the sales of convertible debentures which resulted in proceeds of approximately $0.3 million.

 

ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are not required to provide the information required by this item as we are considered a smaller reporting company, as defined by Rule 229.10(f)(1).

 

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ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures and Changes in Internal Control over Financial Reporting

 

Our management, with the participation of our principal executive officer and principal accounting officer (both positions are held by our Chief Executive Officer), evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) of the Exchange Act of 1934, as amended (the Exchange Act)), as of September 30, 2017. Based on that evaluation, management has concluded that due to limited resources and limited number of employees, its internal control over financial reporting was ineffective as of September 30, 2017 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. Generally Accepted Accounting Principles. 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 (as defined in Rule 13a-15f of the Exchange Act) that occurred during the three month period ending September 30, 2017 that has materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Limitations on Internal Controls

 

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

 

PART II 

OTHER INFORMATION

 

ITEM 1. 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 1A. RISK FACTORS

 

We have described below a number of uncertainties and risks which, in addition to uncertainties and risks presented elsewhere in this Quarterly 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 Quarterly 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 Quarterly 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 may not be able to continue as a going concern if we do not obtain additional financing the fourth quarter of 2017.

 

Since our inception, we have funded our operations through the sale of our securities. Our cash and cash equivalents balance at September 30, 2017 was $0.02 million. Based on our current expected level of operating expenditures, we expect to only be able to fund our operations into the fourth quarter of 2017, at which time we will need additional capital. Our ability to continue as a going concern is 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 preclinical studies or planned 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, 2016 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 fourth quarter of 2017. 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 retain and integrate a new management team, our business could be harmed.

 

On March 16, 2016, our former President, Chief Executive Officer, Chief Financial Officer and founder provided us his notice of termination thereby ceasing his employment. On August 2, 2016, we appointed Christopher Lowe as our new chief executive officer, president and principal accounting officer. On August 8, 2016, we appointed Ronald Shazer, MD, as our chief medical officer and senior vice president. Additionally, on July 31, 2017, we acquired Lewis & Clark Pharmaceuticals, Inc., as a wholly owned subsidiary. While employees and management of Lewis and Clark are currently employed by us, there is no guarantee they will continue to remain employed in the future. Although we feel that we have been able to secure our core senior management team for the Company and our wholly owned subsidiary, 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 as well as the acquisition of our wholly owned subsidiary 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 a limited number of individuals, the loss of these members of our senior management team or key personnel 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. 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.

 

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We are an early-stage company, have no product revenues, are not profitable and may never be profitable.

 

From inception through November 6, 2017, we have raised approximately $36.35 million through the sale of our securities and exercise of outstanding warrants. During this same period, we have recorded an accumulated deficit of approximately $54 million. Our net losses for the two most recent fiscal years ended December 31, 2016 and 2015 were $3.6 million and $5.9 million, respectively. Our net loss for the nine months ended September 30, 2017 was approximately $5.6 million. 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. Currently, our only products in clinical development are (i) mipsagargin, which has completed an open label single arm Phase II clinical trial in refractory liver cancer and (ii) a pipeline of small molecule adenosine receptor modulators which we hope will lead to IND enabling studies. 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, from grants, or through the sale of certain of our assets. To the extent that we raise additional capital by issuing equity securities, our stockholders are likely to experience dilution with regard to their percentage ownership of the company, which may be significant. If we raise additional funds through collaborations or licensing arrangements, we may be required to relinquish some or all the rights to our technologies, product candidates, or grant licenses on terms that are not favorable to us. If we raise additional capital by incurring debt, we could incur significant interest expense and become subject to covenants that could affect the manner in which we conduct our business, including securing such debt obligations with our assets.

 

Our product candidates are at various stages of early development and significant financial resources are required to develop commercially viable products and obtain regulatory approval to market and sell such products. To date, we have dedicated substantially all of our efforts and financial resources to the development of (i) mipsagargin and (ii) subsequent to our acquisition of our wholly owned subsidiary, our small molecule adenosine receptor modulators, and we depend heavily on their success. 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 mipsagargin and our other product candidates. While initial data from our completed pre-clinical studies and clinical trials appear promising, the outcome of the current and anticipated trials is uncertain and these trials or 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.

 

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There are no assurances we will successfully integrate Lewis & Clark Pharmaceuticals into our business, which would adversely affect our future results.

 

On July 31, 2017, we completed our acquisition of Lewis & Clark Pharmaceuticals, Inc. The success of our acquisition will depend, in large part, our ability to realize the anticipated benefits of such transaction. Our management has limited experience with integrating acquired company’s business and operations. The failure to successfully integrate and to successfully manage the challenges presented by the integration process may result in the failure to achieve some or all of the anticipated benefits of the transactions, which may have a material adverse effect on our operations and financial condition. Potential difficulties that may be encountered in the integration process include the following:

 

possible loss of employees and consultants of Lewis & Clark Pharmaceuticals;

using our limited cash reserves and other assets efficiently to develop the business of the combined companies;

appropriately managing the liabilities of the combined company;

potential unknown or currently unquantifiable liabilities associated with the acquisitions and the operations of the combined company;

performance shortfalls of the combined company as a result of the diversion of management’s attention caused by integrating the companies’ operations;

necessary changes in the operations and culture of Lewis & Clark Pharmaceuticals in order to accommodate the changes from a privately-held company to a subsidiary of a public company;

significant increases in our operating expenses; and

additional business, financial and operating risks we have yet to identify.

 

There are no assurances that the acquisition will ultimately result in the realization of the anticipated benefits. If we are unable to realize the perceived benefits from these acquisitions, we may be required to impair some or all of the goodwill associated with this acquisition which would materially adversely impact our results of operations in future periods.

 

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

 

Our inability to complete pre-clinical and clinical testing and trials of certain of our product candidates may materially harm our business.

 

Our small molecule adenosine receptor modulators platform is in its development stage and has not yet applied for approval by the FDA to conduct clinical trials. Even if we successfully file an IND application and receive clearance from the FDA to commence trials, the outcome of pre-clinical, clinical and product testing of these products is uncertain, and if we are unable to satisfactorily complete such testing, or if such testing yields unsatisfactory results, we will be unable to commercially produce such proposed products. Before obtaining regulatory approvals for the commercial sale of any potential human products, our products will be subjected to extensive pre-clinical and clinical testing to demonstrate their safety and efficacy in humans. No assurances can be given that such clinical trials, or those of licensees or collaborators, will demonstrate the safety and efficacy of such products at all, or to the extent necessary to obtain appropriate regulatory approvals, or that the testing of such products will be completed in a timely manner, if at all, or without significant increases in costs, program delays or both, all of which could harm our ability to generate revenues. In addition, such proposed products may not prove to be effective. Accordingly, we may have to delay or abandon efforts to research, develop or obtain regulatory approval to market such proposed products. Many companies involved in biotechnology research and development have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials. The failure to adequately demonstrate the safety and efficacy of a therapeutic product under development could delay or prevent regulatory approval of the product and could harm our ability to generate revenues, operate profitably or produce any return on an investment in the Company.

 

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Our small molecule adenosine receptor modulators platform has substantial risks as a preclinical asset and our inability to develop such asset may materially harm our business.

 

Our small molecule adenosine receptor modulators platform has not yet commenced animal studies and we are uncertain if and when we will have sufficient data in order to file an IND application to commence trials. Some of these risks include, but are not limited to, (i) possible shortages of ingredients in our supply chain, (ii) unanticipated high dosage levels required to show efficacy, (iii) higher toxicity profile than anticipated, (iv) delays in the studies, including those of third party contractors out of our control, (v) higher levels of cost than anticipate, and (vi) other general risks associated with early stage development of pharmaceutical product candidates.

 

We intend to rely materially upon third-party FDA-regulated manufacturers and suppliers for our proposed products.

 

We currently have no material internal manufacturing capability, and intend to rely materially 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 pre-clinical studies and proposed 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.

 

Our business plan relies 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 pre-clinical studies and 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.

 

Certain of our product candidates are dependent upon securing and importing sufficient quantities of seeds from the Thapsia garganica plant, which plant grows in very specific locations outside of the United States.

 

The therapeutic component of mipsagargin, is derived from the seeds of the Thapsia garganica plant, which grows along the coastal regions of the Mediterranean Sea. We currently secure the seeds from Thapsibiza, SL, a third-party supplier. There can be no assurances that Thapsia garganica will continue to grow in sufficient quantities to produce a commercial supply or that the countries from which we can secure Thapsia garganica will continue to allow the collect and/or export of such seeds. The process of importing Thapsia garganica seeds is subject to U.S. import and export laws and controls. Our supply agreement with Thapsibiza, SL (our sole supplier) expires on April 6, 2022. In the event that we are no longer able to obtain these seeds, we may not be able to produce our proposed drug and our business will be adversely affected.

 

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We may be required to expend significant capital to locate, secure and finance land for the cultivation and harvesting of Thapsia garganica.

 

We believe that we can satisfy our needs for the clinical development of mipsagargin, through completion of a Phase III clinical study from Thapsia garganica that grows naturally in the wild. In the event mipsagargin is approved for commercial marketing and is widely adopted by the medical community, our current supply of Thapsia garganica may not be sufficient. In order to secure sufficient quantities of Thapsia garganica, we would need to secure adequate acreage of land to cultivate and grow Thapsia garganica. We have not yet fully assessed the amount of land or other costs that would be associated with a full-scale farming operation. There can be no assurances that we will be able to secure sufficient acres of land, or the capital to purchase or lease such land, to grow sufficient quantities of Thapsia garganica to manufacture mipsagargin on a commercial scale. Our inability to secure adequate seeds could adversely impact our business.

 

The synthesis of our therapeutic compounds must be conducted in special facilities, which limits the locations where it may be manufactured.

 

We are required to manufacture our therapeutic compounds that are to be used in our pre-clinical studies and clinical trials in FDA approved facilities. There are a limited number of manufacturing facilities qualified to handle and manufacture toxic therapeutic agents and compounds. This limits the number of potential manufacturing sites for our therapeutic compounds derived from Thapsia garganica. No assurances can be provided that these facilities will be available for the manufacture of our therapeutic compounds under our time schedules or within the parameters of our manufacturing budget. In the event facilities are not available for the manufacturing of our therapeutic compounds, we may not be able to complete our pre-clinical studies and clinical trials and our business and future prospects would be adversely affected.

 

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 potentially, our early-stage clinical trials. There can be no assurance that the procedures currently used to manufacture our therapeutic compounds will work at a scale which is adequate for commercial needs. In the event our therapeutic compounds cannot be manufactured in sufficient quantities for commercialization, our future prospects could be significantly impacted and our financial prospects would be materially harmed.

 

Risks Relating to our Intellectual Property

 

Our competitive position is dependent on our intellectual property and we may not be able to withstand challenges to our intellectual property rights.

 

We rely on our intellectual property, including our issued and applied for U.S. and foreign patents as well as our licenses, as the foundation of our business. If our intellectual property rights are challenged, no assurances can be given that our patents or licenses would survive claims alleging invalidity or infringement on other patents and/or licenses. In addition, disputes may arise regarding inventorship of our intellectual property. It is possible that our intellectual property may be infringing upon existing patents that we are not currently unaware of. As the number of participants in the marketplace grows, the possibility of patent infringement claims against us increases. It is difficult, if not impossible, to determine how such disputes would be resolved. Furthermore, because of the substantial amount of discovery required in connection with patent litigation, there is a risk that some of our confidential information could be required to be publicly disclosed. Any litigation claims against us may cause us to incur substantial costs and could place a significant strain upon our financial resources, divert the attention of management or restrict our core business or result in the public disclosure of confidential information.

 

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We may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights and we may be unable to protect our rights to, or use of, our technology.

 

Some or all of our patent applications may not issue as patents, or the claims of any issued patents may not afford meaningful protection for our technologies or products. In addition, patents issued to us or our licensors, if any, may be challenged and subsequently narrowed, invalidated or circumvented. Patent litigation is widespread in the biotechnology industry and could harm our business. Litigation might be necessary to protect our patent position or to determine the scope and validity of third-party proprietary rights. If we choose to go to court to stop someone else from using the inventions claimed in our patents, that individual or company would have the right to ask the court to rule that such patents are invalid and/or should not be enforced against that third party. These lawsuits are expensive and we may not have the required resources to pursue such litigation or to protect our patent rights. In addition, there is a risk that the court might decide that these patents are not valid and that we do not have the right to stop the other party from using the inventions. There is also the risk that, even if the validity of these patents is upheld, the court could refuse to stop the other party on the ground that such other party’s activities do not infringe on our rights contained in these patents.

 

Furthermore, a third party may claim that we are using inventions covered by their patent rights and may go to court to stop us from engaging in our normal operations and activities, including making or selling our product candidates. These lawsuits are costly and could materially increase our operating expenses and divert the attention of managerial and technical personnel. There is a risk that a court would decide that we are infringing the third party’s patents and would order us to stop the activities covered by the patents. In addition, there is a risk that a court would order us to pay the other party damages for having violated the other party’s patents. The biotechnology industry has produced a proliferation of patents, and it is not always clear to industry participants, including us, which patents cover various types of products or methods of use. The coverage of patents is subject to interpretation by the courts, and the interpretation is not always uniform.

 

Because some patent applications in the United States may be maintained in secrecy until the patents are issued, patent applications in the United States and many foreign jurisdictions are typically not published until eighteen months after filing, and publications in the scientific literature often lag behind actual discoveries, we cannot be certain that others have not filed patent applications for technology covered by our issued patents or our pending applications or that we were the first to invent the technology. Our competitors may have filed, and may in the future file, patent applications covering technology similar to ours. Any such patent application may have priority over our patent applications and could further require us to obtain rights to issued patents covering such technologies.

 

If another party has filed a United States patent application on inventions similar to ours, we may have to participate in an interference or other proceeding in the U.S. Patent and Trademark Office, or the PTO, or a court to determine priority of invention in the United States. The costs of these proceedings could be substantial, and it is possible that such efforts would be unsuccessful, resulting in a loss of our United States patent position with respect to such inventions.

 

Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. In addition, any uncertainties resulting from the initiation and continuation of any litigation could have a material adverse effect on our ability to raise the capital necessary to continue our operations.

 

Obtaining and maintaining our patent protection depends upon compliance with various procedural, documentary, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.

 

The PTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other provisions during the patent process. There are situations in which noncompliance can result in abandonment or lapse of a patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, competitors might be able to enter the market earlier than would otherwise have been the case.

 

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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

 

Thapsia garganica is highly toxic and we may be liable for any contamination or injury we may cause or any environmental and safety law we may violate.

 

The therapeutic component of certain of our proposed products, including mipsagargin, is highly toxic. As a consequence, we are subject to numerous environmental and safety laws and regulations, including those governing laboratory procedures and the handling of toxic materials. We may be required to incur significant costs to comply with current or future environmental laws and regulations and may be adversely affected by the cost of compliance with these laws and regulations. Although we believe that our safety procedures for using, handling, storing and disposing of hazardous materials comply with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials cannot be eliminated. In the event of such an accident, state or federal authorities could curtail our use of these materials and we could be liable for any civil damages that result, the cost of which could be substantial. Further, any failure by us to control the use, disposal, removal or storage, or to adequately restrict the discharge, or assist in the clean-up of toxic substances could subject us to significant liabilities, including joint and several liabilities under certain statutes. Although we feel this risk may be minimized through our use of third parties, it is possible that the employees of such contractors could suffer medical issues related to the handling of these toxic agents and subsequently seek compensation from us via, for example, litigation. Any such liability could exceed our resources and could have a material adverse effect on our business, financial condition and results of operations. No assurances can be given, despite our contractual relationship with the third-party contractor, that we would not be the subject of litigation. Additional federal, state and local laws and regulations affecting us may be adopted in the future. We may incur substantial costs to comply with these laws and regulations and substantial fines or penalties if we violate any of these laws or regulations, which would adversely affect our business.

 

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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 clinical trials will be based on many assumptions about the expected effect of our product candidate and if those assumptions are incorrect, our clinical trials may not produce statistically significant results. Preliminary results may not be confirmed on full analysis of the detailed results of early pre-clinical studies and clinical trials. Data already obtained, or in the future obtained, from pre-clinical studies and clinical trials do not necessarily predict the results that may be obtained from later trials. Moreover, pre-clinical and clinical data are susceptible to varying interpretations, which could delay, limit or prevent regulatory approval. A number of companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials. The failure to adequately demonstrate the safety and effectiveness of a proposed formulation or product under development could delay or prevent regulatory clearance of the potential drug. Our products may not prove to be safe and effective in clinical trials and may not meet all regulatory requirements needed to receive regulatory approval. While data from our completed trials appear promising, the outcome of the current trials is uncertain and these trials or future trials may ultimately be unsuccessful. Our clinical trials may among other things, not demonstrate sufficient levels of safety and efficacy necessary to obtain the requisite regulatory approvals for our drugs, and thus our proposed drugs may not be approved for marketing.

 

Our proposed products may not receive FDA or other regulatory approvals.

 

The FDA and comparable government agencies in foreign countries impose substantial regulations on the manufacture and marketing of pharmaceutical products through expensive, lengthy and detailed laboratory, pre-clinical and clinical testing procedures, sampling activities and other costly and time-consuming procedures. Satisfaction of these regulations typically takes several years or more and varies substantially based upon the type, complexity and novelty of the proposed product. Our proposed products are subject to extensive regulation and/or acceptance by numerous governmental authorities in the United States, including the FDA, and authorities in other countries. Most of our proposed products will require governmental approval before they can be commercialized. Our failure to receive the regulatory approvals in the United States or foreign countries will materially impact our business.

 

Our proposed products may not have favorable results in clinical trials or receive regulatory approval.

 

Encouraging results from our pre-clinical and our clinical studies to date should not be relied upon as evidence that our clinical trials will ultimately be successful or our product approved for marketing. Even though the results of our pre-clinical and completed clinical studies to date seem promising, we will be required to demonstrate through further 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 completed trials appear promising, the outcome of the current trials is uncertain and these trials or future trials may ultimately be unsuccessful.

 

We may be unable to complete our planned clinical trials of mipsagargin if we do not have adequate enrollment or capital to finance the studies.

 

We are currently conducting pre-clinical combination studies with mipsagargin for the treatment of hepatocellular carcinoma and we anticipate commencing clinical trials thereafter. The initiation, continuation and/or completion of these studies are dependent on a number of factors, including adequate capital to fund the clinical trials and patient enrollment at the trial sites. At present, we have limited capital resources and require significant additional capital to complete any future clinical trials that we may initiate. Our failure to enroll sufficient patients or to finance our clinical trials could materially harm our business.

  

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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;
  the development status of our drug candidates, particularly the results of our anticipated clinical trials;
  market conditions or trends related to the biotechnology and pharmaceutical industries, or the market in general;

 

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

Our ability to integrate our business and technologies with our wholly-owned subsidiary. 

  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.

 

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 November 7, 2017, we have issued and outstanding 9,578,929 shares of common stock and 60,538,101 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, debentures and other convertible securities. As of November 6, 2017, we have issued 1,853 shares of Series A 0% Convertible Preferred Stock, of which 133.8125 are outstanding (1,614.8107 shares were exchanged for senior convertible debentures), 1,000 shares of Series B 0% Convertible Preferred Stock, of which 71 are outstanding (890 shares were exchanged for senior convertible debentures) and 290.4318 shares of Series C 0% Convertible Preferred Stock, that are all outstanding. Accordingly, we are entitled to issue up to 79,882,970 additional shares of common stock, and 29,996,856 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.

 

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 November 6, 2017, we had 9,578,929 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 and 290.4318 shares of Series C 0% Convertible Preferred Stock issued and outstanding. We additionally issued an aggregate of $2,824,812.50 of senior convertible debentures that are convertible into common stock at any time, of which $2,748,125.80 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 Preferred shares are available for public sale, subject in some cases to volume and other limitations or delivery of a prospectus, or Rule 144 eligibility. As of November 6, 2017, we had reserved for issuance (i) 328,219 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) 2,028,572 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) 8,298,042 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 - April 2017 offering, (iv) 39,258,940 shares of our common stock issuable upon the conversion of an aggregate of $2,748,126 of our senior convertible debentures; (v) 7,929,996 shares of our common stock issuable upon exercise of outstanding warrants at a weighted average exercise price of $4.04 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 - April 2017 offering and (vi) 364,516 shares of our common stock issuable upon exercise of outstanding stock options under our equity compensation plans at a weighted average exercise price of $7.71 per share. Subject to applicable vesting requirements and holding periods, upon conversion or exercise of the outstanding debentures, shares of preferred stock, warrants and options, the underlying shares may be resold into the public market. 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.

 

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 OTCQB tier of the OTC Markets Group Inc. Accordingly, although a limited public market for our common stock exists, it is still relatively illiquid compared to that of a seasoned issuer. Prior to making an investment in our securities, you should consider the limited market for our common stock. No assurances can be given that the trading volume of our common stock will increase or that a liquid public market for our securities will ever materialize.

 

We have not paid cash dividends in the past and do not expect to pay cash dividends in the foreseeable future.

 

We have never paid cash dividends on our common stock and do not anticipate paying cash dividends on our common stock in the foreseeable future. If we do not pay dividends, our common stock may be less valuable because a return on your investment will only occur if the market price of our common stock appreciates.

 

Provisions of Delaware law and executive employment agreements may prevent or delay a change of control, which could depress the trading price of our common stock.

 

We are subject to the Delaware anti-takeover laws regulating corporate takeovers. These anti-takeover laws prevent Delaware corporations from engaging in a merger or sale of more than 10% of its assets with any stockholder, including all affiliates and associates of the stockholder, who owns 15% or more of the corporation’s outstanding voting stock, for three years following the date that the stockholder acquired 15% or more of the corporation’s assets unless:

 

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

 

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.

 

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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.

 

Risks Related to Our Reverse Stock Split

 

On November 17, 2016, we completed a 1:30 reverse stock split and as a result, the liquidity of our common stock may be affected.

 

On November 17, 2016, we completed a 1:30 reverse stock split and as a result, the liquidity of the shares of our common stock may be affected adversely by the reverse stock split given the reduced number of shares that will be outstanding following the reverse stock split. In addition, the reverse stock split may increase the number of stockholders who own odd lots (less than 100 shares) of our common stock, creating the potential for such stockholders to experience an increase in the cost of selling their shares and greater difficulty effecting such sales.

 

The market price of our common stock may further decline.

 

Historically, after a reverse stock split, the market price of a company’s shares declines. On November 17, 2016 we completed a 1:30 reverse stock split. Immediately after the reverse stock split, the price of our common shares was $2.75. As of September 30, 2017, the price of our common stock had decreased to $0.10. There can be no assurance that the price of our common stock does not continue to decline.

 

Other Risks

 

We received a notice of termination from Dr. Craig Dionne, our former chief executive officer demanding certain payments pursuant to the termination of his employment agreement.

 

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. On April 11, 2016, we received a letter from Dr. Dionne demanding approximately $2.3 million as a result of the foregoing. The Company disputes such claims, and does not believe Dr. Dionne had “Good Reason” to terminate his employment. However, in the event of litigation, the outcome of such litigation, as well as the costs associated therewith, could have a material adverse effect on our operations. For a further discussion of this matter, please see the section of this Quarterly Report entitled “Legal Proceedings.”

 

We may be required to make significant payments to members of our management in the event their employment with us is terminated or if we experience a change of control.

 

We are a party to employment agreements with members of senior management that call for severance payments in the event certain conditions as further described in their respective employment agreements are met. In the event that (i) we terminate the employment of certain employees, (ii) we experience a change in control or, (ii) in certain cases, if certain employees terminate employment with us, certain of our employees will be entitled to receive certain severance and related payments. Additionally, in such instance, certain securities held by such employees shall become immediately vested and exercisable. Upon the occurrence of any such event, our obligation to make such payments could significantly impact our working capital and, accordingly, our ability to execute our business plan which could have a materially adverse effect to our business. Also, these provisions may discourage potential takeover attempts that could be beneficial to our stockholders.

 

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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 certain core members of our management team, our anticipated growth and expansion may require the addition of new personnel and the development of additional expertise by existing management. Additionally, we acquired a wholly owned subsidiary on July 31, 2017 that requires additional expertise and personnel. 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 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Recent Sale 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 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.

 

 

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 contained 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.

 

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 November 6, 2017, Debenture holders converted an aggregate of $77,686.70  into 834,340 shares of common stock at per share conversion prices ranging from $0.225335 to $0.06987.

 

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 138,799 units at a 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 3. DEFAULT UPON SENIOR SECURITIES

 

None. 

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

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

    

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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: November 20, 2017   /s/ Christopher Lowe
    Chief Executive Officer
    (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer)

 

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INDEX TO EXHIBITS

 

 

            Incorporated by Reference
Exhibit
No.
  Description   Filed
Herewith
  Form   Exhibit
No.
  File
No.
  Filing
Date
                         
3.01(i)   Amended and Restated Certificate of Incorporation dated September 4, 2013       8-K   3.01   333-153829   9/6/13
                         
3.02(i)   Amendment to the Amended and Restated Certificate of Incorporation, effective August 1, 2016       8-K   3.01   333-153829   8/2/16
                         
3.03(i)   Amended and Restated Certificate of Incorporation dated October 21, 2016       8-K   3.01(i)   000-55331   11/10/16
                         
3.04(ii)   Amended and Restated Bylaws       8-K   3.02   333-153829   1/11/10
                         
3.05(i)   Certificate of Designation of Preferences, Rights and Limitations of Series A 0% Convertible Preferred Stock       8-K   3.01   000-55331   12/23/15
                         
3.06(i)   Certificate of Designation of Preferences, Rights and Limitations of Series B 0% Convertible Preferred Stock       8-K   3.01   000-55331   12/12/16
                         
3.07(i)   Certificate of Designation of Preferences, Rights and Limitations of Series C 0% Convertible Preferred Stock       8-K   3.01   000-55331   3/20/17
                         
 4.01   Specimen of Common Stock Certificate       S-1   4.01   333-153829   10/03/08
                         
4.02   Form of Series A Preferred Stock Certificate       8-K   4.01   000-55331   12/23/15
                         
4.03   Form of Series B Preferred Stock Certificate       8-K   4.01   000-55331   12/12/16
                         
4.04   Form of Series C Preferred Stock Certificate       8-K   4.01   000-55331   3/20/17
                         
 4.05**   Amended and Restated GenSpera 2007 Equity Compensation Plan amended January 2010       8-K   4.01   333-153829   1/11/10
                         
 4.06**   GenSpera / Inspyr Therapeutics Form of 2007 Equity Compensation Plan Option Grant, 2009 Executive Compensation Plan Option Grant and 2017 Equity Compensation Plan Option Grant       8-K   4.02   333-153829   9/09/09
                         
4.07   Form of 4.0% convertible note issued to shareholder       S-1   4.05   333-153829   10/03/08
                         
4.08   Form of 4.0% convertible debenture modification between GenSpera, Inc. and shareholder       8-K   10.02   333-153829   2/20/09
                         
4.09**   Amended and Restated 2009 Executive Compensation Plan amended on March 25, 2013       10-K   4.11   333-153829   3/29/13
                         
4.10   Form of Common Stock Purchase Warrant issued Jan - Mar 2010       10-K   4.28   333-153829   3/31/10
                         
4.11   Form of Consultant Warrants issued in May 2010       10-Q   4.29   333-153829   5/14/10
                         
4.12   Form of Common Stock Purchase Warrant - May 18, 2010 offering, and June 2010 Consultant Warrants       8-K   10.02   333-153829   5/25/10

 

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 4.13**   Form of 2007 Equity Compensation Plan Restricted Stock Grant, 2009 Executive Compensation Plan Restricted Stock Grant and 2017 Equity Compensation Plan Restricted Stock Grant       S-8   4.03   333-171783   1/20/11
                         
 4.14   Form of Common Stock Purchase Warrant dated January and February of 2011       8-K   10.02   333-153829   1/27/11
                         
4.15**   Form of 2007 Equity Compensation Plan Restricted Stock Unit Agreement, 2009 Executive Compensation Plan Restricted Stock Unit Agreement and 2017 Equity Compensation Plan Restricted Stock Unit Agreement       10-K   4.22   333-153829   3/30/11
                         
4.16   Form of Common Stock Purchase Warrant dated April 2011       8-K   10.02   333-153829   5/03/11
                         
 4.17**   Form of Executive Deferred Compensation Plan       8-K   99.01   333-153829   7/08/11
                         
 4.18   Form of Common Stock Purchase Warrant issued to consultants in December of 2011       10-K   4.26   333-153829   3/06/12
                         
4.19   Form of Common Stock Purchase Warrant issued to LifeTech on January 12, 2012       10-K   4.27   333-153829   3/06/12
                         
4.20   Form of Common Stock Purchase Warrant for December 2012 through March 2013 Offering       8-K   4.01   333-153829   3/28/13
                         
4.21   Form of Securities Purchase Agreement for August 2013 Offering       8-K   10.02   333-153829   8/20/13
                         
4.22   Form of Warrant from August 2013 Offering       8-K   10.04   333-153829   8/20/13
                         
4.23   Form of Series A, B and C Common Stock Purchase Warrant for May 2014 Registered Offering       S-1/A   4.34   333-194687   5/22/14
                         
4.24   Form of Securities Purchase Agreement for May 2014 Registered Offering       S-1/A   10.12   333-194687   5/22/14
                         
4.25   Form of Series D Common Stock Purchase Warrant for June 2014 Private Placement       10-Q   4.36   333-153829   8/8/14
                         
4.26   Form of Securities Purchase Agreement for June 2014 Private Placement       10-Q   4.37   333-153829   8/8/14
                         
4.27   Form of Consultant Common Stock Purchase Warrant issued February, August 2014, January 2015 and May 2015       10-Q   4.38   333-153829   8/8/14
                         
4.28   Form of Securities Purchase Agreement for July 2015 Private Placement       8-K   10.01   000-55331   7/6/15
                         
4.29   Form of Registration Rights Agreement for July 2015 Private Placement       8-K   10.02   000-55331   7/6/15
                         
4.30   Form of Series D and E Common Stock Purchase Warrants for July 2015 Private Placement       8-K   10.03   000-55331   7/6/15
                         
4.31   Form of Securities Purchase Agreement for December 2015 Private Placement       8-K   10.01   000-55331   12/23/15
                         
4.32   Form of Registration Rights Agreement for December 2015 Private Placement       8-K   10.02   000-55331   12/23/15

 

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4.33   Form of Series F and Series G Common Stock Purchase Warrants for December 2015 Private Placement       8-K   10.03   000-55331   12/23/15
                         
4.34   Form of Series H and I Common Stock Purchase Warrants for December 2015 Private Placement       8-K   10.05   000-55331   12/23/15
                         
4.35   Form of Amendment Agreement from December 2015 Private Placement       8-K   10.04   000-55331   12/23/15
                         
4.36**   Inducement Stock Option Plan adopted 7/15/2016       8-K   4.01   000-55331   7/20/16
                         
4.37**   Form of Inducement Award non-Qualified Stock Option Grant       8-K   4.01   000-55331   7/20/16
                         
4.38   Form of Securities Purchase Agreement for December 2016 Private Placement       8-K   10.01   000-55331   12/12/16
                         
4.39   Form of Registration Rights Agreement for December 2016 Private Placement       8-K   10.02   000-55331   12/12/16
                         
4.40   Form of Series J, K and L Warrants for December 2016 Private Placement       8-K   10.03   000-55331   12/12/16
                         
4.41   Form of Common Stock Purchase Warrant issued to 3rd party pursuant to Mr. Lowe’s Employment Agreement       S-1   4.41   333-215561   1/13/17
                         
4.42   Form of Securities Purchase Agreement for March 2017 – April 2017 Private Placement       8-K   10.01   000-55331   3/20/16
                         
4.43   Form of Series M, N and O warrants for March 2017 – April 2017 Private Placement       8-K   10.02   000-55331   3/20/16
                         
4.44**   2017 Equity Compensation Plan adopted 11/1/17       8-K   4.01   000-55331   11/3/17
                         
 10.01   Exclusive Supply Agreement between GenSpera and Thapsibiza dated April 2012 that expires April 6, 2022       10-K   10.01    333-153829   3/29/13
                         
 10.02**   Craig Dionne Employment Agreement       8-K   10.04   333-153829   9/09/09
                         
 10.03**   Amendment dated May 14, 2010 to the Employment Agreement of Craig Dionne       10-Q   10.03   333-153829   8/13/10
                         
 10.04**   Craig Dionne Severance Agreement       8-K   10.05   333-153829   9/09/09
                         
10.05**   Form of Indemnification Agreement with Directors and Officers       8-K   10.01   000-55331   9/12/16
                         
10.06**   Russell Richerson Employment Agreement       8-K   10.08   333-153829   9/09/09
                         
 10.07**   Amendment dated May 14, 2010 to the Employment Agreement of Russell Richerson       10-Q   10.08   333-153829   8/13/10
                         
 10.08**   Independent Director Agreement       8-K   10.01   333-153892   06/1/12
                         
10.09   Engagement Letter with H.C. Wainwright for May 2014 Registered Offering       S-1/A   10.11   333-194687   5/22/14
                         
 10.10**   Christopher Lowe employment Agreement       8-K   10.01   000-55331   8/05/16
                         
10.11**   Form of Proprietary Information, Inventions and Competition Agreement       8-K   10.01   000-55331   8/10/16
                         
10.12**   Ronald Shazer Employment Agreement       8-K   10.01   000-55331   8/10/16
                         
10.13**   Form of Separation Agreement with Russell Richerson dated February 28, 2017       8-K   10.01   000-55331   3/03/17

 

48 

 

 

10.14   Form of Share Exchange Agreement between Inspyr Therapeutics and Lewis & Clark Pharmaceuticals       8-K   10.01   000-55331   8/03/17
                         
10.15   Form of Share Escrow Agreement pursuant to Lewis & Clark Share Exchange Transaction       8-K   10.02   000-55331   8/03/17
                         
10.16   Form of Exchange Agreement for September 2017 Private Placement       8-K   10.01   000-55331   9/12/17
                         
10.17   Form of Senior Convertible Debenture due 9/12/18 issued pursuant to Exchange Agreement       8-K   10.02   000-55331   9/12/17
                         
10.18   Form of Securities Purchase Agreement for September 2017 Private Placement       8-K   10.01   000-55331   9/12/17
                         
10.19   Form of Senior Convertible Debenture due 9/12/17 issued pursuant to Securities Purchase Agreement       8-K   10.02   000-55331   9/12/17
                         
10.20   Form of Registration Rights Agreement entered into 9/12/17       8-K   10.03   000-55331   9/12/17
                         
31.1   Certification of the Principal Executive Officer Pursuant to Section 3.02 of the Sarbanes-Oxley Act of 2002.   *                
                         
31.2   Certification of the Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.   *                
                         
32.1   Certification of Principal Executive Officer pursuant to 18 U.S.C § 1350.   ***                
                         
32.2   Certification of Principal Financial Officer Pursuant to 18 U.S.C § 1350.   ***                
                         
101.INS   XBRL Instance Document   *                
                         
101.SCH   XBRL Taxonomy Extension Schema   *                
                         
101.CAL   XBRL Taxonomy Extension Calculation Linkbase   *                
                         
101.DEF   XBRL Taxonomy Extension Definition Linkbase   *                
                         
101.LAB   XBRL Taxonomy Extension Label Linkbase   *                
                         
101.PRE   XBRL Taxonomy Extension Presentation Linkbase   *                

  

* Filed Herein
** Management contracts or compensation plans or arrangements in which directors or executive officers are eligible to participate.
*** Furnished herein

 

49