UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-K
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(Mark
One)
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended December 31, 2008
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OR
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
1934
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For
the transition period from______________________
to____________________________
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ADEONA
PHARMACEUTICALS, INC.
(Name
of small business issuer in its charter)
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Delaware
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13-3808303
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(State
or other jurisdiction of incorporation or organization)
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(IRS
Employer Identification Number)
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3930
Varsity Drive
Ann
Arbor, MI
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48108
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code:
(734)
332-7800
Securities
registered pursuant to Section 12(b) of the Act:
Common
Stock, $0.001 par value per share
Securities
registered pursuant to Section 12(g) of the Act:
None.
(Title of
Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes ¨
No ý
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes
¨
No ý
Indicate by check mark whether the issuer: (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 ý
No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of issuer’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ý
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated file, a non-accelerated file, 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. (Check one):
| Large accelerated filer ¨ | Accelerated filer ¨ | |
| Non-Accelerated filer ¨ | Smaller reporting company ý | |
| (Do not check if a smaller reporting company | ||
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes o
No ý
The aggregate market value of the issuer’s common stock held by non-affiliates
of the registrant as of March 26, 2009, was approximately $3,602,853 based on
$0.17, the price at which the registrant’s common stock was last sold on that
date.
As of March 26, 2009, the issuer had 21,193,254 shares of common stock
outstanding.
Documents
incorporated by reference: None.
ADEONA
PHARMACEUTICALS, INC.
FORM
10-K
TABLE
OF CONTENTS
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Page
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PART
I.
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1
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Item
1.
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Business
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1
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Item
1A.
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Risk
Factors
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7
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Item
1B.
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Unresolved
Staff Comments
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23
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Item
2.
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Properties
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24
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Item
3.
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Legal
Proceedings
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24
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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24
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PART
II.
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25
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Item
5.
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Market
for Registrant’s Common Equity Related Stockholder Matters and Issuer
Purchases of Equity Securities
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25
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Item
6.
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Selected
Financial Data
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27
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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27
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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32
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Item
8.
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Financial
Statements and Supplementary Data
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33
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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60
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Item
9A(T).
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Controls
and Procedures
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60
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Item
9B.
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Other
Information
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60
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PART
III.
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61
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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61
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Item
11.
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Executive
Compensation
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64
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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68
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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69
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Item
14.
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Principal
Accountant Fees and Services
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70
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PART
IV.
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71
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Item
15.
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Exhibits
and Financial Statement Schedules
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71
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SIGNATURES
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73
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FORWARD-LOOKING
STATEMENTS
Most of
the matters discussed within this report include forward-looking statements on
our current expectations and projections about future events. In some cases you
can identify forward-looking statements by terminology such as “may,” “should,”
“potential,” “continue,” “expects,” “anticipates,” “intends,” “plans,”
“believes,” “estimates,” and similar expressions. These statements are based on
our current beliefs, expectations, and assumptions and are subject to a number
of risks and uncertainties, many of which are difficult to predict and generally
beyond our control, that could cause actual results to differ materially from
those expressed, projected or implied in or by the forward-looking
statements. Such risks and uncertainties include the risks noted
under “Item 1A Risk Factors.” We do not undertake any obligation to
update any forward-looking statements.
ITEM
1. BUSINESS
GENERAL
Adeona
Pharmaceuticals, Inc. (together with its subsidiaries, “Adeona” or the
“Company”) is a specialty pharmaceutical company that is preparing to
commercialize a series of proprietary products for the prevention and treatment
of degenerative conditions that we believe involve subclinical zinc deficiency
and/or chronic copper toxicity. We believe that such conditions are
highly prevalent and under-recognized in the aging population and that
they may contribute to the progression of dry age-related macular
degeneration (dry AMD), Alzheimer’s disease (AD), and mild cognitive impairment
(MCI).
Our
leading product candidate brands, Zinthionein™ and EyeDaily™ with Zinthionein™,
are expected to be products that contain proprietary ingredients (such as, zinc
monocysteine complex), proprietary combinations of ingredients, proprietary
modified-release zinc-containing formulations and proprietary product
packaging. We believe that our technologies and expertise may provide
physicians and aging patients with the most timely, convenient, well-tolerated,
“best-in-class” product solutions for what we consider to be an
under-recognized potential multi-billion dollar market.
Zinc-monocysteine
is a complex of zinc and the amino acid cysteine that we believe may have
improved properties compared to currently marketed zinc–based
products. Zinc-monocysteine was invented and developed by David A.
Newsome, M.D., former Chief of the Retinal Disease Section of the National Eye
Institute (NEI). Dr. Newsome was the first to demonstrate the
benefits of oral high dose zinc therapy in dry AMD. Oral high dose
zinc containing products now represent the standard of care for dry AMD
affecting over 10 million Americans and have annual sales of approximately $300
million. Zinthionein™ has completed an 80-patient,
randomized, double-masked, placebo controlled clinical trial in dry AMD and
demonstrated highly statistically significant improvements in central retinal
function, the results of which were published in a peer-reviewed journal in
2008. In addition, we believe that our patent pending
modified-release formulations of zinc-monocysteine and other zinc moieties may
offer the significant advantages of convenient once-a-day dosing and improved
gastrointestinal tolerability compared to currently-marketed oral high dose
zinc-containing products.
Our sales
and marketing plans include promoting prevention through public awareness,
physician and patient education including current research, the research and
development of potential proprietary diagnostic products to aid in the
identification of individuals who may be at increased risk as well as the
commercialization of our proprietary zinc-based products intended for the
treatment and/or nutritional support of conditions characterized by subclinical
zinc deficiency and chronic copper toxicity.
We also
have a number of proprietary drug candidates at various stages of clinical
development, including; dnaJP1 for the induction of immune tolerance in
rheumatoid arthritis which has completed a 160-patient, multicenter, randomized,
double blind, placebo-controlled clinical trial; and TRIMESTA™ (oral estriol)
for relapse-remitting multiple sclerosis in female
patients. TRIMESTA™ is currently the subject of a 150-patient,
multicenter, double-blind, randomized, placebo-controlled clinical trial that is
currently fully funded by a $5 million grant from the National Multiple
Sclerosis Society and National Institutes of Health (NIH).
Below is
a table of our product candidates, their respective therapeutic indication and
their respective stage of development:
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Product
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Therapeutic
Indication
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Stage
of Development
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Zinthionein™
(oral
high dose zinc)
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Dry
Age-Related Macular Degeneration
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80-patient
trial of zinc-monocysteine
in
dry AMD completed and published
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dnaJP1™
(oral dnaJP1 hsp
peptide)
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Induction
of Immune Tolerance for Rheumatoid Arthritis
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160-patient
phase II completed
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Trimesta™
(oral
estriol)
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Relapsing-Remitting
Multiple Sclerosis in Female Patients
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150-patient
phase IIb ongoing
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Effirma™
(oral
flupirtine)
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Fibromyalgia
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90-patient
phase II
IND
and IRB approved
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CD4
Inhibitor 802-2
(oral
cyclic heptapeptide)
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Immune
Tolerance Induction for
Prevention
of Severe GvHD
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24-patient
phase I/II completed
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1
Product
Summary
The
following is a summary of the product candidates that we are
developing:
Products
for Subclinical Zinc Deficiency and Chronic Copper Toxicity
Our
leading product candidate brands, Zinthionein™ and EyeDaily™ with Zinthionein™,
are expected to be products that contain proprietary ingredients (such as, zinc
monocysteine complex), proprietary combinations of ingredients, proprietary
modified-release zinc-containing formulations and proprietary product
packaging. We believe that our technologies and expertise may provide
physicians and aging patients with the most timely, convenient, well-tolerated,
“best-in-class” product solutions we consider to be an
under-recognized, potential multi-billion dollar market to address
for the prevention and treatment of degenerative conditions that we believe
involve subclinical zinc deficiency and/or chronic copper toxicity.
Zinc-monocysteine
is a complex of zinc and the amino acid cysteine that we believe may have
improved properties compared to currently marketed zinc–based
products. Zinc-monocysteine was invented and developed by David A.
Newsome, M.D., former Chief of the Retinal Disease Section of the National Eye
Institute (NEI). Dr. Newsome was the first to pioneer demonstrate the
benefits of oral high dose zinc therapy in dry AMD. Oral high dose
zinc containing products now represent the standard of care for dry AMD
affecting over 10 million Americans and have annual sales of approximately $300
million. Zinthionein™ has completed an 80-patient,
randomized, double-masked, placebo controlled clinical trial in dry AMD and
demonstrated highly statistically significant improvements in central retinal
function the results of which were published in a peer-reviewed journal in
2008. In addition, we believe that our patent pending
modified-release formulations of zinc-monocysteine and other zinc moieties may
offer the significant advantages of convenient once-a-day dosing and improved
gastrointestinal tolerability compared to currently-marketed oral high dose
zinc-containing products.
Our sales
and marketing plans include promoting prevention through public awareness,
physician and patient education including current research, the
research and development of potential proprietary diagnostic products to aid in
the identification of individuals who may be at increased risk as well as the
commercialization of our proprietary zinc-based products intended for the
treatment and/or nutritional support of conditions characterized by subclinical
zinc deficiency and chronic copper toxicity. We recently completed an
observational clinical study in 90 subjects that we believe demonstrates a
statistically significant subclinical zinc deficiency and increased chronic
copper toxicity susceptibility in subjects AD subjects compared to normal
subjects and intend to publish these results in the future. We intend
to seek relationships with third parties to develop proprietary diagnostic
products based on our findings. We intend to launch a branded website,
educational materials and marketing campaign to increase public awareness aimed
at the prevention of chronic copper toxicity and market product
solutions. Our EyeDaily™ brand of oral zinc-based therapies is
expected to utilize patent-pending product packaging that incorporates an
eye-self test to improve compliance and convenience of patients with dry
AMD.
Oral dnaJP1
Oral
dnaJP1 is our oral, once-daily candidate for immune tolerance induction and
treatment of rheumatoid arthritis (RA). Oral dnaJP1 has completed a
160-patient, six-month, multi-center, double-blind, randomized,
placebo-controlled Phase II clinical trial for the treatment of
RA. This clinical trial was funded by a $5 million grant from the
National Institutes of Health. Rheumatoid arthritis is an autoimmune disease
which affects approximately 20 million people worldwide. Oral dnaJP1
is a 15 amino acid sequence delivered orally to RA patients. The
dnaJP1 amino acid sequence is expressed on the surface of cells during an immune
response and is expressed by an estimated 70% of RA patients. The
intended mechanism of action of oral dnaJP1 is to induce immune
tolerance to the dnaJP1 peptide in RA patients and thereby modify the course of
disease.
Oral
dnaJP1 is a heat shock protein (hsp)-derived peptide which was previously
identified as a contributor of T-cell mediated inflammation in RA. Immune
responses to hsp are often found at sites of inflammation and have an initial
amplifying effect that upregulates the autoimmune disease.
2
Phase II
Clinical Trial Results with oral dnaJP1
The
response data from the phase II clinical trial for oral dnaJP1 at the ACR20
endpoint along with the percentage of ACR20 response at day 112, 140 and 168
(AUC p=0.09 (primary endpoint)) as well as day 112, 140 and 168 and day 196
follow-up without further drug therapy (AUC p=0.04). ACR20 is a
composite endpoint developed the American College of Rheumatology and is
generally accepted as an FDA approvable scoring criteria.
Consistent
with the disease modifying process of active immune tolerization, there was a
progressive separation between treatment and placebo groups for both ACR20 and
ACR50 endpoints after day 112. Oral dnaJP1 treated patients achieved a 40.7%
ACR20 response at follow up versus 21.5% of placebo-treated patients (CMH test
p=0.007, GEE p<0.001). The proportion of dnaJP1-treated patients who achieved
an ACR20 response at Days 112, 140, 168, and follow up was significantly higher
than that of placebo-treated patients (CMH p=0.03; GEE p=0.0005). A
statistically significant difference was also seen for the AUC when more strict
ACR50 criteria were applied (GEE p-value=0.02). The primary endpoint (AUC
112-140-168) found more patients succeeding on dnaJP1 (p=0.09 by CMH and p=0.04
by adjusted GEE). GEE analysis was employed to correct for
intercenter variability and this was possible as randomization occurred per
center. Patients in this study were permitted to be on currently available
standard background therapies, including HCQ, corticosteroids, sulfasalazine,
analgesics, NSAIDS, but not on disease modifying agents or
biologics. Potential side effects noted in this study included
leucopenia and anemia in 11% and 25%, respectively, of treated patients and 1.3%
and 18%, respectively, in placebo patients but was not considered to be
statistically significant.
From an
immunologic standpoint, oral dnaJP1 also demonstrated an 80% reduction in the
production in-vitro of TNF-alpha by T cells (p<0.007), a hallmark cytokine of
inflammation. Additionally, oral dnaJP1 treated patients demonstrated
an increase in tolerogenic cytokines and immune response genes, including IL-10
and FoxP3 production.
Our
clinical collaborators are planning an end-of-phase II meeting with the FDA to
discuss a proposed further clincial trial of dnaJP1 for the treatment of
rheumatoid arthritis.
Market Opportunity for oral
dnaJP1
Rheumatoid
arthritis is a chronic inflammatory disease that leads to pain, stiffness,
swelling and limitation in the motion and function of multiple joints. If left
untreated, rheumatoid arthritis can produce serious destruction of joints that
frequently leads to permanent disability. Though the joints are the principal
body part affected by rheumatoid arthritis, inflammation can develop in other
organs as well. The disease currently affects over two million Americans, almost
1% of the population, and is two to three times more prevalent in women. Onset
can occur at any point in life but is most frequent in the fourth and fifth
decades of life, with most patients developing the disease between the ages of
35 and 50. Over 20 million people suffer from rheumatoid arthritis
worldwide and the global market is estimated at over $6.3 billion. DMARDs,
including biologics, accounted for nearly $5.0 billion of that
figure.
TRIMESTATM
(oral, once-daily
estriol)
We are
developing TRIMESTATM (oral
estriol) as an oral immunomodulatory and anti-inflammatory bio-identical
estrogenic agent for the North American market. Estriol has been approved and
marketed throughout Europe and Asia as a mild estrogenic agent for over 40 years
for the treatment of post-menopausal hot flashes. Estriol is an important
endogenous hormone that is produced in the placenta by women during pregnancy.
Maternal levels of estriol increase in a linear fashion throughout the third
trimester of pregnancy until birth, whereupon they abruptly fall to near zero.
Our scientific collaborator of TRIMESTA TM
has explored the role that estriol plays in affording immunologic privilege to
the fetus so as to prevent its rejection by the mother. It is a widely observed
phenomenon that pregnant women with autoimmune diseases (such as multiple
sclerosis and rheumatoid arthritis) experience a spontaneous reduction of 80% of
relapse rates (p<0.001) during pregnancy (especially in the third trimester)
as well as high rates of relapse during the post-partum period (especially in
the three-month post-partum period). Based upon these insights, our scientific
collaborator of TRIMESTA TM
has conducted an initial clinical trial of TRIMESTA TM
in multiple sclerosis patients and has demonstrated encouraging results, the
results of which were published.
Phase IIb Clinical Trial of
TRIMESTA TM
in Relapsing-Remitting
MS
TRIMESTA
TM
is currently the subject of an ongoing 150 patient double-blind phase IIb
clinical in relapsing-remitting MS patients. TRIMESTA TM will be
given in combination with subcutaneously injected Copaxone®, a standard
treatment for MS. The primary endpoint is evaluating effects of the treatment
combination on relapse rates using several clinical and magnetic resonance
imaging measures of disability progression. This clinical trial is expected to
be enrolled up to 16 sites within the U.S. and has received a $5 million grant
from the National Multiple Sclerosis Society (NMSS) in partnership with the
National MS Society’s Southern California chapter, with support from the
National Institutes of Health (NIH).
3
TRIMESTA
TM
for Relapsing-Remitting Multiple Sclerosis (MS)
Current Therapies for
Relapsing-Remitting MS.
There are
currently five FDA-approved therapies for the treatment of relapsing-remitting
multiple sclerosis: Betaseron ®, Rebif ®, Avonex ®, Novantrone, Copaxone ® and
Tysabri ®. These therapies provide only a modest benefit for patients with
relapsing-remitting MS and therefore serve to only delay progression of the
disease. All of these drugs require frequent (daily, weekly & monthly)
injections (or infusions) on an ongoing basis and are associated with unpleasant
side effects (such as flu-like symptoms), high rates of non-compliance among
users, and eventual loss of efficacy due to the appearance of resistance in
approximately 30% of patients. An estimated two-thirds of MS patients are
women.
Phase II Clinical Trial
Results of TRIMESTA in Relapsing-Remitting
MS
TRIMESTA
TM
has completed an initial 10-patient, 16-month, single-agent, crossover, phase
IIA clinical trial in the U.S. for the treatment of MS. The results of this
study were encouraging.
Decrease in Volume and
Number of Myelin Lesions
In
relapsing-remitting MS patients treated, the total volume and number of
pathogenic gadolinium enhancing myelin lesions (an established neuroimaging
measurement of disease activity in MS) decreased during the treatment period as
compared to a six-month pre-treatment baseline period. The median total
enhancing lesion volumes decreased by 79% (p =0.02) and the number of lesions
decreased by 82% (p =0.09) within the first three months of treatment with
TRIMESTA TM . Over
the next three months, lesion volumes decreased by 82% (p =0.02) and the number
of lesions decreased by 82% (p =0.02) compared to baseline. During a three-month
re-treatment phase of this clinical trial, relapsing-remitting MS patients again
showed a decrease in enhancing lesion volumes (88%) (p =0.008) and a decrease in
the number of lesions (48%) (p =0.04) compared to baseline.
Market Opportunities for
TRIMESTA TM
Multiple
Sclerosis
MS is a
progressive neurological disease in which the body loses the ability to transmit
messages along nerve cells, leading to a loss of muscle control, paralysis, and,
in some cases, death. Currently, more than 2.5 million people worldwide
(approximately 400,000 patients in the US), mainly young adults aged 18-50, are
afflicted with MS and 66% of these patients are women. The most common form of
MS is relapsing-remitting MS, which accounts for approximately 75% of MS
patients.
Oral
Flupirtine
We are
developing oral flupirtine, a non-opiate, non-addictive oral therapy for the
treatment of fibromyalgia and other ophthalmic
indications. Fibromyalgia is a common, centrally-mediated pain
disorder characterized by chronic diffuse pain and other symptoms. Flupirtine
was originally developed by Asta Medica and has been approved in Europe since
1984 for the treatment of pain, although it has never been introduced to the
U.S. market for any indication.
Preclinical
data and clinical experience suggests that flupirtine should also be effective
for neuropathic pain since it acts in the central nervous system via a mechanism
of action distinguishable from most marketed analgesics. Flupirtine is
especially attractive because it operates through non-opiate pain pathways,
exhibits no known abuse potential, and lacks withdrawal effects. In addition, no
tolerance to its antinocioceptive effects has been observed. One common link
between neuroprotection, nocioception, and flupirtine may be the NMDA
(N-methyl-D-aspartate) glutamate system, a major receptor subtype for
the excitotoxic neurotransmitter, glutamate. Flupirtine has strong
inhibitory actions on NMDA-mediated neurotransmission.
Flupirtine for
Fibromyalgia
Our
scientific collaborator has demonstrated preliminary anecdotal efficacy
of flupirtine for the treatment of fibromyalgia in a small number of
U.S. patients suffering from fibromyalgia that were refractive to other
analgesics and therapies. Flupirtine was well tolerated by patients with no
untoward side effects. In addition, substantial improvement in signs and
symptoms was demonstrated in this difficult-to-treat fibromyalgia patient
population. Our scientific collaborator filed an investigator initiated IND with
the FDA to conduct a phase II clinical trial in
4
fibromyalgia
patients with oral flupirtine. During 2008, this proposed clinical trial and IND
have been approved the FDA. Additionally, this protocol has received
institutional review board (IRB) approval although we do not currently plan to
immediately initiate this study.
Fibromyalgia
is an arthritis-related condition that is characterized by generalized muscular
pain and fatigue. It is a chronic and debilitating condition characterized by
widespread pain and stiffness throughout the body, accompanied by severe
fatigue, insomnia and mood symptoms. It is estimated to affect between two and
four percent of the world's population and after osteoarthritis is the most
commonly diagnosed disorder in rheumatology clinics.
We
estimate that there are approximately 6 million Americans with fibromyalgia.
During 2007, Lyrica®, which is marketed by Pfizer, was the only FDA-approved
medication for fibromyalgia, recorded $1.8 billion in sales and $1.2 billion
during its first year on the market.
CD4
Inhibitors
We are
developing a series of small molecule and peptide based inhibitors of the T-cell
CD4 co-receptor. The CD4 co-receptor is central to a number of autoimmune
disorders, such as, multiple sclerosis.
Our lead
CD4 inhibitor molecule, named 802-2, has demonstrated preliminary safety and
efficacy in a number of animal models of autoimmune disease models, and it has
been evaluated in a phase I/II clinical trial for the prevention of
graft-vs.-host disease. Anti-CD4 802-2 may represent the first clinical stage,
nonantibody-based molecule capable of inducing immune tolerance for a
variety of CD4-mediated autoimmune diseases.
Market Opportunity for
Anti-CD4 802-2 and Small Molecule CD4 Inhibitors
From a
commercial perspective, anti-CD4 802-2 and our other anti-CD4 molecules address
an autoimmune disease market estimated at $21 billion (2006) with an anticipated
annual growth rate of 15%. Autoimmune diseases represent the third-largest
category of illness in the industrialized world, after heart disease and cancer.
A partial list of such diseases includes MS, psoriasis, and rheumatoid
arthritis, as well as “nontypical” CD4-mediated diseases such as allergy
and asthma.
Intellectual
Property
Our goal
is to (a) obtain, maintain, and enforce patent protection for our products,
formulations, processes, methods, and other proprietary technologies, (b)
preserve our trade secrets, and (c) operate without infringing on the
proprietary rights of other parties, worldwide. We seek, where appropriate, the
broadest intellectual property protection for product candidates, proprietary
information, and proprietary technology through a combination of contractual
arrangements and patents.
We have
exclusively licensed from various universities issued patent and patent
applications, including foreign equivalents relating to our product candidates.
We also file patent applications for inventions invented or discovered by
us.
Some of
our products also have various regulatory exclusivities, such as
“Waxman-Hatch” designations including, TRIMESTA and Flupirtine. Waxman-Hatch
exclusivities provide 5 years of market exclusivity in the U.S. These
regulatory exclusivities combined with our patents and patent applications
provide for supplemental intellectual property protection for our products
against competitors.
Below is a description of our license and development agreements
relating to our product candidates:
The
Regents of University of California License Agreement
We have
an exclusive worldwide license agreement with the Regents of the University of
California relating to a issued and pending U.S. and international patents and
patent applications covering the composition of matter and uses of an epitope
specific immunotherapeutic technology for which dnaJP1 is the lead product
candidate. Pursuant to this agreement, we have paid an upfront license fee,
reimbursed patent expenses as well as annual maintenance fees, success based
milestone payments totaling $11 million as well as royalties on net sales of
products covered by the licensed patents.
The
Regents of University of California License Agreement
We have
an exclusive worldwide license agreement with the Regents of the University of
California relating to issued U.S. Patent No. 6,936,599 and pending patent
applications covering the uses of the TRIMESTA TM
technology. Pursuant to this agreement, we paid an upfront license fee of
$20,000, reimbursed patent expenses of $41,000 and agreed to pay a license fee
of $25,000 during 2006, as well as annual maintenance fees, milestone payments
totaling $750,000 that are payable on filing an NDA, and on approval of an NDA
with the FDA, as well
5
as
royalties on net sales of the TRIMESTA TM
technology covered by the licensed patents. If we become public or are acquired
by a public company, we may be permitted to partially pay milestone payments in
the form of equity.
McLean
Hospital Exclusive License Agreement
We have
entered into an exclusive license agreement with the McLean Hospital, a Harvard
University hospital, relating to U.S. Patent No. 6,610,324 and its foreign
equivalents, entitled “Flupirtine in the treatment of fibromyalgia and related
conditions.” Pursuant to this agreement, we agreed to pay McLean royalties on
net sales of flupirtine equal to 3.5% of net sales of flupirtine for indications
covered by the issued patents, reduced to 1.75% if we have a license to other
intellectual property covering those indications; use our best efforts to
commercialize flupirtine for the therapeutic uses embodied in the patent
applications; reimburse back patent costs of approximately $41,830; and pay the
following milestone payments: $150,000 upon the initiation of a pivotal phase
III clinical trial of flupirtine; $300,000 upon the filing of an NDA for
flupirtine; and $600,000 upon FDA approval of flupirtine.
Thomas
Jefferson University License Agreement
Our
majority-owned subsidiary CD4 Biosciences Inc. has entered into an exclusive
worldwide license agreement with Thomas Jefferson University (TJU) relating to
certain U.S. and foreign issued patents and patent applications relating to all
uses of anti-CD4 802-2 and CD4 inhibitor technology. We are obligated to pay
annual maintenance fees, milestone payments upon the filing of an NDA and
approval of an NDA with the FDA, as well as royalties on net sales of anti-CD4
802-2 and other anti-CD4 molecules covered by the licensed patents. We also
received rights to valuable data generated under any IND application filing,
which includes toxicology and manufacturing information relating to anti-CD4
802-2. As partial consideration for this license, TJU was issued shares
representing 5% of the common stock of CD4 Biosciences Inc. We also agreed that
TJU would receive anti-dilution protection on those CD4 shares through the first
$2 million in financing to CD4. We also agree to indemnify TJU against certain
liabilities.
University
of Michigan (UM) Exclusive License Agreement
We have
entered into an exclusive worldwide license agreement with the University of
Michigan (UM) for all uses of U.S. Patent No. 6,855,340, corresponding
international applications, and a related corresponding patent application that
relates to various uses of anti-copper therapeutics to treat inflammatory and
fibrotic diseases. Pursuant to this agreement, we will use our best efforts to
commercialize oral TTM for the therapeutic uses embodied in the
issued patent and pending patent application; reimburse UM for patent expenses;
pay UM royalties equal to 2% of net sales of oral TTM for uses covered by the UM
patents; issue UM shares of our common stock; pay UM success-based milestone
fees totaling $350,000 (the first of which is due when we file an NDA
and the second of which is due when we receive FDA approval for oral TTM in
an indication covered by the UM patents), and indemnify UM against
certain liabilities.
Research
and License Agreements Terminated in 2009 and First Quarter of 2009
During
2008 and the first quarter of 2009, we terminated our research agreement with
the University of Michigan as well our license agreements with Maine
Medical Institute, Oregon Health & Sciences Center (OHSU), University of
Southern California (USC), and Children’s Hospital-Boston.
6
Manufacturing
We
utilize contract manufacturing firms to produce the bulk active ingredients for
CD4 Inhibitor 802-2 and dnaJP1 in accordance with “current good manufacturing
processes” (cGMP) guidelines outlined by the FDA. Our 17,675 square feet of
primary office, laboratory and manufacturing facility in Ann Arbor, MI includes
approximately 6,000 square feet of cleanroom suites, cGMP areas and QA/QC
analytical lab that we utilize to perform formulation and process development,
ingredient storage, milling, sieving, blending, tableting, capsuling,
dissolution testing, stability testing and potential commercial production of
our Zinthionein™ and modified-release zinc formulation finished
products. Our monthly rent is $15,033.80 and our lease expires on
February 28, 2011, but extendable at our option for an additional three years.
We are currently seeking to sublease some or all of our excess space at this
facility. Our Trimesta bulk and finished product is manufactured by
Organon NV, a European subsidiary of Schering-Plough which has manufactured the
active ingredient in Trimesta for nearly 40 years.
Sales
and Marketing
We
currently do not market any products. We may hire a Vice President of Sales and
Marketing and develop our own marketing team and/or enter into a co-promotion or
licensing agreement for specific territories with biotechnology or
pharmaceutical companies to market our products.
ITEM
1A. RISK FACTORS
An
investment in our securities is highly speculative and involves a high degree of
risk. Therefore, in evaluating us and our business you should carefully consider
the risks set forth below, which are only a few of the risks associated with our
business and our common stock. You should be in a position to risk the loss of
your entire investment.
RISKS RELATING TO OUR BUSINESS
We are a
development stage company. We currently have no product revenues and will need
to raise additional capital to operate our
business.
We are a
development stage company that has experienced significant losses since
inception and has a significant accumulated deficit. We expect to incur
additional operating losses in the future and expect our cumulative losses to
increase. To date, we have generated no product revenues. As of December 31,
2008, we have expended approximately $23.0 million on a consolidated basis
acquiring and developing our current product candidates. Until such time as we
receive approval from the FDA and other regulatory authorities for our product
candidates, we will not be permitted to sell our drugs and will not have product
revenues. Therefore, for the foreseeable future we will have to fund all of our
operations and capital expenditures from equity and debt offerings, cash on
hand, licensing fees, and grants. We will need to seek additional sources of
financing and such additional financing may not be available on favorable terms,
if at all. If we do not succeed in raising additional funds on acceptable terms,
we may be unable to complete planned pre-clinical and clinical trials or obtain
approval of our product candidates from the FDA and other regulatory
authorities. In addition, we could be forced to discontinue product development,
reduce or forego sales and marketing efforts, and forego attractive business
opportunities. Any additional sources of financing will likely involve the
issuance of our equity or debt securities, which will have a dilutive effect on
our stockholders.
We
are not currently profitable and may never become profitable.
We have a
history of losses and expect to incur substantial losses and negative operating
cash flow for the foreseeable future. Even if we succeed in developing and
commercializing one or more of our product candidates, we expect to incur
substantial losses for the foreseeable future and may never become profitable.
We also expect to continue to incur significant operating and capital
expenditures and anticipate that our expenses will increase substantially in the
foreseeable future as we do the following:
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continue
to undertake pre-clinical development and clinical trials for our product
candidates;
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seek
regulatory approvals for our product candidates;
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implement
additional internal systems and infrastructure;
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lease
additional or alternative office facilities; and
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hire
additional personnel, including members of our management
team.
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We also
expect to experience negative cash flow for the foreseeable future as we fund
our technology development with capital expenditures. As a result, we will need
to generate significant revenues in order to achieve and maintain profitability.
We may not be able to generate these revenues or achieve profitability in the
future. Our failure to achieve or maintain profitability could negatively impact
the value of our common stock and underlying securities.
We
have a limited operating history on which investors can base an investment
decision.
We are a
development-stage company and have not demonstrated our ability to perform the
functions necessary for the successful commercialization of any of our product
candidates. The successful commercialization of our product candidates will
require us to perform a variety of functions, including:
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continuing
to undertake pre-clinical development and clinical
trials;
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participating
in regulatory approval processes;
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formulating
and manufacturing products; and
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conducting
sales and marketing activities.
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Our
operations have been limited to organizing and staffing our company, acquiring,
developing, and securing our proprietary technology, and undertaking
pre-clinical trials and Phase I/II, and Phase II and Phase III clinical trials
of our principal product candidates. These operations provide a limited basis
for you to assess our ability to commercialize our product candidates and the
advisability of investing in our securities.
We
have experienced several management changes.
We have
had significant changes in management in the past two
years. Effective July 1, 2008, Charles L. Bisgaier resigned as our
President and Corporate Secretary and as a director of our
Company. Also effective on July 1, 2008, Steve H. Kanzer resigned as
our Chief Executive Officer (although he did remain as our Chairman of the
Board). Effective July 1, 2008, Nicholas Stergis was appointed our
Chief Executive Officer. Effective
March 29, 2009, Nicholas Stergis resigned as our Chief Executive Officer. Mr.
Stergis remains a director of the Company and Steve H. Kanzer was appointed our
Chief Executive Officer and President. Changes
in key positions in our Company, as well as additions of new personnel and
departures of existing personnel, can be disruptive, might lead to additional
departures of existing personnel and could have a material adverse effect on our
reputations, business, operating results, financial results and internal
controls over financial reporting.
We may not obtain
the necessary U.S. or worldwide regulatory approvals to commercialize any other
of our product(s).
We will
need FDA approval to commercialize our product candidates in the U.S. and
approvals from equivalent regulatory authorities in foreign jurisdictions to
commercialize our product candidates in those jurisdictions. In order to obtain
FDA approval for any of our product candidates, we must submit to the
FDA an NDA, demonstrating that the product candidate is safe for humans and
effective for its intended use and that the product candidate can be
consistently manufactured and is stable. This demonstration requires significant
research and animal tests, which are referred to as “pre-clinical studies,”
human tests, which are referred to as “clinical trials” as well as the ability
to manufacture the product candidate, referred to as “chemistry
manufacturing control” or “CMC.” We will also need to file additional
investigative new drug applications and protocols in order to initiate clinical
testing of our drug candidates in new therapeutic indications and delays in
obtaining required FDA and institutional review board approvals
to commence such studies may delay our initiation of such planned
additional studies.
Satisfying
the FDA’s regulatory requirements typically takes many years, depending on the
type, complexity, and novelty of the product candidate, and requires substantial
resources for research development, and testing. We cannot predict whether our
research and clinical approaches will result in drugs that the FDA considers
safe for humans and effective for indicated uses. The FDA has substantial
discretion in the drug approval process and may require us to conduct additional
pre-clinical and clinical testing or to perform post-marketing
studies.
8
The
approval process may also be delayed by changes in government regulation, future
legislation or administrative action, or changes in FDA policy that occur prior
to or during our regulatory review. Delays in obtaining regulatory approvals may
do the following:
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delay
commercialization of, and our ability to derive product revenues from, our
product candidates;
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impose
costly procedures on us; and
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diminish
any competitive advantages that we may otherwise
enjoy.
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Even if
we comply with all FDA requests, the FDA may ultimately reject one or more of
our NDAs. We cannot be sure that we will ever obtain regulatory clearance for
our product candidates. Failure to obtain FDA approval of any of our product
candidates will severely undermine our business by reducing our number of
salable products and, therefore, corresponding product revenues.
In
foreign jurisdictions, we must receive approval from the appropriate regulatory
authorities before we can commercialize our drugs. Foreign regulatory approval
processes generally include all of the risks associated with the FDA approval
procedures described above. We cannot assure you that we will receive the
approvals necessary to commercialize our product candidate for sale outside the
United States.
We
may not be able to retain rights licensed to us by others to commercialize key
products and may not be able to establish or maintain the relationships we need
to develop, manufacture, and market our products.
In
addition to our own patent applications, we also currently rely on licensing
agreements with third party patent holders/licensors for our
products. We have an exclusive license agreement with the McLean
Hospital relating to the use of flupirtine to treat fibromyalgia
syndrome; an exclusive license agreement with Thomas Jefferson University
relating to our CD4 inhibitor program; an exclusive license agreement
with the Regents of the University of California relating to our TRIMESTA™
technology; an exclusive license to our oral immunotherapeutic tolerance
program, named dnaJP1 from UCSD and an exclusive license agreement with Dr.
Newsome and Mr. Tate relating to our Zinthionein program. Each of these
agreements requires us to use our best efforts to commercialize each of the
technologies as well as meet certain diligence requirements and timelines in
order to keep the license agreement in effect. In the event we are not able to
meet our diligence requirements, we may not be able to retain the rights granted
under our agreements or renegotiate our arrangement with these institutions on
reasonable terms, or at all.
Furthermore,
we currently have very limited product development capabilities, and limited
marketing or sales capabilities. For us to research, develop, and test our
product candidates, we would need to contract with outside researchers, in most
cases those parties that did the original research and from whom we have
licensed the technologies.
We can
give no assurances that any of our issued patents licensed to us or any of our
other patent applications will provide us with significant proprietary
protection or be of commercial benefit to us. Furthermore, the issuance of a
patent is not conclusive as to its validity or enforceability, nor does the
issuance of a patent provide the patent holder with freedom to operate without
infringing the patent rights of others.
Developments
by competitors may render our products or technologies obsolete or
non-competitive.
Companies
that currently sell or are developing both generic and proprietary
pharmaceutical compounds to treat central-nervous-system and autoimmune diseases
include: Pfizer, Inc., Rigil Pharmaceuticals, Incyte Pharmaceuticals, Chelsea
Therapeutics International, Inc., Aton Pharma, GlaxoSmithKline Pharmaceuticals,
Alcon, Inc., Shire Pharmaceuticals, Plc., Schering-Plough, Organon NV, Merck
& Co., Eli Lilly & Co., Serono, SA, Biogen Idec, Inc.,
Achillion, Ltd., Active Biotech, Inc., Panteri Biosciences, Meda, Merrimack
Pharmaceuticals, Inc., Merch-Schering AG, Forest Laboratories, Inc.,
Attenuon, LLC, Cypress Biosciences, Inc., Genentech, Neurotech, Amgen, Inc.,
Centocor/Johnson and Johnson, UCB Group, Abbott, Wyeth, OM Pharma, Cel-Sci
Pharmaceuticals, Novartis, Axcan Pharma, Inc., Teva Pharmaceuticals, Inc.,
Intermune, Inc. Fibrogen, Inc., Active Biotech, CNSBio, Pty., Rare
Disease Therapeutics, Inc., Prana Biotechnology, Inc., Merz & Co.,
AstraZeneca Pharmaceuticals, Inc., Chiesi Pharmaceuticals, Inc.,
Alcon, Inc., Bausch and Lomb, Inc., Targacept, Inc., and Johnson & Johnson,
Inc. Alternative technologies or alternative delivery or dosages of already
approved therapies are being developed to treat dry AMD, autoimmune
inflammatory, rheumatoid arthritis, psoriasis, Fibromyalgia, MS, Huntington’s,
Alzheimer’s and Wilson’s diseases, several of which may be approved or are in
early and advanced clinical trials, such as zinc based combinations,
Syk inhibitors, Jak inhibitors, connective tissue growth factors (CTGF),
FTY-720, Laquinimod, pirfenidone, milnacipram, Lyrica, anti-depressant
combinations, Rituxan, Enbrel, Cimzia, Humira, Remicade, Cymbalta, Effexor,
Actimmune and other interferon preparations. Unlike us, many of our competitors
have significant financial and human resources. In addition, academic research
centers may develop technologies that compete with our TRIMESTA, Zinthionein,
dnaJP1, CD4 inhibitors and flupirtine technologies. Should clinicians or
regulatory authorities view these therapeutic regiments as more effective than
our products, this might delay or prevent us from obtaining regulatory approval
for our products, or it might prevent us from obtaining favorable reimbursement
rates from payers, such as Medicare, Medicaid and private insurers.
9
Competitors
could develop and gain FDA approval of our products for a different
indication.
Since we
do not have composition of matter patent claims for, flupirtine and TRIMESTA,
others may obtain approvals for other uses of these products which are not
covered by our issued or pending patents. For example, the active ingredients in
both flupirtine and TRIMESTA have been approved for marketing in overseas
countries for different uses. Other companies, including the original developers
or licensees or affiliates may seek to develop flupirtine or TRIMESTA or their
respective active ingredient(s) for other uses in the US or any
country we are seeking approval for. We cannot provide any assurances that any
other company may obtain FDA approval for products that contain flupirtine or
TRIMESTA in various formulations or delivery systems that might adversely affect
our ability to develop and market these products in the US. We are
aware that other companies have intellectual property protection using the
active ingredients and have conducted clinical trials of flupirtine, and
TRIMESTA for different applications that what we are developing. Many
of these companies may have more resources than us. Should a
competitor obtain FDA approval for their product for any indication prior to us,
we might be precluded under the Waxman-Hatch Act to obtain approval for our
product candidates for a period of five years. We cannot provide any
assurances that our products will be FDA approved prior to our
competitors.
Other
companies could manufacture and develop oral TTM and its active ingredient,
tetrathiomolybdate, and secure approvals for different indications. We are aware
that a potential competitor has an exclusive license from the University of
Michigan (UM) to an issued U.S. patent that relates to the use of
tetrathiomolybdate to treat angiogenic diseases (the “Angiogenic
Patent”) and is currently in phase I and phase II clinical trials for the
treatment of various forms of cancer. To our knowledge, this competitor and UM
have filed additional patent applications claiming various analog structures and
formulations of tetrathiomolybdate to treat various diseases. Further, we cannot
predict whether our competitor might obtain approval in the U.S. or Europe to
market tetrathiomolybdate for cancer or another indication ahead of us. We also
cannot predict whether, if issued, any patent corresponding to the Angiogenic
Patent may prevent us from conducting our business or result in lengthy and
costly litigation or the need for a license. Furthermore, if we need to obtain a
license to these or other patents in order to conduct our business, we may find
that it is not available to us on commercially reasonable terms, or
is not available to us at all.
If
the FDA approves other products containing our active ingredients to treat
indications other than those covered by our issued or pending patent
applications, physicians may elect to prescribe a competitor’s products to treat
the diseases for which we are developing—this is commonly referred to
as “off-label” use. While under FDA regulations a competitor is not allowed to
promote off-label uses of its product, the FDA does not regulate the practice of
medicine and, as a result, cannot direct physicians as to which source it should
use for these products they prescribe to their patients. Consequently, we might
be limited in our ability to prevent off-label use of a competitor’s product to
treat the diseases we are developing, even if we have issued patents
for that indication. If we are not able to obtain and enforce these patents, a
competitor could use our products for a treatment or use not covered by any of
our patents. We cannot provide any assurances that a competitor will
not obtain FDA approval for a product that contains the same active ingredients
as our products.
We
rely primarily on method patents and patent applications and various regulatory
exclusivities to protect the development of our technologies, and our ability to
compete may decrease or be eliminated if we are not able to protect our
proprietary technology.
Our
competitiveness may be adversely affected if we are unable to protect our
proprietary technologies. Other than our CD4 inhibitor, oral dnaJP1 and
Zinthionein program, we do not have composition of matter patents for TRIMESTA,
flupirtine, oral TTM or their respective active ingredients estriol, flupirtine,
and ammonium tetrathiomolybdate. We also expect to rely on patent
protection from an issued U.S. Patent for the use of oral TTM and related
compounds to treat inflammatory and fibrotic diseases (U.S. Patent No
6,855,340). These patents have been exclusively licensed to us. We have also
filed various pending patent applications which cover various formulations,
packaging, distribution & monitoring methods for oral TTM. We rely on issued
patent and pending patent applications for use of TRIMESTA to treat MS (issued
U.S. Patent No. 6,936,599) and various other therapeutic indications which have
been exclusively licensed to us. We have exclusively licensed issued U.S. Patent
No. 5,773,570, 6,153,200, 6,946,132, 6,989,146, 7,094,597, 7,301,005, including
foreign equivalents along with several patent applications which
cover dnaJP1, methods and its uses, We have also exclusively licensed an issued
patent for the treatment of fibromyalgia with flupirtine.
Our
Zinthionein product candidate is exclusively licensed from its inventors, David
A. Newsome, M.D. and David Tate, Jr. Zinthionein is the subject of
two issued U.S. patents, 7,164,035 and 6,586,611 and pending U.S. patent
application ser. no. 11/621,380 which cover composition of matter
claims. In our annual Form 10-KSB for the year ending December 31, 2007
filed March 31, 2008 (page 23), we described our receipt in March 2008 (and
potential impact on claim 1 of our exclusively licensed issued U.S. patent
7,164,035) of an English translation of a Russian disclosure, Zegzhda et. al.
Chemical Abstracts Vol. 85 Abstract No. 186052 (1976) that was cited by the U.S.
patent examiner during our
10
prosecution
of the pending divisional U.S. patent application Ser. No. 11/621,390. In April
2008, we analyzed the zinc-cysteine complex described by Zegzhda and concluded
that such complex describes an insoluble zinc salt and does not describe a
non-zinc salt zinc monocyteine complex and therefore believe that such
disclosure should not affect the validity of any of our issued U.S. patent
claims relating our zinc-monocysteine composition-of-matter
claims. We have filed a response and declaration describing the
results of our analysis with the U.S. Patent and Trademark Office with respect
to the Zegzhda reference with respect to U.S. patent application ser. no.
11/621,380. In an office action dated August 20, 2008, the U.S.
patent examiner did not accept our arguments filed May 23, 2008 in connection
with the Zegzhda reference under pending divisional application ser. no.
11/621,390, to which we intend to respond. Public copies of relevant and future
communications can be obtained using the electronic PAIR system of the U.S.
Patent and Trademark Office.
The
patent positions of pharmaceutical companies are uncertain and may involve
complex legal and factual questions. We may incur significant expense in
protecting our intellectual property and defending or assessing claims with
respect to intellectual property owned by others. Any patent or other
infringement litigation by or against us could cause us to incur significant
expense and divert the attention of our management.
We may
also rely on the United States Drug Price Competition and Patent Term
Restoration Act, commonly known as the “Hatch-Waxman Amendments,” to protect
some of our current product candidates, specifically oral TTM, dnaJP1, TRIMESTA,
zinc-monocystine, CD4 inhibitor, flupirtine and other future product candidates
we may develop. Once a drug containing a new molecule is approved by the FDA,
the FDA cannot accept an abbreviated NDA for a generic drug containing that
molecule for five years, although the FDA may accept and approve a drug
containing the molecule pursuant to an NDA supported by independent clinical
data. Recent amendments have been proposed that would narrow the scope of
Hatch-Waxman exclusivity and permit generic drugs to compete with our
drug.
Others
may file patent applications or obtain patents on similar technologies or
compounds that compete with our products. We cannot predict how broad the claims
in any such patents or applications will be, and whether they will be allowed.
Once claims have been issued, we cannot predict how they will be construed or
enforced. We may infringe intellectual property rights of others without being
aware of it. If another party claims we are infringing their technology, we
could have to defend an expensive and time consuming lawsuit, pay a large sum if
we are found to be infringing, or be prohibited from selling or licensing our
products unless we obtain a license or redesign our product, which may not be
possible.
We also
rely on trade secrets and proprietary know-how to develop and maintain our
competitive position. Some of our current or former employees, consultants, or
scientific advisors, or current or prospective corporate collaborators, may
unintentionally or willfully disclose our confidential information to
competitors or use our proprietary technology for their own benefit.
Furthermore, enforcing a claim alleging the infringement of our trade secrets
would be expensive and difficult to prove, making the outcome uncertain. Our
competitors may also independently develop similar knowledge, methods, and
know-how or gain access to our proprietary information through some other
means.
We
may fail to retain or recruit necessary personnel, and we may be unable to
secure the services of consultants.
As of
March 28, 2009, we have 3 full-time employees and 3 part-time employees. We have
also engaged regulatory consultants to advise us on our dealings with the FDA
and other foreign regulatory authorities. We intend to recruit certain key
executive officers, including a Vice President of Sales and Marketing and Vice
President of Business Development during 2009. Our future performance will
depend in part on our ability to successfully integrate newly hired executive
officers into our management team and our ability to develop an effective
working relationship among senior management.
Effective
March 29, 2009, Nicholas Stergis resigned as our Chief Executive Officer. Mr.
Stergis remains a director of the Company. In order to fill the vacancy, Steve
H. Kanzer was appointed our President and Chief Executive Officer. The Company
has engaged an executive search firm to identify potential candidates for the
Chief Executive Officer position.
Certain
of our directors, (Jeffrey Kraws, a director and former VP of Business
Development, Jeffrey Wolf, a director, Nicholas Stergis, a director, and Dr.
Kuo, a director) scientific advisors, and consultants serve as officers,
directors, scientific advisors, or consultants of other biopharmaceutical or
biotechnology companies which might be developing competitive products to ours.
Other than corporate opportunities, none of our directors are obligated under
any agreement or understanding with us to make any additional products or
technologies available to us. Similarly, we can give no assurances, and we do
not expect and stockholders should not expect, that any biomedical or
pharmaceutical product or technology identified by any of our directors or
affiliates in the future would be made available to us other than corporate
opportunities.
11
We can
give no assurances that any such other companies will not have interests that
are in conflict with our interests.
Losing
key personnel or failing to recruit necessary additional personnel would impede
our ability to attain our development objectives. There is intense competition
for qualified personnel in the drug-development field, and we may not be able to
attract and retain the qualified personnel we would need to develop our
business.
We rely
on independent organizations, advisors, and consultants to perform certain
services for us, including handling substantially all aspects of regulatory
approval, clinical management, manufacturing, marketing, and sales. We expect
that this will continue to be the case. Such services may not always be
available to us on a timely basis when we need them.
We
may experience difficulties in obtaining sufficient quantities of our products
or other compounds.
In order
to successfully commercialize our product candidates, we must be able to
manufacture our products in commercial quantities, in compliance with regulatory
requirements, at acceptable costs, and in a timely manner. Manufacture of the
types of biopharmaceutical products that we propose to develop present various
risks. For example, manufacture of the active ingredient in oral TTM and
Zinthionein is a complex process that can be difficult to scale up for purposes
of producing large quantities. This process can also be subject to delays,
inefficiencies, and poor or low yields of quality products. Furthermore, the
active ingredient of Zinthionein has been difficult to scale up at larger
quantities. As such, we can give no assurances that we will be able
to scale up the manufacturing of Zinthionein. Oral TTM is also known
to be subject to a loss of potency as a result of prolonged exposure to moisture
and other normal atmospheric conditions. The active ingredient of our dnaJP1
program is a peptide. Traditionally, peptide manufacturing is costly,
time consuming, resulting in low yields and poor stability. We cannot give any
assurances that we will not encounter this issues when scaling up manufacturing
for dnaJP1. We are developing proprietary formulations and specialty
packaging solutions to overcome this stability issue, but we can give no
assurances that we will be successful in meeting the stability requirements
required for approval by regulatory authorities such as the FDA or the
requirements that our new proprietary formulations and drug product will
demonstrate satisfactory comparability to less stable formulations utilized in
prior clinical trials. We may experience delays in demonstrating satisfactory
stability requirements and drug product comparability requirements that could
delay our planned clinical trials of for any of our products.
For
manufacturing and nonclinical information for TRIMESTA, we rely upon an
agreement with Organon, a division of Schering-Plough for access to clinical,
nonclinical, stability and drug supply relating to estriol, the active
ingredient in TRIMESTA which is currently in a phase IIb clinical trial for MS.
Should Organon terminate our agreement or be unable or unwilling to
continue to supply TRIMESTA to us, this might delay enrollment and
commercialization plans for our TRIMESTA clinical trial program. Organon has
manufactured estriol the active ingredient of TRIMESTA for the European and
Asian market for approximately 40 years but has never been approved in the
US.
Historically,
our manufacturing has been handled by contract manufacturers and compounding
pharmacies. We can give no assurances that we will be able to continue to use
our current manufacturer or be able to establish another relationship with a
manufacturer quickly enough so as not to disrupt commercialization of any of our
products, or that commercial quantities of any of our products, if approved for
marketing, will be available from contract manufacturers at acceptable
costs.
In
addition, any contract manufacturer that we select to manufacture our product
candidates might fail to maintain a current “good manufacturing practices”
(cGMP) manufacturing facility. During February 2007, we established a
manufacturing facility in Ann Arbor, MI and we are currently seeking to
sublease some or all of our excess office, laboratory and manufacturing
space. In March 2009, our building control systems for cleanrooms and
associated air handling equipment were removed and sold which might affect our
ability to reachieve cGMP status for our facility.
The cost
of manufacturing certain product candidates may make them prohibitively
expensive. In order to successfully commercialize our product candidates we may
be required to reduce the costs of production, and we may find that we are
unable to do so. We may be unable to obtain, or may be required to pay high
prices for compounds manufactured or sold by others that we need for comparison
purposes in clinical trials and studies for our product candidates.
The
manufacture of our products is a highly exacting process, and if we or one of
our materials suppliers encounter problems manufacturing our products, our
business could suffer.
The FDA
and foreign regulators require manufacturers to register manufacturing
facilities. The FDA and foreign regulators also inspect these facilities to
confirm compliance with cGMP or similar requirements that the FDA or foreign
regulators establish. We or our materials suppliers may face manufacturing or
quality control problems causing product production and shipment delays or a
situation where we or the supplier may not be able to maintain compliance with
the FDA’s cGMP requirements, or those of foreign regulators, necessary to
continue manufacturing our drug substance. Any failure to comply with cGMP
requirements or other FDA or foreign regulatory requirements could adversely
affect our clinical research activities and our ability to market and develop
our products.
If
the parties we depend on for supplying our drug substance raw materials and
certain manufacturing-related services do not timely supply these products and
services, it may delay or impair our ability to develop, manufacture and market
our products.
12
We rely
on suppliers for our drug substance raw materials and third parties for certain
manufacturing-related services to produce material that meets appropriate
content, quality and stability standards and use in clinical trials of our
products and, after approval, for commercial distribution. To succeed, clinical
trials require adequate supplies of drug substance and drug product, which may
be difficult or uneconomical to procure or manufacture. We and our suppliers and
vendors may not be able to (i) produce our drug substance or drug product to
appropriate standards for use in clinical studies, (ii) perform under any
definitive manufacturing, supply or service agreements with us or (iii) remain
in business for a sufficient time to successfully produce and market our product
candidates. If we do not maintain important manufacturing and service
relationships, we may fail to find a replacement supplier or required vendor or
develop our own manufacturing capabilities which could delay or impair our
ability to obtain regulatory approval for our products and substantially
increase our costs or deplete profit margins, if any. If we do find replacement
manufacturers and vendors, we may not be able to enter into agreements with them
on terms and conditions favorable to us and, there could be a substantial delay
before a new facility could be qualified and registered with the FDA and foreign
regulatory authorities.
Clinical
trials are very expensive, time-consuming, and difficult to design and
implement.
Human
clinical trials are very expensive and difficult to design and implement, in
part because they are subject to rigorous regulatory requirements. The clinical
trial process is also time-consuming. We estimate that clinical trials of our
product candidates would take at least several years to complete. Furthermore,
failure can occur at any stage of the trials, and we could encounter problems
that cause us to abandon or repeat clinical trials. Commencement and completion
of clinical trials may be delayed by several factors,
including:
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unforeseen
safety issues;
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determination
of dosing;
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lack
of effectiveness during clinical trials;
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slower
than expected rates of patient recruitment;
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inability
to monitor patients adequately during or after treatment;
and
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inability
or unwillingness of medical investigators to follow our clinical
protocols.
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In
addition, we or the FDA may suspend our clinical trials at any time if it
appears that we are exposing participants to unacceptable health risks or if the
FDA finds deficiencies in our submissions or conduct of our trials.
The
results of our clinical trials may not support our product candidate
claims.
Even if
our clinical trials are initiated and completed as planned, we cannot be certain
that the results will support our product-candidate claims. Success in
pre-clinical testing and phase II clinical trials does not ensure that later
phase II or phase III clinical trials will be successful. We cannot be sure that
the results of later clinical trials would replicate the results of prior
clinical trials and pre-clinical testing. Clinical trials may fail to
demonstrate that our product candidates are safe for humans and effective for
indicated uses. Any such failure could cause us to abandon a product candidate
and might delay development of other product candidates. Any delay in, or
termination of, our clinical trials would delay our obtaining FDA approval for
the affected product candidate and, ultimately, our ability to commercialize
that product candidate.
Physicians
and patients may not accept and use our technologies.
Even if
the FDA approves our product candidates, physicians and patients may not accept
and use them. Acceptance and use of our product will depend upon a number of
factors, including the following:
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the
perception of members of the health care community, including physicians,
regarding the safety and effectiveness of our drugs;
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the
cost-effectiveness of our product relative to competing
products;
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availability
of reimbursement for our products from government or other healthcare
payers; and
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the
effectiveness of marketing and distribution efforts by us and our
licensees and distributors, if
any.
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Because
we expect sales of our current product candidates, if approved, to generate
substantially all of our product revenues for the foreseeable future, the
failure of any of these drugs to find market acceptance would harm our business
and could require us to seek additional financing.
13
We depend on
researchers who are not under our control.
Since we
have in-licensed some of our product candidates, we depend upon
independent investigators and scientific collaborators, such as universities and
medical institutions or private physician scientists, to conduct our
pre-clinical and clinical trials under agreements with us. These collaborators
are not our employees and we cannot control the amount or timing of resources
that they devote to our programs or the timing of their procurement of
clinical-trial data or their compliance with applicable regulatory guidelines.
Should any of these scientific inventors/advisors become disabled or die
unexpectedly, or should they fail to comply with applicable regulatory
guidelines, we may be forced to scale back or terminate development of that
program. They may not assign as great a priority to our programs or
pursue them as diligently as we would if we were undertaking those programs
ourselves. Failing to devote sufficient time and resources to our
drug-development programs, or substandard performance and failure to comply with
regulatory guidelines, could result in delay of any FDA applications and our
commercialization of the drug candidate involved.
These
collaborators may also have relationships with other commercial entities, some
of which may compete with us. Our collaborators assisting our competitors at our
expense could harm our competitive position. For example, we are highly
dependent on scientific collaborators for our dnaJP1, TRIMESTA,
Zinthionein, CD4 Inhibitor 802-2 and flupirtine development programs.
Specifically, all of the clinical trials have been conducted under
physician-sponsored investigational new drug applications (INDs), not
corporate-sponsored INDs. Generally, we have experienced difficulty in
collecting data generated from these physician sponsored clinical trials or
physician sponsored INDs for our programs. We cannot provide any
assurances that we will not experience any additional delays in the
future. For example, the clinical trials for oral TTM have been
conducted and completed prior to us licensing this technology from the
University of Michigan. Due to various patient privacy regulations
and other administrative matters, we have experienced delays and/or an
inability to obtain clinical trial data relating to oral TTM. We have also
experienced similar difficulties with our Zinthionein program. George
J. Brewer, M.D., our initial clinical collaborator for oral TTM for Wilson’s
disease, has retired from University of Michigan, will no longer participate as
a clinical investigator and no longer has an IND for oral TTM. We do
not plan to conduct any further clinical studies of oral TTM. Should
we or a future sublicensee elect to seek to conduct additional clinical trials
of oral TTM, we or such sublicensee as the ase may be would be expected to be
required to file a new IND with the FDA for oral TTM and gain FDA approval for
such IND prior to initiating any clinical studies and would be subject to the
risks and potential delays associated with obtaining such
approval. Any delay or inability to obtain any data, and any such
regulatory issues, might result our inability to advance our products through
the regulatory process or obtain pharmaceutical partners for them.
We are
also highly dependent on government and private grants to fund certain of our
clinical trials for our product candidates. For example, TRIMESTA has received a
$5 million grant from the Southern California Chapter of the National Multiple
Sclerosis Society and the National Institutes of Health (NIH) which funds a
majority of our ongoing 150 patient phase IIb clinical trial in relapsing
remitting multiple sclerosis. If our scientific collaborator is
unable to maintain these grants, we might be forced to scale back or terminate
the development of this product candidate.
We
have no experience selling, marketing, or distributing products and do not have
the capability to do so.
We
currently have no sales, marketing, or distribution capabilities. We do not
anticipate having resources in the foreseeable future to allocate to selling and
marketing our proposed products. Our success will depend, in part, on whether we
are able to enter into and maintain collaborative relationships with a
pharmaceutical or a biotechnology company charged with marketing one or more of
our products. We may not be able to establish or maintain such collaborative
arrangements or to commercialize our products in foreign territories, and even
if we do, our collaborators may not have effective sales forces.
If we do
not, or are unable to, enter into collaborative arrangements to sell and market
our proposed products, we will need to devote significant capital, management
resources, and time to establishing and developing an in-house marketing and
sales force with technical expertise. We may be unsuccessful in doing
so.
If
we fail to maintain positive relationships with particular individuals, we may
be unable to successfully develop our product candidates, conduct clinical
trials, and obtain financing.
If we
fail to maintain positive relationships with members of our management team or
if these individuals decrease their contributions to our company, our business
could be adversely impacted. We do not carry key employee insurance policies for
any of our key employees.
We also
rely greatly on employing and retaining other highly trained and experienced
senior management and scientific personnel. The competition for these and other
qualified personnel in the biotechnology field is intense. If we are not able to
attract and retain qualified scientific, technical, and managerial personnel, we
probably will be unable to achieve our business objectives.
14
We
may not be able to compete successfully for market share against other drug
companies.
The
markets for our product candidates are characterized by intense competition and
rapid technological advances. If our product candidates receive FDA approval,
they will compete with existing and future drugs and therapies developed,
manufactured, and marketed by others. Competing products may provide greater
therapeutic convenience or clinical or other benefits for a specific indication
than our products, or may offer comparable performance at a lower cost. If our
products fail to capture and maintain market share, we may not achieve
sufficient product revenues and our business will suffer.
We will
compete against fully integrated pharmaceutical companies and smaller companies
that are collaborating with larger pharmaceutical companies, academic
institutions, government agencies, or other public and private research
organizations. Many of these competitors have therapies to treat autoimmune
fibrotic and central nervous system diseases already approved or in development.
In addition, many of these competitors, either alone or together with their
collaborative partners, operate larger research-and-development programs than we
do, have substantially greater financial resources than we do, and have
significantly greater experience in the following areas:
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developing
drugs;
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undertaking
pre-clinical testing and human clinical trials;
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obtaining
FDA and other regulatory approvals of drugs;
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formulating
and manufacturing drugs; and
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launching,
marketing and selling drugs.
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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, as well as costs
associated with frivolous lawsuits.
If any
other person files patent applications, or is issued patents, claiming
technology also claimed by us in pending applications, we may be required to
participate in interference proceedings in the U.S. Patent and Trademark Office
to determine priority of invention. We, or our licensors, may also need to
participate in interference proceedings involving our issued patents and pending
applications of another entity.
We
cannot guarantee that the practice of our technologies will not conflict with
the rights of others. In some foreign jurisdictions, we could become involved in
opposition proceedings, either by opposing the validity of another’s foreign
patent or by persons opposing the validity of our foreign patents.
We
may also face frivolous litigation or lawsuits from various competitors or from
litigious securities attorneys. The cost to us of any litigation or other
proceeding relating to these areas, even if resolved in our favor, could be
substantial and could distract management from our business. Uncertainties
resulting from initiation and continuation of any litigation could have a
material adverse effect on our ability to continue our operations.
If we infringe the rights of others
we could be prevented from selling products or forced to pay damages.
If our
products, methods, processes, and other technologies are found to infringe the
proprietary rights of other parties, we could be required to pay damages, or we
may be required to cease using the technology or to license rights from the
prevailing party. Any prevailing party may be unwilling to offer us a license on
commercially acceptable terms.
Our
products, if approved, may not be commercially viable due to change in health
care practice and third party reimbursement limitations.
Recent
initiatives to reduce the federal deficit and to change health care delivery are
increasing cost-containment efforts. We anticipate that Congress, state
legislatures and the private sector will continue to review and assess
alternative benefits, controls on health care spending through limitations on
the growth of private health insurance premiums and Medicare and Medicaid
spending, price controls on pharmaceuticals, and other fundamental changes to
the health care delivery system. Any changes of this type could negatively
impact the commercial viability of our products, if approved. Our ability to
successfully commercialize our product candidates, if they are approved, will
depend in part on the extent to which appropriate reimbursement codes and
authorized cost reimbursement levels of these products and related treatment are
obtained from governmental authorities, private health insurers and other
organizations, such as health maintenance organizations. In the absence of
national Medicare coverage determination, local contractors that administer the
Medicare program may make their own coverage decisions. Any of our product
candidates, if approved and when commercially available, may not be included
within the then current Medicare coverage determination or the coverage
determination of state Medicaid programs, private insurance companies or
other
15
health
care providers. In addition, third-party payers are increasingly challenging the
necessity and prices charged for medical products, treatments and
services.
We
may not be able to obtain adequate insurance coverage against product liability
claims.
Our
business exposes us to the product liability risks inherent in the testing,
manufacturing, marketing, and sale of human therapeutic technologies and
products. Even if it is available, product liability insurance for the
pharmaceutical and biotechnology industry generally is expensive. Adequate
insurance coverage may not be available at a reasonable cost.
RISKS RELATING TO OUR
STOCK
We
will seek to raise additional funds in the future, which may be dilutive to
stockholders or impose operational restrictions.
We expect
to seek to raise additional capital in the future to help fund development of
our proposed products. If we raise additional capital through the issuance of
equity or debt securities, the percentage ownership of our current stockholders
will be reduced. We may also enter into strategic transactions, issue equity as
part of license issue fees to our licensors, compensate consultants or settle
outstanding payables using equity that may be dilutive. Our stockholders may
experience additional dilution in net book value per share and any additional
equity securities may have rights, preferences and privileges senior to those of
the holders of our common stock. If we cannot raise additional funds, we will
have to delay development activities of our products candidates.
We
are controlled by our current officers, directors, and principal
stockholders.
Currently,
our directors, executive officers, and principal stockholders beneficially own a
majority of our common stock. As a result, they will be able to exert
substantial influence over the election of our board of directors and the vote
on issues submitted to our stockholders. In January 2009, we
registered for sale under the Securities Act of 1933, as amended, 8,816,918
shares of our outstanding common stock held by our officers, directors and
principal stockholders and 1,148,753 shares of common stock issuable upon the
exercise of warrants held by our officers, directors and principal
stockholders. Because our common stock has from time to time been
“thinly traded”, the sale of these shares by our officers, directors and
principal stockholders could have an adverse effect on the market for our stock
and our share price.
Our
shares of common stock are from time to time thinly traded, so stockholders may
be unable to sell at or near ask prices or at all if they need to sell shares to
raise money or otherwise desire to liquidate their shares.
Our
common stock has from time to time been “thinly-traded,” meaning that the number
of persons interested in purchasing our common stock at or near ask prices at
any given time may be relatively small or non-existent. This situation is
attributable to a number of factors, including the fact that we are a small
company that is relatively unknown to stock analysts, stock brokers,
institutional investors and others in the investment community that generate or
influence sales volume, and that even if we came to the attention of such
persons, they tend to be risk-averse and would be reluctant to follow an
unproven company such as ours or purchase or recommend the purchase of our
shares until such time as we became more seasoned and viable. As a consequence,
there may be periods of several days or more when trading activity in our shares
is minimal or nonexistent, as compared to a seasoned issuer which has a
large and steady volume of trading activity that will generally support
continuous sales without an adverse effect on share price. We cannot give
stockholders any assurance that a broader or more active public trading market
for our common shares will develop or be sustained, or that current trading
levels will be sustained.
Our
compliance with the Sarbanes-Oxley Act and SEC rules concerning internal
controls may be time consuming, difficult and costly.
Although
individual members of our management team have experience as officers of
publicly traded companies, much of that experience came prior to the adoption of
the Sarbanes-Oxley Act of 2002. It may be time consuming, difficult and costly
for us to develop and implement the internal controls and reporting procedures
required by Sarbanes-Oxley. We may need to hire additional financial reporting,
internal controls and other finance staff in order to develop and implement
appropriate internal controls and reporting procedures. If we are unable to
comply with Sarbanes-Oxley’s internal controls requirements, we may not be able
to obtain the independent accountant certifications that Sarbanes-Oxley Act
requires publicly-traded companies to obtain.
We
cannot assure you that the common stock will be liquid or that it will remain
listed on a securities exchange.
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We cannot
assure you that we will be able to maintain the listing standards of the
NYSEAmex formerly the American Stock Exchange or NYSE Alternext US. The NYSEAmex
requires companies to meet certain continued listing criteria including certain
minimum stockholders' equity and equity prices per share as outlined
in the Exchange Company Guide. We may not be able to maintain such minimum
stockholders' equity or prices per share or may be required to effect a reverse
stock split to maintain such minimum prices and/or issue additional equity
securities in exchange for cash or other assets, if available, to maintain
certain minimum stockholders' equity required by the NYSEAmex. If we are
delisted from the Exchange then our common stock will trade, if at all, only on
the over-the-counter market, such as the OTC Bulletin Board securities market,
and then only if one or more registered broker-dealer market makers comply with
quotation requirements. In addition, delisting of our common stock could further
depress our stock price, substantially limit liquidity of our common stock and
materially adversely affect our ability to raise capital on terms acceptable to
us, or at all. Delisting from the Exchange could also have other negative
results, including the potential loss of confidence by suppliers and employees,
the loss of institutional investor interest and fewer business development
opportunities.
There
may be issuances of shares of preferred stock in the future.
Although
we currently do not have preferred shares outstanding, the board of directors
could authorize the issuance of a series of preferred stock that would grant
holders preferred rights to our assets upon liquidation, the right to receive
dividends before dividends would be declared to common stockholders, and the
right to the redemption of such shares, possibly together with a premium, prior
to the redemption of the common stock. To the extent that we do issue preferred
stock, the rights of holders of common stock could be impaired thereby,
including without limitation, with respect to liquidation.
Our
board has approved a plan to re-incorporate the Company from the State of
Delaware to the State of Nevada
During
the Company’s annual shareholder meeting held during June 2008, the Company
received authorization to re-incorporate from the State of Delaware to the State
of Nevada. The Company intends to complete this re-incorporation
during the second quarter of 2009.
We have never
paid dividends.
We have
never paid cash dividends on our common stock and do not anticipate paying any
for the foreseeable future.
RISKS
RELATED TO OUR INDUSTRY
Government
Regulation
In the
United States, the formulation, manufacturing, packaging, storing, labeling,
promotion, advertising, distribution and sale of our products are subject to
regulation by various governmental agencies, including (1) the Food and
Drug Administration, or FDA, (2) the Federal Trade Commission, or FTC,
(3) the Consumer Product Safety Commission, or CPSC, (4) the United
States Department of Agriculture, or USDA. Our proposed activities may also be
regulated by various agencies of the states, localities and foreign countries in
which our proposed products may be manufactured, distributed and sold. The FDA,
in particular, regulates the formulation, manufacture and labeling of
over-the-counter, or OTC, drugs, conventional foods, dietary supplements, and
cosmetics such as those that we intend to distribute. FDA regulations
require us and our suppliers to meet relevant current good
manufacturing practice, or cGMP, regulations for the preparation, packing and
storage of foods and OTC drugs. On June 25, 2007, the FDA published its
final rule regulating cGMPs for dietary supplements. The final rule became
effective August 24, 2007 and small companies with less than 20 employees,
such as us, have until June 2010 to achieve compliance. As a result
of inactivity and the removal and sale of certain equipment, our facility in Ann
Arbor, Michigan is no longer currently cGMP compliant.
The
U.S. Dietary Supplement Health and Education Act of 1994, or DSHEA, revised
the provisions of the Federal Food, Drug and Cosmetic Act, or FFDCA, concerning
the composition and labeling of dietary supplements and, we believe, the
revisions are generally favorable to the dietary supplement industry. The
legislation created a new statutory class of dietary supplements. This new class
includes vitamins, minerals, herbs, amino acids and other dietary substances for
human use to supplement the diet, and the legislation grandfathers, with some
limitations, dietary ingredients that were on the market before October 15,
1994. A dietary supplement that contains a dietary ingredient that was not on
the market before October 15, 1994 will require evidence of a history of
use or other evidence of safety establishing that it is reasonably expected to
be safe. Manufacturers or marketers of dietary supplements in the United States
and certain other jurisdictions that make product performance claims, including
structure or function claims, must have substantiation in their possession that
the statements are truthful and not misleading. The majority of the products
marketed by us in the United States are classified as conventional foods or
dietary supplements under the FFDCA. Internationally, the majority of products
marketed by us are classified as foods or food supplements.
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In
January 2000, the FDA issued a regulation that defines the types of statements
that can be made concerning the effect of a dietary supplement on the structure
or function of the body pursuant to DSHEA. Under DSHEA, dietary supplement
labeling may bear structure or function claims, which are claims that the
products affect the structure or function of the body, without prior FDA
approval, but with notification to the FDA. They may not bear a claim that they
can prevent, treat, cure, mitigate or diagnose disease (a disease claim). The
regulation describes how the FDA distinguishes disease claims from structure or
function claims. During 2004, the FDA issued a guidance, paralleling an earlier
guidance from the FTC, defining a manufacturers obligations to substantiate
structure/function claims. The FDA also issued a Structure/Function Claims Small
Entity Compliance Guide. In addition, the agency permits companies to use
FDA-approved full and qualified health claims for products containing specific
ingredients that meet stated requirements.
In order
to make disease claims, we may seek to market some our proposed products as
medical foods for the dietary management of certain diseases. Medical
foods are defined in section 5(b) of the Orphan Drug Act (21 U.S.C. 360ee (b)
(3)) is "a food which is formulated to be consumed or administered enterally
under the supervision of a physician and which is intended for the specific
dietary management of a disease or condition for which distinctive nutritional
requirements, based on recognized scientific principles, are established by
medical evaluation." Although we believe our products may qualify as
medical foods provided we are able to generate, and have published, sufficient
clinical data to support such claims. Medical foods are required to
be utilized under a medical doctor’s supervision and as such, our distribution
channels may be limited and/or complicated.
Should we
seek to make disease claims beyond those permitted for medical foods, we may
seek to conduct necessary clinical trials to support such claims and file one or
more New Drug Applications with respect to such products which would be the
subject of the time, expense and uncertainty associated with achieving approval
of such NDA by the FDA.
On
December 22, 2007, a new law went into effect in the United States
mandating the reporting of all serious adverse events occurring within the
United States which involve dietary supplements or OTC drugs. We believe that in
order to be in compliance with this law we will be required to implement a
worldwide procedure governing adverse event identification, investigation and
reporting. As a result of our receipt of adverse event reports, we may from time
to time elect, or be required, to remove a product from a market, either
temporarily or permanently.
Some of
the products marketed by us are considered conventional foods and are currently
labeled as such. Within the United States, this category of products is subject
to the Nutrition, Labeling and Education Act, or NLEA, and regulations
promulgated under the NLEA. The NLEA regulates health claims, ingredient
labeling and nutrient content claims characterizing the level of a nutrient in
the product. The ingredients added to conventional foods must either be
generally recognized as safe by experts, or GRAS, or be approved as food
additives under FDA regulations. Our zinc-monocysteine complexes are
comprised of zinc (a GRAS ingredient) and cysteine (an amino acid that also has
GRAS status). While many chelated zinc products are currently on the
market and are generally not considered new dietary ingredients, we cannot
provide any assurance that zinc-monocysteine will be similarly considered by the
FDA.
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The FTC,
which exercises jurisdiction over the advertising of all of our proposed
products, has in the past several years instituted enforcement actions against
several dietary supplement companies and against manufacturers of products
generally for false and misleading advertising of some of their products. These
enforcement actions have often resulted in consent decrees and monetary payments
by the companies involved. In addition, the FTC has increased its scrutiny of
the use of testimonials, which we also utilize, as well as the role of expert
endorsers and product clinical studies. It is unclear whether the FTC will
subject our advertisements to increased surveillance to ensure compliance with
the principles set forth in its published advertising guidance. The
copper industry has supported research studies that conclude that
copper has no effect in Alzheimer’s disease. In February 2007, the
State of California issued its public health goal for copper in drinking water
and considered the research studies mentioned above as well as those of our
scientific collaborators and concluded that at the present time, the data with
respect to copper in drinking water’s role in Alzheimer’s disease were to be
“equivocal” . We cannot provide assurance that the FTC will allow is
to publically advertise or promote our products to the American
public.
The
FDA, comparable foreign regulators and state and local pharmacy regulators
impose substantial requirements upon clinical development, manufacture and
marketing of pharmaceutical products. These and other entities regulate research
and development and the testing, manufacture, quality control, safety,
effectiveness, labeling, storage, record keeping, approval, advertising, and
promotion of our products. The drug approval process required by the FDA under
the Food, Drug, and Cosmetic Act generally involves:
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Preclinical
laboratory and animal tests;
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Submission
of an IND, prior to commencing human clinical trials;
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Adequate
and well-controlled human clinical trials to establish safety and efficacy
for intended use;
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Submission
to the FDA of a NDA; and
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FDA
review and approval of a NDA.
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The
testing and approval process requires substantial time, effort, and financial
resources, and we cannot be certain that any approval will be granted on a
timely basis, if at all.
Preclinical
tests include laboratory evaluation of the product candidate, its chemistry,
formulation and stability, and animal studies to assess potential safety and
efficacy. Certain preclinical tests must be conducted in compliance with good
laboratory practice regulations. Violations of these regulations can, in some
cases, lead to invalidation of the studies, requiring them to be replicated. In
some cases, long-term preclinical studies are conducted concurrently with
clinical studies.
We will
submit the preclinical test results, together with manufacturing information and
analytical data, to the FDA as part of an IND, which must become effective
before we begin human clinical trials. The IND automatically becomes effective
30 days after filing, unless the FDA
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raises
questions about conduct of the trials outlined in the IND and imposes a clinical
hold, as occurred with oral TTM, in which case, the IND sponsor and FDA must
resolve the matters before clinical trials can begin. It is possible that our
submission may not result in FDA authorization to commence clinical
trials.
Clinical
trials must be supervised by a qualified investigator in accordance with good
clinical practice regulations, which include informed consent requirements. An
independent Institutional Review Board (“IRB”) at each medical center reviews
and approves and monitors the study, and is periodically informed of the study’s
progress, adverse events and changes in research. Progress reports are submitted
annually to the FDA and more frequently if adverse events occur.
Human
clinical trials typically have three sequential phases that may
overlap:
Phase I:
The drug is initially tested in healthy human subjects or patients for safety,
dosage tolerance, absorption, metabolism, distribution, and
excretion.
Phase II:
The drug is studied in a limited patient population to identify possible adverse
effects and safety risks, determine efficacy for specific diseases and establish
dosage tolerance and optimal dosage.
Phase
III: When phase II evaluations demonstrate that a dosage range is effective with
an acceptable safety profile, phase III trials to further evaluate dosage,
clinical efficacy and safety, are undertaken in an expanded patient population,
often at geographically dispersed sites.
We
cannot be certain that we will successfully complete phase I, phase II, or phase
III testing of our product candidates within any specific time period, if at
all. Furthermore, the FDA, an IRB or the IND sponsor may suspend clinical trials
at any time on various grounds, including a finding that subjects or patients
are exposed to unacceptable health risk. Concurrent with these trials and
studies, we also develop chemistry and physical characteristics data and
finalize a manufacturing process in accordance with good manufacturing practice
(“GMP”) requirements. The manufacturing process must conform to consistency and
quality standards, and we must develop methods for testing the quality, purity,
and potency of the final products. Appropriate packaging is selected and tested,
and chemistry stability studies are conducted to demonstrate that the product
does not undergo unacceptable deterioration over its shelf-life. Results of the
foregoing are submitted to the FDA as part of a NDA for marketing and commercial
shipment approval. The FDA reviews each NDA submitted and may request additional
information.
Once the
FDA accepts the NDA for filing, it begins its in-depth review. The FDA has
substantial discretion in the approval process and may disagree with our
interpretation of the data submitted. The process may be significantly extended
by requests for additional information or clarification regarding information
already provided. As part of this review, the FDA may refer the application to
an appropriate advisory committee, typically a panel of clinicians.
Manufacturing establishments often are inspected prior to NDA approval to assure
compliance with GMPs and with manufacturing commitments made in the
application.
Submission
of a NDA with clinical data requires payment of a fee (for fiscal year 2008,
$1,178,500). In return, the FDA assigns a goal of ten months for issuing its
“complete response,” in which the FDA may approve or deny the NDA, or require
additional clinical data. Even if these data are submitted, the FDA may
ultimately decide the NDA does not satisfy approval criteria. If the FDA
approves the NDA, the product becomes available for physicians prescription.
Product approval may be withdrawn if regulatory compliance is not maintained or
safety problems occur. The FDA may require post-marketing studies, also known as
phase IV studies, as a condition of approval, and requires surveillance programs
to monitor approved products that have been commercialized. The agency has the
power to require changes in labeling or prohibit further marketing based on the
results of post-marketing surveillance.
Satisfaction
of these and other regulatory requirements typically takes several years, and
the actual time required may vary substantially based upon the type, complexity
and novelty of the product. Government regulation may delay or prevent marketing
of potential products for a considerable period of time and impose costly
procedures on our activities. We cannot be certain that the FDA or other
regulatory agencies will approve any of our products on a timely basis, if at
all. Success in preclinical or early-stage clinical trials does not assure
success in later-stage clinical trials. Data obtained from pre-clinical and
clinical activities are not always conclusive and may be susceptible to varying
interpretations that could delay, limit or prevent regulatory approval. Even if
a product receives regulatory approval, the approval may be significantly
limited to specific indications or uses.
20
Even
after regulatory approval is obtained, later discovery of previously unknown
problems with a product may result in restrictions on the product or even
complete withdrawal of the product from the market. Delays in obtaining, or
failures to obtain regulatory approvals would have a material adverse effect on
our business.
Any
products manufactured or distributed by us pursuant to FDA approvals are subject
to pervasive and continuing FDA regulation, including record-keeping
requirements, reporting of adverse experiences, submitting periodic reports,
drug sampling and distribution requirements, manufacturing or labeling changes,
record-keeping requirements, and compliance with FDA promotion and advertising
requirements. Drug manufacturers and their subcontractors are required to
register their facilities with the FDA and state agencies, and are subject to
periodic unannounced inspections for GMP compliance, imposing procedural and
documentation requirements upon us and third-party manufacturers. Failure to
comply with these regulations could result, among other things, in suspension of
regulatory approval, recalls, suspension of production or injunctions, seizures,
or civil or criminal sanctions. We cannot be certain that we or our present or
future subcontractors will be able to comply with these
regulations.
The FDA
regulates drug labeling and promotion activities. The FDA has actively enforced
regulations prohibiting the marketing of products for unapproved uses. The FDA
permits the promotion of drugs for unapproved uses in certain circumstances,
subject to stringent requirements. We and our product candidates are subject to
a variety of state laws and regulations which may hinder our ability to market
our products. Whether or not FDA approval has been obtained, approval by foreign
regulatory authorities must be obtained prior to commencing clinical trials, and
sales and marketing efforts in those countries. These approval procedures vary
in complexity from country to country, and the processes may be longer or
shorter than that required for FDA approval. We may incur significant costs to
comply with these laws and regulations now or in the future.
The FDA’s
policies may change, and additional government regulations may be enacted which
could prevent or delay regulatory approval of our potential products. Increased
attention to the containment of health care costs worldwide could result in new
government regulations materially adverse to our business. We cannot predict the
likelihood, nature or extent of adverse governmental regulation that might arise
from future legislative or administrative action, either in the U.S. or
abroad.
Other Regulatory
Requirements
The U.S.
Federal Trade Commission and the Office of the Inspector General of the U.S.
Department of Health and Human Services (“HHS”) also regulate certain
pharmaceutical marketing practices. Government reimbursement practices and
policies with respect to our products are important to our success.
We are
subject to numerous federal, state and local laws relating to safe working
conditions, manufacturing practices, environmental protection, fire hazard
control, and disposal of hazardous or potentially hazardous substances. We may
incur significant costs to comply with these laws and regulations. The
regulatory framework under which we operate will inevitably change in light of
scientific, economic, demographic and policy developments, and such changes may
have a material adverse effect on our business.
European
Product Approval
Prior
regulatory approval for human healthy volunteer studies (phase I studies) is
required in member states of the European Union (E.U.). Summary data from
successful phase I studies are submitted to regulatory authorities in member
states to support applications for phase II studies. E.U. authorities typically
have one to three months (which often may be extended in their discretion) to
raise objections to the proposed study. One or more independent ethics
committees (similar to U.S. IRBs) review relevant ethical issues.
For E.U.
marketing approval, we submit to the relevant authority for review a dossier, or
MAA (Market Authorization Application), providing information on the quality of
the chemistry, manufacturing and pharmaceutical aspects of the product as well
as non-clinical and clinical data.
Approval
can take several months to several years, and can be denied, depending on
whether additional studies or clinical trials are requested (which may delay
marketing approval and involve unbudgeted costs) or regulatory authorities
conduct facilities (including clinical investigation site) inspections and
review manufacturing procedures, operating systems and personnel qualifications.
In many cases, each drug manufacturing facility must be approved, and further
inspections may occur over the product’s life.
21
The
regulatory agency may require post-marketing surveillance to monitor for adverse
effects or other studies. Further clinical studies are usually necessary for
approval of additional indications. The terms of any approval, including
labeling content, may be more restrictive than expected and could affect the
marketability of a product.
Failure
to comply with these ongoing requirements can result in suspension of regulatory
approval and civil and criminal sanctions. European renewals may require
additional data, resulting in a license being withdrawn. E.U. regulators have
the authority to revoke, suspend or withdraw approvals, prevent companies and
individuals from participating in the drug approval process, request recalls,
seize violative products, obtain injunctions to close non-compliant
manufacturing plants and stop shipments of violative products.
Pricing
Controls
Pricing
for products under approval applications is also subject to regulation.
Requirements vary widely between countries and can be implemented disparately
intra-nationally. The E.U. generally provides options for member states to
control pricing of medicinal products for human use, ranging from specific
price-setting to systems of direct or indirect controls on the producer’s
profitability. U.K. regulation, for example, generally provides controls on
overall profits derived from sales to the U.K. National Health Service that are
based on profitability targets or a function of capital employed in servicing
the National Health Service market. Italy generally utilizes a price monitoring
system based on the European average price over the reference markets of France,
Spain, Germany and the U.K. Italy typically establishes price within a
therapeutic class based on the lowest price for a medicine belonging to that
category. Spain generally establishes selling price based on prime cost plus a
profit margin within a range established yearly by the Spanish Commission for
Economic Affairs.
There can
be no assurance that price controls or reimbursement limitations will result in
favorable arrangements for our products.
Third-Party
Reimbursements
In the
U.S., the E.U. and elsewhere, pharmaceutical sales are dependent in part on the
availability and adequacy of reimbursement from third party payers such as
governments and private insurance plans. Third party payers are increasingly
challenging established prices, and new products that are more expensive than
existing treatments may have difficulty finding ready acceptance unless there is
a clear therapeutic benefit.
In the
U.S., consumer willingness to choose a self-administered outpatient prescription
drug over a different drug or other form of treatment often depends on the
manufacturer’s success in placing the product on a health plan formulary or drug
list, which results in lower out-of-pocket costs. Favorable formulary placement
typically requires the product to be less expensive than what the health plan
determines to be therapeutically equivalent products, and often requires
manufacturers to offer rebates. Federal law also requires manufacturers to pay
rebates to state Medicaid programs in order to have their products reimbursed by
Medicaid. Medicare, which covers most Americans over age 65 and the disabled,
has adopted a new insurance regime that will offer eligible beneficiaries
limited coverage for outpatient prescription drugs effective January 1, 2006.
The prescription drugs that are covered under this insurance are specified on a
formulary published by Medicare. As part of these changes, Medicare is adopting
new payment formulas for prescription drugs administered by providers, such as
hospitals or physicians that are generally expected to lower
reimbursement.
The E.U.
generally provides options for member states to restrict the range of medicinal
products for which their national health insurance systems provide
reimbursement. Member states can opt for a “positive” or “negative” list, with
the former listing all covered medicinal products and the latter designating
those excluded from coverage. The E.U., the U.K. and Spain have negative lists,
while France uses a positive list. Canadian provinces establish their own
reimbursement measures. In some countries, products may also be subject to
clinical and cost effectiveness reviews by health technology assessment bodies.
Negative determinations in relation to our products could affect prescribing
practices. In the U.K., the National Institute for Clinical Excellence (“NICE”)
provides such guidance to the National Health Service, and doctors are expected
to take it into account when choosing drugs to prescribe. Health authorities may
withhold funding from drugs not given a positive recommendation by NICE. A
negative determination by NICE may mean fewer prescriptions. Although NICE
considers drugs with orphan status, there is a degree of tension on the
application of standard cost assessment for orphan drugs, which are often priced
higher to compensate for a limited market. It is unclear whether NICE will adopt
a more relaxed approach toward the assessment of orphan drugs.
We cannot
assure you that any of our products will be considered cost effective, or that
reimbursement will be available or sufficient to allow us to sell them
competitively and profitably.
22
Fraud
and Abuse Laws
The U.S.
federal Medicare/Medicaid anti-kickback law and similar state laws prohibit
remuneration intended to induce physicians or others either to refer patients,
or to acquire or arrange for or recommend the acquisition of health care
products or services. While the federal law applies only to referrals, products
or services receiving federal reimbursement, state laws often apply regardless
of whether federal funds are involved. Other federal and state laws prohibit
anyone from presenting or causing to be presented false or fraudulent payment
claims. Recent federal and state enforcement actions under these statutes have
targeted sales and marketing activities of prescription drug manufacturers. As
we begin to market our products to health care providers, the relationships we
form, such as compensating physicians for speaking or consulting services,
providing financial support for continuing medical education or research
programs, and assisting customers with third-party reimbursement claims, could
be challenged under these laws and lead to civil or criminal penalties,
including the exclusion of our products from federally-funded reimbursement.
Even an unsuccessful challenge could cause adverse publicity and be costly to
respond to, and thus could have a material adverse effect on our business,
results of operations and financial condition. We intend to consult counsel
concerning the potential application of these and other laws to our business and
to our sales, marketing and other activities to comply with them. Given their
broad reach and the increasing attention given them by law enforcement
authorities, however, we cannot assure you that some of our activities will not
be challenged.
Patent
Restoration and Marketing Exclusivity
The U.S.
Drug Price Competition and Patent Term Restoration Act of 1984 (Hatch-Waxman)
permits the FDA to approve Abbreviated New Drug Applications (“ANDAs”) for
generic versions of innovator drugs, as well as NDAs with less original clinical
data, and provides patent restoration and exclusivity protections to innovator
drug manufacturers. The ANDA process permits competitor companies to obtain
marketing approval for drugs with the same active ingredient and for the same
uses as innovator drugs, but does not require the conduct and submission of
clinical studies demonstrating safety and efficacy. As a result, a competitor
could copy any of our drugs and only need to submit data demonstrating that the
copy is bioequivalent to gain marketing approval from the FDA. Hatch-Waxman
requires a competitor that submits an ANDA, or otherwise relies on safety and
efficacy data for one of our drugs, to notify us and/or our business partners of
potential infringement of our patent rights. We and/or our business partners may
sue the company for patent infringement, which would result in a 30-month stay
of approval of the competitor’s application. The discovery, trial and appeals
process in such suits can take several years. If the litigation is resolved in
favor of the generic applicant or the challenged patent expires during the
30-month period, the stay is lifted and the FDA may approve the application.
Hatch-Waxman also allows competitors to market copies of innovator products by
submitting significantly less clinical data outside the ANDA context. Such
applications, known as “505(b)(2) NDAs” or “paper NDAs,” may rely on clinical
investigations not conducted by or for the applicant and for which the applicant
has not obtained a right of reference or use and are subject to the ANDA
notification procedures described above.
The law
also restores a portion of a product’s patent term that is lost during clinical
development and NDA review, and provides statutory protection, known as
exclusivity, against FDA approval or acceptance of certain competitor
applications. Restoration can return up to five years of patent term for a
patent covering a new product or its use to compensate for time lost during
product development and regulatory review. The restoration period is generally
one-half the time between the effective date of an IND and submission of an NDA,
plus the time between NDA submission and its approval (subject to the five-year
limit), and no extension can extend total patent life beyond 14 years after the
drug approval date. Applications for patent term extension are subject to U.S.
Patent and Trademark Office (“USPTO”) approval, in conjunction with FDA.
Approval of these applications takes at least six months, and there can be no
guarantee that it will be given at all.
Hatch-Waxman
also provides for differing periods of statutory protection for new drugs
approved under an NDA. Among the types of exclusivity are those for a “new
molecular entity” and those for a new formulation or indication for a
previously-approved drug. If granted, marketing exclusivity for the types of
products that we are developing, which include only drugs with innovative
changes to previously-approved products using the same active ingredient, would
prohibit the FDA from approving an ANDA or 505(b)(2) NDA relying on safety and
efficacy data for three years. This three-year exclusivity, however, covers only
the innovation associated with the original NDA. It does not prohibit the FDA
from approving applications for drugs with the same active ingredient but
without our new innovative change. These marketing exclusivity protections do
not prohibit FDA from approving a full NDA, even if it contains the innovative
change.
Not
applicable.
23
ITEM
2. PROPERTIES
Our
primary offices, laboratories and manufacturing facility is located at 3930
Varsity Drive, Ann Arbor, MI 48108. We currently rent approximately 17,675
square feet of office, laboratory and production space for monthly rent of
$15,033.80. This lease expires on February 28, 2011, but extendable
at our option for an additional three years. We believe our current offices will
be adequate for the foreseeable future and we are currently seeking to sublease
some or all of our excess space at this facility. Our phone number is
(734) 332-7800 and our facsimile number is (734) 332-7878. Our website is
located at www.adeonapharma.com
..
On
January 13, 2009, a subsidiary of the Company was served with legal action from
an individual regarding a claim for payment of past consulting services and
associated expenses from 2005. The Company does not have a written
agreement executed by both parties, management believes the lawsuit is without
merit. The Company has engaged legal counsel to respond to this
matter.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not
applicable.
24
ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Our
common stock has traded on the NYSEAmex (formerly the American Stock Exchange)
under the symbol “AEN” since October 16, 2008. Prior to this, our
common stock traded under the symbol “PP” on the American Stock Exchange since
July 2007. We were previously listed on the OTC Bulletin Board under the name
“PPXP” beginning on December 18, 2006. The following table states the
range of the high and low bid-prices per share of our common stock for each of
the calendar quarters during the last two fiscal years while our common stock
was quoted on the OTC Bulletin Board and the high and sale price while our
common stock has traded on the American Stock Exchange. These quotations
represent inter-dealer prices, without retail mark-up, markdown, or commission,
and may not represent actual transactions. The last price of our common stock as
reported on the American Stock Exchange on March 4, 2009 was $0.15 per share. As
of March 4, 2009, there were approximately 379 stockholders of record of our
common stock. This number does not include beneficial owners from whom shares
are held by nominees in street name.
|
High
|
Low
|
|||||||
|
YEAR
ENDED DECEMBER 31, 2008
|
||||||||
|
Fourth
quarter
|
$
|
0.55
|
$
|
0.03
|
||||
|
Third
quarter
|
$
|
1.02
|
$
|
0.48
|
||||
|
Second
quarter
|
$
|
1.40
|
$
|
0.65
|
||||
|
First
quarter
|
$
|
5.25
|
$
|
0.80
|
||||
|
YEAR
ENDED DECEMBER 31, 2007
|
||||||||
|
Fourth
quarter
|
$
|
7.10
|
$
|
4.68
|
||||
|
Third
quarter
|
$
|
8.00
|
$
|
4.30
|
||||
|
Second
quarter
|
$
|
8.10
|
$
|
3.71
|
||||
|
First
quarter
|
$
|
30.00
|
$
|
3.06
|
||||
Dividend
Policy
We have
not paid any cash dividends on our common stock to date, and we have no
intention of paying cash dividends in the foreseeable future. Whether we declare
and pay dividends is determined by our board of directors at their discretion,
subject to certain limitations imposed under Delaware corporate law. The timing,
amount and form of dividends, if any, will depend on, among other things, our
results of operations, financial condition, cash requirements and other factors
deemed relevant by our board of directors.
The
following table provides information about Company purchases of its equity
securities that are registered pursuant to Section 12 of the Exchange Act during
the quarter ended December 31, 2008:
ISSUER
PURCHASES OF EQUITY SECURITIES
|
Period
|
Total
Number
of
Shares
Purchased
|
Average
Price
Paid
per
Share
|
Total
Number of
Shares
Purchased
as
Part of Publicly
Announced
Plans
or Programs
|
Maximum
Number of Shares
that
May Yet Be
Purchased
Under
the
Plans or Programs
|
|
Month
Ended October
31, 2008
|
0
|
$ 0
|
0
|
0
|
|
Month
Ended November
30, 2008
|
0
|
0
|
0
|
0
|
|
Month
Ended December
31, 2008
|
0
|
0
|
0
|
0
|
|
Total
|
0
|
$0
|
0
|
0
|
25
Equity
Compensation Plan Information
See Item
11 for equity compensation plan information.
Recent
Sales of Unregistered Securities; Uses of Proceeds from Registered
Securities
In
October, November and December 2008, we issued a total of 44,312 shares of our
common stock to 2 consultants for services rendered. These offering
and sales of shares qualified for exemption under Section 4(2) of the Securities
Act of 1933 since the issuances did not involve a public offering. The offerings
were not a public offering as defined in Section 4(2) because the offer and sale
was made to an insubstantial number of persons and because of the manner of the
offering. This offering was done with no general solicitation or advertising by
the Registrant. Based on an analysis of the above factors, the Registrant has
met the requirements to qualify for exemption under Section 4(2) of the
Securities Act of 1933 for these sales.
In August
and September 2008, we issued a total of 113,958 shares of our common stock to 2
consultants for services rendered and 31,875 shares to 2 universities for
license fees. These offering and sales of shares qualified for
exemption under Section 4(2) of the Securities Act of 1933 since the issuances
did not involve a public offering. The offerings were not a public offering as
defined in Section 4(2) because the offer and sale was made to an insubstantial
number of persons and because of the manner of the offering. This offering was
done with no general solicitation or advertising by the Registrant. Based on an
analysis of the above factors, the Registrant has met the requirements to
qualify for exemption under Section 4(2) of the Securities Act of 1933 for these
sales.
In May
and June 2008, we issued a total of 106,630 shares of our common stock to 2
universities for license fees and 39,370 shares to a university for a milestone
payment. These offerings and sales of shares qualified for exemption under
Section 4(2) of the Securities Act of 1933 since the issuances did not involve a
public offering. The offerings were not a public offering as defined in Section
4(2) because the offer and sale was made to an insubstantial number of persons
and because of the manner of the offering. The offerings were done with no
general solicitation or advertising by the Registrant. Based on an analysis of
the above factors, the Registrant has met the requirements to qualify for
exemption under Section 4(2) of the Securities Act of 1933 for these
sales.
In April
2008, we issued a total of 37,603 shares of our common stock to 8 of our
employees and 13,887 shares of our common stock to a consultant for services
rendered. These offerings and sales of shares qualified for exemption under
Section 4(2) of the Securities Act of 1933 since the issuance did not involve a
public offering. The offerings were not a public offering as defined in Section
4(2) because the offer and sale was made to an insubstantial number of persons
and because of the manner of the offering. The offerings were done with no
general solicitation or advertising by the Registrant. Based on an analysis of
the above factors, the Registrant has met the requirements to qualify for
exemption under Section 4(2) of the Securities Act of 1933 for these
sales.
From
October through November 2007, the Company issued a total of 3,274,566 shares of
our common stock to a total of 50 warrant holders pursuant to a warrant
call. These warrants had been previously issued in connection with
the Company’s 2006 private placement transaction. In connection with
this warrant call, the Company appointed Noble International Investments, Inc.
(“Noble”) as the Company’s exclusive warrant solicitation agent. The
Company paid Noble $579,569 and issued Noble 327,456 warrants to purchase
327,456 share of common stock. The Warrants have a term of five years
and are exercisable at $6.36 per share. This offering and sale of shares of
common stock qualified for exemption under Section 4(2) of the Securities Act of
1933 since the issuance did not involve a public offering. The offering was not
a public offering as defined in Section 4(2) because the offer and sale was made
to an insubstantial number of persons and because of the manner of the offering.
In addition, these investors had the necessary investment intent as required by
Section 4(2) since they agreed to, and received, share certificates bearing a
legend stating that such shares are restricted. This restriction ensures that
these shares will not be immediately redistributed into the market and therefore
not be part of a public offering. This offering was done with no general
solicitation or advertising by us. Each investor made representations regarding
his or her financial sophistication and had an opportunity to ask questions of
our management.
From May
17, 2007 through September 30, 2007, the Registrant issued a total of 127,406
shares of our common stock to a total of three holders of our warrants upon the
exercise of those warrants. This offering and sale of shares of common stock
qualified for exemption under Section 4(2) of the Securities Act of 1933 since
the issuance did not involve a public offering. The offering was not a public
offering as defined in Section 4(2) because the offer and sale was made to an
insubstantial number of persons and because of the manner of the offering. In
addition, these investors had the necessary investment intent as required by
Section 4(2) since they agreed to, and received, share certificates bearing a
legend stating that such shares are restricted. This restriction ensures that
these shares will not be immediately redistributed into the market and therefore
not be part of a public offering. This offering was done with no general
solicitation or advertising by us. Each investor made representations regarding
his or her financial sophistication and had an opportunity to ask questions of
our management.
26
On
January 5, 2007, the Registrant issued 795,248 shares of its common stock, and
assumed a total of 34,685 options to purchase its common stock and a total of
68,858 warrants to purchase its common stock in connection with its acquisition
of the remaining 34.53% interest in its subsidiary EPI. This offering and sale
of securities qualified for exemption under Section 4(2) of the Securities Act
of 1933 since the issuance did not involve a public offering. The offering was
not a public offering as defined in Section 4(2) because of the manner of the
offering. The investors had the necessary investment intent as required by
Section 4(2) since they agreed to, and received, share certificates bearing a
legend stating that such shares are restricted. This restriction ensures that
these shares will not be immediately redistributed into the market and therefore
not be part of a public offering. This offering was done with no general
solicitation or advertising by the Registrant. Based on an analysis of the above
factors, the Registrant has met the requirements to qualify this offering and
sale for exemption under Section 4(2) of the Securities Act of
1933.
Not
applicable because the Company is a smaller reporting company.
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The
following discussion of our financial condition and results of operations should
be read in conjunction with the audited financial statements and notes thereto
for the fiscal year ended December 31, 2008, found in this report. In addition
to historical information, the following discussion contains forward-looking
statements that involve risks, uncertainties and assumptions. Where possible, we
have tried to identify these forward looking statements by using words such as
“anticipate,” “believe,” “intends,” or similar expressions. Our actual results
could differ materially from those anticipated by the forward-looking statements
due to important factors and risks including, but not limited to, those set
forth under “Risk Factors” in Part I, Item 1A of this Report.
Overview
Since our
inception in 2001, our efforts and resources have been focused primarily on
acquiring and developing our pharmaceutical products, costs associated with
operating a publicly traded company, raising capital and recruiting personnel.
We are a development stage company and have had no product sales to date and we
will not have any prescription product sales until and unless we receive
approval from the FDA or receive approval from equivalent foreign regulatory
bodies to begin selling our pharmaceutical candidates. Our major sources of
working capital have been proceeds from equity financings from an affiliate of
our Chairman and Chief Executive Officer and various private financings,
primarily involving private sales of our common stock and other equity
securities.
Our
company’s current corporate structure resulted from the October 2006 merger of a
newly-created wholly owned subsidiary of Sheffield Pharmaceuticals, Inc.
(“Sheffield”), a Delaware corporation incorporated in September 1993, and Pipex
Therapeutics, Inc., a Delaware corporation (“Pipex Therapeutics”). In connection
with that transaction, a wholly owned subsidiary of Sheffield merged with and
into Pipex Therapeutics, with Pipex Therapeutics remaining as the surviving
corporation and a wholly-owned subsidiary of Sheffield. On December 11, 2006,
Sheffield changed its name to Pipex Pharmaceuticals, Inc. (“Pipex”) and on
October 16, 2008 the Company changed its name to Adeona Pharmaceuticals, Inc.
(“Adeona”). In exchange for their shares of capital stock in Pipex Therapeutics,
the former stockholders of Pipex Therapeutics received shares of capital stock
of Sheffield representing approximately 98 percent of the outstanding equity of
Sheffield on a primary diluted basis after giving effect to the transaction,
with Sheffield assuming Pipex’s outstanding options and warrants. In addition,
the board of directors of Sheffield was reconstituted shortly following the
effective time of the transaction such that the directors of Sheffield were
replaced by our current directors, all of whom were previously directors of
Pipex Therapeutics. Further, upon the effective time of the merger, the business
of Sheffield was abandoned and the business plan of Pipex Therapeutics was
adopted. The transaction was therefore accounted for as a reverse acquisition
with Pipex Therapeutics as the acquiring party and Sheffield as the acquired
party. Accordingly, when we refer to our business and financial information
relating to periods prior to the merger, we are referring to the business and
financial information of Pipex Therapeutics, unless the context indicates
otherwise.
Critical
Accounting Policies
In
December 2001, the SEC requested that all registrants discuss their most
“critical accounting policies” in management’s discussion and analysis of
financial condition and results of operations. The SEC indicated that a
“critical accounting policy” is one which is both important to the portrayal of
the company’s financial condition and results and requires management’s most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain. We
believe that the following discussion regarding research and development
expenses, general and administrative expenses and non-cash compensation expense
involve our most critical accounting policies.
Research
and development expenses consist primarily of manufacturing costs, license fees,
salaries and related personnel costs, fees paid to consultants and outside
service providers for laboratory development, legal expenses resulting from
intellectual property prosecution and
27
organizational
affairs and other expenses relating to the design, development, testing, and
enhancement of our product candidates, as well as an allocation of overhead
expenses incurred by the Company. We expense our research and development costs
as they are incurred.
General
and administrative expenses consist primarily of salaries and related expenses
for executive, finance and other administrative personnel, recruitment expenses,
professional fees and other corporate expenses, including business development
and general legal activities, as well as an allocation of overhead expenses
incurred by the Company. We expense our general and administrative expenses as
they are incurred.
This
amount is being recorded over the respective vesting periods of the individual
stock options. The expense is included in the respective categories of expense
in the statement of operations. We expect to record additional non-cash
compensation expense in the future, which may be significant. However, because
some of the options are milestone-based, the total expense is
uncertain.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect certain 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. Actual results could differ from those estimates.
Results
of Operations
Year
Ended December 31, 2008 and 2007.
Research
and Development Expenses. For the year ended December 31, 2008, research and
development expense was $4,643,570 as compared to $6,327,726 for the year ended
December 31, 2007. The decrease of $1,684,156 is due primarily to a decrease in
salaries and payroll taxes of approximately $739,000, a decrease of
approximately $684,000 associated with payments related to further the
development of our licensed clinical drug candidates and a decrease in stock
based compensation charges of approximately $214,000.
General
and Administrative Expenses. For the year ended December 31, 2008, general and
administrative expense was $2,675,636 as compared to $3,810,585 for the year
ended December 31, 2007. The decrease of $1,134,949 is due primarily to
a decrease in stock based compensation charge of approximately $952,000 and
an decrease in salaries and payroll taxes of approximately
$160,000.
Other
Income (Expense), net. For the year ended December 31, 2008, other income-net
was $114,048 compared to $245,878 for the year ended December 31, 2007. For the
year ended December 31, 2008, interest income was $128,236 as compared to
$298,807 for the year ended December 31, 2007. Interest income was lower for the
period in 2008 as compared to the same period in 2007, due to lower interest
rates and lower levels of cash in interest bearing accounts. For the year ended
December 31, 2008, interest expense was $13,831 as compared to $52,929 for the
year ended December 31, 2007. Interest expense for both periods relates to
interest paid on the notes payable which were repaid in March 2008.
Net Loss.
Net loss for the year ended December 31, 2008, was $7,205,158 as compared to
$9,892,433 for the year ended December 31, 2007. This decrease in net loss is
attributable primarily to a decrease in research and development expenses of
$1,684,156 and a decrease in general and administrative expenses of $1,134,149
as discussed above.
Net Loss
Applicable to Common Shareholders. The net loss applicable to common
shareholders for the year ended December 31, 2007 includes a non-cash charge of
$12,409,722 related to the acquisition of Effective Pharmaceuticals, Inc
(“EPI”). The total of the non-cash charges was reflected through
equal and offsetting adjustments to additional paid-in-capital with no net
impact on stockholders’ equity. This amount was considered in the determination
of the Company’s loss per common share amounts for the year ended December 31,
2007 and for the period from January 8, 2001 (inception) to December 31,
2008.
Liquidity
and Capital Resources
During
the year ended December 31, 2008, we had a net decrease in cash of $5,636,418.
Total cash resources as of December 31, 2008 was $5,856,384. During the year
ended December 31, 2008 and 2007, net cash used in operating activities was
$4,851,675 and $6,606,859 respectively. This cash was used to fund our
operations for the periods, adjusted for non-cash expenses and changes in
operating assets and liabilities.
Net cash
provided by investing activities for the year ended December 31, 2008 was
$110,867 compared to $1,965,574 net cash used in investing activities for the
year ended December 31, 2007. The net cash provided by investing
activities for the year ended December 31, 2008
28
resulted
from the proceeds from the sale of equipment in the amount of $132,265, offset
by the purchase of property and equipment n the amount of
$21,398. The net cash used in investing activities for the year ended
December 31, 2007 resulted from the acquisition of property and equipment
totaling $1,965,574.
Our
continued operations will depend on whether we are able to raise additional
funds through various potential sources, such as equity and debt financing. Such
additional funds may not become available on acceptable terms and there can be
no assurance that any additional funding that we do obtain will be sufficient to
meet our needs in the long term. We will continue to fund operations from cash
on hand and through the similar sources of capital previously described. We can
give no assurances that any additional capital that we are able to obtain will
be sufficient to meet our needs.
Current
and Future Financing Needs
We
have incurred an accumulated deficit of $38,281,676 through December 31, 2008.
We have incurred negative cash flow from operations since we started our
business. We have spent, and expect to continue to spend, substantial amounts in
connection with implementing our business strategy, including our planned
product development efforts, our clinical trials, and our research and discovery
efforts. Based on our current plans, we believe that our cash will be sufficient
to enable us to meet our planned operating needs at least for the next 18
months.
However,
the actual amount of funds we will need to operate is subject to many factors,
some of which are beyond our control. These factors include the
following:
• the
progress of our research activities;
• the
number and scope of our research programs;
• the
progress of our pre-clinical and clinical development
activities;
• the
progress of the development efforts of parties with whom we have entered into
research and development agreements;
• our
ability to maintain current research and development programs and to establish
new research and development and licensing
arrangements;
• our
ability to achieve our milestones under licensing arrangements;
• the
costs involved in prosecuting and enforcing patent claims and other intellectual
property rights; and
• the
costs and timing of regulatory approvals.
We have
based our estimate on assumptions that may prove to be wrong. We may need to
obtain additional funds sooner or in greater amounts than we currently
anticipate. Potential sources of financing include strategic relationships,
public or private sales of our shares or debt and other sources. We may seek to
access the public or private equity markets when conditions are favorable due to
our long-term capital requirements. We do not have any committed sources of
financing at this time, and it is uncertain whether additional funding will be
available when we need it on terms that will be acceptable to us, or at all. If
we raise funds by selling additional shares of common stock or other securities
convertible into common stock, the ownership interest of our existing
stockholders will be diluted. If we are not able to obtain financing when
needed, we may be unable to carry out our business plan. As a result, we may
have to significantly limit our operations and our business, financial condition
and results of operations would be materially harmed.
29
License
and Contractual Agreement Obligations
Below is
a table of our contractual obligations for the years 2009 through 2013 as of
December 31, 2008.
|
Year
|
||||||||||||
|
2009
|
2010
|
2011
|
2012
|
2013
|
Total
|
|||||||
|
License
Agreements
|
$
82,000
|
$
95,000
|
$95,000
|
$120,000
|
$155,000
|
$547,000
|
||||||
|
Lease
Agreements
|
$145,733
|
$150,152
|
$25,148
|
0
|
0
|
$321,033
|
||||||
|
Consulting
Agreements
|
$
40,000
|
$
30,000
|
0
|
0
|
0
|
$
70,000
|
||||||
|
Total
|
$267,733
|
$275,152
|
$120,148
|
$120,000
|
$155,000
|
$938,033
|
||||||
Product
Candidates
Zinthionein
TM
(oral
zinc-monocysteine complex)
We plan
to initially develop Zinthionein TM as an
oral treatment for the support of subclinical zinc deficiency and/or chronic
copper toxicity dry age-related macular degeneration (“dry AMD”). Zinthionein
has completed a six month double blind randomized placebo controlled trial in 80
dry AMD patients with statistically significant improvements in visual acuity,
contrast sensitivity and photorecovery times. During July 2008, we announced
detailed results following the publication of the study results in a
peer-reviewed ophthalmic journal. Through December 31, 2008, we have incurred
approximately $410,000 of costs related to our development of Zinthionein of
which $154,000 was incurred during 2007 and $256,000 was incurred in
2008.
Oral
dnaJP1
In June
2008, we acquired Oral dnaJP1, an oral, candidate for the treatment of
rheumatoid arthritis (RA) which has completed a 160 patient, multi-center,
double-blind, randomized, placebo-controlled Phase II clinical trial for the
treatment of RA. Rheumatoid arthritis is an autoimmune disease which affects
approximately 20 million people worldwide. Oral dnaJP1 is a epitope
specific immunotherapy for RA patients. Oral dnaJP1 is a heat shock protein
(hsp)-derived peptide which was previously identified as a contributor of T cell
mediated inflammation in RA. Immune responses to hsp are often found at sites of
inflammation and have an initially amplifying effect that needs to be
downregulated to prevent tissue damage. The mechanisms for this regulation
involve T cells with regulatory function that are specific for hsp-derived
antigens. This regulatory function is one of the key components of a "molecular
dimmer" whose physiologic function is to modulate inflammation independently
from its trigger. This function is impaired in autoimmunity and could be
restored for therapeutic purposes. Through December 31, 2008, we have incurred
approximately $219,000 of costs related to our development of Oral dnaJP1 all of
which has been incurred in 2008.
TRIMESTA TM
(oral
estriol)
In June
2007, a two year seven U.S. center, placebo controlled 150 patient phase IIb
clinical trial using TRIMESTA TM for the
treatment of relapsing-remitting Multiple Sclerosis (MS) was initiated under a
$5 million grant from the Southern California Chapter of the National Multiple
Sclerosis Society and NIH. This phase IIb clinical trial builds upon our
encouraging results from an earlier phase IIa clinical trial. The primary
purpose of this study is to evaluate the safety and efficacy of TRIMESTA TM in a
larger MS patient population with a one year blinded interim analysis. The
preclinical and clinical development of TRIMESTA TM has
been primary financed by grants from the NIH and various non-profit foundations.
Through December 31, 2008, we have incurred approximately $685,000 of costs
related to our development of TRIMESTA TM of
which approximately $49,500, $185,500 and 194,000 was incurred in fiscal years
2005, 2006 and 2007, respectively, and approximately $256,000 was incurred in
2008. During 2009, this clinical trial was expanded to include 16
total clinical trial sites.
30
Oral
flupirtine
A
scientific collaborator of ours has filed and received an IND with the FDA to
conduct a phase II clinical trial with flupirtine in fibromyalgia
patients. Our scientific collaborator also received institutional
review board (IRB) approval to conduct this study. Through December
31, 2008, we have incurred approximately $112,000 of costs related to our
development of flupirtine, of which $85,000 was incurred during 2007 and $27,000
was incurred during 2008. During 2008, we obtained an option to
license issued and pending patent applications relating to flupirtines use in
the treatment of ophthalmic indications. We are seeking
potential U.S. and international corporate partners for the further development
of flupirtine for various indications.
Freebound
TM (metals diagnostic device)
We were,
but no longer are, developing a proprietary electrochemical
diagnostic device, Freebound TM capable of measuring levels of free and bound
metals in biological samples. Through December 31, 2008, we have incurred
approximately $56,000 of costs related to our development of Freebound TM, of
which $38,000 was incurred during 2008. We are no longer
actively developing this electrochemical device and instead are seeking
potential U.S. and international corporate partners for the further development
of FreeBound.
Oral TTM (oral
tetrathiomolybate)
Through
December 31, 2008, we have incurred approximately $3,612,000 of costs related to
our development of oral TTM, of which approximately $150,000, $1,061,000 and
$1,676,000 was incurred in fiscal years 2005, 2006 and 2007, respectively, and
approximately $725,000 was incurred during 2008.
We are
seeking potential U.S. and international corporate partners for the further
development of Oral TTM for Wilson's Disease, idiopathic pulmonary fibrosis
(IPF), Alzheimer’s disease and Huntington’s Disease.
Anti-CD4
802-2
Through
December 31, 2008, we have incurred $1,465,000 of costs related to our
development of anti-CD4 802-2 of which $58,000, $332,000, $303,000, $295,000,
$113,000, $161,000 and $121,000 was incurred in fiscal years 2001, 2002, 2003,
2004, 2005, 2006 and 2007 respectively and approximately $82,000 has been
incurred in 2008.
CORRECTA TM
(clotrimazole
emema)
In
November 2008, we provided Children's Hospital Boston notice of termination of
the license agreement relating to this product candidate.
Through
December 31, 2008, and prior to our termination of this agreement, we incurred
approximately $364,000 of costs related to our development of CORRECTA TM of
which approximately $103,000, $107,000 and $36,000 was incurred in fiscal years
2005, 2006 and 2007, respectively, and $118,000 has been incurred during
2008.
Solovax
TM
(multivalent
T-cell vaccine for MS)
In
November 2008, we provided University of Southern California notice of
termination of the license agreement relating to this product
candidate.
Through
December 31, 2008, and prior to our termination of this agreement, we have
incurred approximately $814,000 of costs related to our development of SOLOVAX
of which $107,000, $158,000, $164,000, $163,000, $67,000, $21,000 and $8,000 was
incurred in fiscal 2001, 2002, 2003, 2004, 2005, 2006 and 2007, respectively,
and $126,000 has been incurred during 2008.
Based on
our current capital expenditures, we believe we currently have sufficient
capital to fund development activities of our principal products for at
least the next 18 months. However, if our business does not generate any cash
flow through corporate partnering transactions, we will need to raise additional
capital to continue operations beyond the second half of 2010. To the extent
additional capital is not available when we need it, we may be forced to
sublicense our rights to our product candidates, abandon our development efforts
altogether, or lose our licenses to our product candidates, any of which
would have a material adverse effect on the prospects of our business. See also
the risks identified under the section entitled “Risk Factors” in this
report.
31
Additional
Licenses
We may
enter into additional license agreements relating to new drug
candidates.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
Not
applicable because the Company is a smaller reporting company.
32
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX
TO FINANCIAL STATEMENTS
ADEONA
PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A
Development Stage Company)
TABLE
OF CONTENTS
|
|
Page
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
34
|
|
Consolidated
Balance Sheets
|
|
35
|
|
Consolidated
Statements of Operations
|
|
36
|
|
Consolidated
Statements of Changes in Stockholders’ Equity
|
|
37
|
|
Consolidated
Statements of Cash Flows
|
|
38
|
|
Notes
to Consolidated Financial Statements
|
|
39
|
33
Report
of Independent Registered Public Accounting Firm
To the
Board of Directors and Stockholders of:
Adeona
Pharmaceuticals, Inc.
We have
audited the accompanying consolidated balance sheets of Adeona Pharmaceuticals,
Inc. and Subsidiaries (a development stage company) as of December 31, 2008 and
2007 and the related consolidated statements of operations, changes in
stockholders’ equity and cash flows for the years ended December 31, 2008 and
2007 and for the period from January 8, 2001 (inception) to December 31, 2008.
These consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included the consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly
in all material respects, the consolidated financial position of Adeona
Pharmaceuticals, Inc. and Subsidiaries (a development stage company) as of
December 31, 2008 and 2007, and the consolidated results of their operations,
changes in stockholders’ equity and cash flows for the years ended December 31,
2008 and 2007, and for the period from January 8, 2001 (inception) to December
31 2008, in conformity with accounting principles generally accepted in the
United States of America.
Berman
& Company, P.A.
Boca
Raton, Florida
March 12,
2009, except for Note 9, as to which the date is March 30, 2009.
34
(A
Development Stage Company)
Consolidated Balance
Sheets
|
December
31,
|
||||||||
|
Assets
|
2008
|
2007
|
||||||
|
Current
Assets
|
||||||||
|
Cash
|
$ | 5,856,384 | $ | 11,492,802 | ||||
|
Other
receivables
|
55,419 | - | ||||||
|
Prepaid
expenses
|
15,109 | 63,636 | ||||||
|
Total
Current Assets
|
5,926,912 | 11,556,438 | ||||||
|
Property
and Equipment, net of accumulated depreciation of $591,876 and
$232,564
|
1,446,407 | 2,063,233 | ||||||
|
Deposits
and other assets
|
11,989 | 13,381 | ||||||
|
Total
Assets
|
$ | 7,385,308 | $ | 13,633,052 | ||||
|
Liabilities and Stockholders'
Equity
|
||||||||
|
Current
Liabilities:
|
||||||||
|
Accounts
payable
|
$ | 574,896 | $ | 728,119 | ||||
|
Accrued
liabilities
|
45,820 | 59,409 | ||||||
|
Notes
payable
|
- | 900,000 | ||||||
|
Total
Current Liabilities
|
620,716 | 1,687,528 | ||||||
|
Stockholders'
Equity
|
||||||||
|
Preferred
stock, $0.001 par value; 10,000,000 shares
authorized,
|
||||||||
|
none
issued and outstanding
|
- | - | ||||||
|
Common
stock, $0.001 par value; 100,000,000 shares
authorized,
|
||||||||
|
20,882,839
and 20,433,467 shares issued and outstanding
|
20,883 | 20,433 | ||||||
|
Additional
paid-in capital
|
45,025,385 | 43,001,609 | ||||||
|
Deficit
accumulated during the development stage
|
(38,281,676 | ) | (31,076,518 | ) | ||||
|
Total
Stockholders' Equity
|
6,764,592 | 11,945,524 | ||||||
|
Total
Liabilities and Stockholders' Equity
|
$ | 7,385,308 | $ | 13,633,052 | ||||
See
accompanying notes to consolidated financial statements
35
(A
Development Stage Company)
Consolidated Statements of
Operations
|
For
the Period
|
||||||||||||
|
from
January 8, 2001
|
||||||||||||
|
For
the years ended December 31,
|
(Inception)
to
|
|||||||||||
|
2008
|
2007
|
December
31, 2008
|
||||||||||
|
Operating
Expenses:
|
||||||||||||
|
Research
and development
|
$ | 4,643,570 | $ | 6,327,726 | $ | 15,804,365 | ||||||
|
General
and administrative
|
2,675,636 | 3,810,585 | 9,520,847 | |||||||||
|
Total
Operating Expenses
|
7,319,206 | 10,138,311 | 25,325,212 | |||||||||
|
Loss
from Operations
|
(7,319,206 | ) | (10,138,311 | ) | (25,325,212 | ) | ||||||
|
Other
Income (Expense):
|
||||||||||||
|
Interest
income
|
128,236 | 298,807 | 471,625 | |||||||||
|
Loss
on sale of equipment
|
(357 | ) | - | (357 | ) | |||||||
|
Interest
expense
|
(13,831 | ) | (52,929 | ) | (66,760 | ) | ||||||
|
Total
Other Income, net
|
114,048 | 245,878 | 404,508 | |||||||||
|
Net
Loss
|
$ | (7,205,158 | ) | $ | (9,892,433 | ) | $ | (24,920,704 | ) | |||
|
Less:
Preferred stock dividend - subsidiary
|
- | - | (951,250 | ) | ||||||||
|
Less:
Merger dividend
|
- | (12,409,722 | ) | (12,409,722 | ) | |||||||
|
Net
Loss Applicable to Common Shareholders
|
$ | (7,205,158 | ) | $ | (22,302,155 | ) | $ | (38,281,676 | ) | |||
|
Net
Loss Per Share - Basic and Diluted
|
$ | (0.35 | ) | $ | (1.27 | ) | $ | (6.14 | ) | |||
|
Weighted
average number of shares outstanding
|
||||||||||||
|
during
the year/period - basic and diluted
|
20,651,027 | 17,597,120 | 6,235,691 | |||||||||
See
accompanying notes to consolidated financial statements
36
(A
Development Stage Company)
Consolidated
Statements of Stockholders' Equity
For the years ended December
31, 2008 and 2007 and for the period from January 8, 2001 (inception) to
December 31, 2008
|
Series
A, Convertible
|
Deficit
accumulated
|
|||||||||||||||||||||||||||
|
Preferred
Stock
|
Common
Stock
|
Additional
|
during
|
Total
|
||||||||||||||||||||||||
|
$0.001
Par Value
|
$0.001
Par Value
|
Paid-in
|
development
|
Stockholders'
|
||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
stage
|
Equity
|
||||||||||||||||||||||
|
Balance,
January 8, 2001 (inception)
|
- | $ | - | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||
|
Issuance
of common stock to founders in exchange for subcription receivable
($0.00003/share)
|
- | - | 1,572,136 | 1,572 | (1,222 | ) | - | 350 | ||||||||||||||||||||
|
Issuance
of preferred stock to founder for cash ($0.055/share)
|
5,421,554 | 5,422 | - | - | 294,578 | - | 300,000 | |||||||||||||||||||||
|
Issuance
of preferred and common stock to founder for cash -
subsidiaries
|
- | - | - | - | 850,540 | - | 850,540 | |||||||||||||||||||||
|
Net
loss for the period ended December 31, 2001
|
- | - | - | - | - | (277,868 | ) | (277,868 | ) | |||||||||||||||||||
|
Balance,
December 31, 2001
|
5,421,554 | 5,422 | 1,572,136 | 1,572 | 1,143,896 | (277,868 | ) | 873,022 | ||||||||||||||||||||
|
Issuance
of common stock for compensation and consulting -
subsidiary
|
- | - | - | - | 119 | - | 119 | |||||||||||||||||||||
|
Grant
of stock options for consulting services - subsidiary
|
- | - | - | - | 5,890 | - | 5,890 | |||||||||||||||||||||
|
Net
loss for the year ended December 31, 2002
|
- | - | - | - | - | (768,508 | ) | (768,508 | ) | |||||||||||||||||||
|
Balance,
December 31, 2002
|
5,421,554 | 5,422 | 1,572,136 | 1,572 | 1,149,905 | (1,046,376 | ) | 110,523 | ||||||||||||||||||||
|
Grant
of stock options for compensation - subsidiary
|
- | - | - | - | 17,984 | - | 17,984 | |||||||||||||||||||||
|
Net
loss for the year ended December 31, 2003
|
- | - | - | - | - | (719,307 | ) | (719,307 | ) | |||||||||||||||||||
|
Balance,
December 31, 2003
|
5,421,554 | 5,422 | 1,572,136 | 1,572 | 1,167,889 | (1,765,683 | ) | (590,800 | ) | |||||||||||||||||||
|
Issuance
of common stock for cash - subsidiary
|
- | - | - | - | 50 | - | 50 | |||||||||||||||||||||
|
Grant
of stock options for consulting services - subsidiary
|
- | - | - | - | 10,437 | - | 10,437 | |||||||||||||||||||||
|
Net
loss for the year ended December 31, 2004
|
- | - | - | - | - | (602,493 | ) | (602,493 | ) | |||||||||||||||||||
|
Balance,
December 31, 2004
|
5,421,554 | 5,422 | 1,572,136 | 1,572 | 1,178,376 | (2,368,176 | ) | (1,182,806 | ) | |||||||||||||||||||
|
Recognition
of stock based consulting in connection with stock options
grants
|
- | - | - | - | 59,960 | - | 59,960 | |||||||||||||||||||||
|
Recognition
of stock based compensation in connection with stock option
grants
|
- | - | - | - | 10,493 | - | 10,493 | |||||||||||||||||||||
|
Recognition
of deferred compensation - subsidiary
|
- | - | - | - | 14,057 | - | 14,057 | |||||||||||||||||||||
|
Issuance
of Series B, convertible preferred stock for cash -
subsidiary
|
- | - | - | - | 1,902,500 | - | 1,902,500 | |||||||||||||||||||||
|
Cash
paid as direct offering costs in connection with sale of Series B,
convertible preferred stock - subsidiary
|
- | - | - | - | (152,200 | ) | - | (152,200 | ) | |||||||||||||||||||
|
10%
in-kind Series B, convertible preferred stock dividend -
subsidiary
|
- | - | - | - | 190,250 | (190,250 | ) | - | ||||||||||||||||||||
|
Net
loss for the year ended December 31, 2005
|
- | - | - | - | - | (1,355,842 | ) | (1,355,842 | ) | |||||||||||||||||||
|
Balance,
December 31, 2005
|
5,421,554 | 5,422 | 1,572,136 | 1,572 | 3,203,436 | (3,914,268 | ) | (703,838 | ) | |||||||||||||||||||
|
Conversion
of related party loan to common stock ($2.02/share)
|
- | - | 1,665,211 | 1,665 | 3,273,063 | - | 3,274,728 | |||||||||||||||||||||
|
Issuance
of common stock for cash - private placement ($2.02/share)
|
- | - | 6,900,931 | 6,901 | 13,919,462 | - | 13,926,363 | |||||||||||||||||||||
|
Cash
paid as direct offering costs in private placements
|
- | - | - | - | (1,160,418 | ) | - | (1,160,418 | ) | |||||||||||||||||||
|
Issuance
of common stock for license fees ($0.92/share)
|
- | - | 422,314 | 422 | 388,269 | - | 388,691 | |||||||||||||||||||||
|
Conversion
of accrued expenses to contributed capital - former related
party
|
- | - | - | - | 3,017 | - | 3,017 | |||||||||||||||||||||
|
Deemed
issuance to shareholders of legal acquiror and
recapitalization
|
- | - | 245,824 | 246 | (665,246 | ) | - | (665,000 | ) | |||||||||||||||||||
|
Conversion
of Series A, convertible preferred stock to common stock
|
(5,421,554 | ) | (5,422 | ) | 5,421,554 | 5,422 | - | - | - | |||||||||||||||||||
|
Recognition
of stock based consulting in connection with stock option
grants
|
- | - | - | - | 411,310 | - | 411,310 | |||||||||||||||||||||
|
Recogntion
of stock based compensation in connection with stock option
grants
|
- | - | - | - | 410,639 | - | 410,639 | |||||||||||||||||||||
|
10%
in-kind Series B, convertible preferred stock dividend -
subsidiary
|
- | - | - | - | 190,250 | (190,250 | ) | - | ||||||||||||||||||||
|
30%
in-kind Series B, convertible preferred stock dividend -
subsidiary
|
- | - | - | - | 570,750 | (570,750 | ) | - | ||||||||||||||||||||
|
Net
loss for the year ended December 31, 2006
|
- | - | - | - | - | (4,099,095 | ) | (4,099,095 | ) | |||||||||||||||||||
|
Balance,
December 31, 2006
|
- | - | 16,227,970 | 16,228 | 20,544,532 | (8,774,363 | ) | 11,786,397 | ||||||||||||||||||||
|
Issuance
of common stock for consideration of preferred shares in EPI acquistion
($19.95/share)
|
- | - | 765,087 | 765 | 12,408,957 | (12,409,722 | ) | 0 | ||||||||||||||||||||
| - | ||||||||||||||||||||||||||||
|
Issuance
of common stock for consideration of common shares in EPI acquistion
($19.95/share)
|
- | - | 30,161 | 30 | 601,682 | - | 601,712 | |||||||||||||||||||||
| - | ||||||||||||||||||||||||||||
|
Cash
paid as direct offering costs in private placements
|
- | - | - | - | (579,569 | ) | - | (579,569 | ) | |||||||||||||||||||
|
Issuance
of common stock for license fees ($6.85/share)
|
- | - | 2,920 | 3 | 19,997 | - | 20,000 | |||||||||||||||||||||
|
Issuance
of common stock for milestone payment ($4.90/share)
|
- | - | 5,102 | 5 | 24,995 | - | 25,000 | |||||||||||||||||||||
|
Recognition
of stock based consulting in connection with stock option
grants
|
- | - | - | - | 673,271 | - | 673,271 | |||||||||||||||||||||
| - | ||||||||||||||||||||||||||||
|
Recognition
of stock based compensation in connection with stock option
grants
|
- | - | - | - | 1,483,123 | - | 1,483,123 | |||||||||||||||||||||
|
Sale
of common stock in connection with warrants exercise
|
- | - | 3,401,967 | 3,402 | 7,548,976 | - | 7,552,378 | |||||||||||||||||||||
|
Contributed
services - related party
|
275,645 | - | 275,645 | |||||||||||||||||||||||||
|
Rounding
of shares due to reverse split
|
260 | - | - | - | ||||||||||||||||||||||||
|
Net
loss for the year ended December 31, 2007
|
- | - | (9,892,433 | ) | (9,892,433 | ) | ||||||||||||||||||||||
|
Balance,
December 31, 2007
|
- | - | 20,433,467 | 20,433 | 43,001,609 | (31,076,518 | ) | 11,945,524 | ||||||||||||||||||||
|
Recognition
of stock based consulting in connection with stock option
grants
|
- | - | - | - | 366,683 | - | 366,683 | |||||||||||||||||||||
|
Recognition
of stock based compensation in connection with stock option
grants
|
- | - | - | - | 1,224,975 | - | 1,224,975 | |||||||||||||||||||||
|
Recognition
of stock based compensation in connection with issuance of common
stock
|
- | - | 61,392 | 61 | 55,324 | - | 55,385 | |||||||||||||||||||||
|
Issuance
of common stock for consulting fee
|
- | - | 172,157 | 172 | 103,870 | - | 104,042 | |||||||||||||||||||||
|
Issuance
of common stock for milestone payment
|
- | - | 39,370 | 39 | 49,961 | - | 50,000 | |||||||||||||||||||||
|
Issuance
of common stock for license fee
|
- | - | 138,505 | 139 | 144,861 | - | 145,000 | |||||||||||||||||||||
|
Issuance
of common stock for stock option exercises
|
- | - | 37,948 | 38 | 4,352 | - | 4,390 | |||||||||||||||||||||
|
Contributed
services - related party
|
- | - | - | - | 73,750 | - | 73,750 | |||||||||||||||||||||
|
Net
loss for year ended December 31, 2008
|
- | - | - | - | - | (7,205,158 | ) | (7,205,158 | ) | |||||||||||||||||||
|
Balance,
December 31, 2008
|
- | $ | - | 20,882,839 | $ | 20,883 | $ | 45,025,385 | $ | (38,281,676 | ) | $ | 6,764,592 | |||||||||||||||
See
accompanying notes to consolidated financial statements
37
(A
Development Stage Company)
Consolidated Statements of
Cash Flows
|
For
the Period
|
||||||||||||
|
from
January 8, 2001
|
||||||||||||
|
For
the year ended December 31,
|
(Inception)
to
|
|||||||||||
|
2008
|
2007
|
December
31, 2008
|
||||||||||
|
Cash
Flows From Operating Activities:
|
||||||||||||
|
Net
loss
|
$ | (7,205,158 | ) | $ | (9,892,433 | ) | $ | (24,920,704 | ) | |||
|
Adjustments
to reconcile net loss to net cash
|
||||||||||||
|
used
in operating activities:
|
||||||||||||
|
Stock-based
consulting
|
366,683 | 673,271 | 1,527,670 | |||||||||
|
Stock-based
compensation
|
1,224,975 | 1,483,123 | 3,161,621 | |||||||||
|
Stock
issued as compensation
|
55,385 | - | 55,385 | |||||||||
|
Stock
issued as compensation in acquisition of subsidiary
|
- | 601,712 | 601,712 | |||||||||
|
Stock
issued for consulting fees
|
104,042 | - | 104,042 | |||||||||
|
Stock
issued for milestone payment
|
50,000 | 25,000 | 75,000 | |||||||||
|
Stock
issued for license fee
|
145,000 | 20,000 | 553,691 | |||||||||
|
Contributed
services - related party
|
73,750 | 275,645 | 349,395 | |||||||||
|
Depreciation
|
404,623 | 199,629 | 637,187 | |||||||||
|
Loss
on sale of equipment
|
357 | - | 357 | |||||||||
|
Changes
in operating assets and liabilities:
|
||||||||||||
|
Prepaid
expenses and other current assets
|
1,793 | (37,934 | ) | (61,843 | ) | |||||||
|
Deposits
and other assets
|
1,392 | (13,381 | ) | (11,989 | ) | |||||||
|
Accounts
payable
|
(60,928 | ) | 187,999 | 667,191 | ||||||||
|
Accrued
liabilities
|
(13,589 | ) | (129,490 | ) | 48,838 | |||||||
|
Net
Cash Used In Operating Activities
|
(4,851,675 | ) | (6,606,859 | ) | (17,212,447 | ) | ||||||
|
Cash
Flows From Investing Activities:
|
||||||||||||
|
Purchases
of property and equipment
|
(21,398 | ) | (1,965,574 | ) | (2,032,805 | ) | ||||||
|
Proceeds
from the sale of equipment
|
132,265 | - | 132,265 | |||||||||
|
Cash
paid to acquire shell in reverse acquisition
|
- | - | (665,000 | ) | ||||||||
|
Net
Cash Provided By (Used In) Investing Activities
|
110,867 | (1,965,574 | ) | (2,565,540 | ) | |||||||
|
Cash
Flows From Financing Activities:
|
||||||||||||
|
Proceeds
from loans payable - related party
|
- | 3,210,338 | ||||||||||
|
Repayments
of loans payable - related party
|
- | (220,000 | ) | |||||||||
|
Proceeds
from notes payable
|
- | 1,100,000 | 1,100,000 | |||||||||
|
Repayments
of notes payable
|
(900,000 | ) | (200,000 | ) | (1,100,000 | ) | ||||||
|
Proceeds
from issuance of common stock for stock option exercises
|
4,390 | - | 4,390 | |||||||||
|
Proceeds
from issuance of preferred and common stock
|
- | - | 1,150,590 | |||||||||
|
Proceeds
from sale of common stock and warrants in private
placements
|
- | - | 13,926,362 | |||||||||
|
Proceeds
from sale of common stock in connection with warrant
exercise
|
- | 7,552,378 | 7,552,378 | |||||||||
|
Cash
paid as direct offering costs in private placements and warrant
call
|
- | (579,569 | ) | (1,739,987 | ) | |||||||
|
Proceeds
from issuance of Series B, convertible preferred stock -
subsidiary
|
- | - | 1,902,500 | |||||||||
|
Direct
offering costs in connection with issuance of
|
||||||||||||
|
series
B, convertible preferred stock - subsidiary
|
- | - | (152,200 | ) | ||||||||
|
Net
Cash Provided By (Used In) Financing Activities
|
(895,610 | ) | 7,872,809 | 25,634,371 | ||||||||
|
Net
increase (decrease) in cash and cash equivalents
|
(5,636,418 | ) | (699,624 | ) | 5,856,384 | |||||||
|
Cash
and cash equivalents at beginning of year/period
|
11,492,802 | 12,192,426 | - | |||||||||
|
Cash
and cash equivalents at end of year/period
|
$ | 5,856,384 | $ | 11,492,802 | $ | 5,856,384 | ||||||
|
Supplemental disclosures of cash flow
information:
|
||||||||||||
|
Cash
paid for interest
|
$ | 13,831 | $ | 52,929 | $ | 66,760 | ||||||
|
Cash
paid for taxes
|
$ | - | $ | - | $ | - | ||||||
|
Supplemental disclosure of non-cash investing and
financing activities:
|
||||||||||||
|
Sale
of equipment in exchange for other receivables
|
$ | 8,685 | $ | - | $ | 8,685 | ||||||
|
Sale
of equipment in exchange for accounts payable
|
$ | 92,294 | $ | - | $ | 92,294 | ||||||
|
Exchange
of EPI preferred stock into Pipex common stock in
acquisition
|
$ | - | $ | 12,409,722 | $ | 12,409,722 | ||||||
|
Pipex
acquired equipment in exchange for a loan with a related
party
|
$ | - | $ | - | $ | 284,390 | ||||||
|
EPI
declared a 10% and 30% in-kind dividend on its Series B,
|
||||||||||||
|
convertible
preferred stock.
|
$ | - | $ | - | $ | 951,250 | ||||||
|
The
Company issued shares and warrants in connection with the
|
||||||||||||
|
conversion
of certain related party debt.
|
$ | - | $ | - | $ | 3,274,728 | ||||||
|
Conversion
of accrued liabilities to contributed capital - former related
party
|
$ | - | $ | - | $ | 3,017 | ||||||
See
accompanying notes to consolidated financial statements
38
Notes
to Consolidated Financial Statements
December 31, 2008 and
2007
Note 1 Organization and
Nature of Operations
(A)
Description of the Business
Adeona
Pharmaceuticals, Inc. (“Adeona”) is a development-stage pharmaceutical company
that is developing proprietary, late-stage drug candidates for the treatment of
opththalmic, neurologic and autoimmune diseases.
(B)
Corporate Name Change
On
October 16, 2008, the Company completed a corporate name change to Adeona
Pharmaceuticals, Inc. from Pipex Pharmaceuticals, Inc.
(C)
Corporate Structure, Basis of Presentation and Non-Controlling
Interest
The
Company has seven subsidiaries, Pipex Therapeutics, Inc. (“Pipex Therapeutics”),
Effective Pharmaceuticals, Inc. (“EPI”), Solovax, Inc. (“Solovax”), CD4
Biosciences, Inc. (“CD4”), Epitope Pharmaceuticals, Inc. (“Epitope”),
Healthmine, Inc. (“Healthmine”) and Putney Drug Corp. (“Putney”) which were
previously under common control. As of December 31, 2008, EPI,
Healthmine and Putney are wholly owned and Pipex Therapeutics, Solovax, CD4 and
Epitope are majority owned. The combinations of these entities prior
to 2006 were accounted for in a manner similar to a pooling of
interests. As of December 31, 2008, Healthmine remains
inactive.
For
financial accounting purposes, the outstanding preferred stock and common stock
of the Company is that of Adeona, the legal registrant. All statements of
operations, stockholders’ equity and cash flows for each of the entities are
presented as consolidated since January 8, 2001 (inception) due to the existence
of common control since that date. All subsidiaries were incorporated on January
8, 2001, except for EPI, which was incorporated on December 12, 2000, Epitope
which was incorporated in January of 2002, Putney which was incorporated in
November of 2006 and Healthmine which was incorporated in December
2007. All of the subsidiaries were incorporated under the laws of the
State of Delaware.
For
financial accounting purposes, the Company’s inception is deemed January 8,
2001. The activity of EPI for the period from December 12, 2000 to January 7,
2001 was nominal. Therefore, there is no financial information presented for
this period.
The
Company’s ownership in its subsidiaries requires the Company to account for the
related non-controlling interest. Under generally accepted accounting
principles, when losses applicable to the minority interest in a subsidiary
exceed the minority interest in the equity capital of the subsidiary, the excess
is not charged to the minority interest since there is no obligation of the
minority interest to make good on such losses. The Company,
therefore, has included losses applicable to the minority interest against its
interest. Since the Company’s subsidiaries have never been profitable
and present negative equity, there has been no establishment of a positive
non-controlling interest. This value is not presented as a deficit balance in
the accompanying consolidated balance sheet.
(D)
Reverse Stock Split
Effective
on April 25, 2007, the Company’s Board of Directors approved a 3 for 1 reverse
stock split of all outstanding common stock, stock options and stock warrants of
Adeona. All share and per share amounts have been retroactively restated to
reflect this reverse stock split.
39
Adeona
Pharmaceuticals, Inc. and Subsidiaries
(A
Development Stage Company)
Notes
to Consolidated Financial Statements
December 31, 2008 and
2007
(E)
Reverse Acquisition and Recapitalization
On
October 31, 2006, Sheffield Pharmaceuticals, Inc. (“Sheffield”), a then shell
corporation, entered into a Merger Agreement (“Merger”) with Pipex Therapeutics,
a privately owned company, whereby Pipex Therapeutics was the surviving
corporation. This transaction was accounted for as a reverse acquisition.
Sheffield did not have any operations at the time of the merger, and this was
treated as a recapitalization of Pipex Therapeutics. Since Pipex Therapeutics
acquired a controlling voting interest in a public shell corporation, it was
deemed the accounting acquirer, while Sheffield was deemed the legal acquirer.
The historical financial statements of the Company are those of Pipex
Therapeutics, EPI, Solovax and CD4 since inception, and of the consolidated
entities from the date of Merger and subsequent. On December 11, 2006, Sheffield
changed its name to Pipex Pharmaceuticals, Inc.
Since the
transaction is considered a reverse acquisition and recapitalization, the
guidance in SFAS No. 141 did not apply for purposes of presenting pro-forma
financial information.
Pursuant
to the agreement, Sheffield issued 34,000,000 shares of common stock for all of
the outstanding Series A, convertible preferred and common stock of Pipex
Therapeutics, and Sheffield assumed all of Pipex Therapeutics’s outstanding
options and warrants, but did not assume the options and warrants outstanding
within any of Pipex Therapeutics’s subsidiaries. On October 31, 2006, concurrent
with the Merger, Pipex Therapeutics executed a private stock purchase agreement
to purchase an additional 2,426,300 shares of common stock held by Sheffield’s
sole officer and director; these shares were immediately cancelled and retired.
Aggregate consideration paid for Sheffield was $665,000. Upon the closing of the
reverse acquisition, shareholders of Sheffield retained an aggregate 245,824
shares of common stock. As a result of these two stock purchase transactions,
Pipex Therapeutics acquired approximately 99% ownership of the issued and
outstanding common shares of Sheffield.
See Note 2(H) as it pertains to the
retroactive effect of the share and per share amounts pursuant to the reverse
acquisition and recapitalization as discussed in this Note 1(E).
(F)
Contribution Agreements — Consolidation of Entities under Common
Control
1.
EPI’s Acquisition of CD4
On
December 31, 2004, EPI acquired 91.61% of the issued and outstanding common
stock of CD4 in exchange for 825,000 shares of common stock having a fair value
of $825. EPI assumed certain outstanding accounts payable and loans of CD4 of
approximately $664,000. The fair value of the exchange was equivalent to the par
value of the common stock issued. CD4 shareholders retained 119,000 shares
(8.39%) of the issued and outstanding common stock of CD4; these shareholders
comprise the non-controlling shareholder base of CD4.
2.
Pipex Therapeutic’s Acquisition of Solovax
On July
31, 2005, Pipex Therapeutics acquired 96.9% of the aggregate voting preferred
and common stock of Solovax. Pipex Therapeutics assumed all outstanding
liabilities of approximately $310,000, the transfer of 1,000,000 shares of
Series A Convertible Preferred Stock owned by Solovax’s president and 250,000
shares of common stock owned by Solovax’s COO. The fair value of the exchange
was equivalent to the par value of the common stock received pursuant to the
terms of the contribution.
40
Adeona
Pharmaceuticals, Inc. and Subsidiaries
(A
Development Stage Company)
Notes
to Consolidated Financial Statements
December 31, 2008 and
2007
3.
Pipex Therapeutics’ Acquisition of EPI/CD4
On
December 31, 2005, Pipex Therapeutics acquired 65.47% of the aggregate voting
preferred and common stock of EPI and EPI’s majority owned subsidiary CD4. In
addition, Pipex Therapeutics assumed $583,500 of outstanding liabilities of EPI.
The fair value of the exchange was equivalent to the par value of the common
stock received pursuant to the terms of the contribution.
In the
consolidated financial statements at December 31, 2007, each of these
transactions described in Notes 1(F)(1), 1(F)(2) and 1(F)(3), was analogous to a
recapitalization with no net change to equity since the entities were under
common control at the date of the transaction.
4.
Adeona’s Acquisition of EPI, Share Issuances and Paid-in Kind Merger
Dividend
On
January 5, 2007, EPI merged with and into a wholly owned subsidiary of Adeona,
Effective Acquisition Corp. In the transaction, Adeona issued an aggregate
795,248 shares of common stock having a fair value of $15,865,198 based upon the
quoted closing trading price of $19.95 per share. As consideration for the share
issuance, EPI exchanged 1,902,501 shares of Series B Convertible Preferred stock
and 75,000 shares of common stock into 765,087 and 30,161, shares of Adeona
common stock, respectively.
See
additional discussion below for the issuance of the 765,087 shares, the Company
recorded a paid-in kind/merger dividend.
In
connection with the issuance of the 30,161 shares, the Company recorded
additional compensation expense of $601,682 as the stock was issued to an
officer and director of the Company.
During
2006, EPI declared a 10% and 30% preferred stock dividend, respectively, on its
outstanding Series B, convertible preferred stock. During 2005, EPI
declared a 10% preferred stock dividend on its outstanding Series B, convertible
preferred stock. In total, 951,250 shares of additional Series B,
convertible preferred stock were issued to the holders of record at the
declaration date. These 951,250 shares of outstanding Series B
preferred stock dividend were cancelled and retired and were not contemplated in
the exchange with Pipex. EPI also cancelled and retired all of the issued and
outstanding 3,000,000 shares of Series A Convertible Preferred stock as well as
750,000 shares of common stock
In
connection with this exchange and pursuant to Securities and Exchange Commission
Regulation S-X, Rule 11-01(d) and EITF 98-3, “Determining whether a Non-Monetary
Transaction involves the receipt of Productive Assets or of a Business”
EPI was classified as a development stage company and thus was not considered a
business. As a result, SFAS No. 141 purchase accounting rules did not apply.
Additionally, the Company applied the provisions of EITF 86-32, “Early Extinguishment of a
Subsidiary’s Mandatorily Redeemable Preferred Stock” and has determined
that even though the preferred stock of EPI was not mandatorily redeemable, this
transaction is analogous to a capital transaction, and there would be no
resulting gain or loss.
Finally,
in connection with EITF Topic D-42, “The Effect on the Calculation of
Earnings Per Share for the Redemption or Induced Conversion of Preferred
Stock” , The Company has determined that the fair value of the
consideration transferred to the holders of EPI Series B, convertible preferred
stock over the carrying amount of the preferred stock represents a return to the
preferred stockholders. The difference is $12,409,722, which is included as a
component of paid in-kind dividends. This amount is included as an additional
reduction in net loss applicable to common shareholders for purposes of
computing loss per share in the accompanying financial statements for the years
ended December 31, 2008 and 2007 and for the period from January 8, 2001
(inception) to December 31, 2008.
As part
of the acquisition of EPI, the Company granted an aggregate 68,858 warrants and
34,685 options for the outstanding warrants and options held by the EPI warrant
and option holders. These new warrants and options will continue to vest
according to their original terms. Pursuant to SFAS No. 123R and fair value
accounting, the Company treated the exchange as a modification of an award of
equity instruments. As such, incremental compensation cost was measured as the
excess of the fair value of the replacement award over the fair value of the
cancelled award at the cancellation date. In substance, Adeona repurchased the
EPI instruments by issuing a new instrument of greater value.
41
Adeona
Pharmaceuticals, Inc. and Subsidiaries
(A
Development Stage Company)
Notes
to Consolidated Financial Statements
December 31, 2008 and
2007
The
Company used the following weighted average assumptions for the fair value of
the replacement award: expected dividend yield of 0%; expected volatility of
196.10%; risk-free interest rate of 4.65%, an expected life ranging from seven
to eight years and exercise prices ranging from $0.09 - $3.30.
The
Company has the following weighted average assumptions for the fair value of the
cancelled award at the cancellation date: expected dividend yield of 0%;
expected volatility of 200%; risk-free interest rate of 4.65%, an expected life
ranging from seven to eight years and exercise prices ranging from $0.09
-$3.30.
The fair
value of the replacement award required an increase in compensation expense of
approximately $352,734.
Note 2 Summary of
Significant Accounting Policies
(A)
Principles of Consolidation
All
significant inter-company accounts and transactions have been eliminated in
consolidation.
(B)
Development Stage
The
Company’s consolidated financial statements are presented as those of a
development stage enterprise. For the period from January 8, 2001
(inception) to date, the Company has been a development stage enterprise, and
accordingly, the Company’s operations have been directed primarily toward the
acquisition and creation of intellectual properties and certain research and
development activities to improve current technological concepts. As the Company
is devoting its efforts to research and development, there have been no sales,
license fees or royalties earned. Additionally, the Company continually seeks
sources of debt or equity based funding to further its intended research and
development activities. The Company has experienced net losses since its
inception, and had an accumulated deficit of $38,281,676 at December 31,
2008.
(C)
Use of Estimates
In
preparing financial statements in conformity with generally accepted accounting
principles, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosure of contingent assets
and liabilities at the date of the financial statements, and revenues and
expenses during the periods presented. Actual results may differ from these
estimates.
Significant
estimates during 2008 and 2007 include depreciable lives of property, valuation
of warrants and stock options granted for services or compensation pursuant to
EITF No. 96-18 and SFAS No. 123R, respectively, estimates of the probability and
potential magnitude of contingent liabilities and the valuation allowance for
deferred tax assets due to continuing operating losses.
42
Adeona
Pharmaceuticals, Inc. and Subsidiaries
(A
Development Stage Company)
Notes
to Consolidated Financial Statements
December 31, 2008 and
2007
(D)
Cash and Cash Equivalents
The
Company considers all highly liquid investments with original maturities of
three months or less at the time of purchase to be cash equivalents. At
December 31, 2008 and 2007, the Company had no cash
equivalents.
The
Company minimizes credit risk associated with cash by periodically evaluating
the credit quality of its primary financial institution. The balance at times
may exceed federally insured limits. At December 31, 2008 and 2007, the balance
exceeded the federally insured limit by $5,653,635 and $11,009,126,
respectively.
(E)
Property and Equipment
Property
and equipment is stated at cost, less accumulated depreciation. Expenditures for
maintenance and repairs are charged to expense as incurred. Items of property
and equipment with costs greater than $1,000 are capitalized and depreciated on
a straight-line basis over the estimated useful lives, as follows:
|
Description
|
|
Estimated
Useful Life
|
|
|
Leasehold
improvements and fixtures
|
|
Lesser
of estimated useful life or life of operating lease
|
|
|
Manufacturing
equipment
|
|
10
years
|
|
|
Office
equipment and furniture
|
|
5
years
|
|
|
Laboratory
equipment
|
|
10
years
|
|
(F)
Long Lived Assets
Long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future undiscounted net cash flows expected to be
generated by the asset. If such assets are considered impaired, the impairment
to be recognized is measured by the amount by which the carrying amount of the
assets exceeds the fair value of the assets. There were no impairment charges
taken during the years ended December 31, 2008 and 2007 and for the period from
January 8, 2001 (inception) to December 31, 2008.
(G)
Derivative Liabilities
In
connection with the reverse acquisition, all outstanding convertible preferred
stock of Adeona was cancelled and retired, as such, the provisions of EITF No.
00-19, “Accounting for
Derivative Financial Instruments Index to, and Potentially Settled in, a
Company’s Own Stock” do not apply. The Company’s majority owned
subsidiaries also contain issued convertible preferred stock; however, none of
these instruments currently contains any provisions that require the recording
of a derivative liability. In connection with the acquisition of EPI on January
5, 2007 (See Notes 1(E) and 1(F)(4)), all issued and outstanding shares of
Series A and B, convertible preferred stock were cancelled and retired. As such,
no potential derivative liabilities will exist pertaining to these
instruments.
(H)
Net Loss per Share
Basic
earnings (loss) per share is computed by dividing the net income (loss) less
preferred dividends for the period by the weighted average number of common
shares outstanding. Diluted earnings per share is computed by dividing net
income (loss) less preferred dividends by the weighted average number of common
shares outstanding including the effect of share equivalents. Since the Company
reported a net loss at December 31, 2008 and 2007 and for the period from
January 8, 2001 (inception) to December 31, 2008, respectively, all common stock
equivalents would be anti-dilutive; as such there is no separate computation for
diluted earnings per share.
The
Company’s net loss per share for the years ended December 31, 2008 and 2007 and
for the period from January 8, 2001 (inception) to December 31, 2008 was
computed assuming the recapitalization associated with the reverse acquisition,
as such, all share and per share amounts have been retroactively restated.
Additionally, the numerator for computing net loss per share was adjusted for
preferred stock dividends recorded during the year ended December 31, 2006 and
the period from January 8, 2001 (inception) to December 31, 2008, in connection
with the acquisition of EPI (See Note 1(F)(4)) as well as and certain provisions
relating to the sale of EPI’s Series B, convertible preferred
stock.
43
Adeona
Pharmaceuticals, Inc. and Subsidiaries
(A
Development Stage Company)
Notes
to Consolidated Financial Statements
December 31, 2008 and
2007
(I)
Research and Development Costs
The
Company expenses all research and development costs as incurred for which there
is no alternative future use. Research and development expenses consist
primarily of manufacturing costs, license fees, salaries, stock based
compensation and related personnel costs, fees paid to consultants and outside
service providers for laboratory development, legal expenses resulting from
intellectual property prosecution and other expenses relating to the design,
development, testing and enhancement of the Company’s product candidates, as
well as an allocation of overhead expenses incurred by the Company.
(J)
Income Taxes
The
Company accounts for income taxes under the liability method in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Under this method, deferred income tax assets and
liabilities are determined based on differences between the financial
reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when
the differences are expected to reverse.
The
Company adopted the provisions of FASB Interpretation No. 48; “Accounting for Uncertainty in
Income Taxes-An Interpretation of FASB Statement No. 109” (“FIN
48”). FIN 48 contains a two-step approach to recognizing and measuring
uncertain tax positions. The first step is to evaluate the tax position for
recognition by determining if the weight of available evidence indicates it is
more likely than not, that the position will be sustained on audit, including
resolution of related appeals or litigation processes, if any. The second step
is to measure the tax benefit as the largest amount, which is more than 50%
likely of being realized upon ultimate settlement. The Company considers many
factors when evaluating and estimating the Company’s tax positions and tax
benefits, which may require periodic adjustments. At December 31, 2008 and 2007,
the Company did not record any liabilities for uncertain tax positions. (See
Note 7)
(K)
Fair Value of Financial Instruments
The
carrying amounts of the Company’s short-term financial instruments, including
other receivables, prepaid expenses, accounts payable and accrued liabilities,
approximate fair value due to the relatively short period to maturity for these
instruments.
(L)
Stock Based Compensation
All
share-based payments to employees since inception have been recorded and
expensed in the statements of operations as applicable under SFAS No. 123R “Share-Based
Payment”.
(M)
Non-Employee Stock Based Compensation
All stock-based
compensation awards issued to non-employees for
services have been recorded at
either the fair value of the services rendered or the instruments issued in
exchange for such services, whichever is more readily determinable, using the
measurement date guidelines enumerated in Emerging Issues Task Force Issue EITF
No. 96-18, “Accounting for
Deficit Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services” (“EITF 96-18”).
44
Adeona
Pharmaceuticals, Inc. and Subsidiaries
(A
Development Stage Company)
Notes
to Consolidated Financial Statements
December 31, 2008 and
2007
(N)
Recent Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” ,
which clarifies the principle that fair value should be based on the assumptions
that market participants would use when pricing an asset or
liability. It also defines fair value and established a hierarchy
that prioritizes the information used to develop assumptions. SFAS
No. 157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007. The adoption of SFAS No. 157 did not have a
material effect on the Company’s financial position, results of operations or
cash flows.
On
February 15, 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards No. 159, “The Fair Value
Option for Financial Assets and Financial Liabilities — Including an Amendment
of FASB Statement No. 115” (“SFAS 159”). This standard permits an entity to
measure financial instruments and certain other items at estimated fair value.
Most of the provisions of SFAS No. 159 are elective; however, the amendment
to FASB No. 115, “Accounting for Certain Investments in Debt and Equity
Securities,” applies to all entities that own trading and available-for-sale
securities. The fair value option created by SFAS 159 permits an entity to
measure eligible items at fair value as of specified election dates. The fair
value option (a) may generally be applied instrument by instrument,
(b) is irrevocable unless a new election date occurs, and (c) must be
applied to the entire instrument and not to only a portion of the instrument.
SFAS 159 is effective as of the beginning of the first fiscal year that begins
after November 15, 2007. Early adoption is permitted as of the beginning of
the previous fiscal year provided that the entity (i) makes that choice in
the first 120 days of that year, (ii) has not yet issued financial
statements for any interim period of such year, and (iii) elects to apply
the provisions of FASB 159. The adoption of SFAS No. 159 did not have a material
effect on the Company’s financial position, results of operations or cash
flows.
In June
2007, the Emerging Issues Task Force (“EITF”) issued EITF No. 07-01, Accounting for Collaborative
Arrangements, (“EITF 07-1”). EITF 07-1 provides guidance for companies in
the biotechnology or pharmaceutical industries that may enter into agreements
with other companies to collaboratively develop, manufacture, and market a drug
candidate (Collaboration Agreements) and is effective for fiscal years beginning
after December 15, 2007. The adoption of EITF 07-1 did not have a material
effect on the Company’s financial position, results of operations or cash
flows.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of Accounting Research Bulletin
No 51” (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for
ownership interests in subsidiaries held by parties other than the parent,
changes in a parent’s ownership of a noncontrolling interest, calculation and
disclosure of the consolidated net income attributable to the parent and the
noncontrolling interest, changes in a parent’s ownership interest while the
parent retains its controlling financial interest and fair value measurement of
any retained noncontrolling equity investment. SFAS 160 is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years. Early adoption is prohibited. The
adoption of SFAS No. 160 is not expected to have a material effect on its
financial position, results of operations or cash flows.
In
December 2007, the FASB issued SFAS 141R, Business Combinations (“SFAS 141R”),
which replaces FASB SFAS 141, Business Combinations. This Statement
retains the fundamental requirements in SFAS 141 that the acquisition method of
accounting be used for all business combinations and for an acquirer to be
identified for each business combination. SFAS 141R defines the acquirer as the
entity that obtains control of one or more businesses in the business
combination and establishes the acquisition date as the date that the acquirer
achieves control. SFAS 141R will require an entity to record
separately from the business combination the direct costs, where previously
these costs were included in the total allocated cost of the
acquisition. SFAS 141R will require an entity to recognize the assets
acquired, liabilities assumed, and any non-controlling interest in the acquired
at the acquisition date, at their fair values as of that date. This
compares to the cost allocation method previously required by SFAS No.
141. SFAS 141R will require an entity to recognize as an asset or
liability at fair value for
45
Adeona
Pharmaceuticals, Inc. and Subsidiaries
(A
Development Stage Company)
Notes
to Consolidated Financial Statements
December 31, 2008 and
2007
certain
contingencies, either contractual or non-contractual, if certain criteria are
met. Finally, SFAS 141R will require an entity to recognize
contingent consideration at the date of acquisition, based on the fair value at
that date. This Statement will be effective for business combinations
completed on or after the first annual reporting period beginning on or after
December 15, 2008. Early adoption of this standard is not permitted
and the standards are to be applied prospectively only. Upon adoption
of this standard, there would be no impact to the Company’s results of
operations and financial condition for acquisitions previously
completed. The adoption of SFAS No. 141R is not expected to have a
material effect on its financial position, results of operations or cash
flows.
In March
2008, the FASB issued SFAS No. 161 “Disclosures about Derivative
Instruments and Hedging Activities—An Amendment of FASB Statement
No. 133.” (“ SFAS 161”). SFAS 161 establishes the disclosure
requirements for derivative instruments and for hedging activities with the
intent to provide financial statement users with an enhanced understanding of
the entity’s use of derivative instruments, the accounting of derivative
instruments and related hedged items under Statement 133 and its related
interpretations, and the effects of these instruments on the entity’s financial
position, financial performance, and cash flows. This statement is
effective for financial statements issued for fiscal years beginning after
November 15, 2008. The Company does not expect its adoption of SFAS 161 to
have a material impact on its financial position, results of operations or cash
flows.
In April
2008, the FASB issued FASB Staff Position (“FSP”) SFAS No. 142-3, “Determination of the Useful Life of
Intangible Assets” . This FSP amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under FASB Statement No. 142,
“Goodwill and Other Intangible
Assets” (“SFAS 142”). The intent of this FSP is to improve the
consistency between the useful life of a recognized intangible asset under
SFAS 142 and the period of expected cash flows used to measure the fair
value of the asset under SFAS 141R, and other GAAP. This FSP is effective for
financial statements issued for fiscal years beginning after December 15,
2008, and interim periods within those fiscal years. Early adoption is
prohibited. The Company does not expect the adoption of SFAS FSP 142-3, to have
a material impact on its financial position, results of operations or cash
flows.
In May
2008, the FASB issued FSP Accounting Principles Board (“APB”) 14-1 “Accounting for Convertible Debt
instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement)” (“FSP APB
14-1”). FSP APB 14-1 requires the issuer of certain convertible debt
instruments that may be settled in cash (or other assets) on conversion to
separately account for the liability (debt) and equity (conversion option)
components of the instrument in a manner that reflects the issuer’s
non-convertible debt borrowing rate. FSP APB 14-1 is effective for fiscal years
beginning after December 15, 2008 on a retroactive basis. The Company does not
expect the adoption of FSP APB 14-1, to have a material impact on its financial
position, results of operations or cash flows.
In
October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a
Financial Asset When the Market For That Asset Is Not Active” (“FSP FAS
157-3”), with an immediate effective date, including prior periods for which
financial statements have not been issued. FSP FAS 157-3 amends FAS 157 to
clarify the application of fair value in inactive markets and allows for the use
of management’s internal assumptions about future cash flows with appropriately
risk-adjusted discount rates when relevant observable market data does not
exist. The objective of FAS 157 has not changed and continues to be the
determination of the price that would be received in an orderly transaction that
is not a forced liquidation or distressed sale at the measurement date.
The adoption of FSP FAS 157-3 is not expected to have a material effect on the
Company’s financial position, results of operations or cash flows.
Other
accounting standards have been issued or proposed by the FASB or other
standards-setting bodies that do not require adoption until a future date and
are not expected to have a material impact on the financial statements upon
adoption.
46
Adeona
Pharmaceuticals, Inc. and Subsidiaries
(A
Development Stage Company)
Notes
to Consolidated Financial Statements
December
31, 2008 and 2007
Property
and Equipment consisted of the following at December 31,
|
2008
|
2007
|
|||||||
|
Leasehold
improvements
|
$
|
862,359
|
$
|
850,302
|
||||
|
Manufacturing
equipment
|
777,928
|
1,054,289
|
||||||
|
Computer
and office equipment
|
232,569
|
227,274
|
||||||
|
Laboratory
equipment
|
165,427
|
163,932
|
||||||
|
Total
|
2,038,283
|
2,295,797
|
||||||
|
Less
accumulated depreciation
|
(591,876
|
)
|
(232,564
|
)
|
||||
|
Property
and equipment, net
|
$
|
1,446,407
|
$
|
2,063,233
|
||||
On
October 14, 2008, the Company sold manufacturing equipment with a net book value
of $154,787, for $140,000, resulting in a loss of $14,787. As of
December 31, 2008, $7,785 remains due from this sale and is included in other
receivables.
On
September 19, 2008, the Company transferred manufacturing equipment with a net
book value of $77,710, and $30,000, to settle accounts payable of
$122,140. This transaction resulted in a gain on the sale of
$14,430.
47
Adeona
Pharmaceuticals, Inc. and Subsidiaries
(A
Development Stage Company)
Notes
to Consolidated Financial Statements
December 31, 2008 and
2007
Note 4
Debt
During
2007, the Company borrowed $1,100,000 and repaid $200,000. These
notes were secured by all assets of the Company as well as the stock
certificates of the subsidiaries; the notes bore interest at 9.25% (prime plus
2%) and were due March 30, 2010. These borrowings represented a 100%
concentration of debt at December 31, 2007. On March 6, 2008, all of
the outstanding principal and accrued interest was
repaid.
An
affiliate of the Company’s founders, current Chairman and President and Chief
Executive Officer has advanced working capital to or on behalf of the Company.
Loan activity for the Company was as follows since inception:
|
Total
loans/ (repayments) per year
|
Amount
|
|||
|
Year
ended December 31, 2001 — loans
|
|
$
|
—
|
|
|
Year
ended December 31, 2002 — loans
|
|
130,520
|
||
|
Year
ended December 31, 2003 — loans
|
|
244,640
|
||
|
Year
ended December 31, 2004 — loans
|
|
785,281
|
||
|
Year
ended December 31, 2005 — loans
|
|
968,943
|
||
|
Year
ended December 31, 2005 — repayments
|
|
(200,000
|
)
|
|
|
Year
ended December 31, 2006 — loans
|
|
1,365,344
|
||
|
Year
ended December 31, 2006 — repayments
|
(20,000)
|
|||
|
Year
ended December 31, 2006 — conversion to equity
|
|
(3,274,728
|
)
|
|
|
|
||||
|
Balance,
December 31, 2006
|
|
$
|
—
|
|
On
October 31, 2006, the non-interest bearing loans payable to an affiliate of the
Company’s founder and Chairman, which amounted to $3,274,728, were converted
into 1,665,211 shares of common stock and 832,606 warrants to purchase common
stock. On January 14, 2009 the warrants were
forfeited. (See Note (6(D))
Note 5 Stockholders’
Equity
(A)
Preferred Stock Issuances
1. For the Year Ended December 31,
2005
On March
10, 2005, EPI’s board of directors and stockholders voted to authorize the
designation of a Series B Convertible Preferred Stock. From March
through June 2005, EPI issued 1,902,500 shares of Series B Convertible Preferred
Stock, at $1 per share, for proceeds of $1,902,500. In connection with this
offering, EPI paid $152,200 of offering costs that were charged against
additional paid in capital. The Company also granted 171,225 warrants as
compensation in connection with this equity raise.
On
January 5, 2007, pursuant to the acquisition of EPI, the shares of Series B
Convertible Preferred Stock were converted into 765,087 shares of Adeona common
stock and the warrants were converted into 68,858 warrants of Adeona. (See Note
1(F)(4))
48
Adeona
Pharmaceuticals, Inc. and Subsidiaries
(A
Development Stage Company)
Notes
to Consolidated Financial Statements
December 31, 2008 and
2007
2.
For the Year Ended December 31, 2001
On
January 8, 2001, EPI issued 3,000,000 shares of Series A Convertible Preferred
Stock to the Founder serving as the CEO and Chairman of the Board of EPI in
exchange for $250,000 ($0.08 per share). On January 5, 2007, pursuant
to the acquisition of EPI, these shares were cancelled and retired.
On
January 15, 2001, Pipex Therapeutics issued 5,421,554 shares of Series A
Convertible Preferred Stock to a founder serving as CEO and Chairman of the
Board of Pipex in exchange for $300,000 ($0.055 per share). On October 31, 2006,
pursuant to the reverse acquisition with Sheffield, these shares were cancelled
and retired.
On
January 31, 2001, Solovax issued 1,000,000 shares of Series A Convertible
Preferred Stock to the Founder serving as the President, CEO and Chairman of the
Board of Solovax in exchange for $300,000 ($0.30 per share).
On
February 7, 2001, CD4 issued 1,000,000 shares of Series A Convertible Preferred
Stock, to an affiliate of a founder serving as the CEO and Chairman of the Board
of CD4 in exchange for $300,000 ($0.30 per share).
The
Company and some of its subsidiaries has each authorized Series A Convertible
Preferred Stock. (See Note 1(F) for conversion of Pipex Series A convertible
preferred stock.)
The terms
of the Series A Convertible Preferred Stock for the Company and its subsidiaries
is summarized below. The terms are the same for each of the
entities.
1.
Dividends
Each
share of Series A Convertible Preferred Stock is entitled to receive dividends
in an amount equal to dividends declared and paid with respect to that number of
shares of common stock into which one share of Series A Convertible Preferred
Stock is then convertible. For the period from January 8, 2001 (inception) to
December 31, 2007, neither the Company, nor any of its majority owned
subsidiaries has declared any Series A Convertible Preferred Stock
dividends.
2.
Liquidation Preference
Upon
liquidation, holders of the Series A Convertible Preferred Stock will be
entitled to the greater of (1) a per share amount equal to the original purchase
price plus any dividends accrued but not paid and (2) the amount that the holder
would receive in respect of a share of Series A, preferred if immediately prior
to dissolution and liquidation, all shares of Series A Convertible Preferred
Stock were converted into shares of common stock.
3.
Conversion
Each
share of Series A Convertible Preferred Stock is immediately convertible on a
one for one basis at the option of the holder. The conversion ratio is
determined by dividing the original issue price of the Series A Convertible
Preferred Stock by the conversion price for the Series A, convertible preferred
stock in effect on the date the certificate is surrendered for conversion. The
conversion price will initially be the original issue price, which is subject to
future adjustment. At December 31, 2007, the conversion ratio is
1.00.
4.
Voting Rights
Each
holder of Series A, convertible preferred stock is entitled to one vote for each
share of common stock into which each share of Series A Convertible Preferred
Stock could then be converted.
49
Adeona
Pharmaceuticals, Inc. and Subsidiaries
(A
Development Stage Company)
Notes
to Consolidated Financial Statements
December 31, 2008 and
2007
5.
Beneficial Conversion Feature and Derivative Liability
The
Company and its subsidiaries has reviewed each of the provisions of its Series A
Convertible Preferred Stock and noted no required accounting for a beneficial
conversion feature pursuant to the guidance in EITF No.’s 98-5 or 00-27. Upon
issuance, the original issue price, its fair value, and conversion price were
equivalent.
Additionally,
there is no required accounting or financial statement impact for derivative
instruments. None of the Company or its subsidiaries Series A Convertible
Preferred Stock has embedded features requiring such treatment.
(C)
Series B Convertible Preferred Stock
Pipex
Therapeutics has authorized Series B Convertible Preferred Stock. At
December 31, 2008, Pipex Therapeutics has not issued any of its Series B
Convertible Preferred Stock. Pipex Therapeutics has not yet designated their
Series B Convertible Preferred Stock as it pertains to dividends, liquidation
preference, conversion, voting rights, and other rights and
preferences.
(D)
Common Stock Issuances of Issuer
For
the Year Ended 2008
In 2008,
the Company issued 61,392 shares of common stock having a fair value of $55,385
($0.90 per share) based on the quoted closing trading prices for payment of
salaries to employees.
In 2008,
the Company issued 172,157 shares of common stock having a fair value of
$104,042 ($0.60 per share) based on the quoted closing trading prices for
consulting fees.
In 2008,
the Company issued 39,370 shares of common stock having a fair value of $50,000
($1.27 per share) based on the quoted closing trading price for a milestone
payment.
In 2008,
the Company issued an aggregate 138,505 shares of common stock having a fair
value of $145,000 ($1.05 per share) based on the quoted closing trading prices
for license fees.
In 2008,
the Company issued 37,948 shares of common stock in connection with the exercise
of stock options for net proceeds of $4,390. The related exercise
prices were $0.09 and $0.18 per share.
For
the Year Ended 2007
In 2007,
the Company issued an aggregate 2,920 shares of common stock having a fair value
of $20,000 ($6.85 per share) based on the quoted closing trading price for
license fees.
In 2007,
the Company issued 5,102 shares of common stock having a fair value of $25,000
($4.90 per share) based on the quoted closing trading price for a milestone
payment.
During
2007, the Company issued 3,401,972 shares of common stock in connection with the
exercise of warrants for net proceeds of $6,972,809 ($2.22 per
share).
50
Adeona Pharmaceuticals, Inc. and
Subsidiaries
(A
Development Stage Company)
Notes
to Consolidated Financial Statements
December 31, 2008 and
2007
For
the Year Ended 2006
During
2006, the loans payable to the Company’s founder, President and CEO were
converted into 1,665,211 shares of common stock and 832,606
warrants. There were no gain or loss on this transaction since it was
with a related party.
During
2006, the Company completed private placements of its stock, which resulted in
the issuance of 6,900,931 shares of common stock and 3,451,524 warrants. The net
proceeds from the private placements were $12,765,945, which included cash paid
as direct offering costs of $1,160,418. As part of the October 2006
private placement, the Company sold 99,104 shares of its common stock and 49,552
warrants to purchase common stock for total proceeds of $200,000 to entities
controlled by the former President. As part of the same private placement,
Adeona sold 49,552 shares of its common stock and 24,776 warrants to purchase
common stock for total proceeds of $100,000 to a related family member of the
Chairman and Chief Executive Officer. The terms on which their purchases were
made were identical to the terms in which the other investors in these offerings
purchased shares.
During
2006, the Company issued 422,314 shares of common stock to an unrelated third
party in connection with the terms of a license agreement. The fair value was
$388,691 based upon the recent cash offering price at that time and was charged
to research and development expense.
During
2006, the Company converted all of its 5,421,554 shares of Series A, convertible
preferred stock in exchange for equivalent common shares. The fair value of the
exchange was based upon par value with a net effect of $0 to the statement of
equity.
(E)
Common Stock Issuances of Subsidiaries
During
the period from January 8, 2001 (inception) to December 31, 2008, the Company’s
majority owned subsidiaries; CD4, Solovax, EPI and Epitope issued 419,000,
419,000, 825,000 and 125,000 shares of common stock, respectively, for $1,788.
Of the 825,000 shares of common stock issued by EPI, 75,000 were converted into
30,161 common shares of Adeona and the remaining 750,000 shares were cancelled
and retired for no additional consideration in the acquisition of EPI on January
5, 2007.
(F)
Stock Option Plan
During
2001, Pipex Therapeutics’ Board and stockholders adopted the 2001 Stock
Incentive Plan (the “2001 Stock Plan”). This plan was assumed by Pipex in the
merger, in October 2006. As of the date of the merger, there were 1,489,353
options issued and outstanding. The total number of shares of stock with respect
to which stock options and stock appreciation rights may be granted to any one
employee of the Company or a subsidiary during any one-year period shall not
exceed 1,250,000. All awards pursuant to the Plan shall terminate upon the
termination of the grantee’s employment for any reason. Awards include options,
restricted shares, stock appreciation rights, performance shares and cash-based
awards (the “Awards”). The Plan contains certain anti-dilution provisions in the
event of a stock split, stock dividend or other capital adjustment, as defined
in the Plan. The Plan provides for a Committee of the Board to grant awards and
to determine the exercise price, vesting term, expiration date and all other
terms and conditions of the awards, including acceleration of the vesting of an
award at any time. As of December 31, 2008, there are 1,229,987 options issued
and outstanding under the 2001 Stock Plan.
On March
20, 2007, the Company’s Board of Directors approved the Company’s 2007 Stock
Incentive Plan (the “2007 Stock Plan”) for the issuance of up to 2,500,000
shares of common stock to be granted through incentive stock options,
nonqualified stock options, stock appreciation rights, dividend equivalent
rights, restricted stock, restricted stock units and other stock-based awards to
officers, other employees, directors and consultants of the Company and its
subsidiaries. The exercise price of stock options under the plan is determined
by the compensation committee of the Board of Directors, and may be equal to or
greater than the fair market value of the Company’s common stock on the date the
option is granted. Options become exercisable over various periods from the date
of grant, and generally expire ten years after the grant date. As of December
31, 2008, there are 1,521,676 options issued and outstanding under the 2007
Stock Plan. This plan was approved by stockholders on November 2,
2007.
51
Adeona
Pharmaceuticals, Inc. and Subsidiaries
(A
Development Stage Company)
Notes
to Consolidated Financial Statements
December 31, 2008 and
2007
Pursuant
to the provisions of SFAS No. 123R, in the event of termination, the Company
will cease to recognize compensation expense. Fair value of share-based payments
is recognized ratably over the stated vesting period.
The
Company has applied fair value accounting and the related provisions of SFAS No.
123R for all share based payment awards since inception. The fair value of each
option or warrant granted is estimated on the date of grant using the
Black-Scholes option-pricing model. The Black-Scholes assumptions used in the
years ended December 31, 2008 and 2007 are as follows:
|
Year
Ended December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Exercise
price
|
|
$0.53
- $5.10
|
|
$0.09
- $22.50
|
||||
|
Expected
dividends
|
|
0%
|
|
0%
|
||||
|
Expected
volatility
|
|
170.09%
- 225.79%
|
|
103.29%
- 200.94%
|
||||
|
Risk
fee interest rate
|
|
3.52%
- 4.02%
|
|
3.83%
- 5.16%
|
||||
|
Expected
life of option
|
|
10
years
|
|
5-10
years
|
||||
|
Expected
forfeitures
|
|
0%
|
|
0%
|
||||
|
Year
Ended December 31,
|
Inception
to
December
31,
|
|||||||||
|
2008
|
2007
|
2008
|
||||||||
|
Research
and development:
|
||||||||||
|
employees
|
$
|
823,605
|
|
$
|
1,226,687
|
$
|
2,289,488
|
|||
|
non-employees
|
334,391
|
|
145,783
|
540,164
|
||||||
|
General
and administrative:
|
||||||||||
|
employees
|
401,546
|
|
858,148
|
1,455,699
|
||||||
|
non-employees
|
32,116
|
|
527,488
|
970,890
|
||||||
|
|
||||||||||
|
$
|
1,591,658
|
|
$
|
2,758,106
|
$
|
5,256,241
|
||||
|
|
||||||||||
52
Adeona
Pharmaceuticals, Inc. and Subsidiaries
(A
Development Stage Company)
Notes
to Consolidated Financial Statements
December 31, 2008 and
2007
A summary
of stock option activity for Adeona for the years ended December 31, 2008 and
2007 is as follows:
|
Number
of Shares
|
Weighted
Average Exercise
Price
|
|||||||
|
Balance
at December 31, 2006
|
1,613,855 | $ | 1.45 | |||||
|
Granted
|
700,176 | $ | 5.97 | |||||
|
Exercised
|
— | $ | — | |||||
|
Forfeited
|
(16,667 | ) | $ | 15.75 | ||||
|
Balance
at December 31, 2007
|
2,297,364 | $ | 2.72 | |||||
|
Granted
|
1,180,666 | $ | 1.00 | |||||
|
Exercised
|
(37,948 | ) | $ | 0.12 | ||||
|
Forfeited
|
(688,419 | ) | $ | 5.07 | ||||
|
Balance
at December 31, 2008
|
2,751,663 | $ | 1.43 | |||||
The total
fair market value of options granted in 2008 totals $933,332.
The
options outstanding and exercisable at December 31, 2008 are as
follows:
|
Options
Outstanding
|
Options
Exercisable
|
|||||||||||||
|
Range
of
Exercise
Price
|
Number
Outstanding
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Weighted
Average
Exercise
Price
|
Number
Exercisable
|
|
Weighted
Average
Exercise
Price
|
||||||
|
$0.09
- $0.50
|
550,780
|
4.58
Years
|
$ 0.10
|
521,777
|
$ 0.10
|
|||||||||
|
$0.51
- $0.75
|
874,999
|
9.54
Years
|
$ 0.70
|
252,777
|
$ 0.69
|
|||||||||
|
$0.76
- $0.99
|
75,000
|
9.44
Years
|
$ 0.81
|
12,500
|
$ 0.81
|
|||||||||
|
$1.00
- $1.99
|
442,834
|
7.41
Years
|
$ 1.83
|
442,834
|
$ 1.83
|
|||||||||
|
$2.00
- $2.99
|
|
587,227
|
8.37
Years
|
$
2.05
|
587,227
|
$ 2.05
|
||||||||
|
$3.00
- $3.99
|
|
64,158
|
|
8.14
Years
|
|
$
3.87
|
|
64,158
|
|
$
3.87
|
||||
|
$4.00
- $4.99
|
|
25,000
|
|
3.42
Years
|
|
$ 4.40
|
|
8,334
|
|
$ 4.40
|
||||
|
$5.00
- $9.99
|
|
128,332
|
|
6.68
Years
|
|
$ 5.91
|
|
89,166
|
|
$ 5.91
|
||||
|
$10.00
- $22.50
|
|
3,333
|
|
8.02
Years
|
|
$22.50
|
|
1,111
|
|
$
22.50
|
||||
|
|
|
|||||||||||||
|
|
2,751,663
|
|
7.73
Years
|
|
$ 1.43
|
|
1,979,884
|
|
$1.56
|
|||||
|
|
|
|||||||||||||
At
December 31, 2008, the Company had 479,083 stock options outstanding that had an
exercise price less than the market price on that date for an aggregate
intrinsic value of $43,117.
Of the
total 2,751,663 options outstanding 1,399,829 are held by related parties of
which 796,043 are fully vested, exercisable and non-forfeitable.
53
Adeona
Pharmaceuticals, Inc. and Subsidiaries
(A
Development Stage Company)
Notes
to Consolidated Financial Statements
December 31, 2008 and
2007
(G)
Stock Warrants
On
November 18, 2008, the Company issued warrants to purchase 5,000 shares of
common stock pursuant to a settlement agreement. The warrants have an
exercise price of $0.41. The fair value of the warrants totals $1,265 and was
determined by using the Black-Scholes model with the following assumptions:
expected dividend yield of 0%; expected volatility of 179.13%; risk-free
interest rate of 1.15% and an expected life of two and one-half
years.
During
October and November 2007, the Company issued 3,274,566 shares of common stock
in connection with the exercise of common stock warrants, pursuant to a warrant
call for $2.22/share. The warrant call had occurred due to the terms
by which the Company sold its common stock and warrants in private placement
offerings. The net proceeds from the warrant call were $6,972,809,
which included cash paid as direct offering costs of $579,569.
In
connection with this warrant call, the Company entered into a warrant
solicitation agreement with Noble International Investments, Inc. (“Noble”). As
compensation for Noble’s services, the Company paid Noble a cash fee of $579,569
which totals 8% of the gross proceeds from the Holder’s exercise of warrants. In
addition, the Company issued Noble 327,456 common stock warrants. The warrants
have a term of five years, will contain customary anti-dilution provisions,
piggyback registration rights, and will be exercisable at a purchase price of
$6.36 per share. The Company may, at its option, call the warrants if
the average daily trading price of the Company’s common stock exceeds, for at
least 20 of 30 consecutive trading days, a price per share that is equal to or
greater than 250% of the warrant’s exercise price of $6.36 per share, and there
is an effective registration statement registering the shares of the Company’s
common stock underlying the warrant. Noble will have the right at any time
during the five-year term of the warrants to exercise the warrants at its option
on a “cashless” basis, only if the Company fails to maintain an effective
registration statement registering the shares of the Company’s common stock
underlying the warrants. Since these warrants were granted as compensation in
connection with an equity raise, the Company has treated these warrants as a
direct offering cost. The result of the warrant grant has a $0 net effect to
equity. These warrants are fully vested and non-forfeitable.
During
May through August 2007, the Company issued 127,406 shares of common stock in
exchange for common stock warrants for $2.22/share. The net proceeds
totaled $282,841.
On
January 5, 2007, the Company issued warrants to purchase 68,858 shares of common
stock as part of the acquisition of EPI. (See Note (1)(F)(4))
In
October and November 2006, the Company issued warrants to purchase 3,451,524
shares of common stock as part of the private placement offering. The warrants
have an exercise price of $2.22 and each warrant has a life of 5
years.
In
addition, as part of the private placements, the Company issued warrants to
purchase 958,277 shares of common stock to the placement agent, that is a
company that is controlled by the Company’s Chairman and Chief Executive
Officer with the majority of these warrants being reissued to the Company's
former CEO. The warrants have an exercise price of $2.22. Since these warrants
were granted as compensation in connection with an equity raise, the Company has
treated these warrants as a direct offering cost. The result of the transaction
has a $0 net effect to equity. The warrants are fully vested and
non-forfeitable. On January 14, 2009, 381,020 of these warrants
representing all of the warrants held by an affiliate of the Company's Chairman
and Chief Executive Officer were cancelled.
On
October 31, 2006, the loans payable to the Company’s founder, President and CEO
were converted into 1,665,211 shares of common stock and 832,606 warrants to
purchase common stock. The warrants have an exercise price of $2.22 and a life
of 5 years. (See Note 4) The warrants were forfeited on January 14,
2009.
54
Adeona
Pharmaceuticals, Inc. and Subsidiaries
(A
Development Stage Company)
Notes
to Consolidated Financial Statements
December 31, 2008 and
2007
A summary
of warrant activity for Adeona for the years ended December 31, 2008 and 2007 is
as follows:
|
Number
of Shares
|
||||
|
Balance
as December 31, 2006
|
5,242,407
|
|||
|
Granted
|
437,981
|
|||
|
Exercised
|
(3,401,972)
|
|||
|
Forfeited
|
—
|
|||
|
Balance
as December 31, 2007
|
2,278,416
|
|||
|
Granted
|
13,333
|
|||
|
Exercised
|
—
|
|||
|
Forfeited
|
—
|
|||
|
Balance
as December 31, 2008
|
2,291,749
|
|||
As of
December 31, 2008, all outstanding warrants are fully vested and
exercisable.
|
Warrants
Outstanding and Exercisable
|
|||||||
|
Range
of
Exercise
Price
|
Number
Outstanding
|
Weighted
Average
Remaining
Contractual
Life
|
|||||
|
$
|
0.41
|
5,000
|
2.38
Years
|
||||
|
$
|
2.22
|
1,840,435
|
3.82
Years
|
||||
|
$
|
3.30
|
68,858
|
6.41
Years
|
||||
|
$
|
3.75
|
41,667
|
7.13
Years
|
||||
|
$
|
6.36
|
327,456
|
3.86
Years
|
||||
|
2,291,749
|
5.02
Years
|
||||||
(H)
Options and Warrants of Subsidiaries
CD4 has
30,000 options outstanding and exercisable, with an exercise price of $0.20 and
a remaining weighted average remaining contractual life of 1.98 years as of
December 31, 2008.
Epitope
has 50,000 options outstanding and none exercisable, with an exercise price of
$0.001 and a remaining contractual life of 9.50 years as of December 31,
2008. These options vest annually over 5 years and have a fair value
of $50 which was determined using the Black-Scholes model with the following
assumptions: expected dividend yield of 0%; expected volatility of 200%, risk
free interest rate of 2.47% and an expected life of 10 years.
55
Adeona
Pharmaceuticals, Inc. and Subsidiaries
(A
Development Stage Company)
Notes
to Consolidated Financial Statements
December 31, 2008 and
2007
Note 6 Commitments and
Contingencies
(A)
License Agreements
Since
inception, the Company has entered into various option and license agreements
for the use of patents and their corresponding applications. These agreements
have been entered into with various educational institutions and hospitals.
These agreements contain payment schedules or stated amounts due for (a) option
and license fees, (b) expense reimbursements, and (c) achievement of success
milestones. All expenses related to these agreements have been recorded as
research and development.
In
connection with these agreements, the Company may be obligated to make milestone
payments up to $16,175,000. Some of these payments may be fulfilled through the
issuance of the Company’s common stock, at the Company’s option. As of December
31, 2008, the Company has achieved two milestones which the Company fulfilled by
issuing common stock having a fair value of $75,000. See Note
(5(D)). The Company can give no assurances that any other milestones
will be achieved. In addition to the milestone payments, the Company may be
obligated to make royalty payments on future sales pursuant to the agreements.
The schedule below does not include the value of these commitments.
(B)
Research Agreement
In
September 2005, the Company entered into a three-year research agreement with a
University. Pursuant to that agreement, the Company paid approximately $460,000
per year. On March 20, 2008, the Company provided the University with written
notice of termination of the agreement.
(C)
Consulting Agreements
In August
2005, Adeona entered into an agreement with an individual to provide consulting
services for the Company’s research and development. The consultant was paid
$25,000 upon the execution of the agreement. The consultant will receive annual
consulting fees of $120,000 for each of the next three years. The consultant
also received 216,847 options having a fair value $59,960 and was determined
using the Black-Scholes model with the following assumptions: expected dividend
yield of 0%, expected volatility of 200%, risk free interest rate of 1.81% and
an expected life of 10 years. On March 24, 2008, the Company granted
the individual an additional 216,667 options having a fair value of $437,667 and
was determined using the Black-Scholes model with the following assumptions:
expected dividend yield of 0%; expected volatility of 221%, risk free interest
rate of 3.56% and an expected life of 10 years. Effective October 1,
2008, this agreement was amended whereby the consultant will receive an hourly
consulting rate of $300 per hour for a minimum of 10 hours per month, payable in
either cash or restricted common stock rather than a quarterly fee of
$30,000.
On February 15, 2007, the Company
executed an agreement with a third party to provide certain services. Pursuant
to the terms of the agreement, the Company will pay $9,000 per month for a
period of twelve months and grant 100,000 stock warrants with a cashless
exercise provision. These warrants vest upon various milestones as well as over
the life of the contract. Adeona has provided a
notice of termination relating to this
agreement.
(D)
Employment Agreements
On July
1, 2008, the Company's Board of Directors approved a compensation package with
its Chief Executive Officer. Under the terms of arrangement, the
Chief Executive Officer will receive an annual salary of
$195,000. The Chief Executive Officer is also eligible for a bonus at
the discretion of the Board of Directors. In the event of
termination, the Company will provide six-month severance, payable over the
Company’s ordinary pay periods. The Company has also
granted a ten year option to purchase 800,000 shares of the Company’s
common stock, exercisable at $0.72 per share, with one-quarter of the options
vesting immediately, and the remainder vesting quarterly in equal increments
over three years. These options expire 90 days from the termination
date. These options shall vest in full should the Company be
acquired. The fair value of the options totaled $576,000 and was
determined using the Black-Scholes model with the following assumptions:
expected dividend yield of 0%, expected volatility of 225.79%, risk free
interest rate of 3.95% and an expected life of 10 years. Effective March 29,
2009, Nicholas Stergis resigned as our Chief Executive Officer. Mr. Stergis
remains a director of the Company.
56
Adeona
Pharmaceuticals, Inc. and Subsidiaries
(A
Development Stage Company)
Notes
to Consolidated Financial Statements
December 31, 2008 and
2007
In
January 2005, the Company entered into a four-year employment agreement with the
Company’s Chairman and former Chief Executive Officer. Pursuant to this
agreement, the Chairman was paid an annual base salary of $297,000, an annual
bonus equal to 30% of base salary and a ten-year option to acquire 271,058
shares of common stock at the completion of the Company’s private placement that
occurred on October 31, 2006. As of December 31, 2008, all of these stock
options have vested. The fair value of the options totaled $544,827 and
was determined using the Black-Scholes model with the following assumptions:
expected dividend yield of 0%, expected volatility of 200%, risk free interest
rate of 4.61% and an expected life of 10 years.
On July
20, 2007, the Board of Directors approved an amended and restated employment
agreement with the Chairman and former Chief Executive Officer. The amended
employment agreement provides that he be paid a base salary of $195,000 per year
plus a guaranteed bonus of $100,000 and may also be entitled to discretionary
transactional bonuses. In addition, the amended agreement provides that the
Chairman and former Chief Executive Officer waived the receipt of any salary and
bonus payable under the original agreement, which amounted to $275,645, for no
additional consideration. This amount was treated as a capital contribution to
the Company in September 2007.
On
July 1, 2008, the former Chief Executive Officer resigned his position
with the Company but remains as Chairman. On January 6, 2009, the
Chairman entered into an amended agreement with the Company which extends his
employment agreement through January 9, 2010 with an annual salary of
$1. Also, the Chairman agreed to forego the $100,000 guaranteed bonus
otherwise due to him on January 1, 2009. The amount of $100,000 will
be recorded on the Company’s books as a capital contribution during the first
quarter of 2009. On March 29, 2009, the Chairman was reappointed as our
President and Chief Executive Officer.
The
Company entered into an employment agreement with its former President on May
24, 2006. Pursuant to this agreement, Adeona paid an annual base salary of
$295,000 and a guaranteed bonus of one-third of base salary. Adeona also granted
a ten-year option to purchase 664,252 shares of common stock, of which 442,834
have vested as of December 31, 2008. On March 5, 2008, the Company’s
former President agreed to work for no cash compensation. Additionally, the
former President agreed to eliminate severance provisions of his
agreement. The Company has recorded contributed services from a
related party totaling $73,750 during 2008. On July 1, 2008 the
President resigned his position with the Company.
On
October 10, 2007, the Company entered into a three-year employment agreement
with its former Chief Scientific Officer. The Company paid the Chief Scientific
Officer a $7,500 signing bonus and a base salary of $205,000 per year. The
agreement also provided that the Chief Scientific Officer was eligible for cash
and non-cash bonuses at the end of each of the Company’s fiscal years during the
term of the agreement at the discretion of the Company’s compensation committee
as well as additional commission-based cash and stock bonuses during each fiscal
year based on significant revenue-generating, out-licensing and merger and
acquisition transactions initiated and completed by the Chief Scientific
Officer, again at the discretion of the compensation committee. Pursuant to the
agreement, the Company granted a ten-year option to purchase 150,000 shares of
the Company’s common stock of which none are outstanding as of December 31,
2008. This agreement was terminated on March 7, 2008.
(E)
Operating Lease
During
2007, the Company entered into a non-cancelable operating lease for office,
laboratory and production space. This lease expires on February 28,
2011.
The
following schedule shows committed amounts due for the lease agreement as of
December 31, 2008:
|
2009:
|
|
$
|
146,000
|
|
|
2010:
|
|
150,000
|
||
|
2011:
|
|
25,000
|
||
|
|
||||
|
Total:
|
|
$
|
321,000
|
|
|
|
57
Adeona
Pharmaceuticals, Inc. and Subsidiaries
(A
Development Stage Company)
Notes
to Consolidated Financial Statements
December 31, 2008 and
2007
During
the years ended December 31, 2008 and 2007 and for the period from January 8,
2001 (inception) to December 31, 2008, the Company recognized rent expense of
$193,557, $202,361 and $784,386, respectively.
The
following schedule shows committed amounts due for license agreements, patent
cost reimbursements and consulting fees as of December 31, 2008:
|
2009:
|
|
$
|
122,000
|
||
|
2010:
|
|
125,000
|
|||
|
2011:
|
|
95,000
|
|||
|
2012:
|
|
120,000
|
|||
|
2013:
|
|
155,000
|
|||
|
|
|||||
|
Total:
|
|
$
|
617,000
|
||
|
|
(F)
Litigation
Note 7 Income
Taxes
There was
no income tax expense for the years ended December 31, 2008 and 2007 due to the
Company’s net losses.
The
Company’s tax expense differs from the “expected” tax expense for the years
ended December 31, 2008 and 2007, (computed by applying the Federal Corporate
tax rate of 34% to loss before taxes and 5.5% for Michigan State Corporate
taxes, the blended rate used was 37.63%), as follows:
|
2008
|
2007
|
|||||||
|
Computed
“expected” tax expense (benefit) - Federal
|
|
$
|
(2,315,000
|
)
|
|
$
|
(3,178,000
|
)
|
|
Computed
“expected” tax expense (benefit) - State
|
|
( 396,000
|
)
|
|
( 544,000
|
)
|
||
|
Meals
and Entertainment
|
1,000
|
3,000
|
||||||
|
Non-deductible
stock and stock based compensation
|
599,000
|
1,055,000
|
||||||
|
Contributed
services – related party
|
28,000
|
103,000
|
||||||
|
Change
in valuation allowance
|
|
2,083,000
|
|
2,561,000
|
||||
|
|
|
|||||||
|
|
$
|
-
|
|
$
|
-
|
|||
|
|
|
|||||||
58
Adeona
Pharmaceuticals, Inc. and Subsidiaries
(A
Development Stage Company)
Notes
to Consolidated Financial Statements
December 31, 2008 and
2007
The
effects of temporary differences that gave rise to significant portions of
deferred tax assets at December 31, 2008 and 2007 are as follows:
|
Deferred
tax assets:
|
2008
|
2007
|
||||||
|
Stock
issued for services
|
$
|
(48,000
|
)
|
$ |
-
|
|||
|
Net
operating loss carry-forward
|
(7,045,000
|
)
|
(5,010,000
|
)
|
||||
|
Total
gross deferred tax assets
|
(7,093,000
|
)
|
(5,010,000
|
)
|
||||
|
Less
valuation allowance
|
7,093,000
|
5,010,000
|
||||||
|
Net
deferred tax assets
|
$
|
-
|
$
|
-
|
||||
At
December 31, 2008, the Company has a net operating loss carry-forward of
$18,722,000 available to offset future taxable income expiring through 2028.
Utilization of these net operating losses may be limited due to potential
ownership changes under Section 382 of the Internal Revenue Code.
The
valuation allowance at December 31, 2007 was $5,010,000. The net change in
valuation allowance during the year ended December 31, 2008 was an increase of
$2,083,000. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred income tax assets will not be realized. The ultimate realization of
deferred income tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred income tax
liabilities, projected future taxable income, and tax planning strategies in
making this assessment. Based on consideration of these items, Management has
determined that enough uncertainty exists relative to the realization of the
deferred income tax asset balances to warrant the application of a full
valuation allowance as of December 31, 2008.
Corporate
Restructuring
On March
11, 2008, the Company implemented cost reduction measures in order to
substantially reduce operating expenses given the delay in refilling its New
Drug Application for oral tetrathiomolybdate (oral TTM) for the treatment of
initially presenting neurologic Wilson’s disease. As part of the
corporate restructuring, the Company eliminated positions in the areas of
manufacturing, analytical, quality control, quality assurance, clinical,
regulatory, diagnostic product development, principally relating to the
development of oral TTM and diagnostics division.
On July 8, 2008, the Company announced
changes in senior management. See Note (6)(D).
Note
9 Subsequent Event
Effective
March 29, 2009, Nicholas Stergis resigned as our Chief Executive Officer. Mr.
Stergis remains a director of the Company. In order to fill the vacancy, Steve
H. Kanzer was appointed our President and Chief Executive Officer. The Company
has engaged an executive search firm to identify potential candidates for the
Chief Executive Officer position.
59
ITEM
9. CHANGES IN AND DISCUSSIONS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM
9A(T). CONTROLS AND PROCEDURES
Disclosure
Controls and Procedures
The
Company has adopted and maintains disclosure controls and procedures that are
designed to provide reasonable assurance that information required to be
disclosed in the reports filed under the Exchange Act, such as this Form 10-K,
is collected, recorded, processed, summarized and reported within the time
periods specified in the rules of the Securities and Exchange
Commission. The Company’s disclosure controls and procedures are also
designed to ensure that such information is accumulated and communicated to
management to allow timely decisions regarding required
disclosure. As required under Exchange Act Rule 13a-15, the Company’s
management, including the Chief Executive Officer and Principal Financial
Officer, has conducted an evaluation of the effectiveness of disclosure controls
and procedures as of the end of the period covered by this
report. Based on that evaluation, the Chief Executive Office and
Principal Financial Officer concluded that the disclosure controls and
procedures are effective.
Management’s
Report on Internal Control Over Financial Reporting
The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting, as defined in Exchange Act Rule
13a-15(f). The Company’s internal control over financial reporting is
designed to provide reasonable assurance to the Company’s management and Board
of Directors regarding the preparation and fair presentation of published
financial statements. Management conducted an assessment of the
Company’s internal control over financial reporting based on the framework and
criteria established by the Committee of Sponsoring Organizations of the
Treadway Commission in Internal Control – Integrated Framework. Based
on the assessment, management concluded that, as of December 31, 2008, the
Company’s internal control over financial reporting is effective based on those
criteria.
The
Company’s management, including its Chief Executive Officer and Principal
Financial Officer, does not expect that the Company’s disclosure controls and
procedures and its internal control processes will prevent all error and all
fraud. A control system, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance that the objectives of the
control system are met. Further, the design of a control system must
reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of error or
fraud, if any, within the Company have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty, and that the breakdowns can occur because of simple error or
mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control. The design of any system of controls also is
based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions. Over time,
controls may become inadequate because of changes in conditions, or the degree
of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective
control system, misstatements due to error or fraud may occur and may not be
detected. However, these inherent limitations are known features of
the financial reporting process. Therefore, it is possible to design
into the process safeguards to reduce, though not eliminate, this
risk.
Changes
in Internal Control
There
have been no changes in internal controls over the financial reporting that
occurred during the most recent fiscal quarter that have materially affected, or
are reasonably likely to materially affect our internal controls over financial
reporting.
This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management’s report in this annual report.
ITEM
9B. OTHER INFORMATION
None.
60
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Below is
certain information regarding our directors and executive officers as of March
31, 2009:
|
Age
|
Position
|
|
|
Steve
H. Kanzer, CPA, JD.
|
45
|
Director,
Chairman, President and Chief Executive Officer
|
|
Nicholas
Stergis, M.S.
|
34
|
Director,
Vice Chairman of the Board
|
|
Jeffrey
J. Kraws
|
44
|
Director
|
|
Jeff
Wolf, Esq.
|
45
|
Director
|
|
James
S. Kuo, M.D., M.B.A.
|
44
|
Director
|
STEVE H. KANZER, C.P.A., J.D.
Mr. Kanzer is our co-founder, Chairman and, effective March 29, 2009, our
President and Chief Executive Officer. Mr. Kanzer served as our
President from our inception in February 2001 until May 2006. Mr. Kanzer
previously served as our Chief Executive Officer from September 2004 until July
of 2008. Since December 2000, he has served as co-founder and
Chairman of Accredited Ventures Inc. and Accredited Equities Inc., a venture
capital firm and FINRA-member investment bank, respectively, which both
specialize in the biotechnology industry. Mr. Kanzer was co-founder, Chairman,
President and Chief Executive Officer of Developmental Therapeutics, Inc., a
cardiovascular drug development company which was developing an oral thyroid
hormone analog, DITPA, for congestive heart failure. Developmental Therapeutics
was acquired in October 2003 by Titan Pharmaceuticals, Inc., a publicly traded
biopharmaceutical company. Prior to founding Accredited Ventures and Accredited
Equities in December 2000, Mr. Kanzer served as Senior Managing Director-Head of
Venture Capital at Paramount Capital from 1991 until December 2000. While at
Paramount Capital, Mr. Kanzer was involved in the formation and financing of a
number of biotechnology companies and held various positions in these companies.
From 1995 through 1999, Mr. Kanzer was founding Chairman of the Board of
Discovery Laboratories, Inc., a public biotechnology company that has a pending
NDA for a drug called SURFAXIN ® which Mr. Kanzer licensed in 1995. From 1997
until 2000, Mr. Kanzer was founding President of PolaRx Biopharmaceuticals,
Inc., a biopharmaceutical company that licensed and developed TRISENOX ®
(arsenic trioxide), a leukemia drug that was approved by the FDA in 2000 and
which currently holds the FDA record for fastest drug ever developed from IND
filing until NDA approval (30 months). PolaRx was merged with Cell Therapeutics
Inc. (NASDAQ:CTIC) in January 2000, and Cephalon acquired the rights to TRISENOX
® in 2005 for $165 million. In March 1998, Mr. Kanzer led the privatization of
the Institute for Drug Research Kft. (IDR) in Budapest, Hungary, a 400-employee,
26 acre pharmaceutical research and development center. Since 1950, IDR operated
as the central pharmaceutical R&D center for the country of Hungary, served
the active pharmaceutical ingredients (API) needs of Eastern Europe, and
performed original drug discovery research, resulting in the registration of
over 80 API products. Mr. Kanzer served as Chief Executive Officer of IDR from
March 1998 and led the sale of IDR to IVAX Corporation, a publicly traded
corporation in October 1999. From 1996 through June 2007, Mr. Kanzer served as
director and Chairman of DOR BioPharma, Inc., a publicly traded biotechnology
company developing orBec® for GvHD, a product acquired from the parent company
of IDR in 2001. Mr. Kanzer has also been a director and officer of
our subsidiaries, including Solovax, Inc., Effective Pharmaceuticals, Inc.,
Putney Drug Corp. and CD4 Biosciences, Inc. Mr. Kanzer has also been
a co-founder and director of 23 biotechnology companies, including Avigen, Inc.,
XTLBio, Boston Life Sciences, Inc. and Titan Pharmaceuticals, Inc., all publicly
traded companies. Prior to joining Paramount Capital in 1992, Mr. Kanzer was an
attorney at the law firm of Skadden, Arps, Slate, Meagher & Flom in New York
where he specialized in mergers and acquisitions. Mr. Kanzer received his J.D.
from New York University School of Law in 1988 and a B.B.A. in Accounting from
Baruch College in 1985, where he was a Baruch Scholar. Mr. Kanzer is active in
university-based pharmaceutical technology licensing and has served as Co-Chair
of the New York Chapter of the Licensing Executives Society.
NICHOLAS STERGIS, M.S. Mr.
Stergis is our co-founder and Vice Chairman of our board of directors. Mr.
Stergis served as our Chief Executive Officer and our subsidiaries from July 1,
2008 to March 29, 2009. Mr. Stergis previously served as our Chief
Operating Officer from our founding during 2001 through October
2006 and Vice Chairman of the board of directors from April 2007 through
present. Prior to co-founding Adeona, Mr. Stergis was a co-founder, Chief
Operating Officer and director of Developmental Therapeutics, Inc., a
cardiovascular drug development company, until its acquisition in October 2003
by Titan Pharmaceuticals, Inc. (AMEX: TTP), a publicly-traded pharmaceutical
company. Mr. Stergis was also a founder of Flower Ventures LLC and Encode
Pharmaceuticals, Inc., a drug development company until its acquisition by
Raptor Pharmaceuticals, Inc., a publicly traded company. From December 2000
until July 2008, Mr. Stergis was also a co-founder and Managing Director of
Accredited Ventures Inc., a venture capital firm and its affiliated FINRA member
firm, Accredited Equities, Inc. Prior to co-founding Accredited Ventures, Mr.
Stergis was the Interim Director of Corporate Development for Corporate
Technology Development, Inc. (CTD), a biopharmaceutical company based in Miami,
Florida, until its merger with DOR BioPharma, Inc. (DOR), a publicly traded
biotechnology company. During his tenure at CTD, he was responsible for all
development tasks associated with the company’s lead product, orBec ®.. He was
also instrumental in CTD’s restructuring, including its divestiture of important
botulinum toxin intellectual property to Allergan, Inc. (NYSE:AGN), a publicly
traded specialty pharmaceutical company as well as the divestiture of another
operating subsidiary to Ivax Corp. (AMEX: IVX). Prior to joining CTD, Mr.
Stergis was a Technology Associate at Paramount Capital, a New York based
private
61
equity,
venture capital, investment banking and asset management group specializing in
the biotechnology and pharmaceutical industries. There, he participated in the
startup, acquisition and financing of various biotechnology companies, including
CTD. Mr. Stergis received his M.S. in Biology from New York University as well
as a B.S. in Biology from the University at Albany, State University of New
York.
JEFFREY J.
KRAWS. Mr. Kraws is a director and has been since January
2006. Mr. Kraws is Chief Executive Officer and co-founder of Crystal
Research Associates. Well known and respected on Wall Street, Mr. Kraws has
received some of the most prestigious awards in the industry. Among other
awards, he was given a “5-Star Rating” in 2001 by Zacks and was ranked the
number one analyst among all pharmaceutical analysts for stock performance in
2001 by Starmine.com . Prior
to founding Crystal Research Associates, Mr. Kraws served as co-president of The
Investor Relations Group (IRG), a firm representing primarily under-followed,
small-capitalization companies. Previously, Mr. Kraws served as a managing
director of healthcare research for Ryan Beck & Co. and as director of
research/senior pharmaceutical analyst and managing director at Gruntal &
Co., LLC (prior to its merger with Ryan Beck & Company). Mr. Kraws served as
managing director of the healthcare research group and senior pharmaceutical
analyst at First Union Securities (formerly EVEREN Securities); as senior U.S.
pharmaceutical analyst for the Swedish-Swiss conglomerate Asea Brown Boveri; and
as managing director and president of the Brokerage/Investment Banking operation
of ABB Aros Securities, Inc. He also served as senior pharmaceutical analyst at
Nationsbanc Montgomery Securities, BT Alex Brown & Sons, and Buckingham
Research. Mr. Kraws also has industry experience, having been responsible for
competitive analysis within the treasury group at Bristol-Myers-Squibb Company.
He holds an MBA from Cornell University and a B.S. degree from State University
of New York-Buffalo. During 2006 through February 2007, Mr. Kraws served as our
Vice President of Business Development, on a part-time basis.
JEFF WOLF, Esq. Mr. Wolf is a
director and has been since June 2005. Mr. Wolf has substantial
experience in creating, financing, nurturing and growing new ventures based upon
breakthrough research and technology. Mr. Wolf is the founding partner of
Seed-One Ventures, LLC, a venture capital group focused on seed-stage
technology-based investments. Mr. Wolf has been a founder of Elusys
Therapeutics, Inc., an antibody-based therapeutic company, Tyrx Pharma, Inc., a
biopolymerbased company, Sensatex, Inc., a medical device company and
Generation Mobile, Inc. a telecommunications company. Prior to founding Seed-One
Ventures, Mr. Wolf served as the Managing Director of The Castle Group, Ltd., a
biomedical venture capital firm. At both organizations, Mr. Wolf was responsible
for supervising the formation and funding of new technology, biomedical, and
service oriented ventures. Mr. Wolf currently sits on the board of Elusys
Therapeutics and Netli, Inc. Mr. Wolf received his MBA from Stanford Business
School, his JD from New York University School of Law and his BA with honors in
Economics from the University of Chicago.
JAMES S. KUO, M.D., M.B.A. Dr.
Kuo is a director and has been since February 2007. Dr. Kuo is the
Chairman and Chief Executive Officer of CorDex Therapeutics, Inc., a public
biopharmaceutical company. From 2003 to 2006, he served as founder, Chairman and
Chief Executive Officer of BioMicro Systems, Inc. a private venture-backed,
microfluidics company. Prior to that time, Dr. Kuo was a founder, President and
Chief Executive Officer of Discovery Laboratories, Inc. where he raised over $22
million in initial private funding and was instrumental in the company going
public. Dr. Kuo was also a founder and board member of Monarch Labs, LLC, a
private medical device company. Dr. Kuo is the former Managing Director of
Venture Analysis for Healthcare Ventures, LLC, which managed $378 million in
venture funds. He has also been a senior licensing and business development
executive at Pfizer, Inc., where he was directly responsible for cardiovascular
licensing and development. After studying molecular biology and receiving his
B.A. at Haverford College, Dr. Kuo simultaneously received his M.D. from the
University of Pennsylvania School of Medicine and his M.B.A. from the Wharton
School of Business.
Directors’
Term of Office
Directors
will hold office until the next annual meeting of stockholders and the election
and qualification of their successors. Officers are elected annually by our
board of directors and serve at the discretion of the board of
directors.
Audit
Committee
The Audit
Committee is comprised of Jeff Wolf and Dr. James Kuo. The Audit Committee is
responsible for recommending the Company’s independent public accounting firm
and reviewing management’s actions in matters relating to audit functions. The
Committee reviews with the Company’s independent public accountants the scope
and results of its audit engagement and the Company’s system of internal
controls and procedures. The Committee also reviews the effectiveness of
procedures intended to prevent violations of laws. The Committee also reviews,
prior to publication, our reports on Form 10-K and Form 10-Q. Our board has
determined that all audit committee members are independent under applicable SEC
regulations. Our board of directors has determined that Dr. Kuo qualifies as an
“audit committee financial expert” as that term is used in Section 407 of the
Sarbanes-Oxley Act of 2002.
62
To date,
we have conducted research and development operations and generated no revenue
since inception. In light of the foregoing, and upon evaluating our internal
controls, our board of directors determined that our internal controls are
adequate to insure that financial information is recorded, processed, summarized
and reported in a timely and accurate manner in accordance with applicable rules
and regulations of the SEC.
Compensation
Committee and Nominating Committee
Our
Compensation Committee consists of Jeff Wolf and Jeff Kraws. Our Nominating
Committee consists of Jeff Wolf and Dr. James Kuo. These committees perform
several functions, including reviewing all forms of compensation provided to our
executive officers, directors, consultants and employees, including stock
compensation, and recommending appointments to the board and appointment of
executive officers.
When
selecting a new director nominee, the committee first determines whether the
nominee must be independent for NYSE Amex purposes or whether the candidate must
qualify as an Audit Committee Financial Expert. The committee then uses its
network of contacts to compile a list of potential candidates, but may also
engage, if it deems appropriate, a professional search firm to assist in the
identification of qualified director candidates. The nominating committee also
will consider nominees recommended by our stockholders. The nominating committee
does not distinguish between nominees recommended by our stockholders and those
recommended by other parties.
Shareholders
wishing to directly recommend candidates for election to the board of directors
at an annual meeting must do so by giving written notice to: Chairman of the
Nominating Committee, Adeona Pharmaceuticals, Inc., 3930 Varsity Drive, Ann
Arbor, Michigan 48108. Any such notice must, for any given annual meeting, be
delivered to the chairman not less than 120 days prior to the anniversary of the
preceding year’s annual meeting. The notice must state (1) the name and address
of the shareholder making the recommendations; (2) the name, age, business
address, and residential address of each person recommended; (3) the principal
occupation or employment of each person recommended; (4) the class and number of
shares of the Company’s stock that are beneficially owned by each person
recommended and by the recommending shareholder; (5) any other information
concerning the persons recommended that must be disclosed in nominee and proxy
solicitations in accordance with Regulation 14A of the Securities Exchange Act
of 1934, as amended; and (6) a signed consent of each person recommended stating
that he or she consents to serve as a director of the Company if
elected.
In
considering any person recommended by one of our shareholders, the committee
will look for the same qualifications that it looks for in any other person that
it is considering for a position on the board of directors. Any shareholder
nominee recommended by the committee and proposed by the board of directors for
election at the next annual meeting of shareholders will be included in the
company’s proxy statement for that annual meeting.
The
nominating committee operates under a formal charter that governs its duties and
standards of performance. A copy of the charter is available at the Investor
Information section of our website at www.adeonapharma.com
..
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934 requires the Company’s executive
officers, directors and persons who beneficially own more than 10 percent of a
registered class of the Company’s equity securities, to file with the SEC
initial reports of ownership and reports of changes in ownership of the
Company’s common stock. Such officers, directors and persons are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms that they file with the SEC.
Based
solely on a review of the copies of such forms that were received by the
Company, or written representations from certain reporting persons that no Form
5s were required for those persons, the Company believes that all filing
requirements applicable to its directors, executive officers and greater than 10
percent stockholders were complied with during 2008.
Code
of Ethics
The
Company has adopted a code of ethics that applies to its principal executive
officer, principal financial officer, principal accounting officer and
controller. Such code of ethics is posted on the Company’s internet
website, which is located at www.adeonapharma.com.
63
ITEM
11. EXECUTIVE COMPENSATION
The
following table discloses information for the fiscal year ended December 31,
2008 regarding the total compensation we paid to our principal executive officer
and two other most highly compensated executive officer who was serving as an
executive officer on December 31, 2008, and our former two other most highly
compensated executive officers who would have been among our most highly
compensated executive officers if they had been serving as executive officers on
December 31, 2008.
|
All
Other
|
|||||||||||||||||||||
|
Name
and Principal
|
Option
|
Annual
|
|||||||||||||||||||
|
Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Awards
(1)
|
Compensation
|
Total
|
|||||||||||||||
|
Nicholas
Stergis
|
2008
|
$ | 171,760 | $ | - | $ | 576,000 | $ | - | $ | 747,760 | ||||||||||
|
Former
Chief Executive Officer (2)
|
2007
|
$ | 137,500 | $ | 17,500 | $ | - | $ | - | $ | 155,000 | ||||||||||
|
Steve
H. Kanzer, CPA, JD
|
2008
|
$ | 195,000 | $ | - | $ | - | $ | - | $ | 195,000 | ||||||||||
|
Chairman and Chief
Executive Officer (3)
|
2007
|
$
|
87,750
|
$
|
45,205
|
$
|
132,955
|
||||||||||||||
|
John
Althaus
|
2008
|
$ | 86,250 | $ | - | $ | - | $ | - | $ | 86,250 | ||||||||||
|
Vice
President, Advanced
Technology
|
2007
|
$ | 100,000 | $ | 15,000 | $ | 87,750 | $ | 202,750 | ||||||||||||
|
David
Newsome, M.D.
|
2008
|
$ | 157,039 | $ | - | $ | - | $ | - | $ | 157,039 | ||||||||||
|
Former
Chief Medical Officer
|
2007
|
||||||||||||||||||||
|
Charles
Bisgaier, Ph.D.
|
2008
|
$ | 57,044 | $ | - | $ | - | $ | - | $ | 57,044 | ||||||||||
|
Former
President
|
2007
|
$ | 295,000 | $ | 100,000 | $ | - | $ | - | $ | 395,000 | ||||||||||
|
(1)
|
The
fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model. The assumptions used for the valuation
of these option awards are as follows: expected dividend yield 0%;
expected volatility 225.79%; risk free interest rate of 3.95%; expected
life of 10 years.
|
|
(2)
|
Mr.
Stergis resigned as our Chief Executive Officer effective March 29,
2009. He remains a director and Vice-Chairman of our Board of
Directors.
|
|
(3)
|
Mr.
Kanzer was appointed our President and Chief Executive Officer effective
March 29, 2009.
|
The
following table contains information relating to grants of stock options made
during the fiscal year ended December 31, 2008, to our senior executive
officers. No stock options were exercised by our senior executive officers
during the last fiscal year.
|
Number
of
|
Percent
of total
|
||||||||||||
|
securities
|
options/SARs
|
||||||||||||
|
underlying
|
granted
to
|
Exercise
|
|||||||||||
|
Name
and Principal
|
options/SARs
|
employees
in
|
Price
|
||||||||||
|
Position
|
granted
(#)
|
fiscal
year
|
($/Sh)
|
Expiration
date
|
|||||||||
|
Nicholas
Stergis
|
800,000 | 85.21 | % | $ | 0.72 |
7/6/2018
|
|||||||
|
Former
Chief Executive Officer
|
|||||||||||||
|
Yingxi
Zhang, MD
|
75,000 | 7.99 | % | $ | 0.81 |
6/8/2018
|
|||||||
|
Vice
President, Clinical
Development
|
|||||||||||||
64
Outstanding
Equity Awards at Fiscal Year-End
|
Name
and Principal Position
|
Number
of securities |
Number
of securities |
Option exercise |
Option expiration |
||||||||||||
|
Nicholas
Stergis,
Former
Chief Executive Officer
and Vice Chairman (1)
|
215,278 | 584,722 | $ | 0.72 |
7/16/2018
|
|||||||||||
|
Steve
H. Kanzer, CPA, JD,
Chairman, President
Chief
Executive Officer
(2)
|
271,058 | - | $ | 2.01 |
10/30/2016
|
|||||||||||
|
John
Althaus,
Vice
President, Advanced
Technology
|
49,694
7,500
|
4,518
7,500
|
$
$
|
0.18
5.85
|
2/5/2016
11/1/2017
|
|||||||||||
|
David
Newsome,
|
- | - | - | - | ||||||||||||
|
Former
Chief Medical Officer
|
||||||||||||||||
|
Charles
Bisgaier, Ph.D.
|
442,852 | - | $ | 1.83 |
5/29/2016
|
|||||||||||
|
Former
President
|
||||||||||||||||
(1) Mr.
Stergis resigned as our Chief Executive Officer effective March 29, 2009. He
remains a director and Vice-Chairman of our Board of Directors.
(2) Mr.
Kanzer was appointed our Chief Executive Officer and
President effective March 29, 2009.
The
following table sets forth information for the fiscal year ended
December 31, 2008 regarding the compensation of our directors who are not
also named executive officers.
|
Name
|
Fees
earned or
paid in cash |
Option
awards (1)
|
Other compensation |
Total
|
||||||||||||
|
Jeffrey
Kraws
|
$ | 9 ,000 | $ | 4,416 | $ | - | $ | 13,416 | ||||||||
|
James
Kuo
|
$ | 15,500 | $ | 4,416 | $ | - | $ | 19,916 | ||||||||
|
Jeffrey
Wolf
|
$ | 16,500 | $ | 4,416 | $ | - | $ | 20,916 | ||||||||
|
The
amounts in the “Option awards” column reflect the dollar amounts
recognized as compensation expense for the financial statement reporting
purposes for stock options for the fiscal year ended December 31, 2007 in
accordance with SFAS 123(R). The fair value of the options was determined
using the Black-Scholes model with the following assumptions: expected
dividend yield of 0%, expected volatility of 170.09%, risk free interest
rate of 3.66% and an expected life of 10
years.
|
|||
During
the first quarter of 2007, director compensation for independent members was
approved at $2,000 per board meeting that they attend in person, $1,000 per
telephonic board meeting and $500 per committee meeting. In addition,
we also grant independent members of our board of directors upon appointment to
our board 25,000 stock options to purchase 25,000 shares of our common stock at
an exercise price equal to the fair market value of our common stock on the date
of grant, and an additional 8,333 stock options each year. We also
reimburse our directors for travel and other out-of-pocket expenses incurred in
attending board of director and committee meetings.
65
Equity Compensation Plan
Information
As of
December 31, 2008, the number of stock options and restricted common stock
outstanding under our equity compensation plans, the weighted average exercise
price of outstanding options and restricted common stock and the number of
securities remaining available for issuance were as follows:
|
Plan
category
|
Number
of securities to
be
issued upon exercise
of
outstanding options
|
Weighted-average
exercise
price of
outstanding
options
|
Number
of securities
remaining
available for
future
issuance under
equity
compensation plans
|
|||||||||
|
2001
Stock Incentive Plan
|
1,229,987
|
$
|
1.14
|
259,366
|
||||||||
|
2007
Stock Incentive Plan
|
1,521,676
|
$
|
1.66
|
978,324
|
||||||||
|
Total
|
|
2,751,663
|
|
$
|
1.43
|
|
1,237,690
|
|||||
Employment
Agreements
On July
1, 2008, the Company's Board of Directors approved an additional compensation
package with Nicholas Stergis, our former Chief Executive Officer and Vice
Chairman as a result of his additional appointment as Chief Executive
Officer. Under the terms of arrangement, his annual salary was
increased to $195,000 for full-time service to the Company. He was
also eligible for a bonus at the discretion of the Board of
Directors. In the event of termination for any reason, the Company
would provide six-month’s severance, payable over the Company’s ordinary pay
periods. The Company has also granted a ten year option to
purchase 800,000 shares of the Company’s common stock, exercisable at $0.72 per
share, with one-quarter of the options vesting immediately, and the remainder
vesting quarterly in equal increments over three years. These options
expire 90 days from the date of termination. These options shall vest in full
should the Company be acquired. The fair value of the options totaled
$576,000 and was determined using the Black-Scholes model with the following
assumptions: expected dividend yield of 0%, expected volatility of 225.79%, risk
free interest rate of 3.95% and an expected life of 10 years. Effective March
29, 2009, Nicholas Stergis resigned as our Chief Executive Officer. Mr. Stergis
remains a director of the Company.
In
January 2005, the Company entered into a four-year employment agreement with
Steve H. Kanzer. Pursuant to this agreement, Adeona paid an annual base salary
of $297,000, an annual bonus equal to 30% of base salary and a ten-year option
to acquire 271,058 shares of common stock at the completion of the Company’s
private placement that occurred on October 31, 2006. As of December 31, 2008,
all of these stock options have vested. The fair value of the options
totaled $544,827 and was determined using the Black-Scholes model with the
following assumptions: expected dividend yield of 0%, expected volatility of
200%, risk free interest rate of 4.61% and an expected life of 10 years. On July
20, 2007, the Board of Directors approved an amended and restated employment
agreement with Steve H. Kanzer. The amended employment agreement provided that
he be paid a base salary of $195,000 per year plus a guaranteed bonus of
$100,000 and may also be entitled to discretionary transactional bonuses. In
addition, the amended agreement provided that Steve H. Kanzer waived the receipt
of any salary and bonus payable under the original agreement, which amounted to
$275,645, for no additional consideration. This amount was treated as a capital
contribution to the Company in September 2007. On July 1, 2008, Steve
H. Kanzer’s employment agreement was amended to resign his title of Chief
Executive Officer and continue to serve as Chairman on a full-time
basis . On January 6, 2009, the Company entered into an amended
agreement with Mr. Kanzer pursuant to which Mr. Kanzer agreed to continue to
serve as Chairman on a full-time basis through January 9, 2010 with
an annual salary of $1.00. Mr. Kanzer agreed to forego the $100,000
guaranteed bonus otherwise due to him on January 1, 2009. The amount
of $100,000 will be recorded on the Company’s books as a capital contribution
during the first quarter of 2009. Mr. Kanzer pays for health
insurance under our corporate policy at his own expense and reimburses the
Company for this expense. On March 29, 2009, Steve H. Kanzer was appointed our
Chief Executive Officer and President.
On
October 10, 2007, the Company entered into a three-year employment agreement
with its former Chief Scientific Officer. The Company paid the Chief Scientific
Officer a $7,500 signing bonus and a base salary of $205,000 per year. The
agreement also provided that the Chief Scientific Officer was eligible for cash
and non-cash bonuses at the end of each of the Company’s fiscal years during the
term of the agreement at the discretion of the Company’s compensation committee
as well as additional commission-based cash and stock bonuses during each fiscal
year based on significant revenue-generating, out-licensing and merger and
acquisition transactions initiated and completed by the Chief Scientific
Officer, again at the discretion of the compensation committee. Pursuant to the
agreement, the Company granted a ten-year option to purchase 150,000 shares of
the Company’s common stock of which none are outstanding as of December 31,
2008, as the agreement was terminated on March 7, 2008.
The
Company entered into an employment agreement with Charles Bisgaier, its former
President on May 24, 2006. Pursuant to this agreement, Adeona paid an annual
base salary of $295,000 and a guaranteed bonus of one-third of base salary.
Adeona also granted a ten-year option to
66
purchase
664,252 shares of common stock, of which 442,834 have vested as of December 31,
2008. On March 5, 2008, the Company’s President agreed to work for no
cash compensation. Additionally, the former President agreed to
eliminate severance provisions of his agreement. The Company has
recorded contributed services from a related party totaling $73,750 during
2008. On July 1, 2008 the President resigned his position with the
Company.
During
January 2006, the Company entered into an employment letter agreement with our
director Jeffrey Kraws to serve as Vice President of Business Development,
pursuant to which we agreed to pay him an annual base salary of $75,000
following the closing of a financing and granted him an option to purchase
228,773 shares of common stock, at an exercise price of $0.09 per share, with
114,387 vested upon execution of his employment agreement and the remainder
vesting annually over three years. During March 2007, the Company entered into
an amended agreement with Mr. Kraws whereby he agreed forgo any cash
compensation and continued as a director in exchange for 38,129 options
vesting. Mr. Kraws was not paid any cash compensation pursuant under
his original or amended agreement.
Pursuant
to an employment letter agreement, our subsidiary EPI paid Dr. Rudick $175,000
per annum, paid life and disability insurance on behalf of Dr. Rudick and he
received an option to purchase 262,500 shares of EPI common stock. Following the
acquisition of EPI, Dr. Rudick agreed to reduce his annual base salary to
$95,000 per annum, forgo any life or disability reimbursement from us and agree
to cancel an unvested option to purchase 294,071 shares of our common stock. As
a result of the acquisition of EPI, Dr. Rudick’s vested stock options converted
into options to purchase 27,106 of Adeona common stock at an exercise price of
$0.09 per share which expire on September 13, 2014. His shares of EPI common
stock converted to 30,161 shares of Adeona common stock and his EPI warrants
converted into 42,845 warrants to purchase Adeona common stock at an exercise
price of $3.30 per share with an expiration date of May 30, 2015. As of November
1, 2007, Dr. Rudick is no longer employed by the Company.
During
November 2005, we entered into an employment agreement as amended with John
Althaus, MS, the Vice President of Advanced Technology. We currently
pay Mr. Althaus $45,000 per year and we issued have issued him a total of 69,212
options to acquire our common stock.
67
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The
following table sets forth certain information regarding beneficial ownership of
our common stock and warrants to purchase shares of our common stock as of March
5, 2008 by (i) each person (or group of affiliated persons) who is known by us
to own more than five percent of the outstanding shares of our common stock,
(ii) each of our directors and executive officers, and (iii) all of our
directors and executive officers as a group.
Beneficial
ownership is determined in accordance with SEC rules and generally includes
voting or investment power with respect to securities. The principal address of
each of the stockholders listed below except as indicated is c/o Adeona
Pharmaceuticals, Inc., 3930 Varsity Drive, Ann Arbor, MI 48108. We believe that
all persons named in the table have sole voting and investment power with
respect to shares beneficially owned by them. All share ownership figures
include shares issuable upon exercise of options or warrants exercisable within
60 days of March 5, 2009, which are deemed outstanding and beneficially owned by
such person for purposes of computing his or her percentage ownership, but not
for purposes of computing the percentage ownership of any other
person.
All
references to the number of shares and per share amounts have been retroactively
restated to reflect a 3 for 1 reverse stock split, of all the outstanding common
stock, stock options and stock warrants of the Company, which was effective on
April 25, 2007.
|
Name
of Owner
|
Shares
Owned
|
Percentage
of Shares
Outstanding
|
||||||
|
Accredited
Venture Capital, LLC
|
|
7,086,380
|
(
1)
|
|
33.44
|
%
|
||
|
Steve
H. Kanzer, CPA, JD
|
|
7,732,684
|
(
2)
|
|
37.29
|
%
|
||
|
Nicholas
and Jennifer Stergis Tenancy by Entirety
|
|
1,955,195
|
(
3)
|
|
8.97
|
%
|
||
|
Firebird
Capital
|
|
1,496,550
|
(
4)
|
|
7.01
|
%
|
||
|
Chestnut
Ridge Partners
|
1,185,820
|
(
5)
|
5.60
|
%
|
||||
|
Jeffrey
J. Kraws
|
|
226,375
|
(
6)
|
|
1.06
|
%
|
||
|
Jeffrey
Wolf, Esq.
|
|
41,666
|
(
7)
|
|
*
|
|||
|
James
S. Kuo
|
|
41,666
|
(
8)
|
|
*
|
|||
|
All
officers and directors as a group (5 persons)
|
|
10,268,644
|
|
47.71
|
%
|
|||
*
represents less than 1% of our common stock
(1)
Consists of 7,086,380 shares held in the name of Accredited Venture Capital,
LLC.
(2)
Consists of the 7,086,380 shares of common stock and 375,246 common shares, and
271,058 shares issuable upon stock options presently exercisable held directly
in Mr. Kanzer’s name. Pharmainvestors, LLC is the managing member of Accredited
Venture Capital, LLC, and Mr. Kanzer is the managing member of Pharmainvestors,
LLC. As such, Mr. Kanzer may be considered to have control over the voting and
disposition of the shares registered in the name of Accredited Venture Capital,
LLC. Mr. Kanzer disclaims beneficial ownership of those shares, except to the
extent of his pecuniary interest.
(3)
Consists of 1,355,292 shares of common stock, warrants to purchase 346,418 and
7,651 shares of common stock, issued to Mr. Stergis and 245.834 shares issuable
upon stock options presently exercisable or exercisable with 60 days. If
unexercised, these options will expire within 90 days of termination. Does not
include 554,116 shares issuable upon stock options that are not presently
exercisable. Mr. Stergis’s business address is 9100 South Dadeland Blvd., Suite
1809, Miami FL 33156 .
68
(4)
Consists of 743,275 shares of common stock issued to Firebird Global Master
Fund, Ltd and 743,275 shares of common stock issued to Firebird Global Master
Fund II, Ltd. Firebird’s address is 152 West 57th Street, 24th Floor, New York,
New York 10019.
(5)
Consists of 1,185,820 shares of common stock issued to Chestnut Ridge Capital
Partners. Chestnut Ridge Capital Partners address is 50 Tice Blvd.
Suite 18, Woodcliff Lake, NJ 07677-7603.
(6)
Assumes the exercise of a vested option to purchase 226,375 shares of our common
stock presently exercisable. Mr. Kraws’ business address is 800 Third
Avenue, 17th Fl., New York, NY 10022.
(7)
Assumes the exercise of an option to purchase 41,666 shares of our common stock.
Mr. Wolf’s business address is 119 Washington Ave., Suite 401, Miami,
Florida 33139.
(8)
Consists of 41,666 options to purchase common stock. Mr. Kuo’s
business address is 470 Nautilus St, Suite 300, La Jolla, California,
92037.
All
references to the number of shares and per share amounts have been retroactively
restated to reflect a 3 for 1 reverse stock split, of all the outstanding common
stock, stock options and stock warrants of the Company, which was effective on
April 25, 2007.
During
January 2001, we sold approximately $1.1 million of Series A Preferred Stock to
Accredited Venture Capital, LLC, a company controlled by Steve H. Kanzer, our
Chairman. From 2002 until October 2006, we relied on non-interest bearing bridge
loans from Accredited Ventures, Inc. (AVI), a company controlled Steve H.
Kanzer, our Chairman and Chief Executive Officer and the managing member of our
largest stockholder, Accredited Venture Capital, LLC. During this 5 year period,
AVI loaned us $3,363,494 for no additional consideration. In connection with the
private placement during October 2006, AVI agreed to convert these loans into
units in the offering. As a result of the conversion of these loans, we issued
1,665,211 shares of common stock and 832,606
warrants to purchase common stock. In the merger, all shares of preferred stock
were converted into common stock of the Company.
In
connection with a private placement in October and November 2006, we engaged
Accredited Equities Inc. (AEI), a company controlled by Steve H. Kanzer, our
Chairman as our placement agent. At the closing of our private placement during
October and November 2006, we paid AEI the sum of approximately $639,844 as
commissions for its services, of which $489,755 was paid to Mr. Stergis, a
former managing director of AEI and Vice Chairman and $68,850 was
paid to Dr. Joseph Rudick, a former director, and a former registered
representative of AEI. A selected dealer not affiliated with AEIwas
paid a cash fee of $327,950. AEI also received a non-accountable expense
allowance of $75,000 and a warrant to purchase 958,277 shares of common stock.
Mr. Nicholas Stergis, our co-founder and Vice Chairman, was the managing
director of AEI and AVI in November 2006. In January 2009, the
placement warrants allocated to Accredited Venture Capital, LLC an affiliate of
Mr. Kanzer were agreed to be cancelled.
As part
of the October 2006 private placement, Adeona sold 99,104 shares of its common
stock and 49,552 warrants to purchase common stock for total proceeds of
$200,000 to entities controlled by Dr. Charles Bisgaier, our former President.
As part of the same private placement, Adeona sold 49,552 shares of its common
stock and 24,776 warrants to purchase common stock for total proceeds of
$100,000 to the father of our Chairman. The terms on which their purchases were
made were identical to the terms in which the other investors in these offerings
purchased shares.
In
connection with our acquisition of Effective Pharmaceuticals Inc. (EPI),
Accredited Venture Capital, LLC, an affiliate of Mr. Kanzer, our Chairman and
Mr. Stergis, our Vice Chairman, contributed their 65.47% equity ownership in EPI
to Adeona for no additional consideration. During 2005, EPI paid $152,200 to AEI
for placement agent services rendered in connection with the issuance of its
Series B preferred stock. EPI also issued a warrant to purchase 171,225 shares
of common stock to designees of AEI, including Mr. Kanzer and Mr. Stergis,
current members of our board of directors and Dr. Rudick, a former board member.
During March 2005, EPI repaid AVI for loans totaling $200,000 and AVI agreed to
defer repayment of loans totaling $513,886 until the next financing or a merger
of EPI. These EPI loans were converted into Units as part of our October 2006
private placement. During 2006, EPI paid $2,150 per month to AVI and until March
31, 2007 we paid AVI $1,000 per month for office space.
On
January 5, 2007, we acquired the remaining 34.53% interest in our subsidiary EPI
in exchange for 795,248 shares of our common stock and assumed a total of 34,685
options to purchase our common stock and 68,858 warrants to purchase our common
stock. In connection therewith, Messrs. Kanzer and Stergis each exchanged their
existing EPI warrants for 7,651 warrants to purchase our common stock, and Dr.
Rudick exchanged EPI common stock for 30,161 shares of our common stock and
exchanged his existing EPI options for 27,106 options to purchase our common
stock, all of which is vested, and exchanged his EPI warrants for 42,845
warrants to purchase our common stock.
69
We
entered into an agreement with Crystal Research Associates, LLC, a firm in which
Mr. Kraws one of our directors and VP of Business Development is the CEO to
write an executive information overview. Pursuant to this agreement, we have
paid Crystal Research Associates $35,000 for the generation of the
report.
From
April 2007 through July 1, 2008, Mr. Stergis served as our Vice Chairman on a
part-time basis in Miami FL pursuant to which the Company paid Mr. Stergis an
annual salary of $150,000. From inception through October 2006, Mr.
Stergis served as Chief Operating Officer of the Company on a part-time basis
for an annual salary $72,000 per year.
See
“Employment Agreements” and ”Risk Factors” section of this filing for further
descriptive information on employment compensation.
During January 2009, we entered into a
registration rights agreement with Accredited Venture Capital, LLC
(AVC). Pursuant to this agreement AVC agreed to cancel
warrants to purchase 1,213,626 shares of common stock of the Company exercisable
at $2.22 and 7,651 shares of common stock of Company exercisable at $3.30 per
share. This cancellation results in a reduction of total outstanding shares on a
fully diluted basis of the Company of approximately 4.7%. The Company also
agreed to register for resale the 7,086,379 shares of common stock of the
Company held by AVC under the Securities Act of 1933, as
amended. During February 2009, a resale registration statement
covering these shares was declared effective by the SEC. Steve H.
Kanzer is the managing member of Pharmainvestors LLC, the managing member of
Accredited Venture Capital LLC. Mr. Kanzer currently serves as Chairman of the
Company.
Berman
& Company, P.A. serves as our independent registered public accounting
firm.
INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM FEES AND SERVICES
Aggregate
fees including expenses billed to us for the years ended December 31, 2008 and
2007, for processional services performed by Berman & Company, P.A. were as
follows:
|
2008
|
2007
|
|||||||
| Audit Fees and Expenses | $ | 74,000 | $ | 68,000 | ||||
| Audit-Related Fees | 0 | 0 | ||||||
| Tax Fees | 0 | 0 | ||||||
| All Other Fees | 0 | 0 | ||||||
| Total | $ | 74,000 | $ | 68,000 | ||||
Your
Audit Committee has adopted procedures for pre-approving all audit and non-audit
services provided by the independent registered public accounting firm,
including the fees and terms of such services. These procedures include
reviewing detailed back-up documentation for audit and permitted non-audit
services. The documentation includes a description of, and a budgeted amount
for, particular categories of non-audit services that are recurring in nature
and therefore anticipated at the time that the budget is submitted. Audit
Committee approval is required to exceed the pre-approved amount for a
particular category of non-audit services and to engage the independent
registered public accounting firm for any non-audit services not included in
those pre-approved amounts. For both types of pre-approval, the Audit Committee
considers whether such services are consistent with the rules on auditor
independence promulgated by the SEC and the PCAOB. The Audit Committee also
considers whether the independent registered public accounting firm is best
positioned to provide the most effective and efficient service, based on such
reasons as the auditor’s familiarity with the Company’s business, people,
culture, accounting systems, risk profile, and whether the services enhance the
Company’s ability to manage or control risks and improve audit quality. The
Audit Committee may form and delegate pre-approval authority to subcommittees
consisting of one or more members of the Audit Committee, and such subcommittees
must report any pre-approval decisions to the Audit Committee at its next
scheduled meeting. All of the services provided by the independent registered
public accounting firm were pre-approved by your Audit Committee.
The Board
of Directors anticipates that representatives of Berman & Company, P.A.
will be present at our 2009 annual meeting of Stockholders to respond to
appropriate questions, and will have an opportunity, if they desire, to make a
statement.
70
ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K
(a)(1) The
following financial statements are included in this Annual Report on Form 10-K
for the fiscal year ended December 31, 2008.
|
|
1.
|
Independent
Auditor’s Report
|
|
|
2.
|
Consolidated
Balance Sheets as of December 31, 2008 and
2007
|
|
|
3.
|
Consolidated
Statements of Operations for the years ended December 31, 2008 and 2007
and for the period from January 8, 2001 (inception) to December 31,
2008
|
|
|
4.
|
Consolidated
Statements of changes in Stockholders’ Equity for the years ended December
31, 2008 and 2007 and for the period from January 8, 2001 (inception) to
December 31, 2008
|
|
|
5.
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2008 and 2007
and for the period from January 8, 2001 (inception) to December 31,
2008
|
|
|
6.
|
Notes
to Consolidated Financial
Statements
|
(a)(2) All
financial statement schedules have been omitted as the required information is
either inapplicable or included in the Consolidated Financial Statements or
related notes.
(a)(3) The
following exhibits are either filed as part of this report or are incorporated
herein by reference:
3.1
Certificate of Incorporation, as amended (1)
3.2
By-Laws (2)
4.1 Form
of Warrant Certificate (3)
4.2/10.25 2001
Stock Incentive Plan (4)*
4.3/10.26
2007 Stock Incentive Plan (4)*
10.1
Employment Agreement with Charles L. Bisgaier (5)*
10.2
Consulting Agreement with George J. Brewer (5)
10.3
License Agreement with the Regents of the University of Michigan
(5)
10.5
Option and License Agreement between University of Southern California and
Autoimmune Vaccines, Inc. (5)
10.6
First Amendment to Option and License Agreement between University of Southern
California and Solovax, Inc. (formerly Autoimmune Vaccines, Inc.)
(5)
10.7
License Agreement between Children’s Medical Center Corporation and Effective
Pharmaceuticals, Inc. (5)
10.8
License Agreement between Thomas Jefferson University and Quantas
Biopharmaceuticals, Inc. (5)
10.9
First Amendment to License Agreement between Thomas Jefferson University and CD4
Biosciences, Inc. (5)
10.10
Private Stock Purchase Agreement with Michael Manion (5)
10.11
Lock-up Agreement with Michael Manion (5)
10.12
Lock-up Agreement with Accredited Venture Capital, LLC (5)
71
10.13
Lock-up Agreement with Nicholas Stergis (5)
10.14
Lock-up Agreement with Joseph Rudick (5)
10.15
Lock-up Agreement with Jeffrey Kraws (5)
10.16
Lock-up Agreement with Jeffrey Wolf (5)
10.17
Lock-up Agreement with Charles Bisgaier (5)
10.18
Unit Purchase Agreement (3)
10.19
First Amendment to License Agreement between Children's Medical Center
Corporation and Effective Pharmaceuticals, Inc. (6)
10.20
License Agreement between Maine Medical Center and Pipex Pharmaceuticals, Inc.
(7)
10.21
License Agreement between The Regents of the University of California and
Epitope Pharmaceuticals, Inc. (8)
10.22
Consulting Agreement between Salvatore Albani, M.C. Ph.D. and Epitope
Pharmaceuticals, Inc. (8)
10.23
Form of Director/Officer Indemnification Agreement (9)*
10.24
Amendment to Employment Agreement of Steve H. Kanzer (10)*
31.1
Certification pursuant to Rule 13a-14(a)/15d-14(a) (11)
31.2
Certification pursuant to Rule 13a-14(a)/15d-14(a) (11)
32.1
Certification pursuant to Section 1350 of the Sarbanes-Oxley Act of 2002
(11)
_____________________
(1)
Incorporated by reference to (i) Exhibit 3.1 of the Registrant’s Current
Report on Form 8-K filed October 16, 2008, (ii) Exhibit 3.1 of the
Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June
30, 2001 filed August 14, 2001, and (iii) Exhibits 3.1, 4.1 and 4.2 of the
Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June
30, 1998 filed August 14, 1998.
(3)
Incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on
Form 8-K filed January 6, 2009
(4)
Incorporated by reference to the Registrant’s Form S-8 filed on January 18,
2008.
(5)
Incorporated by reference to the Registrant’s Form 8-K filed on November 6,
2006.
(6)
Incorporated by reference to the Registrant’s Form 10QSB filed on August 14,
2007.
(7)
Incorporated by reference to the Registrant’s Form 10QSB filed on November 14,
2007.
(8)
Incorporated by reference to the Registrant’s Form 10Q filed on November 14,
2008.
(9)
Incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on
Form 8-K filed January 6, 2009.
(10)
Incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on
Form 8-K filed January 6, 2009.
(11)
Filed herewith.
*
Management compensation agreement.
72
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned.
|
ADEONA
PHARMACEUTICALS, INC
|
|
|
By:
/s/ Steve H.
Kanzer
|
|
|
Steve
H. Kanzer
|
|
|
President
and Chief Executive Officer
|
|
|
(Principal
Executive Officer and Principal Financial Officer)
|
|
|
Date:
March 31, 2009
|
Pursuant
to the requirements of the Securities Act of 1934, this report has been signed
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
|
Date:
March 31, 2009
|
|
By:
/s/ Steve H.
Kanzer
Steve
H. Kanzer
Director,
Chairman and President and Chief Executive Officer
(Principal
Executive Officer and Principal Financial Officer)
|
|
Date:
March 31, 2009
|
|
By:
/s/ Nicholas
Stergis
Nicholas
Stergis
Director,
and Vice Chairman
|
|
Date:
March 31, 2009
|
|
By:
/s/ Jeffrey
Kraws
Jeffrey
Kraws
Director
|
|
Date:
March 31, 2009
|
|
By:
/s/ Jeff
Wolf
Jeff
Wolf
Director
|
|
Date:
March 31, 2009
|
|
By:
/s/ James S.
Kuo
James
S. Kuo
Director
|
73