NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three
Months and Six Months Ended June 30, 2018 and 2017
1.
Organization and Basis of Presentation
The
condensed consolidated financial statements of the Lixte Biotechnology Holdings, Inc., a Delaware corporation (“Holdings”),
including its wholly-owned Delaware subsidiary, Lixte Biotechnology, Inc. (“Lixte”) (collectively, the “Company”),
at June 30, 2018, and for the three months and six months ended June 30, 2018 and 2017, are unaudited. In the opinion of management
of the Company, all adjustments, including normal recurring accruals, have been made that are necessary to present fairly the
financial position of the Company as of June 30, 2018, and the results of its operations for the three months and six months ended
June 30, 2018 and 2017, and its cash flows for the six months ended June 30, 2018 and 2017. Operating results for the interim
periods presented are not necessarily indicative of the results to be expected for a full fiscal year. The consolidated balance
sheet at December 31, 2017 has been derived from the Company’s audited financial statements at such date.
The
statements and related notes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission
(the “SEC”). Accordingly, certain information and footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. These financial
statements should be read in conjunction with the financial statements and other information included in the Company’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2017, as filed with the SEC.
2.
Business
The
Company is a drug discovery company that uses biomarker technology to identify enzyme targets associated with serious common diseases
and then designs novel compounds to attack those targets. The Company’s product pipeline encompasses two major categories
of compounds at various stages of pre-clinical and clinical development that the Company believes have broad therapeutic potential
not only for cancer but also for other debilitating and life-threatening diseases.
The
Company’s activities are subject to significant risks and uncertainties, including the need for additional capital, as described
below. The Company has not yet commenced any revenue-generating operations, does not have positive cash flows from operations,
and is dependent on periodic infusions of equity capital to fund its operating requirements.
The
Company’s common stock is traded on the OTCQB operated by the OTC Markets under the symbol “LIXT”.
Going
Concern
The
Company’s consolidated financial statements have been presented on the basis that it is a going concern, which contemplates
the realization of assets and satisfaction of liabilities in the normal course of business. The Company has not generated any
revenues from operations to date and does not expect to do so in the foreseeable future. The Company has experienced recurring
operating losses and negative operating cash flows since inception and has financed its working capital requirements during this
period through the recurring sale of its equity securities and the exercise of outstanding common stock options and purchase warrants.
As
a result, management has concluded that there is substantial doubt about the Company’s ability to continue as a going concern
within one year of the date that the condensed consolidated financial statements are being issued. In addition, the Company’s
independent registered public accounting firm, in their report on the Company’s consolidated financial statements for the
year ended December 31, 2017, has also expressed substantial doubt about the Company’s ability to continue as a going concern.
The
Company’s ability to continue as a going concern is dependent upon its ability to raise additional equity capital to fund
its research and development activities and to ultimately achieve sustainable operating revenues and profits. The Company’s
consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
Because
the Company is currently engaged in research at a relatively early stage, it will likely take a significant amount of time to
develop any product or intellectual property capable of generating sustainable revenues. Accordingly, the Company’s business
is unlikely to generate any sustainable operating revenues in the next several years and may never do so. In addition, to the
extent that the Company is able to generate revenues through licensing its technologies or through product sales, there can be
no assurance that the Company will be able to achieve positive earnings and operating cash flows.
At
June 30, 2018, the Company had cash of $535,995 available to fund its operations. The Company will need to raise additional capital
during the quarter ending December 31, 2018 to fund its ongoing business activities. The next steps in the development of the
Company’s lead anti-cancer compound LB-100 are to evaluate its anti-cancer effects in Phase 1b/2 clinical trials, which
will require additional financing. The Company’s longer-term objective is to secure one or more strategic partnerships with
pharmaceutical companies with major programs in cancer.
The
amount and timing of future cash requirements in 2018 and thereafter will depend on the pace and design of the Company’s
clinical trial program. As market conditions present uncertainty as to the Company’s ability to secure additional funds,
there can be no assurances that the Company will be able to secure additional financing on acceptable terms, or at all, as and
when necessary to continue to conduct operations. If cash resources are insufficient to satisfy the Company’s ongoing cash
requirements, the Company would be required to scale back or discontinue its technology and product development programs and/or
clinical trials, or obtain funds, if available (although there can be no certainty), through strategic alliances that may require
the Company to relinquish rights to certain of its compounds, or to discontinue its operations entirely.
Reclassifications
Certain
comparative amounts in 2017 have been reclassified to conform to the current year’s presentation. Other than the reclassification
for comparability of $122,810 and $282,421 of patent-related legal costs from research and development costs to general and administrative
costs in the condensed consolidated statements of operations for the three months and six months ended June 30, 2017, respectively,
these reclassifications were immaterial, both individually and in the aggregate. These changes did not impact loss from operations
or net loss for the three months and six months ended June 30, 2017.
3.
Summary of Significant Accounting Policies
Principles
of Consolidation
The
accompanying condensed consolidated financial statements of the Company have been prepared in accordance with United States generally
accepted accounting principles (“GAAP”) and include the financial statements of Holdings and its wholly-owned subsidiary,
Lixte. Intercompany balances and transactions have been eliminated in consolidation.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of expenses during
the reporting period. Management bases its estimates on historical experience and on various assumptions that are believed to
be reasonable in relation to the financial statements taken as a whole under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
Management regularly evaluates the key factors and assumptions used to develop the estimates utilizing currently available information,
changes in facts and circumstances, historical experience and reasonable assumptions. After such evaluations, if deemed appropriate,
those estimates are adjusted accordingly. Actual results could differ from those estimates. Significant estimates include those
related to assumptions used in accruals for potential liabilities, valuing equity instruments issued for services, and the realization
of deferred tax assets.
Cash
Concentrations
The
Company maintains cash balances with financial institutions in federally-insured accounts. The Company may periodically have cash
balances in banks in excess of FDIC insurance limits. The Company maintains its accounts with financial institutions with high
credit ratings. The Company has not experienced any losses to date resulting from this practice.
Research
and Development
Research
and development costs consist primarily of fees paid to consultants and outside service providers, and other expenses relating
to the acquisition, design, development and testing of the Company’s compounds and product candidates.
Research
and development costs are expensed ratably over the life of the underlying contracts, unless the achievement of milestones, the
completion of contracted work, or other information indicates that a different expensing schedule is more appropriate.
Obligations
incurred with respect to mandatory scheduled payments under research agreements without milestone provisions are recognized ratably
over the appropriate period, as specified in the agreement, and are recorded as liabilities in the Company’s consolidated
balance sheet, with a corresponding charge to research and development costs in the Company’s consolidated statement of
operations.
The
Company retained Theradex Systems, Inc. (“Theradex”), an international contract research organization (“CRO”)
that provides professional services for the clinical research and development of pharmaceutical compounds, to be responsible for
managing and administering the Company’s Phase 1 clinical trial of LB-100. The costs of the Phase 1 clinical trial of LB-100
that were paid through Theradex were recorded and expensed based upon the documentation provided by the CRO.
Payments
made pursuant to research and development contracts are initially recorded as advances on research and development contract services
in the Company’s balance sheet and then charged to research and development costs in the Company’s statement of operations
as those contract services are performed. Expenses incurred under research and development contracts in excess of amounts advanced
are recorded as research and development contract liabilities in the Company’s balance sheet, with a corresponding charge
to research and development costs in the Company’s statement of operations. The Company reviews the status of its research
and development contracts on a quarterly basis.
Patent
and Licensing Costs
Due
to the significant uncertainty associated with the successful development of one or more commercially viable products based on
the Company’s research efforts and related patent applications, all patent-related legal and filing fees and licensing-related
legal fees are expensed as incurred. Patent and licensing costs were $243,153 and $172,394 for the three months ended June 30,
2018 and 2017, respectively, and $460,813 and $487,748 for the six months ended June 30, 2018 and 2017, respectively. Patent and
licensing costs are included in general and administrative costs in the Company’s condensed consolidated statements of operations.
Accounting
for Preferred Stock
The
Company accounts for preferred stock as either equity or debt, depending on the specific characteristics of the security issued.
The Series A Convertible Preferred Stock issued by the Company in January 2016 and March 2015 has been classified in stockholders’
equity, as described at Note 4.
Concentration
of Risk
The
Company periodically contracts with directors, including companies controlled by or associated with directors, to provide consulting
services related to the Company’s research and development and clinical trial activities. Agreements for these services
can be for a specific time period (typically one year) or for a specific project or task and can include both cash and non-cash
compensation. The only such contract that represents 10% or more of general and administrative or research and development costs
is described below.
On
September 21, 2012, the Company entered into a work order agreement with Theradex, the CRO responsible for the clinical development
of the Company’s lead anti-cancer compound LB-100, to manage and administer the Phase 1 clinical trial of LB-100. The Phase
1 clinical trial of LB-100, which began during April 2013 with the entry of patients into the clinical trial, was carried out
by nationally recognized comprehensive cancer centers. The patient accrual goal was reached in April 2016 and the clinical trial
was closed to further patient enrollment at that time. All patients completed treatment with LB-100 and were off study by the
end of May 2016. Thereafter, the Company continued to incur costs to complete the analysis of the clinical data, reconcile and
pay the remaining costs owed to the participating clinical sites, and to prepare and submit the required Clinical Study Report
to the United States Food and Drug Administration (“FDA”) on the completed Phase 1 clinical trial of LB-100, which
process was substantially complete at December 31, 2017.
Total
costs charged to operations from 2013 through December 31, 2017 for services paid to or through Theradex for the Phase 1 clinical
trial of LB-100 aggregated $2,233,248, with approximately 60% of such costs allocated for services provided by Theradex and approximately
40% for pass-through costs for clinical center laboratory costs and investigator costs over the life of the clinical trial. During
the three months ended June 30, 2018 and 2017, the Company did not incur any such clinical trial costs. During the six months
ended June 30, 2018 and 2017, the Company incurred $0 and $64,615, respectively, of such clinical trial costs, representing approximately
0% and 41% of research and development costs for such periods. Costs pursuant to this agreement are included in research and development
costs in the Company’s condensed consolidated statements of operations.
Income
Taxes
The
Company accounts for income taxes under an asset and liability approach for financial accounting and reporting for income taxes.
Accordingly, the Company recognizes deferred tax assets and liabilities for the expected impact of differences between the financial
statements and the tax basis of assets and liabilities.
The
Company has elected to deduct research and development costs on a current basis for federal income tax purposes. For federal tax
purposes, start-up and organization costs were deferred until January 1, 2008 at which time the Company began to amortize such
costs over a 180-month period.
The
Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized.
In the event the Company was to determine that it would be able to realize its deferred tax assets in the future in excess of
its recorded amount, an adjustment to the deferred tax assets would be credited to operations in the period such determination
was made. Likewise, should the Company determine that it would not be able to realize all or part of its deferred tax assets in
the future, an adjustment to the deferred tax assets would be charged to operations in the period such determination was made.
The
Company is subject to U.S. federal income taxes and income taxes of various state tax jurisdictions. As the Company’s net
operating losses have yet to be utilized, all previous tax years remain open to examination by Federal authorities and other jurisdictions
in which the Company currently operates or has operated in the past. The Company had no unrecognized tax benefits as of June 30,
2018 and December 31, 2017 and does not anticipate any material amount of unrecognized tax benefits within the next 12 months.
The
Company accounts for uncertainties in income tax law under a comprehensive model for the financial statement recognition, measurement,
presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns as prescribed by GAAP.
The tax effects of a position are recognized only if it is “more-likely-than-not” to be sustained by the taxing authority
as of the reporting date. If the tax position is not considered “more-likely-than-not” to be sustained, then no benefits
of the position are recognized. As of June 30, 2018, the Company had not recorded any liability for uncertain tax positions. In
subsequent periods, any interest and penalties related to uncertain tax positions will be recognized as a component of income
tax expense.
On
December 22, 2017, the Tax Reform Act was signed into law. The Tax Reform Act, effective for tax years beginning on or after January
1, 2018, except for certain provisions, resulted in significant changes to existing United States tax law, including various provisions
that are expected to impact the Company. Among other provisions, the Tax Reform Act reduces the federal corporate tax rate from
35% to 21% effective January 1, 2018, allows for the acceleration of expensing for certain business assets, requires companies
to pay a one-time transition tax on certain unremitted earnings of foreign subsidiaries, and eliminates U.S. federal income tax
on dividends from foreign subsidiaries.
Stock-Based
Compensation
The
Company periodically issues common stock and stock options to officers, directors, Scientific Advisory Committee members and consultants
for services rendered. Options vest and expire according to terms established at the issuance date of each grant.
The
Company accounts for stock-based payments to officers and directors by measuring the cost of services received in exchange for
equity awards based on the grant date fair value of the awards, with the cost recognized as compensation expense on the straight-line
basis in the Company’s financial statements over the vesting period of the awards. The Company accounts for stock-based
payments to Scientific Advisory Committee members and consultants by determining the value of the stock compensation based upon
the measurement date at either (a) the date at which a performance commitment is reached or (b) at the date at which the necessary
performance to earn the equity instruments is complete.
Stock
grants, which are generally time vested, are measured at the grant date fair value and charged to operations ratably over the
vesting period.
Stock
options granted to members of the Company’s Scientific Advisory Committee and to outside consultants are revalued each reporting
period to determine the amount to be recorded as an expense in the respective period. As the stock options vest, they are valued
on each vesting date and an adjustment is recorded for the difference between the value already recorded and the value on the
date of vesting.
The
fair value of common stock issued as stock-based compensation is determined by reference to the closing price of the Company’s
common stock on the date of issuance. The fair value of stock options granted as stock-based compensation is determined utilizing
the Black-Scholes option-pricing model, and is affected by several variables, the most significant of which are the life of the
equity award, the exercise price of the stock option as compared to the fair market value of the common stock on the grant date,
and the estimated volatility of the common stock over the term of the equity award. Estimated volatility is based on the historical
volatility of the Company’s common stock. The risk-free interest rate is based on the U.S. Treasury yield curve in effect
at the time of grant. The fair market value of common stock is determined by reference to the quoted market price of the Company’s
common stock.
The
Company recognizes the fair value of stock-based compensation awards in general and administrative costs and in research and development
costs, as appropriate, in the Company’s condensed consolidated statement of operations. The Company issues new shares of
common stock to satisfy stock option exercises.
Earnings
(Loss) Per Share
The
Company’s computation of earnings (loss) per share (“EPS”) includes basic and diluted EPS. Basic EPS is measured
as the income (loss) attributable to common stockholders divided by the weighted average common shares outstanding for the period.
Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., preferred
shares, warrants and stock options) as if they had been converted at the beginning of the periods presented, or issuance date,
if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss
per share) are excluded from the calculation of diluted EPS.
Loss
per common share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during
the respective periods. Basic and diluted loss per common share is the same for all periods presented because all preferred shares,
warrants and stock options outstanding are anti-dilutive.
At
June 30, 2018 and 2017, the Company excluded the outstanding securities summarized below, which entitle the holders thereof to
acquire shares of common stock, from its calculation of earnings per share, as their effect would have been anti-dilutive.
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Series A Convertible Preferred Stock
|
|
|
4,375,000
|
|
|
|
4,375,000
|
|
Common stock options, including options issued in the form of warrants
|
|
|
7,470,000
|
|
|
|
8,600,000
|
|
Total
|
|
|
11,845,000
|
|
|
|
12,975,000
|
|
Fair
Value of Financial Instruments
The
authoritative guidance with respect to fair value established a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value into three levels and requires that assets and liabilities carried at fair value be classified
and disclosed in one of three categories, as presented below. Disclosure as to transfers in and out of Levels 1 and 2, and activity
in Level 3 fair value measurements, is also required.
Level
1. Observable inputs such as quoted prices in active markets for an identical asset or liability that the Company has the ability
to access as of the measurement date. Financial assets and liabilities utilizing Level 1 inputs include active-exchange traded
securities and exchange-based derivatives.
Level
2. Inputs, other than quoted prices included within Level 1, which are directly observable for the asset or liability or indirectly
observable through corroboration with observable market data. Financial assets and liabilities utilizing Level 2 inputs include
fixed income securities, non-exchange-based derivatives, mutual funds, and fair-value hedges.
Level
3. Unobservable inputs in which there is little or no market data for the asset or liability which requires the reporting entity
to develop its own assumptions. Financial assets and liabilities utilizing Level 3 inputs include infrequently-traded non-exchange-based
derivatives and commingled investment funds and are measured using present value pricing models.
The
Company determines the level in the fair value hierarchy within which each fair value measurement falls in its entirety, based
on the lowest level input that is significant to the fair value measurement in its entirety. In determining the appropriate levels,
the Company performs an analysis of the assets and liabilities at each reporting period end.
The
carrying value of financial instruments (consisting of cash and accounts payable and accrued expenses) is considered to be representative
of their respective fair values due to the short-term nature of those instruments.
Recent
Accounting Pronouncements
Recently
Adopted Accounting Standards
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09, Revenue
from Contracts with Customers (Topic 606) (“ASU 2014-09”). ASU 2014-09 eliminates transaction- and industry-specific
revenue recognition guidance under current GAAP and replaces it with a principle-based approach for determining revenue recognition.
ASU 2014-09 requires that companies recognize revenue based on the value of transferred goods or services as they occur in the
contract. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash
flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs
incurred to obtain or fulfill a contract. The FASB has recently issued ASU 2016-08, ASU 2016-10, ASU 2016-11, ASU 2016-12, and
ASU 2016-20, all of which clarify certain implementation guidance within ASU 2014-09. ASU 2014-09 is effective for reporting periods
beginning after December 15, 2017. The Company adopted the provisions of ASU 2014-09 in the quarter beginning January 1, 2018.
The adoption of ASU 2014-09 did not have any impact on the Company’s financial statement presentation or disclosures.
In
July 2017, the FASB issued Accounting Standards Update No. 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities
from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down
Round Features; (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic
Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception (“ASU 2017-11”). ASU 2017-11
allows companies to exclude a down round feature when determining whether a financial instrument (or embedded conversion feature)
is considered indexed to the entity’s own stock. As a result, financial instruments (or embedded conversion features) with
down round features are no longer be required to be accounted for as derivative liabilities. A company will recognize the value
of a down round feature only when it is triggered and the strike price has been adjusted downward. For equity-classified freestanding
financial instruments, an entity will treat the value of the effect of the down round as a dividend and a reduction of income
available to common shareholders in computing basic earnings per share. For convertible instruments with embedded conversion features
containing down round provisions, entities will recognize the value of the down round as a beneficial conversion discount to be
amortized to earnings. ASU 2017-11 is effective for fiscal years beginning after December 15, 2018, and interim periods within
those fiscal years. Early adoption is permitted. The Company adopted the provisions of ASU 2017-11 in the quarter beginning January
1, 2018. The adoption of ASU 2017-11 did not have any impact on the Company’s financial statement presentation or disclosures.
Recently
Issued Accounting Standards
In
February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02
requires a lessee to record a right-of-use asset and a corresponding lease liability, initially measured at the present value
of the lease payments, on the balance sheet for all leases with terms longer than 12 months, as well as the disclosure of key
information about leasing arrangements. ASU 2016-02 requires recognition in the statement of operations of a single lease cost,
calculated so that the cost of the lease is allocated over the lease term, generally on a straight-line basis. ASU 2016-02 requires
classification of all cash payments within operating activities in the statement of cash flows. Disclosures are required to provide
the amount, timing and uncertainty of cash flows arising from leases. A modified retrospective transition approach is required
for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period
presented in the financial statements, with certain practical expedients available. ASU 2016-02 is effective for fiscal years
beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company
will adopt the provisions of ASU 2016-02 in the quarter beginning January 1, 2019. The adoption of ASU 2016-02 is not expected
to have any impact on the Company’s financial statement presentation or disclosures.
In
June 2018, the FASB issued Accounting Standards Update 2018-07, Compensation – Stock Compensation (Topic 718): Improvements
to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”). ASU 2018-07 expands the scope of Topic 718 to include
share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 also clarifies that Topic 718
does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction
with selling goods or services to customers as part of a contract accounted for under Revenue from Contracts with Customers (Topic
606). ASU 2018-07 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal
years. Early adoption is permitted. The Company will adopt the provisions of ASU 2018-07 in the quarter beginning January 1, 2019.
The adoption of ASU 2018-07 is not expected to have any impact on the Company’s financial statement presentation or disclosures.
Management
does not believe that any other recently issued, but not yet effective, authoritative guidance, if currently adopted, would have
a material impact on the Company’s financial statement presentation or disclosures.
4.
Stockholders’ Equity
Preferred
Stock
The
Company has authorized a total of 10,000,000 shares of preferred stock, par value $0.0001 per share. On March 17, 2015, the Company
filed a Certificate of Designations, Preferences, Rights and Limitations (the “Certificate of Designations”) of its
Series A Convertible Preferred Stock with the Delaware Secretary of State to amend the Company’s certificate of incorporation.
The Company designated 175,000 shares as Series A Convertible Preferred Stock, which are non-voting and are not subject to increase
without the written consent of a majority of the holders of the Series A Convertible Preferred Stock or as otherwise set forth
in the Certificate of Designations. The holders of each 175,000 share tranche of the Series A Convertible Preferred Stock are
entitled to receive a per share dividend equal to 1% of the annual net revenue of the Company divided by 175,000, until converted
or redeemed.
Effective
January 28, 2016, the Series A Convertible Preferred Stock Certificate of Designations was amended to increase the authorized
shares of Series A Convertible Preferred Stock from 175,000 shares to 350,000 shares. Accordingly, as of December 31, 2017, 9,650,000
shares of preferred stock were undesignated and may be issued with such rights and powers as the Board of Directors may designate.
Effective
March 17, 2015, the Company entered into a Securities Purchase Agreement with a stockholder of the Company who owned 10.6% of
the Company’s issued and outstanding shares of common stock immediately prior to this transaction, pursuant to which such
stockholder purchased 175,000 shares of the Company’s Series A Convertible Preferred Stock at $10.00 per share for an aggregate
purchase price of $1,750,000. As the closing price of the Company’s common stock was $0.25 per share on March 17, 2015,
which was less than the $0.80 effective price per share of the shares of common stock underlying the Series A Convertible Preferred
Stock, there was no beneficial conversion feature associated with this transaction.
Effective
January 21, 2016, the Company entered into a Securities Purchase Agreement with the holder of the Series A Convertible Preferred
Stock previously sold on March 17, 2015, pursuant to which the Company sold an additional 175,000 shares of Series A Convertible
Preferred Stock at $10.00 per share for an aggregate purchase price of $1,750,000. As the closing price of the Company’s
common stock was $0.22 per share on January 21, 2016, which was less than the $0.80 effective price per share of the shares of
common stock underlying the Series A Convertible Preferred Stock, there was no beneficial conversion feature associated with this
transaction.
Each
share of Series A Convertible Preferred Stock may be converted, at the option of the holder, into 12.5 shares of common stock
(subject to customary anti-dilution provisions) and the Series A Convertible Preferred Stock is subject to mandatory conversion
at the conversion rate in the event of a merger or sale transaction resulting in gross proceeds to the Company of at least $21,875,000.
The Series A Convertible Preferred Stock has a liquidation preference based on its assumed conversion into shares of common stock.
The Series A Convertible Preferred Stock does not have a cash liquidation preference.
If
fully converted, the 350,000 outstanding shares of Series A Convertible Preferred Stock would convert into 4,375,000 shares of
common stock at June 30, 2018. The Company has the right to redeem the Series A Convertible Preferred Stock up to the fifth anniversary
of the respective closing dates at a price per share equal to $50.00. The Series A Convertible Preferred Stock has no right to
cash, except for the payment of the aforementioned dividend based on the generation of revenues by the Company and does not have
any registration rights.
Based
on the attributes of the Series A Convertible Preferred Stock described above, the Company determined to account for the Series
A Convertible Preferred Stock as a permanent component of stockholders’ equity.
Common
Stock
The
Company is authorized to issue up to 100,000,000 shares of common stock (par value $0.0001). As of June 30, 2018 and December
31, 2017, the Company had 58,025,814 shares of common stock issued and outstanding.
Effective
February 24, 2017, the Company entered into a Securities Purchase Agreement with an accredited investor pursuant to which the
purchaser purchased 4,000,000 shares of the Company’s common stock at a price of $0.25 per share for an aggregate purchase
price of $1,000,000.
Effective
April 3, 2017, the Company entered into a Securities Purchase Agreement with an accredited investor pursuant to which the purchaser
purchased 6,000,000 shares of the Company’s common stock at a price of $0.25 per share for an aggregate purchase price of
$1,500,000.
Information
with respect to the issuance of common stock in connection with various stock-based compensation arrangements is provided at Note
6.
5.
Related Party Transactions
The
Company’s Chairman and major stockholder, Dr. John Kovach, was paid a salary of $15,000 for the three months ended June
30, 2018 and 2017, and $30,000 for the six months ended June 30, 2018 and 2017, respectively, which amounts are included in general
and administrative costs in the Company’s condensed consolidated statements of operations. Beginning in late February 2017,
Dr. Kovach began devoting 100% of his time to the Company’s business activities.
The
Company’s principal office facilities are being provided without charge by Dr. Kovach. Such costs were not material to the
Company’s consolidated financial statements and, accordingly, have not been reflected therein.
On
September 12, 2007, the Company entered into a consulting agreement with Gil Schwartzberg for Mr. Schwartzberg to provide financial
advisory and consulting services to the Company with respect to financing matters, capital structure and strategic development,
and to assist management in communications with investors and shareholders. Mr. Schwartzberg is currently a significant stockholder
of the Company and continues to be a consultant to the Company. Consideration under this consulting agreement, including subsequent
extensions, has been paid exclusively in the form of stock options. On January 28, 2014, the Company entered into a second amendment
to the consulting agreement to extend it to January 28, 2019. In conjunction with the second amendment to the consulting agreement,
the Company granted to Mr. Schwartzberg stock options to purchase an additional aggregate of 4,000,000 shares of common stock,
exercisable for a period of the earlier of five years from the grant date or the termination of the consulting agreement at $0.50
per share, with one-half of the stock options (2,000,000 shares) vesting immediately and one-half of the stock options (2,000,000
shares) vesting on January 28, 2015. Accordingly, all stock-based compensation expense with respect to the January 28, 2014 extension
of the consulting agreement was charged to operations during the years ended December 31, 2015 and 2014.
Legal
and consulting fees charged to operations for services rendered by the Eric Forman Law Office were $12,000 for the three months
ended June 30, 2018 and 2017, and $24,000 for the six months ended June 30, 2018 and 2017, respectively. Eric J. Forman is the
son-in-law of Gil Schwartzberg, a significant stockholder of and consultant to the Company, and is the son of Dr. Stephen J. Forman,
who was elected to the Company’s Board of Directors on May 13, 2016. Julie Forman, the wife of Eric Forman and the daughter
of Gil Schwartzberg, is Vice President of Morgan Stanley Wealth Management, where the Company maintains a banking relationship.
Stock-based
compensation arrangements involving members of the Company’s Board of Directors and affiliates are described at Note 6.
Total stock-based compensation expense relating to directors, officers, affiliates and related parties was $0 and $1,837 for the
three months ended June 30, 2018 and 2017, respectively, and $0 and $5,681 for the six months ended June 30, 2018 and 2017,respectively.
6.
Stock-Based Compensation
The
Company issues common stock and stock options as incentive compensation to directors and as compensation for the services of independent
contractors and consultants of the Company.
On
June 20, 2007, the Board of Directors of the Company approved the 2007 Stock Compensation Plan (the “2007 Plan”),
which provides for the granting of awards, consisting of stock options, stock appreciation rights, performance shares, or restricted
shares of common stock, to employees and independent contractors, for up to 2,500,000 shares of the Company’s common stock,
under terms and conditions as determined by the Company’s Board of Directors. The 2007 Plan terminated on June 19, 2017.
As of June 30, 2018, unexpired stock options for 1,350,000 shares were issued and outstanding under the 2007 Plan.
The
fair value of each stock option awarded is estimated on the date of grant and subsequent measurement dates using the Black-Scholes
option-pricing model. The expected dividend yield assumption is based on the Company’s expectation of dividend payouts.
The expected volatilities are based on historical volatility of the Company’s stock. The risk-free interest rate is based
on the U.S. treasury yield curve in effect as of the grant date. The expected life of the stock options is the average of the
vesting term and the full contractual term of the stock options.
There
were no stock options requiring an assessment of value during the six months ended June 30, 2018.
For
stock options requiring an assessment of value during the six months ended June 30, 2017, the fair value of each stock option
award was estimated using the Black-Scholes option-pricing model with the following assumptions:
Risk-free interest rate
|
|
1.18% to 1.53
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
Expected volatility
|
|
|
308.51% to 311.11
|
%
|
Expected life
|
|
|
1.5 to 3.5 years
|
|
On
December 24, 2013, the Company entered into an agreement with NDA Consulting Corp. (“NDA”) for consultation and advice
in the field of oncology research and drug development. As part of the agreement, NDA also agreed to cause its president, Dr.
Daniel D. Von Hoff, M.D., to become a member of the Company’s Scientific Advisory Committee. In connection with this agreement,
NDA was granted stock options to purchase 100,000 shares of the Company’s common stock, vesting 25,000 shares on June 24,
2014, and thereafter 25,000 shares annually on June 24, 2015, 2016 and 2017, exercisable for a period of five years from the date
of grant at $0.13 per share, which was the fair market value of the Company’s common stock on the grant date. The fair value
of these stock options, as calculated pursuant to the Black-Scholes option-pricing model, was initially determined to be $12,960
($0.13 per share). The Company re-measures the non-vested options to fair value at the end of each reporting period. The unvested
portion of the fair value of the stock options was charged to operations ratably from December 24, 2013 through June 24, 2017.
During the three months and six months ended June 30, 2017, the Company recorded a (credit) charge to operations of ($9,646) and
$2,492, respectively, with respect to these stock options.
Effective
September 14, 2015, the Company entered into a Collaboration Agreement with BioPharmaWorks LLC (“BioPharmaWorks”),
pursuant to which the Company engaged BioPharmaWorks to perform certain services for the Company as described at Note 7. In connection
with the Collaboration Agreement, the Company agreed to issue to BioPharmaWorks 1,000,000 fully-vested shares of the Company’s
common stock, valued at $260,000, based upon the closing price of the Company’s common stock of $0.26 per share, on September
14, 2015. Additionally, the Company issued to BioPharmaWorks two options in the form of warrants to purchase 1,000,000 shares
(500,000 shares per warrant) of the Company’s common stock. The first warrant vested on September 14, 2016 and is exercisable
for a period of five years from the date of grant at $1.00 per share. The second warrant vested on September 14, 2017 and is exercisable
for a period of five years from the date of grant at $2.00 per share. The fair value of the first and second warrants, as calculated
pursuant to the Black-Scholes option-pricing model, was determined to be $128,400 ($0.2568 per share) and $127,850 ($0.2557 per
share), respectively. The Company re-measured the non-vested stock options to fair value at the end of each reporting period through
September 30, 2017. During the three months and six months ended June 30, 2017, the Company recorded a (credit) charge to operations
of ($42,389) and $13,568, respectively, with respect to these warrants.
Effective
May 13, 2016, in conjunction with his appointment as a director of the Company, the Company granted to Dr. Stephen J. Forman stock
options to purchase an aggregate of 200,000 shares of common stock under the 2007 Plan, exercisable for a period of five years
from vesting date at $0.16 per share, which was the fair market value of the Company’s common stock on such date. One-half
of such stock option (100,000 shares) vested on May 13, 2016 and the remaining one-half of such stock option (100,000 shares)
vested on May 13, 2017. The fair value of these stock options, as calculated pursuant to the Black-Scholes option-pricing model,
was determined to be $31,180 ($0.1559 per share), of which $15,590 was attributable to the stock options fully-vested on May 13,
2016 and was therefore was charged to operations on that date. The remaining unvested portion of the fair value of the stock options
was charged to operations ratably from May 13, 2016 through May 13, 2017. During the three months and six months ended June 30,
2017, the Company recorded charges to operations of $1,837 and $5,681, respectively, with respect to these stock options.
Total
stock-based compensation expense (credit) was $0 and ($50,198) for the three months ended June 30, 2018 and 2017, respectively.
Total stock-based compensation expense was $0 and $21,741 for the six months ended June 30, 2018 and 2017, respectively.
A
summary of stock option activity, including options issued in the form of warrants, during the six months ended June 30, 2018
is presented in the table below.
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
Number
|
|
|
Average
|
|
|
Contractual
|
|
|
|
of
|
|
|
Exercise
|
|
|
Life
|
|
|
|
Shares
|
|
|
Price
|
|
|
(in Years)
|
|
|
|
|
|
|
|
|
|
|
|
Stock options outstanding at December 31, 2017
|
|
|
7,470,000
|
|
|
$
|
0.545
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Stock options outstanding at June 30, 2018
|
|
|
7,470,000
|
|
|
$
|
0.545
|
|
|
|
1.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercisable at December 31, 2017
|
|
|
7,470,000
|
|
|
$
|
0.545
|
|
|
|
|
|
Stock options exercisable at June 30, 2018
|
|
|
7,470,000
|
|
|
$
|
0.545
|
|
|
|
1.41
|
|
There
was no deferred compensation expense for the outstanding value of unvested stock options at June 30, 2018.
The
exercise prices of common stock options outstanding and exercisable, including options issued in the form of warrants, are as
follows at June 30, 2018:
|
|
|
Options
|
|
|
Options
|
|
Exercise
|
|
|
Outstanding
|
|
|
Exercisable
|
|
Prices
|
|
|
(Shares)
|
|
|
(Shares)
|
|
|
|
|
|
|
|
|
|
$
|
0.120
|
|
|
|
450,000
|
|
|
|
450,000
|
|
$
|
0.130
|
|
|
|
100,000
|
|
|
|
100,000
|
|
$
|
0.150
|
|
|
|
320,000
|
|
|
|
320,000
|
|
$
|
0.160
|
|
|
|
200,000
|
|
|
|
200,000
|
|
$
|
0.200
|
|
|
|
500,000
|
|
|
|
500,000
|
|
$
|
0.250
|
|
|
|
500,000
|
|
|
|
500,000
|
|
$
|
0.500
|
|
|
|
4,400,000
|
|
|
|
4,400,000
|
|
$
|
1.000
|
|
|
|
500,000
|
|
|
|
500,000
|
|
$
|
2.000
|
|
|
|
500,000
|
|
|
|
500,000
|
|
|
|
|
|
|
7,470,000
|
|
|
|
7,470,000
|
|
The
intrinsic value of exercisable but unexercised in-the-money stock options at June 30, 2018 was approximately $203,460, based on
a fair market value of $0.2780 per share on June 30, 2018.
All
outstanding options to acquire shares of the Company’s common stock were vested at June 30, 2018.
The
Company expects to satisfy such stock obligations through the issuance of authorized but unissued shares of common stock.
7.
Commitments and Contingencies
The
Company may be subject to legal proceedings from time to time as part of its business activities. As of June 30, 2018, the Company
was not subject to any pending or threatened legal actions or claims.
Significant
agreements and contracts are summarized as follows:
Effective
October 18, 2013, the Company entered into a Materials Cooperative Research and Development Agreement (M-CRADA) with the National
Institute of Neurological Disorders and Stroke (NINDS) of the National Institutes of Health (NIH) for a term of four years. The
Surgical Neurology Branch of NINDS is conducting research characterizing a variety of compounds proprietary to the Company and
is examining the potential of the compounds for anti-cancer activity, reducing neurological deficit due to ischemia and brain
injury, and stabilizing catalytic function of misfolded proteins for inborn brain diseases. Under an M-CRADA, a party provides
research material, in this case proprietary compounds from the Company’s pipeline, for study by scientists at NIH. The exchange
of material is for research only and does not imply any endorsement of the material on the part of either party. Under the M-CRADA,
the NIH grants a collaborator an exclusive option to elect an exclusive or non-exclusive commercialization license.
On
June 14, 2017, the Company executed Amendment No. 1 to the M-CRADA, pursuant to which the Company agreed to provide funding in
the amount of $100,000 to the National Cancer Institute for use in acquiring technical, statistical and administrative support
for research activities. The $100,000 amount was scheduled to be paid in two equal installments of $50,000, the first of which
was paid, as scheduled, on July 9, 2017, and was charged to operations on such date. The second installment of $50,000 was scheduled
to be paid on the June 14, 2018 anniversary date of the amendment and was accreted ratably through such date. During the three
months and six months ended June 30, 2018, $12,500 and $25,000, respectively, was charged to operations and is included in research
and development costs with respect to Amendment No. 1. Prior to the payment of the second installment of $50,000, NINDS and the
Company agreed to defer such payment, which has been fully accrued at June 30, 2018, until further collaborative plans have been
established.
On
December 24, 2013, the Company entered into an agreement with NDA Consulting Corp. (“NDA”) for consultation and advice
in the field of oncology research and drug development. As part of the agreement, NDA also agreed to cause its president, Dr.
Daniel D. Von Hoff, M.D., to become a member of the Company’s Scientific Advisory Committee. The term of the agreement was
for one year and provided for a quarterly cash fee of $4,000. In 2014, 2015, 2016 and 2017, the agreement had been automatically
renewed on its anniversary date for an additional one-year term. Consulting and advisory fees charged to operations pursuant to
this agreement were $4,000 during the three months ended June 30, 2018 and 2017, and $8,000 during the six months ended June 30,
2018 and 2017.
Effective
September 14, 2015, the Company entered into a Collaboration Agreement with BioPharmaWorks, pursuant to which the Company engaged
BioPharmaWorks to perform certain services for the Company. Those services include, among other things: (a) assisting the Company
to (i) commercialize its products and strengthen its patent portfolio, (ii) identify large pharmaceutical companies with potential
interest in the Company’s product pipeline, and (iii) prepare and deliver presentations concerning the Company’s products;
(b) at the request of the Board of Directors, serving as backup management for up to three months should the Company’s Chief
Executive Officer and scientific leader be temporarily unable to carry out his duties; (c) being available for consultation in
drug discovery and development; and (d) identifying providers and overseeing tasks relating to clinical use and commercialization
of new compounds.
BioPharmaWorks
was founded in 2015 by former Pfizer scientists with extensive multi-disciplinary research and development and drug development
experience. The Collaboration Agreement was for an initial term of two years and automatically renews for subsequent annual periods
unless terminated by a party not less than 60 days prior to the expiration of the applicable period. In connection with the Collaboration
Agreement, the Company agreed to pay BioPharmaWorks a monthly fee of $10,000, subject to the right of the Company to pay a negotiated
hourly rate in lieu of the monthly payment and agreed to issue to BioPharmaWorks certain equity-based compensation as described
at Note 6. In November 2016, it was mutually agreed to suspend services and payments pursuant to this agreement, without extending
the term of the agreement, for the period from November 1, 2016 through March 31, 2017. The agreement resumed as scheduled on
April 1, 2017 and was automatically renewed for an additional one-year period on September 13, 2017. In April 2018, it was again
mutually agreed to suspend services and payments pursuant to this agreement, without extending the term of the agreement, for
the period from February 1, 2018 through June 30, 2018. The Company recorded charges to operations pursuant to this Collaboration
Agreement of $0 and $30,000 during the three months ended June 30, 2018 and 2017, respectively, and $10,000 and $30,000 during
the six months ended June 30, 2018 and 2017, respectively.
On
March 22, 2018, the Company entered into a Patent Assignment and Exploitation Agreement (the “Agreement”) with INSERM
TRANSFERT SA, acting as delegatee of the French National Institute of Health and Medical Research (“INSERM”), for
the assignment to the Company of INSERM’S interest in United States Patent No. 9,833,450 entitled “Oxabicyloheptanes
and Oxabicycloheptenes for the Treatment of Depressive and Stress Disorders”, which was filed with the United States Patent
and Trademark Office in the name of INSERM and the Company as co-owners on February 19, 2015 and granted on May 12, 2017, and
related patent applications and filings. INSERM is a French public institution dedicated to research in the field of health and
medicine that had previously entered into a Material Transfer Agreement (“MTA”) with the Company to allow INSERM to
conduct research on the Company’s proprietary compound LB-100 and/or its analogs for the treatment of depressive or stress
disorders in humans. Pursuant to the Agreement, the Company has agreed to make certain milestone payments to INSERM aggregating
up to $1,750,000 upon achievement of development milestones and up to $6,500,000 upon achievement of commercial milestones. The
Company also agreed to pay INSERM certain commercial royalties on net sales of products attributed to the Agreement. The Company’s
current plan is to complete the validation process to evaluate LB-100 for the treatment of depressive or stress disorders in humans
within three years; however, the exploitation of this patent for the treatment of depressive and stress disorders in humans will
require substantial additional capital and/or a joint venture or other type of business arrangement with a pharmaceutical company
with substantially greater capital and business resources than the Company. As there can be no assurances that the Company will
be able to obtain the capital or business resources necessary to focus on the exploitation of this patent, it is uncertain when
the Company may reach any of the development or commercialization milestones under the Agreement, if at all.
Effective
April 2, 2018, the Company entered into a consulting agreement for a term of two years with Liberi Life Sciences Consultancy BV,
located in The Netherlands, for consulting and advisory services with respect to sales and licensing, as well as the procurement
of investors in China, Japan and South Korea (the “Consulting Agreement”). The Consulting Agreement provided for the
payment of a fixed, one-time retainer of EURO 15,000 (US $18,348), which was paid on April 5, 2018, and 2.5% of the net payments
received by the Company from sales of products or licensing activities arising directly and exclusively from leads generated by
the advisor during the term of the Consulting Agreement, and any investors introduced to the Company by the advisor that results
in an investment in the Company during the term of the Consulting Agreement. The Company recorded the payment of the retainer
as a prepaid expense in the Company’s condensed consolidated balance sheet. The Company is amortizing the retainer payment
over the two-year life of the Consulting Agreement, as a result of which the Company recorded a charge to operations of $2,294
during the three months and six months ended June 30, 2018. At June 30, 2018, the unamortized balance of the retainer payment
was $16,054, of which $9,174 was classified as a current asset and $6,880 was classified as a non-current asset at such date.
Summary
of Principal Cash Obligations and Commitments
The
following table sets forth the Company’s principal cash obligations and commitments for the next five fiscal years as of
June 30, 2018 aggregating $105,740, of which $62,440 is included in current liabilities in the Company’s condensed consolidated
balance sheet at June 30, 2018. Amounts included in the 2018 column represent amounts due at June 30, 2018 for the remainder of
the 2018 fiscal year ending December 31, 2018.
|
|
|
|
|
Payments Due by Year
|
|
|
|
Total
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development contracts
|
|
$
|
67,740
|
|
|
$
|
67,740
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Consulting agreements
|
|
|
38,000
|
|
|
|
38,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
105,740
|
|
|
$
|
105,740
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
8.
Subsequent Events
The
Company performed an evaluation of subsequent events through the date of filing of these condensed consolidated financial statements
with the SEC. There were no material subsequent events which affected, or could affect, the amounts or disclosures in the condensed
consolidated financial statements.