Acer Therapeutics Inc. - Annual Report: 2007 (Form 10-K)
UNITED
STATES
SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
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x
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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, 2007
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o
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
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Commission
File Number: 001-33004
Opexa
Therapeutics, Inc.
(Exact
Name of Registrant as Specified in Its Charter)
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Texas
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76-0333165
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(State
or Other Jurisdiction of
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(IRS
Employer
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Incorporation
or Organization)
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Identification
No.)
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2635 N Crescent Ridge Drive, The Woodlands,
Texas
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77381
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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: (281)
272-9331
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Securities
registered pursuant to Section 12(b) of the Act: Series E
Warrant
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Securities
registered pursuant to Section 12(g) of the Act: Common
Stock
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No þ
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 o No þ
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days. Yes þ No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
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“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (check one):
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filer
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Accelerated filer
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reporting company
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(Do
not check if a smaller reporting company)
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No þ
As
of March 13, 2008, 10,196,784 shares of the registrant’s common stock, par value
$0.50 per share, were outstanding. The aggregate market value of the voting and
non-voting common equity held by non-affiliates of the registrant as of March
13, 2008 based upon the closing price as of such date was approximately $8.8
million.
TABLE
OF CONTENTS
Forward
Looking Statements
The
statements contained in this report, other than statements of historical fact,
constitute forward-looking statements. Such statements include, without
limitation, all statements as to expectation, belief, estimation, intent,
anticipation, development, trial, contingency and statements as to our future
results of operations, the progress of our research and product development
programs, the need for, and timing of, additional capital and capital
expenditures, partnering prospects, the need for additional intellectual
property rights, effects of regulations, and the potential market
opportunities. These statements relate to events and/or future
financial performance and involve known and unknown risks, uncertainties and
other factors that may cause our actual results, levels of activity, performance
or achievements or the industry in which we operate to be materially different
from any future results, levels of activity, performance or achievements
expressed or implied by the forward-looking statements. These risks and other
factors include those listed under "Risk Factors" and those described elsewhere
in this report.
In
some cases, you can identify forward-looking statements by our use of terms such
as "may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," “intends,” "predicts," "potential," or the negative of these terms
or other comparable terminology. These statements are only predictions. Actual
events or results may differ materially. In evaluating these statements, you
should specifically consider various factors, including the risks outlined under
"Risk Factors." These factors may cause our actual results to differ materially
from any forward-looking statement. Factors that could affect our actual results
and could cause actual results to differ materially from those in
forward-looking statements include, but are not limited to, the
following:
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Our ability to conduct
successful clinical trials in a timely
manner;
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Our ability to raise capital
to finance our operations;
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Our ability to compete in the
markets in which we expect to market our
products;
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Our ability to generate
revenue from the commercialization and sale of our
products;
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Our ability to obtain
regulatory approval for our products from the
FDA;
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Our ability to ensure the
safety and efficacy of our
products;
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Our ability to obtain and
protect proprietary
technologies;
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Our ability to attract and
retain talented employees;
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Our ability to manufacture our
products on a
commercial-scale;
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Our ability to meet our
obligations under our license
agreements;
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The availability of third
party reimbursement policies to sustain a market for our
products;
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The acceptance of our product
candidates in the medical community;
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A variety of other risks
common to our industry and development stage companies, including ongoing
regulatory review, legislative and regulatory changes and public and
investment community perceptions of our
industry.
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Although
we believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance,
or achievements. Moreover, neither we nor any other person assumes
responsibility for the accuracy and completeness of these forward-looking
statements. We do not intend to update any of the forward-looking statements
after the date of this report to conform prior statements to actual
results.
Overview
Unless
otherwise indicated, we use “Opexa,” “the Company,” “we,” “our” and “us” in this
annual report to refer to the businesses of Opexa Therapeutics,
Inc.
We are a
biopharmaceutical company developing autologous cellular therapies to treat
several major illnesses, including multiple sclerosis (MS), rheumatoid arthritis
(RA), and diabetes. These therapies are based on our proprietary T-cell and
adult stem cell technologies. The information discussed related to
our product candidates is preliminary and investigative. Our product
candidates are not approved by the Food and Drug Administration
(FDA).
T-Cell
Therapy
We have an exclusive worldwide license
from Baylor College of Medicine (or Baylor) to an individualized T-cell
therapeutic vaccine, TovaxinÒ, which is in a United States (U.S.) FDA
Phase IIb human clinical trial to evaluate its safety and effectiveness in
treating MS.
MS is the
result of a person’s own T-cells attacking the myelin sheath that coats the
nerve cells of the central nervous system (CNS). Tovaxin consists of attenuated
patient-specific myelin reactive T-cells (MRTCs) against peptides from one or
more of the primary proteins on the surface of the myelin sheath (myelin basic
protein (MBP), proteolipid protein (PLP) and myelin oligodendrocyte glycoprotein
(MOG)). Patient-specific MRTCs are expanded in culture with specific peptides
identified by our proprietary test of the patient’s peripheral blood. The cells
are then attenuated by gamma irradiation, and returned to the patient as a
subcutaneous injection. Although further testing is necessary, results from our
initial human trials appear to indicate that these attenuated T-cells cause an
immune response directed at the autoreactive T-cells in the patient’s body,
resulting in a reduction in the level of harmful T-cells.
We believe
that our initial human trials suggest that Tovaxin safely induces the depletion
and regulation of MRTCs, possibly stabilizing the disease, reducing the
annualized relapse rate, and potentially improving the disability scores of
patients. Patients treated in a 10-subject, open-label Phase I/II dose
escalation clinical trial with Tovaxin have experienced minimal side effects and
the “per protocol” analysis of patients treated with Tovaxin achieved a 90%
reduction (p=0.0039) in annualized relapse rate (ARR). The group treated with
the mid dose (30-45 x 106
attenuated T-cells) achieved a 100% reduction in ARR. The Phase IIb trial is
being conducted with the mid dose. In November 2006, we enrolled the first
patient in a double blind, placebo controlled, 150 patient Phase IIb clinical
trial. We completed enrollment of all 150 patients in May 2007.
In a
one-year, 8-subject extension clinical trial of relapsing remitting (RRMS) and
secondary progressive multiple sclerosis (SPMS) subjects, the
“per-protocol” analysis of Tovaxin therapy achieved a 92% (p=0.0078) reduction
in annualized relapse rate (ARR) in subjects who received two treatment doses of
30-45 x 106
attenuated T-cells eight weeks apart and were monitored for an additional 44
weeks. Subjects in the extension study had previously been treated an average of
approximately 5 years earlier at Baylor College of Medicine under the direction
of the inventor of Tovaxin Jingwu Zhang, M.D., Ph.D with an early version of the
T-cell vaccine.
Preclinical
Development
Our
Rheumatoid Arthritis (RA) T-cell vaccination (TCV) technology is conceptually
similar to Tovaxin. RA is an autoimmune T-cell-mediated disease in which
pathogenic T-cells trigger an inflammatory autoimmune response of the synovial
joints of the wrists, shoulders, knees, ankles and feet which causes pain,
stiffness, and swelling around the joints and erosion into cartilage and bone.
Our RA TCV technology allows the isolation of these pathogenic T-cells from
synovial fluid drawn from a patient. We can expand and attenuate these T-cells
in our laboratory. The attenuated T-cells can then be injected subcutaneously
into patients with the goal of inducing an immune response directed at the
Pathogenic T-cells in the patient’s body. We believe this immune response could
reduce the level of pathogenic T-cells and potentially allow the reduction of
joint swelling in RA patients.
Stem
Cell Therapy
We have
developed a proprietary adult stem cell technology to produce monocyte-derived
stem cells (MDSC) from blood. These MDSC can be derived from a patient’s
monocytes, expanded in our laboratories, and then administered to the same
patient. We believe that because this is an autologous therapy, there should be
no immunological problems. Normally, allogenic cells trigger host immune
responses and require the use of anti-rejection drugs.
2
Our
multi-potent stem cell is derived from peripheral blood monocytes which when
cultured under defined conditions are able to further differentiate into several
cellular lineages. Molecular biology and cellular analysis studies have shown
that these MDSCs have specific markers that distinguish them from other stem
cells. In addition these studies have also shown a time-dependence for the
expression of these markers during the growth and differentiation of MDSCs.
In vitro experiments
with MDSCs have shown their capacity to differentiate as hematopoietic,
epithelial, endothelial, endocrine and neuronal cells. Our main focus is the
further development of this monocyte-derived stem cell (MDCS) technology as a
platform for the in
vitro generation of highly specialized cells for potential application in
autologous cell therapy for patients with diseases such diabetes mellitus and
cardiovascular disease.
Other
Opportunities
We may
conduct basic research to determine the potential use of stem cells and
differentiated cells in other indications, such as macular degeneration, stroke,
myocardial infarction, wound healing and Parkinson’s disease. We will attempt to
partner or sublicense some of these indications if they are not pursued for
internal development. For those indications where we believe we can participate
commercially, we also desire to partner in key commercial markets outside of the
U.S.
Our
Products and Services
Our
T-cell Platform
Multiple
Sclerosis—Background
In the
U.S., approximately 400,000 people suffer from MS, a chronic progressive
autoimmune disease of the central nervous system (CNS) that is caused by myelin
autoreactive T-cells progressively eroding the myelin that surrounds and
insulates nerve fibers of the brain and spinal cord resulting in varying amounts
of disability. Globally, there are approximately 2.5 million MS patients
representing a drug market believed to be approximately $5 billion in 2005. The
US markets accounted for slightly more than 50 percent of global MS sales in
2005, approximately $2.5 billion. MS remains a challenging autoimmune disease to
treat because the pathophysiologic mechanisms are diverse, and the chronic,
unpredictable course of the disease makes it difficult to determine whether the
favorable effects of short-term treatment will be sustained. Therapies that are
easy to use and can safely prevent or stop the progression of disease represent
the greatest unmet need in MS.
In recent
years, the understanding of MS pathogenesis has evolved to comprise an initial,
T-cell-mediated inflammatory activity followed by selective demyelination
(erosion of the myelin coating of the nerve fibers) and then neurodegeneration.
The discovery of disease-relevant immune responses has accelerated the
development of targeted therapeutic products for the treatment of the early
stages of MS.
Some
subjects, who have the appropriate genetic background, have increased
susceptibility for the in
vivo activation and expansion of myelin autoreactive T-cells. These
myelin autoreactive T-cells may remain dormant, but at some point they are
activated in the periphery, thus enabling them to cross the blood-brain barrier
(BBB) and infiltrate the healthy tissue of the brain and spinal cord. The
cascade of pathogenic events leads to demyelination of axons, which causes nerve
impulse transmissions to diffuse into the tissue resulting in disability to the
subject.
Current
Therapy for Multiple Sclerosis
Current MS
disease modifying drugs on the market are mostly palliative and generally work
by modulation or suppression of the immune system. These therapies for MS are
dominated by three forms of interferon that when used as therapies, require
frequent subcutaneous or intramuscular injections (Avonex, Betaseron and Rebif).
Copaxone is an immunomodulator that is administered daily. Novantrone
(mitoxanthrone) is an immunosuppressive drug that can only be given four times
per year with a lifetime limit of 8 to 12 doses. All of the current therapies
only claim to slow the progression of MS and present significant patient
compliance challenges because of the dosing schedule, limited decrease in
relapse rate and side effects profile The interferon formulations produce severe
flu-like symptoms, injection site reactions, infection and neutralizing
antibodies (ranging from 5% to 45%) that limit the efficacy of treatment.
Copaxone causes significant injection site reactions; while Novantrone causes
infections, bone marrow suppression, nausea, hair thinning, bladder infections,
and mouth sores. These drugs must be administered daily to weekly. Tysabri®, a
selective adhesion molecule inhibitor (an alpha 4 integrin antagonist),
represents another class of MS drugs that works by preventing immune system
cells from crossing the BBB and from moving into the
central nervous system (CNS). Tysabri® requires
a once per month infusion and has been reintroduced to the market after being
originally withdrawn in 2005 based on safety concerns over several patient
deaths due to a virally mediated brain inflammation.
3
Tovaxin
for Multiple Sclerosis
We believe
that Tovaxin works selectively on the myelin autoreactive T-cells by harnessing
the body’s natural immune defense system and feedback mechanisms to deplete
these T-cells and induce favorable immune regulatory responses by rebalancing
the immune system. Tovaxin is manufactured by taking the MRTCs from the blood,
expanding them to a therapeutic dose ex-vivo, and attenuating them
with gamma irradiation to prevent DNA replication. These attenuated MRTCs are
then injected subcutaneously into the body in large quantities. The body
recognizes specific T-cell receptor molecules of these MRTCs as foreign and
mounts an immune response reaction against them, not only destroying the
injected attenuated MRTCs, but also the circulating, myelin autoreactive T-cells
carrying the peptide-specific T-cell receptor molecules. In addition, T-cell
activation molecules on the surface of the activated MRTCs used as vaccine
induce favorable immune regulatory responses, which promote anti-inflammatory
responses. Because the therapy uses an individual’s own cells, the only directly
identifiable side effect, observed thus far, is injection site reaction in a
small percentage of the patients. These reactions are minor and generally clear
within 24 hours.
We believe
that this technology platform may have applications in other T-cell mediated
diseases such as Crohn’s disease, psoriasis, RA and Type 1diabetes.
Tovaxin
Manufacturing
We
manufacture our TCV therapy in our own Good Manufacturing Practice (“GMP”)
facility. The TCV technology used to produce Tovaxin is similar to that of
traditional microbial vaccine technology, where the pathogen (or the attenuated
derivative) is used to derive the protective antigens necessary to induce
protective immune responses. In preparing the Tovaxin for a patient, the myelin
autoreactive T-cells causing the disease are taken from the blood, specifically
identified, and expanded ex
vivo by incubating these T-cells with selected peptides in the presence
of antigen-presenting cells and growth factors. Myelin-peptide reactive T-cells
are grown to therapeutic levels and cryopreserved. Prior to use, the MRTCs are
expanded, formulated, and attenuated (by irradiation) to render them incompetent
to replicate but viable for therapy. These attenuated T-cells are administered
in a defined schedule of subcutaneous injections. We have shown that a single
draw of a 500 ml bag of patient blood is sufficient to provide a full year’s
therapeutic regimen of Tovaxin.
Clinical Development of
Tovaxin
Tovaxin is
currently in a Phase IIb clinical trial. Patients treated in our Phase I/II
open-label studies with Tovaxin have experienced minimal side effects, an
approximate 90% average reduction in annualized relapse rate and improvements in
their Kurtzke Expanded Disability Status Scale (EDSS), a scoring method used to
measure the disability of MS patients.
Tovaxin
Phase IIb Clinical Trial
The Phase
IIb trial, entitled “A Multicenter, Randomized, Double-Blind, Placebo-Controlled
Study of Subcutaneous Tovaxin in Subjects with Clinically Isolated Syndrome or
Relapsing Remitting Multiple Sclerosis”, is a multi-site double-blind,
randomized, placebo-controlled 150 (100 treated, 50 placebo) patient trial. The
trial is being conducted at 33 sites in the U.S. The primary endpoint will be
brain lesion evaluation (the total number of gadolinium-enhancing lesions) via
MRI with a secondary endpoint being annual relapse rate. This trial is designed
to demonstrate the safety and efficacy of Tovaxin. We completed enrollment in
May 2007 and expect top-line results at the end of the third quarter of
2008.
4
Preclinical
Development
Our
Adult Stem Cell Platform
Stem
Cells—Background
Stem cells
are undifferentiated primary cells that have the potential to become any tissue
or organ of the body. They hold therapeutic promise for the development of
effective treatments and possibly cure for various diseases. The current stem
cell research efforts have been divided between embryonic and tissue specific
adult stem cells as potential therapeutic progenitor cells. Recent experiments
with embryonic stem (ES) cells have demonstrated that these highly
proliferative, pluripotent cells can differentiate into pancreatic-like b-cells. The major
problem with ES cells is their pluripotency and risk that these cells, once
transplanted, could form tumors. Given that as well as the political and ethical
issues surrounding the use of ES cells, adult tissue specific stem cells have
become attractive as a potential cell therapeutic. Adult tissue-specific stem
cells have advantages over ES cells; first, these cells can be isolated from a
more manageable source such as bone marrow or other tissues; second, they
proliferate in a controlled fashion and without the likelihood of
tumorogenicity, and third, they can be used in an autologous setting and avoid
the potential for rejection which exists for allogenic use of stem
cells.
Hematopoietic
stem cells (HSC’s), present in the bone marrow and precursors to all blood
cells, are currently the only type of stem cells commonly used for therapy.
Doctors have been transferring HSC’s in bone marrow transplants for more than 40
years. Advanced techniques for collecting or “harvesting” HSC’s are now used to
treat leukemia, lymphoma and several inherited blood disorders.
The
clinical potential of stem cells has also been demonstrated in the treatment of
other human diseases, including diabetes and advanced kidney cancer. However,
these new therapies have been offered only to a very limited number of patients
using adult stem cells.
Stem cell
therapies have technical, ethical and legal hurdles to overcome before they will
be able to be used for tissue and organ repair. A significant hurdle to most
uses of stem cells is that scientists do not yet fully understand the signals
that turn specific genes on and off to influence the differentiation of the stem
cell. Therefore, scientists will have to be able to precisely control the
differentiation of stem cells into the specific cell type to be used in a
therapy. Current knowledge of the signals controlling differentiation falls well
short of being able to mimic these conditions precisely to consistently have
identical differentiated cells for each specified use.
To realize
the promise of novel cell-based therapies for such pervasive and debilitating
diseases such as diabetes and kidney cancer, scientists must be able to easily
and reproducibly manipulate stem cells so that they possess the necessary
characteristics for successful differentiation, transplantation and engraftment.
To be useful for transplant purposes, stem cells must be reproducibly made to:
proliferate extensively and generate sufficient quantities of tissue,
differentiate into the desired cell type(s), survive in the recipient after
transplant, integrate into the surrounding tissue after transplant, function
appropriately for the duration of the recipient’s life, avoid harming the
recipient in any way, and avoid the problem of immune rejection. There is no
assurance that any commercialized cell-based therapies will ever be
developed.
Therapies
Utilizing Our Stem Cell Platform
We have
developed a proprietary adult stem cell technology to produce monocyte-derived
stem cells (MDSC) from blood. These MDSC can be derived from a patient’s
monocytes, expanded ex
vivo, and then administered to the same patient. We believe that because
this is an autologous therapy, there should be no allogenic rejection issues.
Normally, allogenic cells are deleted by host immune responses and require the
use of anti-rejection drugs.
Our
multi-potent stem cell is derived from peripheral blood monocytes which when
cultured under defined conditions are able to further differentiate into several
cellular lineages. Molecular biology and cellular analysis studies have shown
that these MDSCs have specific markers that distinguish them from other stem
cells. In addition these studies have also shown a time-dependence for the
expression of these markers during the growth and differentiation of MDSCs. In
vitro experiments with MDSCs have shown their capacity to differentiate towards
hematopoietic, epithelial, endothelial, endocrine and neuronal cells. Our main
focus is the further development of this monocyte-derived stem cell technology
as a platform for the in vitro generation of highly specialized cells for
potential application in autologous cell therapy for patients with diseases such
as diabetes mellitus and cardiovascular disease.
5
Working
either alone or in conjunction with strategic partners, we may utilize these
MDSC from the same patient to attempt to develop a therapy which may cause
autologous tissue or organ repair. Our initial internal therapeutic target is
diabetes mellitus. Other therapeutic targets would be pursued through
early-stage licensing or strategic alliances. The diabetes program is currently
in pre-clinical development.
Pancreatic
Islet Cell Development
Diabetes
is a disease characterized by the failure or loss of pancreatic b-cells to generate
sufficient levels of the hormone insulin required to maintain normal healthy
glucose levels. Type 1 diabetes is caused by the complete loss of pancreatic
b-cells when
the body’s own immune system mistakenly attacks and destroys a person’s b-cells. While for
Type 2 diabetes the causes are far more complicated and poorly understood, the
results of the disease are similar in that often the b-cells fail to
generate sufficient amounts of insulin to maintain normal healthy glucose
levels. The loss of insulin results in an increase in blood glucose levels that
may eventually lead to the development of premature cardiovascular disease,
stroke, and kidney failure. Currently there is no permanent cure for diabetes;
however, recent clinical islet cell transplantations have shown good success in
restoring long-term endogenous insulin production and glycemic stability in
subjects who have Type 1 diabetes mellitus with unstable baseline control.
Persistent islet function without injected insulin dependence provides
considerable benefit.
Current
cell transplant therapy for the treatment of diabetes is limited by an
inadequate supply of insulin-producing cells. Cadaveric sources are limited and
up to three pancreata are required to obtain clinically significant quantities
of b-cells for
one patient. The identification of adult human stem cells provides a new
prospect for obtaining a sufficient number of insulin-producing b-cells for
transplantation. Using our technology a single blood draw may be adequate to
produce clinical quantities of b-cells for a
patient.
In vitro experiments with
MDSC have shown their capacity to differentiate toward a wide variety of cell
types including pancreatic b-like cells. These
cells aggregate into clusters resembling pancreatic Islets of Langerhans termed
monocyte derived islets (MDI). The cluster aggregates show endocrine gene
expression. Biochemical assays have demonstrated that MDI can synthesize and
secrete significant amounts of insulin during their growth and respond in a
glucose-dependent manner. In addition, MDI can be stimulated or repressed by the
addition of agonists or antagonists of insulin in vitro.
These stem
cells are important because of our ability to easily and cost effectively derive
them from an individual’s circulating monocytes, expand them and administer them
back into the same patient. This autologous approach provides a method to
overcome any rejection issues and the need to suppress the immune system, which
are often associated with current transplantations.
Stem
Cell Pre-Clinical and Clinical Development
We are
conducting pre-clinical studies to demonstrate proof of concept and method of
delivery in preparation for an IND (Investigational New Drug) submission to the
FDA.
Licenses,
Patents and Proprietary Rights
We believe
that proprietary protection of our technologies is critical to the development
of our business. We intend to continue to protect our proprietary intellectual
property through patents and other appropriate means. We rely upon trade-secret
protection for some confidential and proprietary information and take active
measures to control access to that information. We currently have non-disclosure
agreements with all of our employees, consultants, vendors, advisory board
members and contract research organizations.
Our
intellectual property strategy includes developing proprietary technology for
the sourcing, scale up, manufacturing, and storage of T cells and
multipotent adult stem cells and the use of these cells in multiple therapeutic
applications. This strategy will include expanding on technologies in-licensed
to us as well as in-licensing additional technologies through collaborations
with universities and biotech companies.
We have
exclusive, worldwide licenses to certain patents and patent applications that
relate to our T-cell technology and our multipotent adult stem cell
technology.
6
T-Cell
Therapy Intellectual Property
Our T-cell
technology is based on discoveries made by Dr. Jingwu Zang at the Baylor
College of Medicine in Houston. We have an exclusive, worldwide license from
Baylor College of Medicine to develop and commercialize three technology areas
for MS, namely T-cell vaccination, peptides, and diagnostics. Under the License
Agreement with Baylor College of Medicine, we have rights to a total of 11
patents (2 U.S. and 9 foreign) and 80 patent applications (6 U.S. and 74
foreign).
The
license was granted to us by Baylor in exchange for common stock in Opexa
Pharmaceuticals, a company we acquired in November 2004. The license requires us
to pay royalties on sales of products covered by the license. We have filed
additional patent applications related to T-Cell vaccination for
MS.
Rheumatoid
Arthritis Therapy Intellectual Property
We have an
exclusive worldwide license for the intellectual property rights and research
results of an autologous T cell vaccine for RA from the Shanghai Institutes for
Biological Sciences (SIBS), Chinese Academy of Sciences of the People’s Republic
of China. We made a one time $125,000 license payment and agreed to pay a
royalty on net sales of products covered by the license. We have filed
additional patent applications related to T-Cell vaccination for
RA.
Stem
Cell Therapy Intellectual Property
We have an
exclusive, worldwide license from the University of Chicago, through its prime
contractor relationship with Argonne National Laboratory, to a patent
application related to the development of adult multipotent stem cells from
monocytes isolated from adult human peripheral blood. The technology was
discovered and developed at the Argonne National Laboratory, a U.S. Department
of Energy Laboratory.
Pursuant
to the license we have issued a total of 53,462 shares of our common stock and
paid $232,742 to the University of Chicago. We will owe milestone payments upon
demonstration of efficacy in Phase II clinical studies, submission for product
approval to the FDA and approval of licensed products totaling $1,350,000. We
will also pay royalties on net sales of products covered by the
license.
We have
filed additional patent applications related to the process of obtaining
monocyte-derived stem cells. In addition, we have filed a patent application for
the process of differentiation of MDSCs into monocyte-derived islets which
function like pancreatic islet cells.
Our
Product Pipeline
Multiple
Sclerosis Therapy
Tovaxin is
a vaccine approach for treating MS, in that it induces the body’s immune system
to attack the MRTCs that we believe are responsible for destroying the myelin
sheath coating of the axons in the central nervous system. We believe that the
depletion and regulation of the MRTCs may stop progression of multiple
sclerosis. Tovaxin is currently in a Phase IIb clinical trial. We completed
enrollment of this trial in May, 2007 and expect to release top-line data from
this trial at the end of the third quarter of 2008.
Rheumatoid
Arthritis Therapy
Our
Rheumatoid Arthritis (RA) T-cell vaccination (TCV) technology is conceptually
similar to Tovaxin. RA is an autoimmune T-cell-mediated disease in which
pathogenic T-cells trigger an inflammatory autoimmune response of the synovial
joints of the wrists, shoulders, knees, ankles and feet which causes pain,
stiffness, and swelling around the joints. This technology is in preclinical
development.
Diabetes
Stem Cell Therapy
We believe
that there are approximately 20.8 million people in the U.S. who have
diabetes. More than 1 million of these people have Type 1 diabetes
mellitus. Among adults with diagnosed diabetes, approximately 31% take insulin
to control their disease. Research studies have found that improved glycemic
control benefits people with either Type 1 or Type 2 diabetes. Islet
transplantation using Opexa’s proprietary monocyte-derived islet cell may offer
the potential to improve glycemic control in a subgroup of patients with Type 1
and Type 2 diabetes mellitus who are disabled by refractory hypoglycemia. We are
in preclinical development in preparation for an IND submission to the
FDA.
7
Other
Opportunities
We intend
to conduct basic research to determine the potential use of our stem cells in
other indications such as macular degeneration, heart attack, and Parkinson’s
disease. Liver cells (hepatocytes) derived from our stem cells may be valuable
across the biopharmaceutical industry to test for drug toxicity or to help cure
liver diseases. We intend to partner or sublicense some of these indications if
they are not pursued for internal development. For those indications where we
believe it can participate commercially, we will possibly take partners in key
commercial markets outside of the United States.
Research
Collaborations
We
anticipate that from time to time in the future we will enter into collaborative
research agreements with other academic and research institutions. We will use
such agreements to enhance our research capabilities. Typically, in the
industry, such agreements provide the industry partner with rights to license
the intellectual property created through the collaboration. We may also enter
into collaborative research agreements with other pharmaceutical companies when
we believe such collaboration will support the development and commercialization
of our technology.
Commercialization
Through Third Parties
We
anticipate that we will grant sublicenses for certain applications of our
technologies. We believe that by sublicensing some of the rights to our
technology to pharmaceutical companies and other third parties, we will be able
to more efficiently develop some applications of our technologies. We currently
do not have any sublicenses.
Competition
The
development of therapeutic agents for human disease is intensely competitive.
Major pharmaceutical companies currently offer a number of pharmaceutical
products to treat MS, heart attack, stroke, Parkinson’s disease, diabetes, liver
diseases, arthritis and other diseases for which our technologies may be
applicable. Many pharmaceutical and biotechnology companies are investigating
new drugs and therapeutic approaches for the same purposes, which may achieve
new efficacy profiles, extend the therapeutic window for such products, alter
the prognosis of these diseases, or prevent their onset. We believe that our
products, when and if successfully developed, will compete with these products
principally on the basis of improved and extended efficacy and safety and their
overall economic benefit to the health care system. We expect competition to
increase. We believe that our most significant competitors will be fully
integrated pharmaceutical companies and more established biotechnology
companies. Smaller companies may also be significant competitors, particularly
through collaborative arrangements with large pharmaceutical or biotechnology
companies. Some of our primary competitors in the current treatment of and in
the development of treatments for MS include Biogen-Idec, Elan, Serono, Aventis,
Teva, and Bayer/Schering AG. Some of our primary competitors in the development
of stem cell therapies include Aastrom Biosciences, Geron, Gamida-Cell Ltd, Stem
Cells Inc., Cellerant Therapeutics, and Osiris Therapeutics. Many of these
competitors have significant products in development that could be competitive
with our potential products.
Sales
and Marketing
We intend
to develop a sales force to market our MS cell therapy products in the U.S.
Given the concentration of MS treatment among a relatively small number of
specialized neurologists, we believe that a modest size sales force would be
sufficient to market the MS products.
We plan to
partner with large biotech and pharmaceutical companies for the marketing and
sales of our MS and RA T-cell products outside the U.S. and for our stem cell
therapy products.
Government
Regulation
Our
research and development activities and the future manufacturing and marketing
of our potential products are, and will be, subject to regulation for safety and
efficacy by a number of governmental authorities in the United States and other
countries.
8
In the
U.S., pharmaceuticals, biologicals and medical devices are subject to FDA
regulation. The Federal Food, Drug and Cosmetic Act, as amended, and the Public
Health Service Act, as amended, the regulations promulgated thereunder, and
other Federal and state statutes and regulations govern, among other things, the
testing in human subjects, manufacture, safety, efficacy, labeling, storage,
export, record keeping, approval, marketing, advertising and promotion of our
potential products. Product development and approval within this regulatory
framework takes a number of years and involves significant uncertainty combined
with the expenditure of substantial resources.
FDA
Approval
We will
need to obtain FDA approval of any therapeutic product we plan to market and
sell. The FDA will only grant marketing approval if it determines that a product
is safe and effective. The testing and approval process will require substantial
time, effort and expense. The steps required before our potential products may
be marketed in the U.S. include:
Preclinical Laboratory and Animal
Tests. Preclinical tests include laboratory evaluation of the product and
animal studies in specific disease models to assess the potential safety and
efficacy of the product and our formulation as well as the quality and
consistency of the manufacturing process.
Submission to the FDA of an
Application for an Investigational New Drug Exemption, or IND, Which Must Become
Effective Before U.S. Human Clinical Trials May Commence. The results of
the preclinical tests are submitted to the FDA as part of marketing approval
authorization, and the IND becomes effective 30 days following its receipt by
the FDA, as long as there are no questions, requests for delay or objections
from the FDA. The sponsor of an IND must keep the FDA informed during the
duration of the study through required amendments and reports, including adverse
event reports.
Adequate and Well-Controlled Human
Clinical Trials to Establish the Safety and Efficacy of the Product.
Clinical trials, which test the safety and efficacy of the product in
humans, are conducted in accordance with protocols that detail the objectives of
the study, the parameters to be used to monitor safety and the efficacy criteria
to be evaluated. Any product administered in a U.S. clinical trial must be
manufactured in accordance with Current Good Manufacturing Practice (cGMP or
GMP). Each protocol is submitted to the FDA as part of the IND.
The
protocol for each clinical study must be approved by an independent
Institutional Review Board, or IRB, at the institution at which the study is
conducted and the informed consent of all participants must be obtained. The IRB
will consider, among other things, the existing information on the product,
ethical factors, the safety of human subjects, the potential benefits of the
therapy and the possible liability of the institution.
Clinical
development is traditionally conducted in three sequential phases, which may
overlap:
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In
Phase I, products are typically introduced into healthy human subjects or
into selected patient populations (i.e., patients with a serious disease
or condition under study, under physician supervision, as may be the case
with our potential products) to test for adverse reactions, dosage
tolerance, absorption and distribution, metabolism, excretion and clinical
pharmacology.
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Phase
II involves studies in a limited population of patients with the disease
or condition under study to (i) determine the efficacy of the product
for specific targeted indications and populations, (ii) determine
optimal dosage and dosage tolerance and (iii) identify possible and
common adverse effects and safety risks. (Phase II may divided into Phase
IIa and Phase IIb studies to address these issues.) When a dose is chosen
and a candidate product is found to have preliminary evidence of
effectiveness, and to have an acceptable safety profile in Phase II
evaluations, Phase III trials begin
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Phase
III trials are undertaken to develop additional safety and effectiveness
information from an expanded patient population, generally at multiple
study sites. This information obtained is used to develop a better
understanding of the risks and benefits of the product, and to determine
appropriate labeling for use.
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Based on
clinical trial progress and results, the FDA may request changes or may require
discontinuance of the trials at any time if significant safety issues
arise.
9
Submission to the FDA of Marketing
Authorization Applications and FDA Review. The results of the preclinical
studies and clinical studies are submitted to the FDA as part of marketing
approval authorization applications such as New Drug Applications (NDAs) or
Biologics License Applications (BLAs). The FDA will evaluate such applications
for the demonstration of safety and effectiveness. A BLA is required
for biological products subject to licensure under the Public Health Service Act
and must show that the product is safe, pure and potent. In addition
to preclinical and clinical data, the BLA must contain other elements such as
manufacturing materials, stability data, samples and labeling. FDA approval of a
BLA (granted by issuance of a license) is required prior to commercial sale or
shipment of a biologic, A BLA shall only be approved once the FDA examines the
product and inspects the manufacturing establishment to assure conformity to the
BLA and all applicable regulations and standards for biologics. The Center for
Biologics Evaluation and Research has regulatory responsibility for review of
biologics including cellular products and human cells, tissues and cellular and
tissue-based products (HCT/Ps), while the Center for Drug Evaluation and
Research is responsible for review of certain therapeutic biological
products.
The time
for approval may vary widely depending on the specific product and disease to be
treated, and a number of factors, including the risk/benefit profile identified
in clinical trials, the availability of alternative treatments, and the severity
of the disease. Additional animal studies or clinical trials may be requested
during the FDA review period, which might add to the review time.
The FDA’s
marketing approval for a product for the treatment of a specific disease or
condition in specified populations in certain clinical circumstances, as
described on the approved labeling. The approved use is known as the
“indication.” After the FDA approves a product for the initial indication,
further clinical trials may be required to gain approval for the use of the
product for additional indications. The FDA may also require post-marketing
testing (Phase IV studies) and surveillance to monitor for adverse
effects, which could involve significant expense, or may elect to grant only
conditional approvals.
Interaction with the FDA During the
Application and Review Process. Generally, early interaction and ongoing
communication with the FDA can facilitate the testing and approval process by
helping to clarify FDA expectations, obtain FDA guidance and directions, and
resolve disputed issues. In addition, expectations can be formalized in a
“Special Protocol Assessment,” in which the FDA provides official evaluation and
guidance on proposed protocols for pivotal Phase III clinical trials. An SPA
documents the FDA’s agreement that the design and plan analysis of the Phase III
study adequately addresses objectives in support of a regulatory submission such
as a BLA.
Ongoing
Compliance Requirements
Even after
product approval or licensure, there are a number of ongoing FDA regulatory
requirements, including:
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Registration
and listing;
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Regulatory
submissions relating to changes in an NDA or BLA (such as the
manufacturing process or labeling) and annual
reports;
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Adverse
event reporting;
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Compliance
with advertising and promotion restrictions that relate to drugs and
biologics;
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Compliance
with GMP and biological product standards (subject to FDA inspection of
facilities to determine
compliance);
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Compliance
with “Good Tissue Practice” regulations, as applicable. (As defined by
regulation, “human cell, tissue and cellular and tissue-based products”
(HCT/P), which are subject to additional regulatory requirement, include
stem cells that are progenitors of blood cells; however, the FDA makes no
explicit statement in the regulations regarding the inclusion of other
types of stem cells.)
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Other
Regulations
In
addition to safety regulations enforced by the FDA, we are also subject to
regulations under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act and other present and potential
future foreign, Federal, state and local regulations. For instance, Product
manufacturing establishments located in certain states also may be subject to
separate regulatory and licensing requirements.
Outside
the U.S., we will be subject to regulations that govern the import of drug
products from the U.S. or other manufacturing sites and foreign regulatory
requirements governing human clinical trials and marketing approval for our
products. The requirements governing the conduct of clinical trials, product
licensing, pricing and reimbursements vary widely from country to country. In
particular, the European Union is revising its regulatory approach to high tech
products, and representatives from the U.S., Japan and the European Union are in
the process of harmonizing and making more uniform the regulations for the
registration of pharmaceutical products in these three markets.
Research
and Development
Research
and development expenses for the year ended December 31, 2007 were approximately
$13.1 million, mainly reflecting the costs of the Phase I/II and Phase IIb
clinical trials for Tovaxin and research and development in support of
pre-clinical diabetes stem cell therapies. Research and development
expenses for the year ended December 31, 2006, were approximately $7.9
million.
Organizational
History
We are a
development-stage company and have a limited operating history. Our
predecessor company for financial reporting purposes was formed on January 22,
2003 to acquire rights to our adult stem cell technology. In November
2004 we acquired Opexa Pharmaceuticals, Inc. and its MS treatment technology. We
are still developing all of our technology, and to date, we have not generated
any revenues from our operations. As we continue to execute our
operations plan, we expect our development and operating expenses to
increase.
Stock
Split
In June
2006, our shareholders approved a one for ten reverse common stock
split. All share, par share and par value amounts (except authorized
shares) have been retroactively adjusted to reflect the split.
Employees
As of
December 31, 2007, we had 40 full time employees. We believe that our relations
with our employees are good. None of our employees is represented by a union or
covered by a collective bargaining agreement.
Available
Information
We are
subject to the information and reporting requirements of the Securities Exchange
Act of 1934, or the Exchange Act, under which we file periodic reports, proxy
and information statements and other information with the United States
Securities and Exchange Commission, or SEC. Copies of the reports, proxy
statements and other information may be examined without charge at the Public
Reference Room of the SEC, 100 F Street, N.E., Room 1580, Washington, D.C.
20549, or on the Internet at http://www.sec.gov.
Copies of all or a portion of such materials can be obtained from the Public
Reference Room of the SEC upon payment of prescribed fees. Please call the SEC
at 1-800-SEC-0330 for further information about the Public Reference
Room.
Financial
and other information about Opexa is available on our website (www.opexatherapeutics.com).
Information on our website is not incorporated by reference into this
report. We make available on our website, free of charge, copies of
our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K, and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable
after filing such material electronically or otherwise furnishing it to the SEC.
Copies are available in print to any Opexa shareholder upon request in writing
to Attention: Investor Relations, Opexa Therapeutics, Inc., 2635 N. Crescent
Ridge Drive, The Woodlands, TX 77381.
11
Risks
Related to Our Business
The
following factors affect our business and the industry in which we operate. The
risks and uncertainties described below are not the only ones we face.
Additional risks and uncertainties not presently known or which we currently
consider immaterial may also have an adverse effect on our business. If any of
the matters discussed in the following risk factors were to occur, our business,
financial condition, results of operations, cash flows, or prospects could be
materially adversely affected.
Our
business is at an early stage of development.
Our
business is at an early stage of development. We do not have any products in
late-stage clinical trials or on the market. We are still in the early stages of
identifying and conducting research on potential products. Only one of our
products has progressed to the stage of being studied in human clinical trials
in the United States. Our potential products will require regulatory approval
prior to marketing in the United States and other countries. Obtaining such
approval will require significant research and development and preclinical and
clinical testing. We may not be able to develop any products, to obtain
regulatory approvals, to enter clinical trials for any of our product
candidates, or to commercialize any products. Our product candidates may prove
to have undesirable and unintended side effects or other characteristics
adversely affecting their safety, efficacy or cost-effectiveness that could
prevent or limit their use. Any product using any of our technology may fail to
provide the intended therapeutic benefits, or achieve therapeutic benefits equal
to or better than the standard of treatment at the time of testing or
production.
We
have a history of operating losses and do not expect to be profitable in the
near future.
We have
not generated any profits since our entry into the biotechnology business, have
no source of revenues, and have incurred significant operating losses. We expect
to incur additional operating losses for the foreseeable future and, as we
increase our research and development activities, we expect our operating losses
to increase significantly. We do not have any sources of revenues and may not
have any in the foreseeable future.
We
will need additional capital to conduct our operations and develop our products
and our ability to obtain the necessary funding is uncertain.
We need to
obtain significant amounts of additional capital to develop our products and
continue our business. The capital may come from many sources,
including equity and/or debt financings, license arrangements, grants and/or
collaborative research arrangements. As of December 31, 2007, we had cash and
cash equivalents of approximately $2.6 million. In February 2008 we completed a
public financing of common stock and warrants. The net proceeds to Opexa, after
underwriter discounts and commissions but before expenses was approximately $6.8
million. Our current burn rate is approximately $900,000 per month. We will need
to raise additional capital to fund our working capital needs beyond early
fourth quarter of 2008. We must rely upon third-party debt or equity funding and
we can provide no assurance that we will be successful in any funding effort.
The failure to raise such funds will necessitate the curtailment or ceasing of
operations and impact the completion of our clinical trials.
The timing
and degree of any future capital requirements will depend on many factors,
including:
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the
accuracy of the assumptions underlying our estimates for capital needs in
2008 and beyond;
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scientific
progress in our research and development
programs;
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the
magnitude and scope of our research and development
programs;
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our
ability to establish, enforce and maintain strategic arrangements for
research, development, clinical testing, manufacturing and
marketing;
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our
progress with preclinical development and clinical
trials;
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the
time and costs involved in obtaining regulatory
approvals;
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the
costs involved in preparing, filing, prosecuting, maintaining, defending
and enforcing patent claims; and
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the
number and type of product candidates that we
pursue.
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We do not
have any committed sources of capital, although we have issued and outstanding
warrants that, if exercised, would result in an equity capital raising
transaction. Additional financing through strategic collaborations, public or
private equity financings, capital lease transactions or other financing sources
may not be available on acceptable terms, or at all. Additional equity
financings could result in significant dilution to our stockholders. Further, if
additional funds are obtained through arrangements with collaborative partners,
these arrangements may require us to relinquish rights to some of our
technologies, product candidates or products that we would otherwise seek to
develop and commercialize ourselves. If sufficient capital is not available, we
may be required to delay, reduce the scope of or eliminate one or more of our
programs, any of which could have a material adverse effect on our financial
condition or business prospects.
We
have a “going-concern qualification” in our certifying accountant’s financial
statement report, which may make capital raising more difficult and may require
us to scale back or cease operations.
The report
of our independent auditors in respect of the 2007 fiscal year, included
elsewhere in this annual report includes a going concern qualification which
indicates an absence of obvious or reasonably assured sources of future funding
that will be required by us to maintain ongoing operations. Although
we have successfully funded Opexa, to date, by attracting additional investors
in our equity, there is no assurance that our capital raising efforts will be
able to attract the additional capital needed to sustain our operations. The
going concern qualification from our auditors may make it more difficult for us
to raise funds. If we are unable to obtain additional funding
for operations, we may not be able to continue operations as proposed, requiring
us to modify our business plan, curtail various aspects of our operations or
cease operations. In such event, investors may lose a portion or all
of their investment.
We
will need regulatory approvals for all of our product candidates which require
that all of our product candidates be tested in clinical trials. Clinical trials
are subject to extensive regulatory requirements, very expensive, time-consuming
and difficult to design and implement. Our products may fail to achieve
necessary safety and efficacy endpoints during clinical trials in which case we
will be unable to generate revenue from the commercialization and sale of our
products.
Human
clinical trials are very expensive and difficult to design and implement, in
part because they are subject to rigorous Food and Drug Administration (FDA)
requirements, and must otherwise comply with federal, state and local
requirements and policies of the medical institutions where they are
conducted. The clinical trial process is also time-consuming. We
estimate that clinical trials of our product candidates will 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. The commencement and completion of clinical trials may be
delayed by several factors, including:
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FDA
or Institutional Review Board (IRB) objection to proposed
protocols;
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discussions
or disagreement with the FDA over the adequacy of trial design to
potentially demonstrate effectiveness, and subsequent design
modifications;
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unforeseen
safety issues;
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determination
of dosing issues and related
adjustments;
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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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product
quality problems (e.g., sterility or
purity)
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challenges
to patient monitoring and data collection during or after treatment (for
example, patients’ failure to return for follow-up visits);
and
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failure
of medical investigators to follow our clinical
protocols.
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In
addition we or the FDA (based on its authority over clinical studies) may delay
a proposed investigation or suspend clinical trials in progress at any time if
it appears that the study may pose significant risks to the study participants
or other serious deficiencies are identified. Prior to approval of our product
the FDA must determine that the data demonstrate safety and effectiveness. The
large majority of drug candidates that begin human clinical trials fail to
demonstrate the desired safety and efficacy characteristics.
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Even if we
obtain regulatory approvals for certain of our product candidates, that approval
may be subject to limitations on the indicated uses for which it may be
marketed. Our ability to generate revenues from the commercialization
and sale of our products will be limited by any failure to obtain necessary
regulatory approvals.
We
are dependent upon our management team and a small number of
employees.
Our
business strategy is dependent upon the skills and knowledge of our management
team. If any critical employee leaves, we may be unable on a timely basis to
hire suitable replacements to effectively operate our business. We also operate
with a very small number of employees and thus have little or no backup
capability for their activities. The loss of the services of any member of our
management team or the loss of a number of other employees could have a material
adverse effect on our business and results of operations.
We
are dependent on contract research organizations and other contractors for
clinical testing and for certain research and development activities, thus the
timing and adequacy of our clinical trials and such research activities are, to
a certain extent, beyond our control.
The nature
of clinical trials and our business strategy requires us to rely on contract
research organizations, independent clinical investigators and other third party
service providers to assist us with clinical testing and certain research and
development activities. For example, our current Phase IIb clinical study of
Tovaxin for MS is being managed by the contract research organization PharmaNet,
LLC. As a result, our success is dependent upon the success of these outside
parties in performing their responsibilities. Although we believe our
contractors are economically motivated to perform on their contractual
obligations, we cannot directly control the adequacy and timeliness of the
resources and expertise applied to these activities by our contractors. If our
contractors do not perform their activities in an adequate or timely manner, the
development and commercialization of our drug candidates could be
delayed.
If
we fail to meet our obligations under our license agreements, we may lose our
rights to key technologies on which our business depends.
Our
business depends on three licenses from third parties. These third party license
agreements impose obligations on us, such as payment obligations and obligations
to diligently pursue development of commercial products under the licensed
patents. If a licensor believes that we have failed to meet our obligations
under a license agreement, the licensor could seek to limit or terminate our
license rights, which could lead to costly and time-consuming litigation and,
potentially, a loss of the licensed rights. During the period of any such
litigation, our ability to carry out the development and commercialization of
potential products could be significantly and negatively affected. If our
license rights were restricted or ultimately lost, our ability to continue our
business based on the affected technology platform could be severely adversely
affected.
Our
current research and manufacturing facility is not large enough to manufacture
future stem cell and T-cell therapies.
We conduct
our research and development in a 10,200 square foot facility in The Woodlands,
Texas, which includes an approximately 800 square foot suite of three rooms for
the manufacture of T-cell therapies which we through Phase III trials of Tovaxin
as a therapy for MS. Our current facility is not large enough to conduct
commercial-scale manufacturing operations. We will need to expand further our
manufacturing staff and facility, obtain a new facility or contract with
corporate collaborators or other third parties to assist with future drug
production.
In the
event that we decide to establish a commercial-scale manufacturing facility, we
will require substantial additional funds and will be required to hire and train
significant numbers of employees and comply with applicable regulations, which
are extensive. We do not have funds available for building a manufacturing
facility, and we may not be able to build a manufacturing facility that both
meets regulatory requirements and is sufficient for our commercial-scale
manufacturing.
We may
arrange with third parties for the manufacture of our future products. However,
our third-party sourcing strategy may not result in a cost-effective means for
manufacturing our future products. If we employ third-party manufacturers, we
will not control many aspects of the manufacturing process, including compliance
by these third parties with the FDA’s current Good Manufacturing Practices and
other regulatory requirements. We further may not be able to obtain adequate
supplies from third-party manufacturers in a timely fashion for development or
commercialization purposes, and commercial quantities of products may not be
available from contract manufacturers at acceptable costs.
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Patents
obtained by other persons may result in infringement claims against us that are
costly to defend and which may limit our ability to use the disputed
technologies and prevent us from pursuing research and development or
commercialization of potential products.
A number
of pharmaceutical, biotechnology and other companies, universities and research
institutions have filed patent applications or have been issued patents relating
to cell therapy, stem cells, T-cells, and other technologies potentially
relevant to or required by our expected products. We cannot predict which, if
any, of such applications will issue as patents or the claims that might be
allowed. We are aware that a number of companies have filed applications
relating to stem cells. We are also aware of a number of patent applications and
patents claiming use of stem cells and other modified cells to treat disease,
disorder or injury.
If third
party patents or patent applications contain claims infringed by either our
licensed technology or other technology required to make and use our potential
products and such claims are ultimately determined to be valid, there can be no
assurance that we would be able to obtain licenses to these patents at a
reasonable cost, if at all, or be able to develop or obtain alternative
technology. If we are unable to obtain such licenses at a reasonable cost, we
may not be able to develop some products commercially. There can be no assurance
that we will not be obliged to defend ourselves in court against allegations of
infringement of third party patents. Patent litigation is very expensive and
could consume substantial resources and create significant uncertainties. An
adverse outcome in such a suit could subject us to significant liabilities to
third parties, require disputed rights to be licensed from third parties, or
require us to cease using such technology.
If
we are unable to obtain future patents and other proprietary rights our
operations will be significantly harmed.
Our
ability to compete effectively is dependent in part upon obtaining patent
protection relating to our technologies. The patent positions of pharmaceutical
and biotechnology companies, including ours, are uncertain and involve complex
and evolving legal and factual questions. The coverage sought in a patent
application can be denied or significantly reduced before or after the patent is
issued. Consequently, we do not know whether the patent applications for our
technology will result in the issuance of patents, or if any future patents will
provide significant protection or commercial advantage or will be circumvented
by others. Since patent applications are secret until the applications are
published (usually eighteen months after the earliest effective filing date),
and since publication of discoveries in the scientific or patent literature
often lags behind actual discoveries, we cannot be certain that the inventors of
our licensed patents were the first to make the inventions covered by the patent
applications or that the licensed patent applications were the first to be filed
for such inventions. There can be no assurance that patents will issue from the
patent applications or, if issued, that such patents will be of commercial
benefit to us, afford us adequate protection from competing products, or not be
challenged or declared invalid.
Our
competition includes fully integrated biopharmaceutical and pharmaceutical
companies that have significant advantages over us.
The
markets for therapeutic stem cell products, multiple sclerosis products, and
rheumatoid arthritis products are highly competitive. Our most significant
competitors are fully integrated pharmaceutical companies and more established
biotechnology companies. These companies have significantly greater capital
resources and expertise in research and development, manufacturing, testing,
obtaining regulatory approvals, and marketing than we currently do. Many of
these potential competitors are further along in the process of product
development and also operate large, company-funded research and development
programs. As a result, our competitors may develop more competitive or
affordable products, or achieve earlier patent protection or product
commercialization than we are able to achieve. Competitive products may render
any products or product candidates that we develop obsolete.
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The market for our products will be
heavily dependent on third party reimbursement
policies.
Our
ability to successfully commercialize our product candidates will depend on the
extent to which government healthcare programs, such as Medicare and Medicaid,
as well as private health insurers, health maintenance organizations and other
third party payors will pay for our products and related treatments.
Reimbursement by third party payors depends on a number of factors, including
the payor’s determination that use of the product is safe and effective, not
experimental or investigational, medically necessary, appropriate for the
specific patient and cost-effective. Reimbursement may not be
available or maintained for any of our product candidates. If we do not obtain
approvals for adequate third party reimbursements, we may not be able to
establish or maintain price levels sufficient to realize an appropriate return
on our investment in product development. Any limits on reimbursement
from third party payors may reduce the demand for, or negatively affect the
price of, our products.
Restrictive
and extensive government regulation could slow or hinder our production of a
cellular product.
The
research and development of stem cell therapies is subject to and restricted by
extensive regulation by governmental authorities in the United States and other
countries. The process of obtaining FDA and other necessary regulatory approvals
is lengthy, expensive and uncertain. We may fail to obtain the necessary
approvals to continue our research and development, which would hinder our
ability to manufacture or market any future product. Even after
granting regulatory approval the FDA and regulatory agencies in other countries
continue to review and inspect marketed products, manufacturers and
manufacturing facilities, which may create additional regulatory
burdens.
To
be successful, our product candidates must be accepted by the health care
community, which can be very slow to adopt or unreceptive to new technologies
and products.
Our
product candidates, if approved for marketing, may not achieve market acceptance
since hospitals, physicians, patients or the medical community in general may
decide to not accept and utilize these products. The product candidates that we
are attempting to develop represent substantial departures from established
treatment methods and will compete with a number of more conventional drugs and
therapies manufactured and marketed by major pharmaceutical companies. The
degree of market acceptance of any of our developed products will depend on a
number of factors, including:
|
|
•
|
our
establishment and demonstration to the medical community of the clinical
efficacy and safety of our product
candidates;
|
|
|
•
|
our
ability to create products that are superior to alternatives currently on
the market;
|
|
|
•
|
our
ability to establish in the medical community the potential advantage of
our treatments over alternative treatment methods;
and
|
|
|
•
|
reimbursement
policies of government and third-party
payers.
|
If the
health care community does not accept our products for any of the foregoing
reasons, or for any other reason, our business would be materially
harmed.
Risks
Related to Our Securities
There
is currently a limited market for our securities, and any trading market that
exists in our securities may be highly illiquid and may not reflect the
underlying value of our net assets or business prospects.
Although
our common stock and Series E warrants are traded on the NASDAQ Capital Market,
there is currently a limited market for our securities and there can be no
assurance that an improved market will ever develop. Investors are cautioned not
to rely on the possibility that an active trading market may
develop.
As
our share price is volatile, we may be or become the target of securities
litigation, which is costly and time-consuming to defend.
In the
past, following periods of market volatility in the price of a company’s
securities or the reporting of unfavorable news, security holders have often
instituted class action litigation. If the market value of our securities
experience adverse fluctuations and we become involved in this type of
litigation, regardless of the outcome, we could incur substantial legal costs
and our management’s attention could be diverted from the operation of our
business, causing our business to suffer.
16
Our
“blank check” preferred stock could be issued to prevent a business combination
not desired by management or our current majority shareholders.
Our
articles of incorporation authorize the issuance of “blank check” preferred
stock with such designations, rights and preferences as may be determined by our
board of directors without shareholder approval. Our preferred stock could be
utilized as a method of discouraging, delaying, or preventing a change in our
control and as a method of preventing shareholders from receiving a premium for
their shares in connection with a change of control.
Future
sales of our common stock in the public market could lower our stock
price.
We may
sell additional shares of common stock in subsequent public or private
offerings. We may also issue additional shares of common stock to finance future
acquisitions. We cannot predict the size of future issuances of our common stock
or the effect, if any, that future issuances and sales of shares of our common
stock will have on the market price of our common stock. Sales of substantial
amounts of our common stock (including shares issued in connection with an
acquisition), or the perception that such sales could occur, may adversely
affect prevailing market prices for our common stock.
We
presently do not intend to pay cash dividends on our common stock.
We
currently anticipate that no cash dividends will be paid on the common stock in
the foreseeable future. While our dividend policy will be based on the operating
results and capital needs of the business, it is anticipated that all earnings,
if any, will be retained to finance the future expansion of the our
business.
None.
Our 10,200
sq. ft. facility is located on 3 acres at 2635 North Crescent Ridge Drive in The
Woodlands, Texas. This location provides space for research and development and
manufacturing capacity for clinical trials; a specialized Flow Cytometry and
Microscopy lab; support of clinical trials with 800 sq. ft. of good
manufacturing practice (GMP) manufacturing suites; Quality Systems management
with a Quality Control Laboratory, Regulatory Affairs, Quality Assurance; as
well as administrative support space. There is 2,500 sq. ft. of space still
available for future build-out. We lease the facility including the property for
a term ending in 2015 with two options for an additional five years each at the
then prevailing market rate.
We are not
currently a party to any material legal proceedings.
No matters
were submitted to a vote of our security holders, through solicitation of
proxies or otherwise, during the quarter ended December 31,
2007.
|
MARKET
FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES.
|
Market
Information and Holders
Our common
stock is traded on the NASDAQ Capital Market under the symbol
“OPXA”. As of March 12, 2008, there were 323 holders of record of the
common stock. This number does not include stockholders for whom shares were
held in “nominee” or “street name.” Our common stock trades on a limited,
sporadic and volatile basis.
17
The table
below shows the high and low per-share bid information for our common stock for
the periods indicated, as reported by NASDAQ.
|
Price
Ranges
|
||||||||
|
High
|
Low
|
|||||||
|
Fiscal
Year Ended December 31, 2006
|
||||||||
|
First
Quarter
|
$ | 7.00 | $ | 4.40 | ||||
|
Second
Quarter
|
10.10 | 5.10 | ||||||
|
Third
Quarter
|
9.15 | 4.93 | ||||||
|
Fourth
Quarter
|
7.00 | 5.40 | ||||||
|
Fiscal
Year Ended December 31, 2007
|
||||||||
|
First
Quarter
|
6.05 | 3.90 | ||||||
|
Second
Quarter
|
5.89 | 4.05 | ||||||
|
Third
Quarter
|
5.35 | 3.50 | ||||||
|
Fourth
Quarter
|
4.30 | 1.85 | ||||||
Dividends
We have
never declared or paid any cash dividends on our common stock and we do not
intend to pay cash dividends in the foreseeable future. We currently expect to
retain any future earnings to fund the operation and expansion of our
business.
Securities Authorized for Issuance Under
Equity Compensation Plans
The
following table sets forth information, as of December 31, 2007, with respect to
our compensation plans under which common stock is authorized for
issuance. We issue options to officers, directors, employees and
consultants under our stockholder approved 2004 Compensatory Stock
Plan. We believe that the exercise price for all of the options set
forth below reflects fair market value.
|
Plan
Category
|
Number
of Securities
to
be Issued Upon
Exercise
of
Outstanding
Options, Warrants and Rights
(A)
|
Weighted
Average
Exercise
Price of
Outstanding
Options,
Warrants
and
Rights
(B)
|
Number
of
Securities
Remaining
Available
for
Future
Issuance
Under
Equity
Compensation
Plans
(Excluding
Securities
Reflected
in
Column
A)
(C)
|
|||||||||
|
Equity
Compensation Plans Approved by Security Shareholders
|
1,039,525 | $ | 9.31 | 160,475 | ||||||||
|
Equity
Compensation Plans Not Approved by Security Shareholders
|
- | - | - | |||||||||
|
Total
|
1,039,525 | $ | 9.31 | 160,475 | ||||||||
Refer to
Item 8, Note 11 “Options and Warrants” in the Notes to Our Consolidated
Financial Statements for the fiscal year ended December 31, 2007, included
elsewhere in the annual report for a description of our equity compensation
plan.
Recent
Sales of Unregistered Securities and Equity Purchases by Company
None.
18
|
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 accompanying financial statements and the
related footnotes thereto.
Organizational
Overview
We are a
development-stage company and have a limited operating history. Our predecessor
company for financial reporting purposes was formed on January 22, 2003 to
acquire rights to our adult stem cell technology. In November 2004 we acquired
Opexa Pharmaceuticals, Inc. and its MS treatment technology. We are still
developing all of our technology, and to date, we have not generated any
revenues from our operations. As we continue to execute our operations plan, we
expect our development and operating expenses to increase.
Critical
Accounting Policies
Our
discussion and analysis of our financial condition and results of operations is
based on our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the U.S. The
preparation of these consolidated financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities
and expenses. We base our estimates on historical experience and on various
other assumptions that we believe to be reasonable 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.
Actual results may differ from these estimates under different assumptions or
conditions. We believe the following critical accounting policies affect our
most significant judgments and estimates used in preparation of our consolidated
financial statements.
Stock-Based Compensation. On
January 1, 2006, we adopted the provisions of Statement of Financial
Accounting Standards No. 123R, “Share-Based Payment” (“SFAS 123R”) which
establishes accounting for equity instruments exchanged for employee service. We
utilize the Black-Scholes option pricing model to estimate the fair value of
employee stock based compensation at the date of grant, which requires the input
of highly subjective assumptions, including expected volatility and expected
life. Further, as required under SFAS 123R, we now estimate forfeitures for
options granted, which are not expected to vest. Changes in these inputs and
assumptions can materially affect the measure of estimated fair value of our
share-based compensation. These assumptions are subjective and generally require
significant analysis and judgment to develop. When estimating fair value, some
of the assumptions will be based on, or determined from, external data and other
assumptions may be derived from our historical experience with stock-based
payment arrangements. The appropriate weight to place on historical experience
is a matter of judgment, based on relevant facts and circumstances.
We
estimated volatility by considering historical stock volatility. As allowed by
Staff Accounting Bulletin (SAB) No. 107, Share-Based Payment, we have opted
to use the simplified method for estimating expected term equal to the midpoint
between the vesting period and the contractual term.
Research and Development. The
costs of materials and equipment or facilities that are acquired or constructed
for research and development activities and that have alternative future uses
are capitalized as tangible assets when acquired or constructed. The cost of
such materials consumed in research and development activities and the
depreciation of such equipment or facilities used in those activities are
research and development costs. However, the costs of materials, equipment, or
facilities acquired or constructed for research and development activities that
have no alternative future uses are considered research and development costs
and are expensed at the time the costs are incurred.
Accounting for Derivative
Instruments. Statement of Financial Accounting Standard (“SFAS”)
No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as
amended, requires all derivatives to be recorded on the balance sheet at fair
value. These derivatives are separately valued and accounted for on our balance
sheet. Fair values for securities traded in the open market and derivatives are
based on quoted market prices. Where market prices are not readily available,
fair values are determined using market based pricing models incorporating
readily observable market data and requiring judgment and
estimates.
19
The
pricing model we use for determining fair values of our derivatives is the Black
Scholes Pricing Model. Valuations derived from this model are subject to ongoing
internal and external verification and review. The model uses market-sourced
inputs such as interest rates, exchange rates and stock price volatilities.
Selection of these inputs involves management’s judgment and may impact net
income.
In December 2006, the FASB
issued FASB Staff Position No. EITF 00-19-2, Accounting for Registration Payment
Arrangements (EITF 00-19-2). EITF 00-19-2 addresses an issuer’s accounting for
registration payment arrangements. It specifies that the contingent obligation
to make future payments or otherwise transfer consideration under a registration
payment arrangement, whether issued as a separate agreement or included as a
provision of a financial instrument or other agreement, should be separately
recognized and measured in accordance with FASB Statement No. 5, Accounting
for Contingencies. The guidance in EITF 00-19-2 amends FASB Statements
No. 133, Accounting for Derivative Instruments and Hedging Activities, and
No. 150, Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity, and FASB Interpretation No. 45, Guarantor’s
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, to include scope exceptions for
registration payment arrangements. EITF 00-19-2 also requires additional
disclosure regarding the nature of any registration payment arrangements,
alternative settlement methods, the maximum potential amount of consideration
and the current carrying amount of the liability, if any. This EITF is effective
immediately for registration payment arrangements and the financial instruments
subject to those arrangements that are entered into or modified subsequent to
the date of issue of this EITF. For registration payment arrangements and
financial instruments subject to those arrangements that were entered into prior
to the issuance of this EITF, this is effective for financial statements issued
for fiscal years beginning after December 15, 2006, and interim periods
within those fiscal years. The impact of implementing EITF 00-19-2 in the
fiscal year 2007 resulted in a cumulative effect of a change in accounting
principle with a credit to beginning retained earnings of $6,656,677 and a
reversal of the same amount to the derivative liability account.
Results
of Operations
Comparison
of Year Ended December 31, 2007 with the Year Ended December 31,
2006
Net Sales. We recorded no sales for
the years ended December 31, 2007 and 2006.
Research and Development Expenses.
Research and development expense was $13,071,856 for the year ended
December 31, 2007, compared to $7,850,373 for the year ended
December 31, 2006.
The
increase in expenses was primarily due to the costs of the Phase IIb clinical
trial for Tovaxin and an increase in stock compensation expense recorded in
2007. We have made and expect to continue to make substantial investments in
research and development in order to develop and market our technology. We
expense research and development costs as incurred. Acquired research and
development that has no alternative future use is expensed when acquired.
Property, plant and equipment for research and development that has an
alternative future use is capitalized and the related depreciation is expensed.
We expect our research and development expense to increase as we continue to
invest in the development of our technology.
General and Administrative Expenses.
Our general and administrative expense was $3,418,306 for the year ended
December 31, 2007, as compared to $5,461,047 for the December 31,
2006. The decrease in expenses is primarily due to a decrease in stock
compensation expense, professional service fees and overhead expenses. We
anticipate increases in general and administrative expenses as we continue to
develop and expand our product platforms.
Interest Expense. Interest
expense was $16,103 for the year ended December 31, 2007, compared to $984
for the year ended December 31, 2006. The increase in interest expense was
primarily due to a loan payable consisting of an equipment line of up to
$250,000 with Wells Fargo of which $222,816 was outstanding as of December 31,
2007.
Interest Income. Interest
income was $477,605 for the year ended December 31, 2007 compared to
$688,299 for the year ended December 31, 2006. The decrease was due to the
reduction in cash balances that were available for investment in cash equivalent
investments.
20
Gain (Loss) on Derivative Instruments
Liabilities, net. The implementation of EITF 00-19-2 in the fiscal year
2007, discussed in “Accounting for Derivative Instruments”, resulted in a
cumulative effect of a change in accounting principle with a credit to beginning
retained earnings of $6,656,677 and a reversal of the same amount to the
derivative liability account as compared to a gain on derivative instruments of
$104,978 for the twelve months ended December 31, 2006.
Gain on Extinguishment of
Debt. Opexa entered into a second amended and restated license
agreement with the University of Chicago that eliminated the obligations under
the prior agreement for the payment of $1.5 million due July 31, 2007 and the
obligation to issue 21,623 shares of Opexa common stock. These
obligations were recorded as research and development expense, with the
liabilities recorded as notes payable - current portion of $1.5 million and a
stock payable of $112,440. As a result of the amendment and
restatement of the license agreement with the University of Chicago $1,612,440
was reported as a gain on extinguishment of liability. Opexa applied
the accounting guidance of Financial Accounting Standard No. 140, “Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities” (“FAS 140”) and EITF 96-19 “Debtor's Accounting for a Modification
or Exchange of Debt Instruments”.
Net loss. We had a net loss
for the year ended December 31, 2007, of $14,667,367, or $2.19 per share
(basic and diluted), compared with a net loss of $12,649,170, or $2.35 per share
(basic and diluted), for the year ended December 31, 2006. The increase in
net loss is primarily due to the costs associated with the Phase IIb clinical
trial for Tovaxin offset in part by a reduction in stock-based compensation
expense, and a gain on extinguishment of liability.
Comparison
of Year Ended December 31, 2006 with the Year Ended December 31,
2005
Net Sales. We recorded no
sales for the twelve months ended December 31, 2006 and 2005.
Research and Development Expenses.
Research and development expense was $7,850,373 for the twelve months
ended December 31, 2006, as compared to $5,159,853 the twelve months ended
December 31, 2005. The increase in expenses was primarily due to the
costs of the Phase I/II and Phase IIb clinical trials for Tovaxin and research
and development in support of pre-clinical diabetes stem cell
therapies. We have made and expect to continue to make substantial
investments in research and development in order to develop and market our
technology. We expense research and development costs as incurred.
Acquired research and development that has no alternative future use is expensed
when acquired. Property, plant and equipment for research and development that
has an alternative future use is capitalized and the related depreciation is
expensed as research and development costs. We expect our research
and development expense to increase as we continue to invest in the development
of our technology.
General and Administrative Expenses.
Our general and administrative expenses during the twelve months ended
December 31, 2006, was $5,461,047 as compared to $6,259,075 for the twelve
months ended December 31, 2005. The decrease in expenses is due to a combination
of factors including a decrease in stock compensation expenses, professional
service fees and overhead expenses in 2006. General and administrative expenses
consist primarily of salaries and benefits, stock compensation expense, office
expense, professional services fees, and other corporate overhead
costs. We anticipate increases in general and administrative expenses
as we continue to develop and prepare for commercialization of our
technology.
Interest Expense. Interest
expense was $984 for the twelve months ended December 31, 2006 compared to
$7,323,851 for the twelve months ended December 31, 2005. Interest
expense during 2005 was due to notes payable that were outstanding during the
second quarter of 2005 which were subsequently converted into equity in June
2005, resulting in acceleration of the amortization of the discount related to
the notes.
Interest Income. Interest
income was $688,299 for the twelve months ended December 31, 2006 compared to
$81,930 for the twelve months ended December 31, 2005. The increase
was due to the investment of the cash proceeds from a 2006 equity financing in
short term and cash equivalent investments.
Gain (Loss) on Derivative Instruments
Liabilities, net. The Company recognized a gain on derivative instruments
of $104,978 for the twelve months ended December 31, 2006 compared to $3,896,841
for the twelve months ended December 31, 2005. The decrease is a result of the
net unrealized (non-cash) change in the fair value of our derivative instrument
liabilities.
21
Net Loss. We had net loss for
the year ended December 31, 2006, of $12,649,170 or ($2.35) per share (basic and
diluted), compared with a net loss of $14,856,724 or ($9.49) per share (basic
and diluted), for the twelve months ended December 31, 2005.
Liquidity
and Capital Resources
Historically,
we have financed our operations primarily from the sale of debt and equity
securities. As of December 31, 2007 we had cash and cash equivalents of
approximately $2.6 million.
Our
financing activities generated $112,494 for the year ended December 31,
2007 as compared to approximately $21.3 million for the same year ended
December 31, 2006. The cash generated from financing activities in 2006
resulted from the sale of common stock in equity financings.
On
February 19, 2008 we closed a public offering of 3,500,000 shares of common
stock at a price to the public of $2.00 per share and 4,025,000 Series E
warrants to purchase shares of common stock exercisable at $2.00 per share at a
price of $0.15 per warrant.
Our
current burn rate is approximately $900,000 per month. Our capital
resources at December 31, 2007, will support our operations at current levels
into the first quarter of 2008. With the proceeds of the February
2008 offering, we will still need to raise additional capital in fiscal year
2008 to fund our business plan and support our operations beyond early fourth
quarter of 2008. As our prospects for funding, if any, develop during
the fiscal year, we will assess our business plan and make adjustments
accordingly. The report of our independent auditors with regard to our financial
statements for the fiscal year ended December 31, 2007, includes a going concern
qualification. Although we have successfully funded our operations to
date by attracting additional investors in our equity, there is no assurance
that our capital raising efforts will be able to attract additional necessary
capital for our operations. If we are unable to obtain additional funding for
operations at any time now or in the future, we may not be able to continue
operations as proposed, requiring us to modify our business plan, curtail
various aspects of our operations or cease operations.
Off-Balance
Sheet Arrangements
None.
Contractual
Commitments
A tabular
disclosure of contractual obligations at December 31, 2007, is as
follows:
|
Payments Due by
Period
|
||||||||||||||||||||
|
Total
|
Less
than
1
year
|
1
- 3
years
|
3
- 5
years
|
More
than
5
years
|
||||||||||||||||
|
Operating
Leases(1)
|
$ | 1,161,729 | $ | 142,524 | $ | 287,322 | $ | 297,669 | $ | 434,214 | ||||||||||
|
Consulting
Agreements
|
$ | 500 | $ | 500 | $ | - | $ | - | $ | - | ||||||||||
|
Total
|
$ | 1,162,229 | $ | 143,024 | $ | 287,322 | $ | 297,669 | $ | 434,214 | ||||||||||
| (1) Includes lease for office equipment. | ||||
Recently
Issued Accounting Pronouncements.
In July
2006, the FASB issued Interpretation No. 48 (FIN No. 48), “Accounting
for Uncertainty in Income Taxes.” This interpretation requires recognition and
measurement of uncertain income tax positions using a “more-likely-than-not”
approach. FIN No. 48 is effective for fiscal years beginning after
December 15, 2006. Management is still evaluating what effect this will
have on the Company’s financial statements.
In
September 2006, the FASB issued SFAS 157, “Fair Value Measurements.” This
standard defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosure about fair
value measurements. This statement is effective for financial statements issued
for fiscal years beginning after November 15, 2007. Early adoption is
encouraged. The adoption of SFAS 157 is not expected to have a material impact
on the financial statements.
22
In
June 2007, the Emerging Issues Task Force (EITF) issued EITF Issue
No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or
Services to be Used in Future Research and Development Activities. EITF Issue
No. 07-3 provides guidance concerning the accounting for non-refundable
advance payments for goods and services that will be used in future research and
development activities and requires that they be expensed when the research and
development activity has been performed and not at the time of payment. The
provisions of EITF Issue No. 07-3 are effective for the Company as of
January 1, 2008, with a cumulative-effect adjustment to retained earnings as of
the beginning of the year of adoption. The Company does not believe EITF 07-3
will have a material impact on its results from operations or financial
position.
There were
various other accounting standards and interpretations issued during 2007, 2006
and 2005, none of which are expected to have a material impact on the Company’s
consolidated financial position, operations or cash flows.
Our
financial instruments include cash, cash equivalents and short-term investments.
Our main investment objectives are the preservation of investment capital and
the maximization returns on our investment portfolio. Our interest income is
sensitive to changes in the general level of U.S. interest rates. We believe
that our investment policy is conservative, both in the duration of our
investments and the credit quality of the investments we hold.
The
Financial Statements and supplementary data required by this item are included
in Part IV, Item 15 of this Form 10-K and are presented beginning
on page F-1.
None.
Evaluation
of Disclosure Controls and Procedures
In
accordance with Exchange Act Rules 13a-15 and 15a-15, we carried out an
evaluation, under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report. Based on that evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures were effective as of December 31, 2007.
Management's
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act
Rule 13a-15(f). Under the supervision and with the participation of our
management, including our principal executive officer and principal financial
officer, we conducted an evaluation of the effectiveness of our internal control
over financial reporting based on the framework in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
Based on
our evaluation under the framework in Internal Control — Integrated
Framework issued by COSO, our management concluded that our internal
control over financial reporting was effective as of December 31, 2007, in
providing reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles.
23
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 Exchange Commission that permit the company to provide only
management’s report in this annual report.
None.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.
|
|
|
Executive
Officers
|
Our
executive officers are elected by the board of directors and serve at the
discretion of the board. Our executive officers are as
follows:
|
Name
|
Age
|
Position
|
||
|
David
B. McWilliams
|
64
|
President, Chief Executive Officer and Director
|
||
|
Jim
C. Williams
|
64
|
Chief
Operating Officer
|
||
|
Lynne
Hohlfeld
|
47
|
Chief
Financial Officer
|
||
|
Donna
R. Rill
|
54
|
Vice
President of Operations
|
Biographical
information for our executive officers is set forth below:
David B. McWilliams was
appointed President and Director in August 2004. From December 2003 until August
2004, Mr. McWilliams was a private investor. From June 2003 to December
2003, Mr. McWilliams served as president and chief executive officer of
Bacterial Barcodes, Inc., a molecular diagnostics company. From May 2002 to June
2003, Mr. McWilliams served as chief executive officer of Signase, Inc., a
cancer therapy company. Mr. McWilliams served as chief executive officer of
Encysive Pharmaceuticals Inc., a cardiovascular therapeutics company from June
1992 to March 2002. Prior to June 1992, Mr. McWilliams served as chief
executive officer of Zonagen Inc., a human reproductive products company. Prior
to that time, Mr. McWilliams was a senior executive with Abbott
Laboratories and a management consultant with McKinsey & Co. He
currently serves as a director of Novelos Therapeutics, Inc. He also serves on
the boards of the Texas Healthcare and Bioscience Institute and the
Houston Technology Center. Mr. McWilliams received an MBA in
finance from the University of Chicago and a B.A. in chemistry, Phi Beta Kappa,
from Washington and Jefferson College.
Jim C. Williams has served as
our Chief Operating Officer since November 2004. Dr. Williams served as
Vice President of Clinical and Regulatory Affairs and as Chief Operating Officer
for Opexa Pharmaceuticals, Inc. from February 2004 to November 2004. From August
2003 to February 2004 he was Senior Vice President, Regulatory Affairs and
Operations for OSIRIS Therapeutics, Inc., and from November 2002 to August 2003
Dr. Williams was Vice President US Regulatory Affairs for Powderject
Vaccines. From September 2001 to November 2002 Dr. Williams served as
Assistant Vice President, Worldwide Regulatory Affairs for Wyeth BioPharma.
Prior to this Dr. Williams served as Executive Director Regulatory Affairs
for Aventis Pasteur from November 1994 to September 2001. Dr. Williams
retired in 1994 as Captain from the U.S. Public Health Service with over twenty
years of service in applied research and human-use product development which
included assignments with the FDA, Center for Biologics Evaluation and Research
as a Director Scientist in the Division of Vaccine and Related Product
Applications; the US Army Medical Research Institute of Infectious Diseases as
Chief, Intracellular Pathogens branch and the National Institutes of Health,
National Institutes of Allergy and Infectious Diseases; and at the U.S. Naval
Medical Research Institute as a research microbiologist. He has an extensive
research and development background, with over 130 publications and four books
in the areas of infectious diseases, vaccinology, and oncology. He received his
B.S. degree in animal science, M.S. degree in genetics, and Ph.D. degree in
biochemistry from Texas A&M University.
24
Lynne Hohlfeld was appointed Chief
Financial Officer and Secretary on June 30, 2006. From April 2006 to
June 30, 2006 she served as Vice President, Finance of the Company. From
September 2004 until April 2006, she was vice president and chief financial
officer of Denota Ventures. From August 2000 until March 2004 she was senior
vice president, chief operating and financial officer of Bacterial Barcodes,
Inc., a Houston-based molecular diagnostics company spun out of the Baylor
College of Medicine. She was also senior vice president and chief financial
officer of Spectral Genomics of Houston upon its merger with Bacterial Barcodes
in March 2004. Ms. Hohlfeld was also employed by LifeCell Corporation from
1997 to 1999, serving as controller. Ms. Hohlfeld’s career includes
positions at Dixie Chemical Company, Price WaterhouseCoopers, McKenna &
Company, and Arthur Andersen. Ms. Hohlfeld received a B.B.A. in accounting
from the University of Wisconsin—Madison and is a certified public
accountant.
Donna R. Rill has served as
our Vice President of Operations since November 2004. Ms. Rill has nearly
30 years of extensive clinical and research laboratory experience in cell and
gene therapy research and clinical application, immunological techniques and
assessment, microbiology, diagnostic virology, experimental design, and method
development and implementation. She has expertise in the areas of laboratory
development and operations, FDA CGMP and regulatory compliance, quality
control/assurance system development, and clinical Standards of Practice. From
April 2003 to November 2004, she was the Director of Quality Systems and Process
Development at Opexa Pharmaceuticals, Inc. From November 1997 to April 2003 she
was the Director of Translational Research for the Center for Cell &
Gene Therapy at Baylor College of Medicine. She has worked to design and qualify
GMP Cell & Gene Therapy Laboratories, GMP Vector Production facilities,
and Translational Research Labs at St. Jude Children’s Research Hospital, Texas
Children’s Hospital, and Baylor College of Medicine. Ms. Rill has held the
positions of Laboratory Director of Cell and Gene Therapy of the Translational
Research Center for Cell and Gene Therapy at Baylor College of Medicine;
Associate Scientist/Lab Manager of the Bone Marrow Transplant Research
Laboratory and the GMP Cell & Gene Therapy Laboratories at St. Jude
Children’s Research Hospital; and Clinical Infectious Disease Laboratory
Manager, Education Coordinator, and Clinical Instructor of the Department of
Clinical Laboratory at LeBonheur Children’s Medical Center and University of
Tennessee Center for the Health Sciences. She received her B.S. in Medical
Technology from the University of Tennessee, Memphis.
|
|
Directors
|
All of the
current directors will serve until the next annual stockholders’ meeting or
until their successors have been duly elected and qualified. Our board of
directors are as follows:
|
Name
|
Age
|
Position
|
||
|
Gregory
H. Bailey
|
52
|
Director
|
||
|
David
Hung
|
50
|
Director
|
||
|
Lorin
J. Randall
|
64
|
Director
|
||
|
Michael
Richman
|
47
|
Director
|
||
|
Scott
B. Seaman
|
52
|
Director
|
Gregory H. Bailey, M.D. has
served as a Director of the Company since April 2006. In January 2007,
Dr. Bailey became the managing partner of Palantir Group, Inc., a biotech
merchant bank. Dr. Bailey served as a managing director at MDB Capital
Group LLC from May 2004 to January 2007. From June 2003 to May 2004 and from
1998 to June 2002, Dr. Bailey served as a managing director of Knightsford
Bank Corp. From June 2002 to June 2003, Dr. Bailey served as a managing
director of Gilford Securities, Inc. Since May 2005, he also has served as
director of Medivation, Inc., a public company focused on acquiring biomedical
technologies. Dr. Bailey was a practicing physician for ten years and holds
a M.D. from the University of Western Ontario.
25
David Hung, M.D. has served as
a Director since May 2006. Dr. Hung has served as the president, chief
executive officer and as a director of Medivation, Inc. since December 2004.
Dr. Hung also has served as the president and chief executive officer, and
member of the board of directors, of Medivation, Inc.’s subsidiary, Medivation
Neurology, Inc. since its inception in September 2003. From 1998 until 2001,
Dr. Hung was employed by ProDuct Health, Inc., a privately held medical
device company, as Chief Scientific Officer (1998-1999), and as president and
chief executive officer (1999-2001). From December 2001 to January 2003,
Dr. Hung served as a consultant to Cytyc Health Corporation. Dr. Hung
received his M.D. from the University of California at San Francisco, and his
A.B. in biology and organic chemistry from Harvard College.
Lorin J. Randall has served as
a Director of the Company since September 2007. Mr. Randall, a financial
consultant, was Senior Vice President and Chief Financial Officer of Eximias
Pharmaceutical Corporation, a development-stage drug development company, from
2004 to 2006. From 2002-2004, Mr. Randall served as Senior Vice President
and Chief Financial Officer of i-STAT Corporation, a publicly-traded
manufacturer of medical diagnostic devices which was acquired by Abbott
Laboratories in 2004. From 1995 to 2001, Mr. Randall was Vice President and
Chief Financial Officer of CFM Technologies, Inc. a publicly traded manufacturer
of semiconductor manufacturing equipment. He currently serves on the boards of
two drug development companies, Acorda Therapeutics, Inc. and Athersys, Inc.
Mr. Randall previously served on the board of Quad Systems Corporation, a
publicly-traded manufacturer of electronics manufacturing equipment where he
also served as Chairman of the Audit Committee. Mr. Randall received a B.S.
in accounting from The Pennsylvania State University and an M.B.A. from
Northeastern University.
Michael S. Richman has served
as a Director of the Company since June 2006. Mr. Richman is President of
Amplimmune, Inc. From April 2002 to May 2007, Mr. Richman served as
executive vice president and chief operating officer of MacroGenics, Inc. He
joined MacroGenics, Inc in 2002 with approximately twenty years experience in
corporate business development within the biotechnology industry. From 2000 to
2002, Mr. Richman served as senior vice president, corporate development
and administration at MedImmune (now Astra Zeneca), and vice president, business
development from 1996 to 2000. From 1985 to 1996 Mr. Richman held
several management positions at Chiron (now Novartis). Mr. Richman serves
on the board of Cougar Biotechnology, a public drug development company.
Mr. Richman obtained his B.S. in Genetics/Molecular Biology at the
University of California at Davis and his MSBA in International Business at San
Francisco State University.
Scott B. Seaman has served as
a Director of since April, 2006. Mr. Seaman currently serves as the
executive director and treasurer of the Albert and Margaret Alkek Foundation of
Houston, Texas, a private foundation primarily supporting institutions in the
Texas Medical Center in Houston, Texas. Since January 1996 to present,
Mr. Seaman has served as the chief financial officer of Chaswil Ltd., an
investment management company. Since September 1986, Mr. Seaman has served
as secretary and treasurer of M & A Properties Inc., a ranching and real
estate concern. Since January 2003, Mr. Seaman has served as chairman and,
since July 2004, president of ICT Management Inc., the general partner of Impact
Composite Technology Ltd., a composite industry supplier. Mr. Seaman serves on
the board of GeneExcel, Inc., a privately held biotechnology company. Since May
2004, Mr. Seaman has served as a Member of the Investment Committee of
Global Hedged Equity Fund LP, a hedge fund. Mr. Seaman received a
bachelor’s degree in business administration from Bowling
Green State University and is a certified public
accountant.
Committees
of the Board of Directors
We
currently have an audit committee, a compensation committee, and a nominating
and corporate governance committee.
Audit Committee
The audit
committee of the Board currently consists of Mr. Randall, Mr. Richman,
and Mr. Seaman, each of whom are independent, non-employee directors. The
audit committee selects, on behalf of our board of directors, an independent
public accounting firm to audit our financial statements, discuss with the
independent auditors their independence, review and discuss the audited
financial statements with the independent auditors and management, and recommend
to our board of directors whether the audited financials should be included in
our Annual Reports to be filed with the SEC. The audit committee operates
pursuant to a written charter, which was adopted in February 2005. During the
last fiscal year, the audit committee held four meetings, and the then members
of the Audit Committee attended each meeting.
26
All of the
members of the audit committee are non-employee directors who: (1) met the
criteria for independence set forth in Rule 10A-3(b)(1) under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”); (2) did not
participate in the preparation of our financial statements or the financial
statements of Opexa; and (3) are able to read and understand fundamental
financial statements, including a balance sheet, income statement, and cash flow
statement. The Board has determined that Mr. Randall and Mr. Seaman
each, individually, qualify as an “audit committee financial expert” as defined
by Item 407(d)(5)(ii) of Regulation S-K of the Exchange
Act.
Compensation
Committee
The
compensation committee of the board consists of Dr. Hung, Mr. Richman,
and Mr. Seaman, each of whom are independent directors, as defined in Rule
10A-3 of the Exchange Act. The compensation Committee reviews and approves
(1) the annual salaries and other compensation of our executive officers,
and (2) individual stock and stock option grants. The compensation
Committee also provides assistance and recommendations with respect to our
compensation policies and practices, and assists with the administration of our
compensation plans. During the last fiscal year the compensation committee held
one meeting, and the then members of the compensation committee attended that
meeting.
In
addition, the Board has adopted a written charter for the compensation
committee, adopted in August 2004, which is available on our website at
www.opexatherapeutics.com.
Nominating
and Corporate Governance Committee
The
nominating and corporate governance committee of the board currently consists of
Dr. Hung, Mr. Richman, and Mr. Seaman, each of whom are found by
the board of directors to be an “independent director” pursuant to the
applicable rules and regulations promulgated by the SEC. The nominating and
corporate governance committee assists our board of directors in fulfilling its
responsibilities by: identifying and approving individuals qualified to serve as
members of our board of directors, selecting director nominees for our annual
meetings of shareholders, evaluating the performance of our board of directors,
and developing and recommending to our board of directors corporate governance
guidelines and oversight procedures with respect to corporate governance and
ethical conduct. This committee operates pursuant to a written charter adopted
in February 2005, which is available on our website at
http://www.opexatherapeutics.com. During the last fiscal year, the nominating
and corporate governance committee held one meeting, and the then members of the
compensation committee attended that meeting.
Compensation
Committee Interlocks and Insider Participation
Our
compensation committee is comprised of Dr. Hung, Mr. Richman, and
Mr. Seaman. None of the committee members has ever been an employee of
Opexa Therapeutics, Inc. None of our executive officers serve as a member of the
board of directors or compensation committee of any entity that has any
executive officer serving as a member of our Board of Directors or compensation
committee.
Code
of Ethics for the CEO, CFO, and Senior Financial Officers
In 2005,
in accordance with SEC rules, the then audit committee and the Board of
Directors adopted the Policy on Whistleblower Protection and Code of
Ethics. The Board of Directors believes that these individuals must
set an exemplary standard of conduct, particularly in the areas of accounting,
internal accounting control, auditing and finance. This code sets
forth ethical standards to which the designated officers must adhere and other
aspects of accounting, auditing and financial compliance. The Code of
Ethics is available on our website at www.opexatherapeutics.com.
Section 16(a) Beneficial
Ownership Reporting Compliance
Section 16(a)
of the Exchange Act requires our directors and officers, and persons who own
more than 10% of a registered class of our equity securities, to file with the
SEC initial reports of ownership and reports of changes in ownership of equity
securities of our common stock. Theses people are required by SEC regulations to
furnish us with copies of all such reports they file. To our knowledge, based
solely on our review of the copies of such reports furnished to us and written
representations from certain insiders that no other reports were required, we
complied with all Section 16(a) filing requirements applicable to our
insiders.
27
Audit
Committee Report
The Audit
Committee of the Board currently consists of Mr. Randall, Mr. Richman and Mr.
Seaman, all of which are independent, non-employee directors.
The Audit
Committee operates under a written charter adopted by the Board of Directors,
which is evaluated annually. The charter of the Audit Committee is available on
the Company’s website at http://www.opexatherapeutics.com under
the heading “Investor Info”. The Audit Committee selects, evaluates
and, where deemed appropriate, replaces the Company’s independent
auditors. The Audit Committee also pre-approves all audit services,
engagement fees and terms, and all permitted non-audit engagements, except for
certain de minimus amounts.
Management
is responsible for the Company’s internal controls and the financial reporting
process. The Company’s independent auditors are responsible for
performing an independent audit of the Company’s consolidated financial
statements in accordance with auditing standards generally accepted in the
United States of America and issuing a report on the Company’s consolidated
financial statements. The Audit Committee’s responsibility is to
monitor and oversee these processes.
In this
context, the Audit Committee has reviewed the Company’s audited financial
statements for fiscal 2007 and has met and held discussions with management and
Malone & Bailey, PC, the Company’s independent
auditors. Management represented to the Audit Committee that the
Company’s consolidated financial statements for fiscal 2007 were prepared in
accordance with accounting principles generally accepted in the United States of
America, and the Audit Committee discussed the consolidated financial statements
with the independent auditors. The Audit Committee also discussed with Malone
& Bailey, PC matters required to be discussed by Statement on Auditing
Standards No. 61 (Communications with Audit Committees).
Malone
& Bailey, PC also provided to the Audit Committee the written disclosure
required by Independence Standards Board Standard No. 1 (Independence
Discussions with Audit Committees), and the Audit Committee discussed with
Malone & Bailey, PC the accounting firm’s independence.
Based upon
the Audit Committee’s discussion with management and Malone & Bailey, PC,
and the Audit Committee’s review of the representation of management and the
report of Malone & Bailey, PC to the Audit Committee, the Audit Committee
recommended to the Board of Directors that the audited consolidated financial
statements be included in the Company’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2007, filed with the Securities and Exchange
Commission.
Submitted
by the Audit Committee of the Board of Directors of Opexa Therapeutics,
Inc.
J.
Lorin Randall, Michael Richman, Scott Seaman
Compensation
Discussion and Analysis
Objectives of Our Executive
Compensation Program
The
compensation committee of our Board (the “Compensation Committee”) administers
our executive compensation program. The Compensation Committee is composed
entirely of independent directors.
The
general philosophy of our executive compensation program is to align executive
compensation with the Company’s business objectives and the long-term interests
of our stockholders. To that end, the Compensation Committee believes executive
compensation packages provided by the Company to its executives, including the
named executive officers, should include both cash and stock-based compensation
that reward performance as measured against established goals. In addition, the
Company strives to provide compensation that is competitive with other
biopharmaceutical and biotechnology companies and that will allow us to attract,
motivate, and retain qualified executives with superior talent and
abilities.
28
Our
executive compensation is designed to reward achievement of the Company’s
corporate goals. In 2007, our corporate goals included, but were not limited
to: (i) advancement of the Company’s clinical trial activities;
(ii) advancing the Company’s research and development programs;
(iii) obtaining additional financing as needed; and (iv) realizing
financial goals. This focus allows us to reward our executives for their roles
in creating value for our stockholders.
The Role of the Compensation
Committee
The
Compensation Committee has the primary authority to determine the Company’s
compensation philosophy and to establish compensation for the Company’s
executive officers. The Compensation Committee oversees the Company’s
compensation and benefit plans and policies; administers the Company’s stock
option plans; reviews the compensation components provided to Opexa’s officers,
employees, and consultants; grants options to purchase common stock Opexa’s
officers, employees, and consultants; and reviews and makes recommendations to
the Board regarding all forms of compensation to be provided to the members of
the Board.
The
Compensation Committee generally sets the initial compensation of each
executive. The Compensation Committee annually reviews and in some cases adjusts
compensation for executives. Although, the Chief Executive Officer provides
recommendations to the Compensation Committee regarding the compensation of the
other executive officers, the Compensation Committee has full authority over all
compensation matters relating to executive officers.
Elements of Executive
Compensation
Although
the Compensation Committee has not adopted any formal guidelines for allocating
total compensation between equity compensation and cash compensation, it strives
to maintain a strong link between executive incentives and the creation of
stockholder value. Therefore, the Company emphasizes incentive compensation in
the form of stock options rather than base salary.
Executive
compensation consists of the following elements:
Base
Salary. Base
salaries for our executives are generally established based on the scope of
their responsibilities, taking into account competitive market compensation paid
by other companies for similar positions and recognizing cost of living
considerations. Prior to making its recommendations and determinations, the
Compensation Committee reviews each executive’s:
|
|
•
|
historical
pay levels;
|
|
|
•
|
past
performance; and
|
|
|
•
|
expected
future contributions.
|
The
Compensation Committee does not use any particular indices or formulae to arrive
at each executive’s recommended pay level.
Equity
Awards. We
also use long-term incentives in the form of stock options. Employees and
executive officers generally receive stock option grants at the commencement of
employment and periodically receive additional stock option grants, typically on
an annual basis. We believe that stock options are instrumental in aligning the
long-term interests of the Company’s employees and executive officers with those
of the stockholders because such individuals realize gains only if the stock
price increases. Stock options also help to balance the overall executive
compensation program, with base salary providing short-term compensation and
stock options rewarding executives for long-term increases in stockholder
value.
Options are generally granted through
our June 2004 Compensatory Stock Option Plan that authorizes us to grant options
to purchase shares of common stock to our employees, directors, and consultants.
The Compensation Committee reviews and approves stock option awards to executive
officers in amounts that are based upon a review and assessment of:
29
|
|
•
|
competitive
compensation data;
|
|
|
•
|
individual
performance;
|
|
|
•
|
each
executive’s existing long-term incentives;
and
|
|
|
•
|
retention
considerations.
|
Periodic
stock option grants are made at the discretion of the Compensation Committee to
eligible employees and, in appropriate circumstances, the Compensation Committee
considers the recommendations of members of management, such as the Chief
Executive Officer. In 2007, each named executive officer was awarded stock
options in the amounts indicated in the section entitled Grants of Plan-Based
Awards. Stock options are granted with an exercise price equal to the fair
market value of our common stock on the day of grant and typically vest ratably
over a three year period.
Section 162(m)
Policy
Section 162(m)
of the Internal Revenue Code limits the tax deductibility by a corporation of
compensation in excess of $1 million paid to its Chief Executive Officer
and any other of its four most highly compensated executive officers. However,
compensation which qualifies as “performance-based” is excluded from the
$1 million limit if, among other requirements, the compensation is payable
only upon attainment of pre-established, objective performance goals under a
plan approved by the corporation’s stockholders.
It is our
policy to qualify, to the extent reasonable, our executive officers’
compensation for deductibility under applicable tax law. However, we intend to
retain the flexibility necessary to provide total cash compensation in line with
competitive practice, our compensation philosophy, and our best interests. It
therefore may from time to time pay compensation to our executive officers that
may not be deductible.
Compensation
Committee Report
The
Compensation Committee of the Board is composed of three independent directors
as defined under the Marketplace Rules of The Nasdaq Capital Market (“Nasdaq”).
The Compensation Committee operates under a written charter adopted by the
Board. The members of the Compensation Committee are David Hung, Michael
Richman, and Scott Seaman. We believe that each member of the
Compensation Committee meets the director independence requirements set forth in
the applicable Securities and Exchange Commission (“Commission”) rules and
Nasdaq Marketplace Rules.
The
Compensation Committee administers Opexa’s June 2004 Compensatory Stock Option
Plan; reviews compensation components to be provided to Opexa’s officers,
employees, and consultants; grants options to purchase common stock and
restricted stock to Opexa’s officers, employees, and consultants; and reviews
and makes recommendations to the Board regarding all forms of compensation to be
provided to the members of the Board. The Compensation Committee believes it has
fulfilled its responsibilities under its charter for the fiscal year ended
December 31, 2007.
The
Compensation Committee has reviewed and discussed the Compensation Discussion
and Analysis required by Item 402(b) for the fiscal year ended December 31,
2007 with management. Based upon this review and discussion, the Compensation
Committee recommended to the Board that the Compensation Discussion and Analysis
be included in Opexa’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2007.
Submitted
by the Compensation Committee of the Board of Directors of Opexa Therapeutics,
Inc.
David
Hung, Michael Richman, Scott Seaman
30
Executive
Officer Compensation
Summary
Compensation Table
The
following tables set forth certain information regarding our CEO and each of our
most highly-compensated executive officers whose total annual salary and bonus
for the fiscal years ending December 31, 2007 and 2006 exceeded
$100,000
|
Name
and Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Options
Awards
($)(4)
|
Total
($)
|
||||||||||||
|
David
B. McWilliams(1)
|
2007
|
275,000
|
—
|
411,807
|
686,807
|
||||||||||||
|
CEO,
President, Director
|
2006
|
264,497
|
—
|
497,377
|
761,874
|
||||||||||||
|
Jim
C. Williams (2)
|
2007
|
225,750
|
—
|
449,024
|
674,774
|
||||||||||||
|
Chief
Operating Officer
|
2006
|
227,094
|
—
|
401,574
|
628,668
|
||||||||||||
|
Lynne
Hohlfeld(3)
|
2007
|
175,000
|
—
|
102,700
|
277,700
|
||||||||||||
|
CFO
and Secretary
|
2006
|
131,250
|
—
|
40,839
|
172,089
|
||||||||||||
|
Donna
R. Rill(2)
|
2007
|
137,940
|
10,000
|
234,598
|
382,538
|
||||||||||||
|
Vice
President of Operations
|
2006
|
133,500
|
—
|
196,590
|
330,090
|
||||||||||||
|
(1)
|
Served
as chief executive officer since August
2004.
|
|
(2)
|
Named
an executive officer in June 2007.
|
|
(3)
|
Served
as chief financial officer since June
2006.
|
|
(4)
|
Reflects
the dollar amount recognized for financial statement reporting purposes
for the year ended December 31, 2007 in accordance with FAS 123(R)
(but disregarding forfeiture estimates related to service-based vesting
conditions) and, accordingly, includes amounts from options granted prior
to 2006. See the information appearing under the heading entitled “Stock
Options and Warrants” in footnote number 11 to our consolidated financial
statements included as part of our Annual report on Form 10-KSB for the
year ended December 31, 2006 for certain assumptions made in the
valuation of options granted in the years ended December 31, 2006,
2005 and 2004.
|
Executive
Employment Agreements
David B.
McWilliams is employed by us pursuant to an Amended and Restated Employment
Agreement entered into on June 15, 2006. Pursuant to the agreement,
Mr. McWilliams is employed as the Chief Executive Officer and a Director of
the Company at an annual salary of $275,000. The term of employment is through
June 15, 2008 and may be extended for periods of one year; however, the
employment agreement may be terminated at any time voluntarily by him or without
cause by the Board. If employment is terminated by the Board without cause,
Mr. McWilliams will receive twelve months base salary. Any and all stock
options granted to Mr. McWilliams prior to termination that are scheduled
to become vested within a 12 month period after termination will be accelerated
to become vested as of the termination date. Mr. McWilliams shall have 90
days from termination to exercise any vested stock options.
Grants
of Plan Based Awards in 2007
The
following table presents each grant of stock options in 2007 to the individuals
named in the summary compensation table above.
|
Name
|
Grant Date
|
Number
of
Securities
Underlying
Options(1)
|
Exercise Price
of
Option
Awards
|
Grant
Date
Fair Value of
Options
|
||||||||||
|
David
B. McWilliams
|
06/18/07
|
41,000 | $ | 5.47 | $ | 178,116 | ||||||||
|
Jim
C. Williams
|
06/18/07
|
30,000 | $ | 5.47 | $ | 130,331 | ||||||||
|
Lynne
Hohlfeld
|
06/18/07
|
32,000 | $ | 5.47 | $ | 139,019 | ||||||||
|
Donna
R. Rill
|
06/18/07
|
32,000 | $ | 5.47 | $ | 139,019 | ||||||||
|
(1)
|
Vests
over three years; 1/3 on each anniversary date
of grant.
|
31
Each of
the options in the foregoing table was granted under the Company’s June 2004
Compensatory Stock Option Plan.
Outstanding
Equity Awards at Fiscal Year-End
|
Option
Awards
|
|||||||||||||
|
Name
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
|
Option
Exercise
Price
($)
|
Option
Expiration
Date
|
|||||||||
|
David
B. McWilliams
|
37,000 | — | 30.00 |
08/31/09
|
|||||||||
| 5,000 | — | 30.00 |
01/21/10
|
||||||||||
| 40,000 | 80,000 | 5.00 |
05/02/16
|
||||||||||
| — | 41,000 | 5.47 |
06/18/17
|
||||||||||
|
|
|||||||||||||
|
Jim
C. Williams
|
12,500 | — | 30.00 |
11/06/09
|
|||||||||
| 6,250 | 6,250 | 7.00 |
12/05/10
|
||||||||||
| 14,292 | 28,583 | 5.00 |
04/20/16
|
||||||||||
| — | 30,000 | 5.47 |
06/18/17
|
||||||||||
|
|
|||||||||||||
|
Lynne
Hohlfeld
|
7,500 | 15,000 | 5.00 |
04/20/16
|
|||||||||
| 4,167 | 8,333 | 8.25 |
07/12/16
|
||||||||||
| — | 32,000 | 5.47 |
06/18/17
|
||||||||||
|
|
|||||||||||||
|
|
|||||||||||||
|
Donna
R. Rill
|
6,000 | — | 30.00 |
11/06/09
|
|||||||||
| 3,000 | 3,000 | 7.00 |
12/05/10
|
||||||||||
| 7,793 | 15,587 | 5.00 |
04/20/16
|
||||||||||
| — | 32,000 | 5.47 |
06/18/17
|
||||||||||
Director
Compensation
The
following table presents summary information for the year ended
December 31, 2007 regarding the compensation of the non-employee members of
our board of directors. Mr. Randall was appointed to the board on September 19,
2007.
|
Name
|
Fees Earned
or
Paid
in
Cash
($)
|
Options
Awards
($)(1)
|
Total
($)
|
|||||||||
|
Gregory
H. Bailey(2)
|
15,750 | 115,616 | 131,366 | |||||||||
|
David
Hung(2)
|
15,750 | 115,616 | 131,366 | |||||||||
|
Lorin
J. Randall (3)
|
7,141 | 35,043 | 42,184 | |||||||||
|
Michael
Richman(2)
|
16,000 | 118,240 | 134,240 | |||||||||
|
Scott
B. Seaman(2)
|
17,000 | 115,616 | 132,616 | |||||||||
32
|
(1)
|
Reflects
the dollar amount recognized for financial statement reporting purposes
for the year ended December 31, 2007 in accordance with FAS 123R (but
disregarding forfeiture estimates related to service-based vesting
conditions) and, accordingly, includes amounts from options granted prior
to 2006. See the information appearing under the heading entitled “Stock
Options and Warrants” in footnote number 11 to our consolidated financial
statements included as part of our Annual report on Form 10-KSB for the
year ended December 31, 2006 for certain assumptions made in the
valuation of options granted in the years ended December 31, 2006,
2005 and 2004.
|
|
(2)
|
45,000
option awards outstanding at fiscal year
end.
|
|
(3)
|
20,000
option awards outstanding at fiscal year
end.
|
No options
were exercised during the fiscal year ended December 31, 2007.
The
following table presents the fair value of each grant of stock options in 2007
to non-employee members of our board of directors, computed in accordance with
FAS 123R:
|
Name
|
Grant Date
|
Number
of
Securities
Underlying
Options
|
Exercise
Price
of
Option
Awards
|
Grant Date
Fair
Value
of
Options
|
||||||||||
|
Gregory
H. Bailey
|
06/18/07
|
10,000 | $ | 5.47 | $ | 42,318 | ||||||||
|
David
Hung
|
06/18/07
|
10,000 | $ | 5.47 | $ | 42,318 | ||||||||
|
Lorin
J. Randall
|
09/19/07
|
20,000 | $ | 3.95 | $ | 61,326 | ||||||||
|
Michael
Richman
|
06/18/07
|
10,000 | $ | 5.47 | $ | 42,318 | ||||||||
|
Scott
B. Seaman
|
06/18/07
|
10,000 | $ | 5.47 | $ | 42,318 | ||||||||
Compensation
of Directors
Mr.
McWilliams who is a director and an officer does not receive any compensation
for his services as a member of our board of directors. We reimburse our
directors for travel and lodging expenses in connection with their attendance at
board and committee meetings. In summary, Board members receive the following
fees:
|
Annual
retainer
|
$ | 12,000 | ||
|
For
each Board meeting attended in person
|
$ | 1,500 | ||
|
For
each Board meeting attended that is held over the
telephone
|
$ | 750 | ||
|
For
each non-chair committee member for each committee meeting
attended
|
$ | 750 | ||
|
For
each committee meeting attended by the chair of that
committee
|
$ | 1,000 | ||
In
addition, on June 18, 2007 Dr. Bailey, Dr. Hung, Mr. Richman and Mr. Seaman were
each granted a ten year option to purchase 10,000 shares of our common stock
that will vest 5,000 shares immediately and 5,000 shares on the first
anniversary of the date of grant an exercise price of $5.47. On September 19,
2007, Mr. Randall was granted an initial ten year option to purchase 20,000
shares of our common stock at an exercise price of $3.95.
The
following table sets forth, as of March 13, 2008, the number and percentage of
outstanding shares of our common stock owned by: (a) each person who is
known by us to be the beneficial owner of more than 5% of our outstanding shares
of common stock; (b) each of our directors; (c) the named executive
officers as defined in Item 402 of Regulation S-K; and (d) all current
directors and executive officers, as a group. As of March 13, 2008, there were
10,196,784 shares of common stock issued and outstanding.
Beneficial
ownership has been determined in accordance with Rule 13d-3 under the Exchange
Act. Under this rule, certain shares may be deemed to be beneficially owned by
more than one person (if, for example, persons share the power to vote or the
power to dispose of the shares). In addition, shares are deemed to be
beneficially owned by a person if the person has the right to acquire shares
(for example, upon exercise of an option or warrant) within 60 days of the date
as of which the information is provided. In computing the percentage ownership
of any person, the amount of shares is deemed to include the amount of shares
beneficially owned by such person by reason of such acquisition rights. As a
result, the percentage of outstanding shares of any person as shown in the
following table does not necessarily reflect the person’s actual voting power at
any particular date.
33
To our
knowledge, except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the table have sole
voting and investment power with respect to all shares of common stock shown as
beneficially owned by them.
|
Name
and Address of Beneficial Owner(1)
|
Number of Shares
Owned
|
Percentage of
Class
|
||||||
|
Beneficial
Owners of more than 5%:
|
||||||||
|
SF
Capital Partners Ltd.(2)
|
1,022,912 | (3) | 9.999 | % | ||||
|
Victory
Park Master Fund, Ltd.(4)
|
966,139 | (5) | 9.19 | % | ||||
|
Austin
W. Marxe and David M. Greenhouse(6)
|
1,296,607 | (6) | 12.12 | % | ||||
|
Albert
and Margaret Alkek Foundation(7)
|
1,047,674 | (8) | 9.999 | % | ||||
|
Alkek &
Williams Ventures Ltd.(9)
|
669,839 | (10) | 6.38 | % | ||||
|
DLD
Family Investments, LLC(11)
|
561,111 | (12) | 5.38 | % | ||||
|
Officers
and Directors:
|
||||||||
|
Scott
B. Seaman(9)
|
761,223 | (13) | 7.20 | % | ||||
|
David
B. McWilliams
|
135,594 | (14) | 1.31 | % | ||||
|
Lynne
Hohlfeld
|
19,167 | (15) | * | |||||
|
Donna
Rill
|
27,197 | (16) | * | |||||
|
Jim
C. Williams
|
55,660 | (17) | * | |||||
|
Gregory
H. Bailey
|
93,928 | (18) | * | |||||
|
David
Hung
|
40,000 | (19) | * | |||||
|
Lorin
Randall
|
10,000 | (20) | * | |||||
|
Michael
Richman
|
31,250 | (21) | * | |||||
|
All
directors and executive officers as a group (9 persons)**
|
1,174,019 | (22) | 10.72 | % | ||||
|
*
|
Indicates
less than 1%
|
|
(1)
|
Unless
otherwise indicated, the mailing address of the beneficial owner is c/o
Opexa Therapeutics, Inc., 2635 North Crescent Ridge Drive, The Woodlands,
Texas 77381.
|
|
(2)
|
Michael
A. Roth and Brian J. Stark exercise joint voting and dispositive power
over all of the shares of common stock beneficially owned by SF Capital
Partners Ltd., but Messrs Roth and Stark disclaim beneficial ownership of
such shares. The information in this footnote is primarily based on a
Schedule 13G reported with the SEC on February 14, 2008 and other
information provided to us. The mailing address of SF Capital Partners
Ltd. is c/o Stark Offshore Management, LLC, 3600 South Lake Drive, St.
Francis, WI 53235.
|
|
(3)
|
Excludes
466,638 shares of Company common stock underlying the Warrant (“Warrant”)
that SF Capital Partners Ltd. is contractually prohibited from exercising
to the extent that it would beneficially own in excess of 9.999% of the
total number of issued and outstanding shares of common stock after such
exercise. “Warrant” refers, in each case to the Warrants dated
April 11, 2006.
|
|
(4)
|
Victory
Park Capital Advisors, LLC is the investment advisor of Victory Park
Master Fund, Ltd., and consequently has voting control and investment
discretion over securities held by Victory Park Master Fund,
Ltd. Richard Levy is the sole member of Jacob Capital,
L.L.C. and sole manager of Victory Park Capital Advisors, LLC.
The mailing address of the beneficial owner is 227 West Monroe Street,
Suite 3900, Chicago, Illinois
60606.
|
|
(5)
|
Includes
320,000 shares of Company common stock underlying a
Warrant.
|
34
|
(6)
|
Consisting
of: (i) 271,603 shares of common stock and 165,500 shares of common
stock issuable upon the exercise of a Warrant held by Special Situations
Fund III QP, L.P., (ii) 18,160 shares of common stock and 14,200
shares of common stock issuable upon the exercise of a Warrant held by
Special Situations Fund III, L.P., (iii)71,683 shares of common stock and
45,300 shares of common stock issuable upon the exercise of a Warrant held
by Special Situations Cayman Fund, L.P., (iv) 316,481 shares of
common stock and 200,000 shares of common stock issuable upon the exercise
of a Warrant held by Special Situations Private Equity Fund, L.P., and
(v) 118,680 shares of common stock and 75,000 shares of common stock
issuable upon the exercise of a Warrant held by Special Situations Life
Sciences Fund, L.P. MGP Advisors Limited (“MGP”) is the general partner of
Special Situations Fund III, QP, L.P. and Special Situations Fund III,
L.P. AWM Investment Company, Inc. (“AWM”) is the general partner of MGP
and the general partner of and investment adviser to the Special
Situations Cayman Fund, L.P. MG Advisers, L.L.C. (“MG”) is the general
partner of and investment adviser to the Special Situations Private Equity
Fund, L.P. LS Advisers, LLC (“LS”) is the general partner and investment
adviser to the Special Situations Life Sciences Fund, L.P. Austin W. Marxe
and David M. Greenhouse are the principal owners of MGP, AWM, MG, and LS.
Through their control of MGP, AWM, MG and LS, Messrs. Marxe and Greenhouse
share voting and investment control over the portfolio securities of each
of the funds listed above. The information in this footnote is primarily
based on a Form 13G reported with the SEC on March 7, 2008 and other
information provided to us. The mailing address of Messrs. Marxe and
Greenhouse is 527 Madison Avenue, Suite 2600, New York, New York
10022.
|
|
(7)
|
This
information is based on the Schedule 13D/A filed with the SEC on March 13,
2008, by Albert and Margaret Alkek Foundation (the
“Foundation”), Alkek & Williams Ventures, Ltd.
(“Ventures”), Scott Seaman, DLD Family Investments, LLC, and the other
reporting persons named therein the (“Foundation 13D”). The Foundation
acts through an investment committee of its board of directors, which
includes Mr. Daniel Arnold, Mr. Joe Bailey, Mr. Scott
Seaman and Ms. Randa Duncan Williams. Mr. Seaman is the
executive director of the Foundation and chairman of the investment
committee. The investment committee has sole voting and investment power
over all of the shares of common stock beneficially owned by the
Foundation. However, pursuant to the Foundation 13D, neither the executive
director nor any member of the investment committee may act
individually to vote or sell shares of common stock held by the
Foundation; therefore, the Foundation has concluded that no
individual committee member is deemed to beneficially own,
within the meaning of Rule 13d-3 of the Exchange Act, any shares of common
stock held by the Foundation solely by virtue of the fact that he or she
is a member of the investment committee. Additionally, pursuant to the
Foundation 13D, the Foundation has concluded that because Mr. Seaman,
in his capacity as executive director or chairman of the investment
committee, cannot act in such capacity to vote or sell shares of common
stock held by the Foundation without the approval of the investment
committee, he is not deemed to beneficially own, within the meaning of
Rule 13d-3 of the Exchange Act, any shares of common stock held by the
Foundation by virtue of his position as executive director or chairman of
the investment committee. The mailing address of the beneficial owner is
1221 McKinney #4525, Houston, Texas
77010.
|
|
(8)
|
Consisting
of: (i) 22,222 shares of common stock underlying Series C Warrants
exercisable at $30.00 per share, (ii) 8,785 shares of common stock
underlying a Warrant, and (iii) 250,000 shares of common stock underlying
Series E Warrants. Excludes 241,215 shares of Company common stock
underlying a Warrant that the Foundation is contractually prohibited from
exercising to the extent that it would beneficially own in excess of
9.999% of the total number of issued and outstanding shares of common
stock after such exercise. Pursuant to the Foundation 13D, the
Foundation and other reporting persons named therein may be deemed to
constitute a group for purposes of Section 13(d) or
Section 13(g) of the Exchange Act. However, the Foundation,
Ventures, Chaswil, Ltd., and Mr. Seaman expressly disclaim
(i) that, for purposes of Section 13(d) or Section 13(g) of
the Exchange Act, they are a member of a group with respect to securities
of the Company held by DLD Family Investments, LLC, Mr. Arnold,
Mr. Bailey or Ms. Williams and (ii) that they have agreed
to act together with DLD Family Investments, LLC, Mr. Arnold,
Mr. Bailey or Ms. Williams as a group other than as described in
the Foundation 13D. Therefore, this does not include the following
securities: (i) 333,333 shares of common stock held by DLD Family
Investments, LLC; (ii) 17,778 shares of common stock underlying
Series C warrants exercisable at $30.00 per share held by DLD Family
Investments, LLC; (iii) 110,000 shares of common stock underlying a
Warrant held by DLD Family Investments, LLC;(iv) 100,000 shares of common
stock underlying Series E warrants held by DLD Family Investments, LLC;
(v) 26,667 shares of common stock held by Mr. Arnold;
(vi) 8,889 shares of common stock underlying Series C warrants
exercisable at $30.00 per share held by Mr. Arnold; (vii) 10,000
shares of common stock underlying a Warrant held by Mr. Arnold;
(viii) 10,000 shares of common stock held by Mr. Bailey;
(ix) 5,000 shares of common stock underlying a Warrant held by
Mr. Bailey; (x) 363,667 shares of common stock held by Ventures;
(xi) 18,223 shares of common stock underlying Series C warrants
exercisable at $30.00 per share held by Ventures; (xii) 125,000
shares of common stock underlying a Warrant held by Ventures; (xiii)
172,949 shares of common stock underlying Series E warrants held by
Ventures; (xiv) 28,550 Series of common stock held by
Mr. Seaman; (xv) 5,334 shares of common stock underlying Series
C warrants exercisable at $30.00 per share held by Mr. Seaman;
(xvi) 7,500 shares of common stock underlying a Warrant held by
Mr. Seaman; and (xvii) 10,000 shares of common stock underlying
Series E warrants held by Mr. Seaman. The information in this footnote is
primarily based on the Foundation 13D and other information provided to
us.
|
35
|
(9)
|
Chaswil,
Ltd. is the investment manager of Ventures and holds voting power and
investment power with respect to Company securities held by Ventures
pursuant to a written agreement. Scott B. Seaman is a principal of
Chaswil, Ltd and has shared voting power and shared investment power over
all of the shares of common stock beneficially owned by Ventures. The
information in this footnote is primarily based on the Foundation 13D and
other information provided to us. The mailing address of the beneficial
owner is 1221 McKinney #4525, Houston, Texas
77010.
|
|
(10)
|
Consisting
of: (i) 363,667 shares of common stock; (ii) 18,223 shares of
common stock underlying Series C warrants exercisable at $30.00 per share;
(iii) 125,000 shares of common stock underlying a Warrant, and (iv)
172,949 shares of common stock underlying Series E
warrants.
|
|
(11)
|
Randa
Duncan Williams is the principal of DLD Family Investments, LLC and she
may be deemed to exercise voting and investment power with respect to such
shares. The information in this footnote is primarily based on the
Foundation 13D and other information provided to us. The mailing address
of the beneficial owner is P.O. Box 4735, Houston, Texas
77210-4735.
|
|
(12)
|
Consisting
of: (i) 333,334 shares of common stock held by DLD Family
Investments, LLC; (ii) 17,778 shares of common stock underlying Series C
warrants exercisable at $30.00 per share held by DLD Family Investments,
LLC; (iii) 110,000 shares of common stock underlying the Warrants
held by DLD Family Investments, LLC, and (iv) 100,000 shares of common
stock underlying Series E warrants. Ms. Williams is on the investment
committee for the Foundation. Pursuant to the Foundation 13D, the
Foundation has concluded that no individual committee
member is deemed to beneficially own, within the meaning of Rule
13d-3 of the Exchange Act, any shares of common stock held by the
Foundation solely by virtue of the fact that he or she is a member of the
investment committee. The information in this footnote is primarily based
on the Foundation 13D and other information provided to us. The mailing
address of the beneficial owner is P.O. Box 4735, Houston, Texas
77210-4735.
|
|
(13)
|
Consisting
of: (i) 40,000 shares underlying stock options; (ii) 363,667
shares of common stock held by Ventures; (iii) 18,223 shares of
common stock underlying Series C warrants exercisable at $30.00 per share
held by Ventures; (iv) 125,000 shares of common stock underlying the
Warrants held by Ventures; (v) 172,949 shares of common stock underlying
Series E warrants held by Ventures; (vi) 5,334 shares of common stock
underlying Series C warrants exercisable at $30.00 per share;
(vii) 7,500 shares of common stock underlying the Warrants; and
(viii) 10,000 shares of common stock underlying Series E warrants. (See
footnote 8 for additional discussion of the information set forth in
clauses (ii) through (v) of the preceding sentence.) Pursuant to
the Foundation 13D, this does not include the following shares which
Mr. Seaman has determined he does not have beneficial ownership or
disclaimed beneficial ownership: (i) 766,667 shares of common stock
held by the Foundation; (ii) 22,223 shares of common stock underlying
Series C warrants exercisable at $30.00 per share held by the Foundation;
(iii) 250,000 shares of common stock underlying a Warrant held by the
Foundation; and (iv) 250,000 shares of common stock underlying Series E
warrants held by the Foundation. (See footnote 7 for additional discussion
of the information set forth in clauses (i) through (iv) of the
preceding sentence.) The mailing address of the beneficial owner is 1221
McKinney #4545, Houston, Texas
77010.
|
|
(14)
|
Consisting
of: (i) 122,000 shares of common stock underlying stock options and
(ii) 6,968 shares of common stock underlying Series C warrants
exercisable at $30.00 per share.
|
|
(15)
|
Consisting
of 19,167 shares of common stock underlying
options.
|
|
(16)
|
Consisting
of 24,587 shares of common stock underlying
options.
|
|
(17)
|
Consisting
of 47,333 shares of common stock underlying options and 2,755 shares of
common stock underlying Series C warrants exercisable at $30.00 per
share.
|
36
|
(18)
|
Consisting
of: (i) 40,000 shares underlying stock options; (ii) a warrant
to purchase 38,928 shares of common stock exercisable at $5.00 per share;
(iii) 10,000 shares of common stock held by Palantir Group, Inc., an
entity in which Dr. Bailey has investment and voting power; and
(iv) 5,000 shares of common stock underlying a Warrant held by
Palantir Group, Inc.
|
| (19) | Consisting of 40,000 shares of common stock underlying options. |
|
(20)
|
Consisting
of 10,000 shares of common stock underlying
options.
|
|
(21)
|
Consisting
of 31,250 shares of common stock underlying stock
options.
|
|
(22)
|
Consisting
of: (a) the following held by Mr. Seaman or which
Mr. Seaman may be deemed to have voting and investment power
(i) 40,000 shares underlying an option; (ii) 363,667 shares of
our common stock held by Ventures; (iii) 18,223 shares of our common
stock underlying Series C warrants exercisable at $30.00 per share held by
Ventures; (iv) 125,000 shares of our common stock underlying a
Warrant held by Ventures; (v) 172,949 shares of our common stock
underlying Series E warrants held by Ventures; (vi) 5,334 shares of
our common stock underlying Series C warrants exercisable at $30.00 per
share; (vii) 7,500 shares of our common stock underlying a Warrant;
and (viii) 10,000 shares of common stock underlying Series E warrants;
(b) the following held by Mr. McWilliams (i)122,000 shares of
common stock underlying stock options and (ii) 6,968 shares of our
common stock underlying Series C warrants exercisable at $30.00 per share;
(iii) 19,167 shares of common stock underlying stock options held by Ms.
Hohlfeld; (iv) 24,587 shares of common stock underlying stock options held
by Ms. Rill; (v) the following held by Dr. Williams: (a) 47,333 shares of
common stock underlying stock options and (b) 2,755 shares of common stock
underlying Series C warrants exercisable at $30.00 per share
(vi) the following held by Dr. Bailey or which Dr. Bailey
has voting and investment power: (a) 40,000 shares underlying stock
options and (b) 38,928 shares of common stock underlying a Warrant
exercisable at $5.00 per share; (vii) 10,000 shares of common stock
held by Palantir Group, Inc.; and (viii) 5,000 shares of commons
underlying a Warrant held by Palantir Group, Inc.; (ix) 40,000 shares
underlying stock options held by Dr. Hung; (x) 10,000 shares
underlying stock options held by Mr. Randall; and (xi) 31,250
shares underlying stock options held by
Mr. Richman.
|
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE.
|
Certain
Relationships and Related Transactions
None
Director
Independence
|
Director
|
Independent(1)
|
Audit
Committee
|
Nominating
and Corporate
Governance
Committee
|
|||
|
Gregory
H. Bailey
|
|
|||||
|
David
Hung
|
X
|
X
|
||||
|
David
B. McWilliams
|
||||||
|
Lorin
J. Randall
|
X
|
X
|
||||
|
Michael
Richman
|
X
|
X
|
X
|
|||
|
Scott
B. Seaman
|
X
|
X
|
X
|
|
|
(1) As
defined by applicable SEC rule and the listing standards of the Nasdaq
Capital Market.
|
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES.
|
The
aggregate fees billed by the principal accountant, Malone & Bailey, PC, for
the audit and related audit services for the period ending December 31, 2007 and
2006, were $181,693 and $167,462 respectively.
No other
fees were billed for services by Malone & Bailey, PC, other than those
covered in the preceding paragraph. No professional fees were billed
for financial information, tax advice or planning, or system design and
implementation.
37
(a) 1. Financial
Statements of the Company
INDEX
TO FINANCIAL STATEMENTS
|
Audited
Financial Statements for years ended December 31, 2007, 2006 and 2005
and the period from January 22, 2003 (Inception) through
December 31, 2007
|
|
| Report of Independent Registered Public Accounting Firm | F-1 |
| Balance Sheets as of December 31, 2007 and 2006 | F-2 |
| Statements of Expenses for the Years Ended December 31, 2007, 2006 and 2005 and the | |
|
period from January
22, 2003 (Inception) through December 31, 2007
|
F-3 |
| Statement of Changes in Stockholders Equity from January 22, 2003 (Inception) through | |
|
December 31,
2007
|
F-4 |
| Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005 and the | |
|
period from January
22, 2003 (Inception) through December 31, 2007
|
F-5 |
|
Notes
to Financial Statements
|
F-6 |
|
2.
|
Financial
Statement Schedules
|
The required information is included in
the Consolidated Financial Statements or Notes thereto.
|
3.
|
List
of Exhibits
|
|
Exhibit
2.1
|
Stock
Purchase Agreement effective as of May 5, 2004 (incorporated by reference
to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed June
4, 2004)
|
|
Exhibit
2.2
|
Agreement
and Plan of Reorganization (incorporated by reference to Exhibit 2.1 to
the Company’s Current Report on 8-K filed October 8,
2004)
|
|
Exhibit
3.1
|
Articles
of Amendment and Restatement of the Articles of Incorporation
(incorporated by reference to Exhibit 3.1 to the Company’s Current Report
on Form 8-K filed on June 19, 2006)
|
|
Exhibit
3.3
|
Amended
and Restated By-laws (incorporated by reference to Exhibit 2.2 to the
Company’s Registration Statement on Form 10-SB (File No. 000-25513),
initially filed March 8, 1999)
|
|
Exhibit
4.1
|
Form
of Common Stock Certificate (incorporated by reference to Exhibit 2.3 to
the Company’s Registration Statement on Form 10-SB (File No. 000-25513),
initially filed March 8, 1999)
|
|
Exhibit 4.2
|
Form
of Series E Warrant (incorporated by reference to Exhibit 4.3 to the
Company’s Current Report on Form 8-K filed December 20,
2007)
|
|
Exhibit 4.3
|
Warrant
Agent Agreement for Series E Warrant (incorporated by reference to
Exhibit 4.3 to the Company’s Current Report on Form 8-K filed
February 14, 2008)
|
|
Exhibit 4.4
|
Form
of Underwriters’ Warrant Agreement (incorporated by reference to
Exhibit 4.4 to the Company’s Current Report on Form 8-K filed
February 14, 2008)
|
|
Exhibit 4.5
|
Form
of Underwriters’ Warrant to Acquire Warrants Agreement (incorporated by
reference to Exhibit 4.5 to the Company’s Current Report on Form 8-K
filed February 14, 2008)
|
|
Exhibit 10.1
|
June
2004 Compensatory Stock Option Plan (incorporated by reference to Exhibit
B to the Company’s Definitive Information Statement filed on June 29,
2004)
|
|
Exhibit 10.2
|
Amended
and Restated Employment Agreement dated June 15, 2006, between the Company
and David McWilliams (incorporated by reference to Exhibit 10.1 to the
Company’s Quarterly Report on Form 10-QSB filed August 14,
2006)
|
38
|
Exhibit 10.12
|
Form
of Warrant Agreement (incorporated by reference to Exhibit 10.13 to the
Company’s Annual Report on Form 10-KSB filed April 15,
2005)
|
|
Exhibit 10.13
|
License
Agreement dated September 5, 2001 between the Company and Baylor College
of Medicine (incorporated by reference to Exhibit 10.14 to the Company’s
Annual Report on Form 10-KSB filed April 15, 2005)
|
|
Exhibit 10.14
|
Second
Amended and Restated License Agreement with University of Chicago
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report
on Form 8-K filed August 3, 2007)
|
|
Exhibit 10.17
|
Form
of Series C Common Stock Purchase Warrant (incorporated by reference to
Exhibit 10.17 to Form SB-2 filed July 19, 2005)
|
|
Exhibit 10.18
|
Securities
Purchase Agreement dated June 17, 2005 by and among the Company and the
Investors named therein (incorporated by reference to Exhibit 10.18 to
Form SB-2 filed July 19, 2005)
|
|
Exhibit 10.19
|
Registration
Rights Agreement dated June 17, 2005 by and among the purchasers of
common stock named therein (incorporated by reference to Exhibit 10.19 to
Form SB-2 filed July 19, 2005)
|
|
Exhibit 10.20
|
Securities
Purchase Agreement dated June 30, 2005 by and among the Company and the
purchasers of common stock named therein (incorporated by reference to
Exhibit 10.20 to Form SB-2 filed July 19,
2005)
|
|
Exhibit 10.21
|
Securities
Purchase Agreement dated July 15, 2005 by and among the Company and the
Investors named therein (incorporated by reference to Exhibit 10.21 to
Form SB-2 filed July 19, 2005)
|
|
Exhibit
10.22
|
Registration
Rights Agreement dated July 15, 2005 by and among the Company and the
Investors named therein (incorporated by reference to Exhibit 10.22 to
Form SB-2 filed July 19, 2005)
|
|
Exhibit
10.23
|
License
Agreement dated January 13, 2006 by the Company and Shanghai Institute for
Biological Services (incorporated by reference to Exhibit 10.23 to
Amendment No. 1 to Form SB-2 filed February 9,
2006)
|
|
Exhibit
10.24
|
Lease
dated August 19, 2005 by the Company and Dirk D. Laukien (incorporated by
reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-KSB
filed March 31, 2006)
|
|
Exhibit
10.25
|
Form
of Warrant Agreement issued to brokers in connection with 2005 offerings
(incorporated by reference to Exhibit 10.25 to Amendment No. 2 to Form
SB-2 filed April 11, 2006)
|
|
Exhibit
10.26
|
Purchase
Agreement dated April 11, 2006 by and among the Company and the Investors
named herein (incorporated by reference to Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed April 18, 2006)
|
|
Exhibit
10.27
|
Registration
Rights Agreement dated April 11, 2006 by and among the Company and the
Investors named herein (incorporated by reference to Exhibit 10.2 to the
Company’s Current Report on Form 8-K filed April 18,
2006)
|
|
Exhibit
10.28
|
Form
of Warrant issued in connection with April 2006 financing (incorporated by
reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K
filed April 18, 2006)
|
|
Exhibit
10.29
|
Form
of Broker Stock Purchase Warrant issued to MDB Capital Group LLC
(incorporated by reference to Exhibit 10.5 of the Company’s Current Report
on Form 8-K filed April 18, 2006)
|
|
Exhibit
10.30
|
Second
Amended and Restated License Agreement dated July 31, 2007 between the
Company and the University of Chicago (incorporated by reference to
Exhibit 10.1 of the Company’s Report on Form 8-K filed August 3,,
2007)
|
|
Exhibit
31.1*
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
Exhibit
31.2*
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
39
|
Exhibit
32.1*
|
Certification
of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
Exhibit
32.2*
|
Certification
of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
*
|
Filed
herewith
|
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, thereunto duly authorized.
| SIGNATURES | ||
| OPEXA THERAPEUTICS, INC. | ||
| By: /s/ DAVID B. MCWILLIAMS | ||
| David B. McWilliams | ||
| President and Chief Executive Officer | ||
| By: /s/ LYNNE HOHLFELD | ||
| Lynne Hohlfeld, Chief Financial Officer and | ||
| Principal Accounting Officer | ||
| Date: March 17, 2008 |
Pursuant
to the requirements of the Securities Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacity
and on the dates indicated.
|
Signature
|
Title
|
Date
|
||
|
/S/ DAVID B.
MCWILLIAMS
|
President,
Chief Executive Officer and Director (principal executive
officer)
|
March
17, 2008
|
||
|
David
B. McWilliams
|
||||
|
/S/ LYNNE
HOHLFELD
|
Chief
Financial Officer (principal financial and accounting
officer)
|
March
17, 2008
|
||
|
Lynne
Hohlfeld
|
||||
|
/S/ GREGORY H. BAILEY
|
Director
|
March
17, 2008
|
||
|
Gregory
H. Bailey
|
||||
|
/S/
DAVID HUNG
|
Director
|
March
17, 2008
|
||
|
David
Hung
|
||||
|
/S/ LORIN J. RANDALL
|
Director
|
March
17, 2008
|
||
|
Lorin
J. Randall
|
||||
|
/S/ MICHAEL
RICHMAN
|
Director
|
March
17, 2008
|
||
|
Michael
Richman
|
||||
|
/S/ SCOTT B. SEAMAN
|
Director
|
March
17, 2008
|
||
|
Scott
B. Seaman
|
40
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the
Board of Directors
Opexa
Therapeutics, Inc.
(formerly
PharmaFrontiers Corp.)
(a
development stage company)
The
Woodlands, Texas
We have
audited the accompanying balance sheets of Opexa Therapeutics, Inc. (a
development stage company), as of December 31, 2007 and 2006 and the
related statements of expenses, changes in stockholders’ equity and cash flows
for the years ended December 31, 2007, 2006 and 2005 and the period from
January 22, 2003 (Inception) through December 31, 2007. These
financial statements are the responsibility of Opexa’s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatements. 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 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 consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Opexa as of
December 31, 2007 and 2006 and the results of its operations and its cash
flows for the periods described in conformity with accounting principles
generally accepted in the United States of America.
As
discussed in Note 2 to the financial statements, the accompanying financial
statements have been prepared assuming that Opexa will continue as a going
concern. Opexa requires significant amount of cash in its operations and does
not have sufficient cash to fund its operations for the next twelve months,
which raises substantial doubt about its ability to continue as a going concern.
Management’s plans regarding those matters are also described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/
MALONE & BAILEY, PC
www.malone-bailey.com
Houston,
Texas
March 14,
2008
F-1
OPEXA
THERAPEUTICS, INC.
(a
development stage company)
BALANCE
SHEETS
|
December 31,
2007
|
December 31,
2006
|
|||||||
|
Assets
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 2,645,482 | $ | 12,019,914 | ||||
|
Investment
in marketable securities
|
— | 2,952,096 | ||||||
|
Other
current assets
|
355,266 | 472,881 | ||||||
|
Total
current assets
|
3,000,748 | 15,444,891 | ||||||
|
Property &
equipment, net accumulated depreciation of $614,079 and $395,284,
respectively
|
1,370,647 | 1,361,377 | ||||||
|
Total
assets
|
$ | 4,371,395 | $ | 16,806,268 | ||||
|
Liabilities
and Stockholders' Equity
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$ | 938,442 | $ | 868,862 | ||||
|
Accounts
payable – related parties
|
54,091 | — | ||||||
|
Stock
payable
|
— | 112,440 | ||||||
|
Accrued
expenses
|
1,022,461 | 135,069 | ||||||
|
Note
payable
|
— | 1,500,000 | ||||||
|
Current
maturity of loan payable
|
60,360 | 14,080 | ||||||
|
Derivative
liability
|
— | 6,656,677 | ||||||
|
Total
current liabilities
|
2,075,354 | 9,287,128 | ||||||
|
Long
term liabilities:
|
||||||||
|
Loan
payable
|
162,456 | 96,242 | ||||||
|
Total
liabilities
|
2,237,810 | 9,383,370 | ||||||
|
Commitments
and contingencies
|
— | — | ||||||
|
Stockholders’
equity:
|
||||||||
|
Convertible
preferred stock, no par value, 10,000,000 shares authorized, none issued
and outstanding
|
— | — | ||||||
|
Common
stock, $0.50 par value, 100,000,000 shares authorized, 6,696,784 shares
issued and outstanding
|
3,348,351 | 3,348,351 | ||||||
|
Additional
paid in capital
|
76,498,054 | 63,118,180 | ||||||
|
Deficit
accumulated during the development stage
|
(77,712,820 | ) | (59,043,633 | ) | ||||
|
Total
stockholders’ equity
|
2,133,585 | 7,422,898 | ||||||
|
Total
liabilities and stockholders’ equity
|
$ | 4,371,395 | $ | 16,806,268 | ||||
See
accompanying summary of accounting policies and notes to financial
statements
F-2
OPEXA
THERAPEUTICS, INC.
(a
development stage company)
STATEMENTS
OF EXPENSES
Years
ended December 31, 2007, 2006 and 2005 and the
Period
from January 22, 2003 (Inception) to December 31, 2007
|
2007
|
2006
|
2005
|
Inception
through
2007
|
|||||||||||||
|
Research
and development
|
$ | 13,071,856 | $ | 7,850,373 | $ | 5,159,853 | $ | 53,757,537 | ||||||||
|
General
and administrative
|
3,418,306 | 5,461,047 | 6,259,075 | 17,624,775 | ||||||||||||
|
Depreciation
|
232,955 | 174,117 | 98,080 | 518,210 | ||||||||||||
|
Loss
on disposal of assets
|
13,192 | 2,376 | 22,810 | 495,501 | ||||||||||||
|
Operating
loss
|
(16,736,309 | ) | (13,487,913 | ) | (11,539,818 | ) | (72,396,023 | ) | ||||||||
|
Interest
income
|
477,605 | 688,299 | 81,930 | 1,253,826 | ||||||||||||
|
Other
income and expense, net
|
(5,000 | ) | 46,450 | 28,174 | 72,003 | |||||||||||
|
Gain
on derivative liability
|
— | 104,978 | 3,896,841 | — | ||||||||||||
|
Gain
on extinguishment of debt
|
1,612,440 | — | — | 1,612,440 | ||||||||||||
|
Interest expense
|
(16,103 | ) | (984 | ) | (7,323,851 | ) | (8,255,066 | ) | ||||||||
|
Net
loss
|
$ | (14,667,367 | ) | $ | (12,649,170 | ) | $ | (14,856,724 | ) | $ | (77,712,820 | ) | ||||
|
Basic
and diluted loss per share
|
$ | (2.19 | ) | $ | (2.35 | ) | $ | (9.49 | ) | N/A | ||||||
|
Weighted
average shares outstanding
|
6,696,784 | 5,390,910 | 1,564,837 | N/A | ||||||||||||
See
accompanying summary of accounting policies and notes to financial
statements
F-3
OPEXA
THERAPEUTICS, INC
(a
development stage company)
STATEMENT
OF CHANGES IN STOCKHOLDERS’ EQUITY
Period
from January 22, 2003 (Inception) through December 31,
2007
|
Common
Stock
|
Additional
Paid
in
Capital
|
Accumulated
Deficit
|
Total
|
|||||||||||||||||
|
Shares
|
Par
|
|||||||||||||||||||
|
Shares
issued for cash
|
525,000 | $ | 262,500 | $ | (261,500 | ) | $ | — | $ | 1,000 | ||||||||||
|
Shares
repurchased and cancelled
|
(170,625 | ) | (85,313 | ) | 84,988 | — | (325 | ) | ||||||||||||
|
Discount
related to:
|
||||||||||||||||||||
|
beneficial
conversion feature
|
— | — | 28,180 | — | 28,180 | |||||||||||||||
|
warrants
attached to debt
|
— | — | 28,180 | — | 28,180 | |||||||||||||||
|
Net
loss
|
— | — | — | (126,003 | ) | (126,003 | ) | |||||||||||||
|
Balances
at December 31, 2003
|
354,375 | 177,187 | (120,152 | ) | (126,003 | ) | (68,968 | ) | ||||||||||||
|
Shares
issued for:
|
||||||||||||||||||||
|
cash
|
2,250 | 1,125 | 7,875 | — | 9,000 | |||||||||||||||
|
services
|
206,500 | 103,250 | 745,750 | — | 849,000 | |||||||||||||||
|
license
|
24,269 | 12,135 | 414,940 | — | 427,075 | |||||||||||||||
|
reverse
merger with Sportan
|
99,740 | 49,870 | (197,603 | ) | — | (147,733 | ) | |||||||||||||
|
acquisition
of Opexa
|
250,000 | 125,000 | 23,625,000 | — | 23,750,000 | |||||||||||||||
|
additional
shares attached to convertible debt
|
16,100 | 8,050 | 280,316 | — | 288,366 | |||||||||||||||
|
conversion
of convertible notes
|
60,750 | 30,375 | 217,995 | — | 248,370 | |||||||||||||||
|
Shares
cancelled
|
(8,000 | ) | (4,000 | ) | 4,000 | — | — | |||||||||||||
|
Discount
related to:
|
||||||||||||||||||||
|
beneficial
conversion feature
|
— | — | 855,849 | — | 855,849 | |||||||||||||||
|
warrants
attached to debt
|
— | — | 1,848,502 | — | 1,848,502 | |||||||||||||||
|
Option
expense
|
— | — | 123,333 | — | 123,333 | |||||||||||||||
|
Net
loss
|
— | — | — | (31,411,736 | ) | (31,411,736 | ) | |||||||||||||
|
Balances
at December 31, 2004
|
1,005,984 | 502,992 | 27,805,805 | (31,537,739 | ) | (3,228,942 | ) | |||||||||||||
|
Shares
issued for:
|
||||||||||||||||||||
|
cash,
net of offering costs
|
389,451 | 194,725 | 5,151,492 | — | 5,346,217 | |||||||||||||||
|
convertible
debt
|
611,026 | 305,513 | 7,343,933 | — | 7,649,446 | |||||||||||||||
|
debt
|
2,300 | 1,150 | 159,850 | — | 161,000 | |||||||||||||||
|
license
|
29,194 | 14,597 | 1,853,787 | — | 1,868,384 | |||||||||||||||
|
services
|
24,000 | 12,000 | 1,000,400 | — | 1,012,400 | |||||||||||||||
|
Discount
related to:
|
||||||||||||||||||||
|
beneficial
conversion feature
|
— | — | 831,944 | — | 831,944 | |||||||||||||||
|
warrants
attached to debt
|
— | — | 1,433,108 | — | 1,433,108 | |||||||||||||||
|
Option
expense
|
— | — | 2,487,741 | — | 2,487,741 | |||||||||||||||
|
Warrant
expense
|
— | — | 2,373,888 | — | 2,373,888 | |||||||||||||||
|
Transition
of warrants from equity instruments to liability
instruments
|
— | — | (10,658,496 | ) | — | (10,658,496 | ) | |||||||||||||
|
Net
loss
|
— | — | — | (14,856,724 | ) | (14,856,724 | ) | |||||||||||||
|
Balances
at December 31, 2005
|
2,061,955 | 1,030,977 | 39,783,452 | (46,394,463 | ) | (5,580,034 | ) | |||||||||||||
|
Shares
issued for:
|
||||||||||||||||||||
|
cash,
net of offering costs
|
4,600,000 | 2,300,000 | 18,853,519 | — | 21,153,519 | |||||||||||||||
|
debt
|
34,829 | 17,374 | 162,626 | — | 180,000 | |||||||||||||||
|
Option
expense
|
— | — | 2,749,617 | — | 2,749,617 | |||||||||||||||
|
Warrant
expense
|
— | — | 1,568,966 | — | 1,568,966 | |||||||||||||||
|
Net
loss
|
— | — | — | (12,649,170 | ) | (12,649,170 | ) | |||||||||||||
|
Balances
at December 31, 2006
|
6,696,784 | 3,348,351 | 63,118,180 | (59,043,633 | ) | 7,422,898 | ||||||||||||||
|
Cumulative
change in derivative liability
|
— | — | 10,658,496 | (4,001,820 | ) | 6,656,676 | ||||||||||||||
|
Option
expense
|
— | — | 1,876,103 | — | 1,876,103 | |||||||||||||||
|
Warrant
expense
|
— | — | 845,275 | — | 845,275 | |||||||||||||||
|
Net
loss
|
— | — | — | (14,667,367 | ) | (14,667,367 | ) | |||||||||||||
| Balances at December 31, 2007 | 6,696,784 | $ | 3,348,351 | $ | 76,498,054 | $ | (77,712,820 | ) | $ | 2,133,585 | ||||||||||
See
accompanying summary of accounting policies and notes to financial
statements
F-4
OPEXA
THERAPEUTICS, INC.
(a
development stage company)
STATEMENTS
OF CASH FLOWS
Years
ended December 31, 2007, 2006 and 2005 and the
Period
from January 22, 2003 (Inception) to December 31, 2007
|
2007
|
2006
|
2005
|
Inception
through
2007
|
|||||||||||||
|
Cash
flows from operating activities
|
||||||||||||||||
|
Net
loss
|
$ | (14,667,367 | ) | $ | (12,649,170 | ) | $ | (14,856,724 | ) | $ | (77,712,820 | ) | ||||
|
Adjustments
to reconcile net loss to net cash used in operating
activities
|
||||||||||||||||
|
Stock
payable for acquired research and development
|
— | 112,440 | — | 112,440 | ||||||||||||
|
Stock
issued for acquired research and development
|
— | — | 1,988,897 | 26,286,589 | ||||||||||||
|
Stock
issued for services
|
— | — | — | 1,861,400 | ||||||||||||
|
Stock issued for debt in excess of
principal
|
— | — | 109,070 | 109,070 | ||||||||||||
|
Amortization
of discount on notes payable due to warrants and beneficial conversion
feature
|
— | — | 5,516,638 | 6,313,205 | ||||||||||||
|
Unrealized
gain on marketable securities
|
25,912 | (25,912 | ) | — | — | |||||||||||
|
(Gain)
on derivative liability
|
— | (104,978 | ) | (3,896,841 | ) | — | ||||||||||
|
(Gain)
on extinguishment of debt
|
(1,612,440 | ) | — | — | (1,612,440 | ) | ||||||||||
|
Depreciation
|
232,955 | 174,117 | 98,080 | 518,210 | ||||||||||||
|
Debt
financing costs
|
— | — | 365,910 | 365,910 | ||||||||||||
|
Option
and warrant expense
|
2,721,378 | 4,318,583 | 4,861,629 | 12,024,923 | ||||||||||||
|
Loss
on disposition of fixed assets
|
13,192 | 2,376 | 22,810 | 495,501 | ||||||||||||
|
Changes
in:
|
||||||||||||||||
|
Accounts
payable
|
123,670 | 359,397 | 26,360 | 542,891 | ||||||||||||
|
Marketable
securities
|
2,926,184 | (2,926,184 | ) | — | — | |||||||||||
|
Prepaid
expenses
|
117,615 | (340,876 | ) | (88,185 | ) | (383,729 | ) | |||||||||
|
Accrued
expenses
|
887,392 | (105,240 | ) | 23,655 | 895,807 | |||||||||||
|
Other
assets
|
— | — | (388,210 | ) | (388,210 | ) | ||||||||||
|
Net
cash used in operating activities
|
(9,231,509 | ) | (11,185,447 | ) | (6,216,911 | ) | (30,571,252 | ) | ||||||||
|
Cash
flows from investing activities
|
||||||||||||||||
|
Purchase
of property & equipment
|
(255,417 | ) | (619,147 | ) | (258,903 | ) | (1,306,471 | ) | ||||||||
|
Net
cash used in investing activities
|
(255,417 | ) | (619,147 | ) | (258,903 | ) | (1,306,471 | ) | ||||||||
|
Cash
flows from financing activities
|
||||||||||||||||
|
Common
stock sold for cash, net of offering costs
|
— | 21,153,520 | 5,346,217 | 26,509,737 | ||||||||||||
|
Common
stock repurchased and canceled
|
— | — | — | (325 | ) | |||||||||||
|
Proceeds
from debt
|
137,286 | 110,322 | 2,896,885 | 8,102,199 | ||||||||||||
|
Repayments
on notes payable
|
(24,792 | ) | — | (58,614 | ) | (88,406 | ) | |||||||||
|
Net
cash provided by financing activities
|
112,494 | 21,263,842 | 8,184,488 | 34,523,205 | ||||||||||||
|
Net
change in cash and cash equivalents
|
(9,374,432 | ) | 9,459,248 | 1,708,674 | 2,645,482 | |||||||||||
|
Cash
and cash equivalents at beginning of period
|
12,019,914 | 2,560,666 | 851,992 | — | ||||||||||||
|
Cash
and cash equivalents at end of period
|
$ | 2,645,482 | $ | 12,019,914 | $ | 2,560,666 | $ | 2,645,482 | ||||||||
|
Cash
paid for:
|
||||||||||||||||
|
Income
tax
|
$ | — | $ | — | — | $ | — | |||||||||
|
Interest
|
— | — | — | 429 | ||||||||||||
|
NON-CASH
TRANSACTIONS
|
||||||||||||||||
|
Issuance
of common stock to Sportan shareholders
|
— | — | — | 147,733 | ||||||||||||
|
Issuance
of common stock for accrued interest
|
— | — | 525,513 | 525,513 | ||||||||||||
|
Conversion
of notes payable to common stock
|
— | — | 6,159,610 | 6,407,980 | ||||||||||||
|
Conversion
of accrued liabilities to common stock
|
— | 180,000 | 17,176 | 197,176 | ||||||||||||
|
Conversion
of accounts payable to note payable
|
— | — | — | 93,364 | ||||||||||||
|
Discount
on convertible notes relating to:
|
||||||||||||||||
|
—warrants
|
— | — | 1,433,108 | 3,309,790 | ||||||||||||
|
—beneficial
conversion feature
|
— | — | 831,944 | 1,715,973 | ||||||||||||
|
—stock
attached to notes
|
— | — | 999,074 | 1,287,440 | ||||||||||||
|
Fair
value of derivative instrument
|
— | — | 6,761,655 | — | ||||||||||||
See
accompanying summary of accounting policies and notes to financial
statements
F-5
OPEXA
THERAPEUTICS, INC.
(a
development stage company)
(formerly
PharmaFrontiers Corp.)
NOTES
TO FINANCIAL STATEMENTS
NOTE
1—SUMMARY OF ACCOUNTING POLICIES
Opexa
Therapeutics, Inc. (“Opexa”) was incorporated in Texas in March, 1991 as a
bio-pharmaceutical company engaged in developing autologous personalized cell
therapies. During the development stage, Opexa acquired the worldwide license to
technology developed at Argonne National Laboratory, a U.S. Department of Energy
Laboratory Operated by the University of Chicago (“Argonne”). This is an
exclusive license to a stem cell technology in which adult multi-potent stem
cells are derived from monocytes obtained from the patient’s own blood (the
“License”). A patent application was filed in November 2003, with the United
States Patent and Trade Office regarding the technology involved in the
License.
On
October 7, 2004, Opexa acquired all of the outstanding stock of Opexa
Pharmaceuticals, Inc., an entity that has the exclusive worldwide license from
Baylor College of Medicine to an individualized T-cell therapeutic vaccine,
Tovaxin®, which is in FDA Phase IIb human clinical trials to evaluate its safety
and effectiveness in treating multiple sclerosis.
Development Stage Company.
Opexa is considered to be in the Development stage as defined in Statement of
Financial Accounting Standards No. 7. Opexa has no revenues to
date.
Basis of Presentation. In June
2006, Opexa (i) changed its name to Opexa Therapeutics, Inc. from
PharmaFrontiers Corp. (“Pharma”) and (ii) effected a one-for-ten reverse common
stock split. All references to number of shares and per share amounts reflect
such split as if it occurred on the first day of the first period presented. The
financial statements include the accounts of Opexa and its wholly-owned
subsidiary, Opexa Pharmaceuticals, Inc through December 31, 2006. All
inter-company accounts and transactions have been eliminated.
Reclassifications. Certain
prior year amounts have been reclassified to conform with the current year
presentation.
Use of Estimates in Financial
Statement Preparation. 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 the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Cash, Cash Equivalents and Marketable
Securities. For purposes of the statements of cash flows, cash
equivalents include all highly liquid investments with original maturities of
three months or less. Marketable securities include investments with maturities
greater than three months but less than one year. The primary objectives for the
fixed income investment portfolio are liquidity and safety of principal.
Investments are made with the objective of achieving the highest rate of return
consistent with these two objectives. Opexa’s investment policy limits
investments to certain types of instruments issued by institutions primarily
with investment grade credit ratings and places restrictions on maturities and
concentration by type and issuer.
Long-lived Assets. Property
and equipment are stated on the basis of historical cost less accumulated
depreciation. Depreciation is provided using the straight-line method over the
estimated useful lives of the assets. Major renewals and improvements are
capitalized, while minor replacements, maintenance and repairs are charged to
current operations. Impairment losses are recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets’
carrying amount.
Income Taxes. Income tax
expense is based on reported earnings before income taxes. Deferred income taxes
reflect the impact of temporary differences between assets and liabilities
recognized for financial reporting purposes and such amounts recognized for tax
purposes, and are measured by applying enacted tax rates in effect in years in
which the differences are expected to reverse.
F-6
Stock-Based Compensation. On
January 1, 2006, Opexa began recording compensation expense associated with
stock options and other forms of equity compensation in accordance with
Statement of Financial Accounting Standards No. 123R, Share-Based Payment, as
interpreted by SEC Staff Accounting Bulletin No. 107. Prior to
January 1, 2006, Opexa had accounted for stock options according to
the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations, and therefore no related
compensation expense was recorded for awards granted with no intrinsic value.
Opexa adopted the modified prospective transition method provided for under SFAS
No. 123R, and, consequently, have not retroactively adjusted results from
prior periods. Under this transition method, compensation cost associated with
stock options recognized in the first quarter of fiscal 2006 includes the
quarterly amortization related to the remaining unvested portion of all stock
option awards granted prior to January 1, 2006, based on the grant date
fair value estimated in accordance with the original provisions of SFAS
No. 123.
The
following table illustrates the effect on net loss and net loss per share if
Opexa had applied the fair value provisions of FASB Statement No. 123 to
stock-based employee compensation prior to January 1, 2006:
|
2005
|
Inception
Through
2007
|
|||||||
|
Net
loss as reported
|
$ | (14,856,724 | ) | $ | (77,712,820 | ) | ||
|
Add:
stock based compensation determined under intrinsic value
method
|
2,487,741 | 2,611,074 | ||||||
|
Less:
stock based compensation determined under fair value based
method
|
(4,264,013 | ) | (4,417,377 | ) | ||||
|
Pro
forma net loss
|
$ | (16,632,996 | ) | $ | (79,519,123 | ) | ||
|
Basic
and diluted loss per share
|
||||||||
|
Net
loss per common share
|
$ | (10.63 | ) | N/A | ||||
|
As
reported
|
$ | (9.49 | ) | N/A | ||||
Research and Development.
Research and development expenses include salaries, related employee expenses,
clinical trial expenses, research expenses, consulting fees, and laboratory
costs. All costs for research and development activities are expensed as
incurred. Opexa expenses the costs of licenses of patents and the prosecution of
patents until the issuance of such patents and the commercialization of related
products is reasonably assured. Acquired in process research and development
that does not have a future alternative use is expensed when acquired. Research
and development expense for the years ended December 31, 2007, 2006 and
2005 was $13,071,856, $7,850,373 and $5,159,853 respectively.
Accounting for Derivative
Instruments. Statement of Financial Accounting Standard (“SFAS”)
No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as
amended, requires all derivatives to be recorded on the balance sheet at fair
value. Opexa’s derivatives are separately valued and accounted for on our
balance sheet. Fair values for securities traded in the open market and
derivatives are based on quoted market prices. Where market prices are not
readily available, fair values are determined using market based pricing models
incorporating readily observable market data and requiring judgment and
estimates.
The
pricing model Opexa used for determining fair values of its derivatives is the
Black-Scholes Pricing Model. Valuations derived from this model are subject to
ongoing internal and external verification and review. The model uses
market-sourced inputs such as interest rates, exchange rates and option
volatilities. Selection of these inputs involves management’s judgment and may
impact net income.
In
September 2000, the Emerging Issues Task Force (“EITF”) issued EITF 00-19,
“Accounting for Derivative Financial Instruments Indexed to and Potentially
Settled in, a Company’s Own Stock,” (“EITF 00-19”) which Requires freestanding
contracts that are settled in a company’s own stock, including common stock
warrants, to be designated as an equity instrument, asset or a liability. Under
the provisions of EITF 00-19, a contract designated as an asset or a liability
must be carried at fair value on a company’s balance sheet, with any changes in
fair value recorded in the company’s results of operations. A contract
designated as an equity instrument must be included within equity, and no fair
value adjustments are required.
F-7
In
December 2006, the FASB issued FASB Staff Position No. EITF 00-19-2, Accounting
for Registration Payment Arrangements (EITF 00-19-2). EITF 00-19-2 addresses an
issuer’s accounting for registration payment arrangements. It specifies that the
contingent obligation to make future payments or otherwise transfer
consideration under a registration payment arrangement, whether issued as a
separate agreement or included as a provision of a financial instrument or other
agreement, should be separately recognized and measured in accordance with FASB
Statement No. 5, Accounting for Contingencies. The guidance in EITF 00-19-2
amends FASB Statements No. 133, Accounting for Derivative Instruments and
Hedging Activities, and No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity, and FASB
Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others, to
include scope exceptions for registration payment arrangements. EITF 00-19-2
also requires additional disclosure regarding the nature of any registration
payment arrangements, alternative settlement methods, the maximum potential
amount of consideration and the current carrying amount of the liability, if
any. This EITF is effective immediately for registration payment arrangements
and the financial instruments subject to those arrangements that are entered
into or modified subsequent to the date of issue of this EITF. For registration
payment arrangements and financial instruments subject to those arrangements
that were entered into prior to the issuance of this EITF, this is effective for
financial statements issued for fiscal years beginning after December 15,
2006, and interim periods within those fiscal years. The impact of
implementing EITF 00-19-2 in the fiscal year 2007 resulted in a cumulative
effect of a change in accounting principle with a credit to beginning retained
earnings of $6,656,677 and a reversal of the same amount to the derivative
liability account.
Recently
Issued Accounting Pronouncements.
In
February 2006, the FASB issued SFAS 155, “Accounting for Certain Hybrid
Financial Instruments,” which amends SFAS 133, “Accounting for Derivative
Instruments and Hedging Activities” and SFAS 140, “Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS 155
simplifies the accounting for certain derivatives embedded in other financial
instruments by allowing them to be accounted for as a whole if the holder elects
to account for the whole instrument on a fair value basis. SFA 155 also
clarifies and amends certain other provisions of SFAS 133 and SFAS 140. SFAS 155
is effective for all financial instruments acquired, issued or subject to a
remeasurement event occurring in fiscal years beginning after September 15,
2006 and is therefore required to be adopted by Opexa as of October 1,
2006. Management is still evaluating what effect this will have on Opexa’s
financial statements.
In July
2006, the FASB issued Interpretation No. 48 (FIN No. 48), “Accounting
for Uncertainty in Income Taxes.” This interpretation requires recognition and
measurement of uncertain income tax positions using a “more-likely-than-not”
approach. FIN No. 48 is effective for fiscal years beginning after
December 15, 2006. Management is still evaluating what effect this will
have on Opexa’s financial statements.
In
September 2006, the FASB issued SFAS 157, “Fair Value Measurements.” This
standard defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosure about fair
value measurements. This statement is effective for financial statements issued
for fiscal years beginning after November 15, 2007. Early adoption is
encouraged. The adoption of SFAS 157 is not expected to have a material impact
on the financial statements.
In
June 2007, the Emerging Issues Task Force (EITF) issued EITF Issue
No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or
Services to be Used in Future Research and Development Activities. EITF Issue
No. 07-3 provides guidance concerning the accounting for non-refundable
advance payments for goods and services that will be used in future research and
development activities and requires that they be expensed when the research and
development activity has been performed and not at the time of payment. The
provisions of EITF Issue No. 07-3 are effective for the Company as of
January 1, 2008, with a cumulative-effect adjustment to retained earnings as of
the beginning of the year of adoption. The Company does not believe EITF 07-3
will have a material impact on its results from operations or financial
position.
There were
various other accounting standards and interpretations issued during 2007, 2006
and 2005, none of which are expected to have a material impact on the Opexa’s
financial position, operations or cash flows.
F-8
NOTE
2—GOING CONCERN
Opexa
incurred a net loss of approximately $14.7 million for the year ended
December 31, 2007 and has an accumulated deficit of approximately $77.7
million. The cash balance of $2.6 million as of December 31, 2007
plus the approximately $6.7 million in proceeds from the February 2008
public offering is not sufficient to fund our operations for the next twelve
months if we are to execute our operating plan including the completion of our
Phase IIb clinical trial of Tovaxin for the treatment of MS. These conditions
raise substantial doubt as to Opexa’s ability to continue as a going concern.
Management continues to seek means to raise additional capital through sales of
equity. The financial statements do not include any adjustments that
might be necessary if Opexa is unable to continue as a going
concern.
NOTE
3—RESTATEMENT OF FINANCIAL STATEMENTS
In
November, 2007, Opexa restated its financial statements for the 2006 and 2005
annual periods. Following is a description of the restatements to the financial
statements:
Opexa
acquired Opexa Pharmaceuticals in October 2004 and originally accounted for the
acquired in process research and development of $23,991,128 as intangible
assets. In November 2007, Opexa re-evaluated its accounting for acquired
research and development and upon further consideration of Paragraph 11(c) of
Statement of Financial Accounting Standards No. 2 (SFAS No. 2) and
accounting guidance from Financial Accounting Standards Board Interpretation
No. 4 “Applicability of FASB Statement No. 2 to Business Combinations
Accounted for by the Purchase Method” (FIN 4), Opexa determined that these
assets did not have an alternative future use at the date of acquisition. Thus,
they had no separate economic value and should be accordingly expensed to
research and development in the period acquired.
In
February 2004, Opexa obtained a license from the University of Chicago for an
adult stem cell technology. Costs associated with the acquisition of this
license were originally accounted for as an intangible asset. The amounts
originally capitalized as intangible assets were $3,051,706, $976,497 and
$112,440 for the years ended December 31, 2004, 2005 and 2006 respectively.
Upon further consideration of Paragraph 11(c) of SFAS No. 2, Opexa
determined that these assets had not reached technological feasibility at the
date of acquisition and had no alternative future use. Therefore, the intangible
asset should have been expensed to in process research and development in the
period acquired.
In March
2006, Opexa obtained an exclusive worldwide license for the intellectual
property rights and research results of an autologous T cell vaccine for
rheumatoid arthritis from the Shanghai Institutes for Biological Sciences
(SIBS), Chinese Academy of Sciences of the People’s Republic of China. Opexa
made a $125,000 license payment and accounted for the license as an intangible
asset. Upon further consideration of Paragraph 11(c) of SFAS No. 2, Opexa
determined that this asset had not reached technological feasibility at the date
of acquisition and had no alternative future use. Therefore, the intangible
asset should have been expensed to in process research and development in the
period acquired.
In the
Statements of Expenses, the effect of the adjustments on operating expenses,
loss from operations and net loss for each of the years ended December 31,
2006 and 2005 and January 22, 2003(Inception) to December 31, 2006 was
as follows:
|
Year Ended
December 31,
|
||||||||||||||||||||||||
|
2006
|
2005
|
|||||||||||||||||||||||
|
As
Reported
|
Adj.
|
As
Restated
|
As
Reported
|
Adj.
|
As
Restated
|
|||||||||||||||||||
|
Research
and development
|
$ | 7,612,932 | $ | 237,441 | (1) | $ | 7,850,373 | $ | 4,183,356 | $ | 976,497 | (1) | $ | 5,159,853 | ||||||||||
|
General
and administrative
|
5,461,047 | — | 5,461,047 | 6,259,075 | — | 6,259,075 | ||||||||||||||||||
|
Depreciation
and amortization
|
1,818,795 | (1,644,678 | )(2) | 174,117 | 1,735,209 | (1,637,129 | )(2) | 98,080 | ||||||||||||||||
|
Loss
on disposal of assets
|
2,376 | — | 2,376 | 22,810 | — | 22,810 | ||||||||||||||||||
|
Operating
loss
|
(14,895,150 | ) | 1,407,237 | (13,487,913 | ) | (12,200,450 | ) | 660,632 | (11,539,818 | ) | ||||||||||||||
F-9
|
Year Ended
December 31,
|
||||||||||||||||||||||||
|
2006
|
2005
|
|||||||||||||||||||||||
|
As
Reported
|
Adj.
|
As
Restated
|
As
Reported
|
Adj.
|
As
Restated
|
|||||||||||||||||||
|
Interest
income
|
688,299 | — | 688,299 | 81,930 | — | 81,930 | ||||||||||||||||||
|
Other
income
|
46,450 | — | 46,450 | 28,174 | — | 28,174 | ||||||||||||||||||
|
Gain
(loss) on derivative liability
|
104,978 | — | 104,978 | 3,896,841 | — | 3,896,841 | ||||||||||||||||||
|
Interest
expense
|
(984 | ) | — | (984 | ) | (7,323,851 | ) | — | (7,323,851 | ) | ||||||||||||||
|
Net
loss
|
$ | (14,056,407 | ) | $ | 1,407,237 | $ | (12,649,170 | ) | $ | (15,517,356 | ) | $ | 660,632 | $ | (14,856,724 | ) | ||||||||
|
Basic
and diluted loss per share
|
$ | (2.61 | ) | $ | 0.26 | $ | (2.35 | ) | $ | (9.92 | ) | $ | 0.42 | $ | (9.49 | ) | ||||||||
|
January 22,
2003 (Inception) to December 31, 2006
|
||||||||||||
|
As
Reported
|
Adjustment
|
As
Restated
|
||||||||||
|
Research
and development
|
$ | 12,428,909 | $ | 28,256,771 | (1) | $ | 40,685,680 | |||||
|
General
and administrative
|
14,206,469 | — | 14,206,469 | |||||||||
|
Depreciation
and amortization
|
3,818,823 | (3,533,568 | )(2) | 285,255 | ||||||||
|
Loss
on disposal of assets
|
482,309 | — | 482,309 | |||||||||
|
Operating
loss
|
(30,936,510 | ) | (24,723,203 | ) | (55,659,713 | ) | ||||||
|
Interest
income
|
776,221 | — | 776,221 | |||||||||
|
Other
income
|
77,003 | — | 77,003 | |||||||||
|
Gain
(loss) on derivative liability
|
4,001,819 | — | 4,001,819 | |||||||||
|
Interest
expense
|
(8,238,963 | ) | — | (8,238,963 | ) | |||||||
|
Net
loss
|
$ | (34,320,430 | ) | $ | (24,723,203 | ) | $ | (59,043,633 | ) | |||
|
Basic
and diluted loss per share
|
N/A | N/A | N/A | |||||||||
______________________
|
(1)
|
Adjustment
for capitalizing acquired research and development to intangible assets
that should have been expensed to research and development (i) for
the year ended 12/31/2006 in the amount of $237,440, (ii) for the
year ended 12/31/2005 in the amount of $976,497 and (iii) inception
to 12/31/2006 in the amount of
$28,256,771.
|
|
(2)
|
Reversal
of amortization of intangible assets that should have been expensed to
research and development (i) for the year ended 12/31/2006 in the
amount of $1,644,678, (ii) for the year ended 12/31/2005 in the
amount of $1,637,129 and (iii) inception to 12/31/2006 in the amount
of $3,533,568.
|
In the
Balance Sheet, the effect of the adjustments on Intangible Assets and
Accumulated Deficit as of December 31, 2006 was as follows:
|
December 31,
2006
|
||||||||||||
|
As
Reported
|
Adjustment
|
As
Restated
|
||||||||||
|
Assets
|
||||||||||||
|
Intangible
Assets
|
$ | 24,723,203 | $ | (24,723,203 | )(1) | $ | — | |||||
|
Stockholders’
Equity
|
||||||||||||
|
Accumulated
Deficit
|
$ | (34,320,430 | ) | $ | (24,723,203 | )(1) | $ | (59,043,633 | ) | |||
______________________
|
(1)
|
Adjustment
for capitalizing acquired research and development to intangible assets
that should have been expensed to research and development and reversal of
amortization of intangible assets that should have been expensed to
research and development. Adjustment for capitalizing acquired research
and development to intangible assets that should have been expensed to
research and development (i) for the year ended 12/31/2006 in the
amount of $237,440, (ii) for the year ended 12/31/2005 in the amount
of $976,497 and (iii) inception to 12/31/2006 in the amount of
$28,256,771. Reversal of amortization of intangible assets that should
have been expensed to research and development (i) for the year ended
12/31/2006 in the amount of $1,644,678, (ii) for the year ended
12/31/2005 in the amount of $1,637,129 and (iii) inception to
12/31/2006 in the amount of
$3,533,568.
|
F-10
NOTE
4—MARKETABLE SECURITIES
At
December 31, 2007, Opexa invested $2.6 million in a money market account
with an average market yield of 4.8%. Interest income of $477,605 was recognized
for the twelve months ended December 31, 2007 in the statements of
expenses.
At
December 31, 2006, Opexa invested $10.9 million in A-1/P-1 commercial paper, of
which $2.9 million is invested in marketable securities, and $3.9 million is
invested in a money market account with an average market yield of 5.33% and
average time to maturity of 1.32 months. Interest income of $688,299 was
recognized for the year ended December 31, 2006 in the statements of
expenses.
NOTE
5—PROPERTY AND EQUIPMENT
Property
and equipment consisted of the following at December 31, 2007:
|
Description
|
Life
|
2007
|
2006
|
|||||||
|
Computer
equipment
|
3 years
|
$ | 155,018 | $ | 134,023 | |||||
|
Office
furniture and equipment
|
3-10 years
|
319,427 | 220,113 | |||||||
|
Software
|
3-5
years
|
88,919 | 46,089 | |||||||
|
Laboratory
equipment
|
3-10
years
|
972,525 | 912,709 | |||||||
|
Leasehold
improvements
|
10
years
|
448,837 | 443,727 | |||||||
|
Subtotal
|
1,984,726 | 1,756,661 | ||||||||
|
Less:
accumulated depreciation
|
(614,079 | ) | (395,284 | ) | ||||||
|
Property
and equipment, net
|
$ | 1,370,647 | $ | 1,361,377 | ||||||
Property
and equipment is carried at cost less accumulated depreciation. Depreciation is
calculated by the straight-line method over the estimated useful life of three
to ten years, depending upon the type of equipment, except for leasehold
improvements which are amortized using the straight-line method over the
remaining lease term or the life of the asset, whichever is shorter. The cost of
repairs and maintenance is charged as an expense as incurred. Depreciation
expense totaled $232,955, $174,117 and $98,080 in fiscal 2007, 2006 and 2005,
respectively.
NOTE
6—INCOME TAXES
Opexa uses
the liability method, where deferred tax assets and liabilities are determined
based on the expected future tax consequences of temporary differences between
the carrying amounts of assets and liabilities for financial and income tax
reporting purposes.
At
December 31, 2007, for federal income tax and alternative minimum tax
reporting purposes, Opexa had approximately $67,963,929 of unused net operating
losses available for carryforward to future years. The benefit from carryforward
of such net operating losses will expire in various years through 2026. Under
the provisions of Section 382 of the Internal Revenue Code, the benefit
from utilization of approximately $5,650,429 of net operating losses incurred
prior to October 7, 2004 was significantly limited as a result of the
change of control that occurred in connection with Opexa’s acquisition of Opexa.
The benefit could be subject to further limitations if significant future
ownership changes occur in Opexa.
At
December 31, 2007, deferred tax assets consisted of the
following:
|
NOL
@ 12/31/07
|
$ | (68,052,241 | ) | |
|
Estimated
tax rate
|
X 34 | % | ||
|
Deferred
tax asset
|
(23,137,762 | ) | ||
|
Valuation
allowance
|
23,137,762 | |||
|
Net
deferred tax asset
|
$ | — |
F-11
NOTE
7—LOAN PAYABLE
Loan
payable consists of an equipment line of up to $250,000 with Wells Fargo of
which $222,816 and $110,322 were outstanding as of December 31, 2007 and
2006, respectively. This loan has an interest rate of 7.61% per annum,
matures in May 2011 and is secured by Opexa’s furniture and equipment purchased
with the loan proceeds. For the years ended December 31, 2007, 2006 and 2005,
Opexa recognized interest expenses of $14,631, $0 and $0,
respectively.
NOTE
8—COMMITMENTS AND CONTINGENCIES
Office
Lease
In October
2005, Opexa entered into a ten-year lease for its office and research
facilities. There is 2,500 sq. ft. of space still available for future
build-out. The facility including the property is leased for a term of ten years
with two options for an additional five years each at the then prevailing market
rate. Future minimum lease payments under the non-cancellable operating lease
are $137,196 for 2008, $139,782 for 2009, $147,540 for 2010, $147,540 for 2011
and $584,343 for years 2012 to 2015. Rent expense was $136,153, $136,153 and
$34,038 for 2007, 2006 and 2005, respectively.
Contract
Research Organization Agreement
In
September 2006, Opexa entered into an Individual Project Agreement (IPA) with
PharmaNet, LLC, a contract research organization focused on managing central
nervous system trials. Pursuant to such IPA, PharmaNet, LLC will provide Opexa
with services in connection with its Phase IIb clinical trial. Under the
terms of the IPA, Opexa is required to advance funds in the amount of (i)
$400,000 for professional fees, (ii) $60,000 for out of pocket expenses and
(iii) $175,000 for investigator grants. The professional fee advance
is applied 1/12th per
month to invoices and replenished once 75% depleted. The out of
pocket advance will be held and applied to the final invoice. The
investigator grant advance is used as a draw down advance and replenished once
75% depleted. This process will continue until the end of the
study. At the conclusion of the program, advance balances remaining
will be applied to outstanding invoices. These advances are treated as prepaid
items and included in the other current assets section of the balance sheet. As
of December 31, 2007 and 2006, the advance balance to PharmaNet, LLC was
$193,337 and $324,663, respectively. For the years ended December 31, 2007 and
2006, Opexa recognized $4,354,303 and $2,026,548, respectively, as its research
and development expense under the PharmaNet agreement.
In July
2007, Opexa entered into a second amended and restated license agreement with
the University of Chicago that requires Opexa to make milestone payments of up
to $1,350,000 if certain late stage clinical trial and FDA approval milestones
are achieved. Opexa has determined that these payments are not
probable at this time and thus no liability has been recorded as of December 31,
2007.
NOTE
9—EQUITY
During
2003, equity related transactions were as follows:
|
|
•
|
525,000
shares of common stock were sold for
$1,000.
|
|
|
•
|
170,625
shares were reacquired for $325 and
canceled.
|
|
|
•
|
Additional
contributions to capital of $56,360 resulted from the discounted value to
notes payable due to warrants and beneficial conversion features attached
to convertible notes was issued in
2003.
|
During
2004, equity related transactions were as follows:
|
|
•
|
2,250
shares of common stock were sold for
$9,000.
|
|
|
•
|
206,500
shares of common stock valued at their then fair value of $849,000 were
issued to employees and consultants for their
services.
|
F-12
|
|
•
|
24,269
shares of common stock valued at their then fair value of $427,075 were
issued to the University of Chicago per the terms of a license agreement.
See Note 12 for details.
|
|
|
•
|
99,740
shares of common stock were issued for net liabilities of $147,733
pursuant to the 2004
reorganization.
|
|
|
•
|
250,000
shares of common stock valued at their then fair value of $23,750,000 were
issued to Opexa Pharmaceuticals, Inc., shareholders. See Note 13 for
details.
|
|
|
•
|
16,100
shares of common stock with a relative fair value of $288,366 were issued
to note holders as their additional shares for their subscription
investment.
|
|
|
•
|
60,750
shares of common stock were issued to note holders for the conversion of
$248,370 of principal and interest from convertible
notes.
|
|
|
•
|
8,000
shares of common stock were cancelled pursuant to the terms of an
employment separation agreement.
|
|
|
•
|
Additional
contributions to capital of $2,704,351 resulted from the discounted value
to notes payable from warrants and beneficial conversion features attached
to convertible notes.
|
|
|
•
|
Employee
stock option compensation expense was $123,333 for
2004.
|
During
2005, equity related transactions were as follows:
|
|
•
|
389,451
shares of common stock with warrants to purchase 1,070,993 shares were
sold for $5,841,769. The relative fair value of the common stock is
$1,103,714 and the relative fair value of the warrants is $4,738,055.
Offering costs of $495,552 related to shares issued were charged to
additional paid in capital.
|
|
|
•
|
45,168
shares of common stock with a relative fair value of $999,074 were issued
to note holders as their additional shares for their subscription
investment.
|
|
|
•
|
565,858
shares of common stock were issued to note holders for the conversion of
$6,124,859 of principal and $525,513 interest from convertible
notes.
|
|
|
•
|
2,300
shares of common stock valued at their fair value of $161,000 were issued
to note holders for the conversion of $51,930 of principal and interest
from the notes.
|
|
|
•
|
29,194
shares of common stock were issued to the University of Chicago per the
terms of a license agreement. These shares were recorded at
$1,868,384.
|
|
|
•
|
24,000
shares of common stock valued at their fair value of $1,012,400 were
issued to consultants for their
services.
|
|
|
•
|
Additional
contributions to capital of $2,265,052 relating to the discounted value to
notes payable from warrants, beneficial conversion features attached to
convertible notes.
|
|
|
•
|
Employee
stock option compensation expense was $2,487,741 for
2005.
|
|
|
•
|
Non-employee
stock option compensation expense was $2,373,888 for
2005.
|
|
|
•
|
Transition
of warrants from equity instruments to liability instruments in the amount
of $10,658,496 was recorded. See Note 11 for
details.
|
During
2006, equity related transactions were as follows:
|
|
•
|
In
March 2006, 34,829 shares of common stock were issued to settle an
outstanding accounts payable in the amount of
$180,000.
|
|
|
•
|
In
April 2006, Opexa sold 4,600,000 shares of its common stock and warrants
to purchase 2,300,000 shares of Opexa’s common stock for $23,000,000.
Opexa paid $1,846,481 for the commissions and fees related to this
offering and granted to its brokers warrants to purchase 213,720 shares of
common stock at an exercise price of $5.00 per share. These warrants are
not callable and have a cashless exercise
option.
|
|
|
•
|
Employee
stock option compensation expense was $2,749,617 for
2006.
|
|
|
•
|
Non-employee
stock option compensation expense was $1,568,966 for
2006.
|
F-13
During
2007, equity related transactions were as follows:
|
|
•
|
Employee
stock option compensation expense was $1,876,103 for
2007.
|
|
|
•
|
Non-employee
stock option compensation expense was $845,275 for
2007.
|
NOTE
10—OPTIONS AND WARRANTS
In 2004,
Opexa adopted the 2004 Stock Option Plan (“the Plan”) for the granting of stock
options to employees and consultants of Opexa. Options granted under the Plan
may be either incentive stock options or nonqualified stock options. The Board
of Directors has discretion to determine the number, term, exercise price and
vesting of all grants.
Employee
Stock Options:
During
2004, options to purchase 96,500 shares were granted to employees at exercise
prices ranging from $30.00 to $50.00. These options have terms of five years and
vest from one to three years. Fair value of $5,623,186 was recorded using the
Black-Scholes method of option-pricing model. Variables used in the
Black-Scholes option-pricing model for options issued during the year ended
December 31, 2004 include (1) discount rate range of 2%, (2) option life of 5
years, (3) expected volatility range of 75.05% and (4) zero expected
dividends.
During
2005, options to purchase 63,050 shares were granted to employees at an exercise
price of $7.00. These options have terms of ten years and vest in four years.
Fair value of $261,879 was recorded using the Black-Scholes option-pricing
model. Variables used in the Black-Scholes option-pricing model for options
issued during the year ended December 31, 2005 include (1) discount rate range
of 2%, (2) option life of 10 years, (3) expected volatility range of 175.4% and
(4) zero expected dividends.
During
2005, options to purchase 4,167 shares were forfeited and
cancelled.
During
2006, options to purchase 389,160 shares of common stock were granted by Opexa
to its employees at exercise prices ranging from $5.00 to $9.40. These options
have terms from five to ten years and vest from one to three years. Fair value
of $3,126,168 was recorded using the Black-Scholes option-pricing
model. Variables used in the Black-Scholes option-pricing model for
options issued during the year ended December 31, 2006 include (1) discount rate
range of 4.72% to 5.22%, (2) option life of 5 to 10 years, (3) expected
volatility range of 401.34% to 429.86% and (4) zero expected
dividends.
Opexa
recorded $2,749,617 stock-based compensation expense to the management and
employees during 2006.
During
2006, options to purchase 14,133 shares were forfeited.
During
2007, options to purchase 224,400 shares of common stock were granted by Opexa
to its employees at exercise prices ranging from $3.96 to $5.47. These options
have terms of ten years and vest annually over a three year
period. Fair value of $958,011 was recorded using the Black-Scholes
option-pricing model. Variables used in the Black-Scholes
option-pricing model for options issued during the year ended December 31, 2007
include (1) discount rate range of 4.22% to 5.07%, (2) option life is a term
with the expected term of 5 to 6 years, (3) expected volatility range of 95.36%
to 103.91% and (4) zero expected dividends.
Opexa
recorded $1,876,103 stock-based compensation expense to the management and
employees during 2007.
During
2007, options to purchase 17,345 shares were forfeited.
Consultant
Options:
During
2004, options to purchase 20,000 shares were granted to consultants at exercise
prices ranging from $30.00 to $50.00. These options have terms of five years and
vest from one to three years. Fair value of $1,011,770 was recorded using the
Black-Scholes option-pricing model. Variables used in the
Black-Scholes option-pricing model for options issued during the year ended
December 31, 2004 include (1) discount rate range of 2% (2) option life of 5
years, (3) expected volatility range of 75.05% and (4) zero expected
dividends.
F-14
During
2005, options to purchase 71,060 shares were granted to consultants. Using the
Black-Scholes fair value for 2005 was $1,552,936 option-pricing model. Variables
used in the Black-Scholes option-pricing model for options issued during the
year ended December 31, 2005include (1) discount rate range of 2%, (2) option
life of 5 years, (3) expected volatility range of 175.4% and (4) zero expected
dividends.
During
2005, options to purchase 10,000 shares were forfeited and
cancelled.
During
2006, options to purchase 156,500 shares of common stock were granted by Opexa
to its consultants, directors and exiting directors at the exercise prices
ranging from $5.20 to $9.80. These warrants have a term of ten years and vest
from one to three years. Fair value of $1,496,375 was recorded using
the Black-Scholes option-pricing model. Variables used in the Black-Scholes
option-pricing model for options issued during the year ended December 31, 2006
include (1) discount rate range of 4.72% – 5.22%, (2) option life of 10 years,
(3) expected volatility range of 401.34% to 429.86% and (4) zero expected
dividends.
Opexa
recorded $1,568,966 stock-based compensation expense to the consultants,
directors and exiting directors during 2006.
During
2006, options to purchase 5,000 shares were expired.
During
2007, options to purchase 69,500 shares of common stock were granted by Opexa to
its consultants, directors and exiting directors at the exercise prices ranging
from $3.95 to $5.47. These warrants have a term of ten years, and have vesting
dates that vary from either full or partial vesting at date of grant to full
vesting at the first and second year anniversary of the date of grant. Fair
value of $268,675 was recorded using the Black-Scholes option-pricing
model. Variables used in the Black-Scholes option-pricing model for
options issued during the year ended December 31, 2007 include (1) discount rate
range of 4.20% to 5.07%, (2) option life is a term with the expected term of
5.75 years, (3) expected volatility range of 95.36% to 95.88% and (4) zero
expected dividends.
Opexa
recorded $845,275 stock-based compensation expense to the consultants and
directors during 2007.
Broker
and Investor Warrants:
During
2003, warrants to purchase 15,000 shares were granted to investors related to
the convertible notes.
During
2004, warrants to purchase 142,800 shares were granted to investors related to
the convertible notes.
During
2005, warrants to purchase 46,084 shares of Common Stock ere issued to several
brokerage firms as the offering costs and commissions for Opexa’s financing
activities at an exercise price of $1.50 per share. These warrants have a fair
value of $2,197,162 and vest immediately.
During
2005, warrants to purchase 2,386,984 shares were granted to investors related to
the convertible notes and warrants to purchase 254,362 shares were forfeited and
cancelled.
In April
2006, warrants to purchase 213,720 shares of common stock were granted by Opexa
to the brokers in connection with the $23,000,000 equity financing, at an
exercise price of $5.20. These warrants have a term of three years, vest
immediately and have a fair value of $1,077,778.
During
2006, warrants to purchase 2,765,043 shares were granted to investors related to
the April 2006 financing and warrants to purchase 1,644,908 shares were
forfeited and cancelled.
During
2007, there were no options granted to investors.
Summary
information regarding options and warrants is as follows:
|
Options
|
Weighted
Average
Exercise
Price
|
Warrants
|
Weighted
Average
Exercise
Price
|
|||||||||||||
|
Year
ended December 31, 2003:
|
||||||||||||||||
|
Granted
|
— | $ | — | 15,000 | $ | 20.80 | ||||||||||
F-15
|
Options
|
Weighted
Average
Exercise
Price
|
Warrants
|
Weighted
Average
Exercise
Price
|
|||||||||||||
|
Outstanding
at December 31, 2003
|
— | — | 15,000 | 20.80 | ||||||||||||
|
Year
ended December 31, 2004:
|
||||||||||||||||
|
Granted
|
116,500 | 32.27 | 142,800 | 20.80 | ||||||||||||
|
Outstanding
at December 31, 2004
|
116,500 | 32.27 | 157,800 | 20.80 | ||||||||||||
|
Year
ended December 31, 2005:
|
||||||||||||||||
|
Granted
|
134,110 | 19.30 | 2,433,068 | 28.73 | ||||||||||||
|
Forfeited
and canceled
|
(14,167 | ) | 33.76 | (254,362 | ) | 24.30 | ||||||||||
|
Outstanding
at December 31, 2005
|
236,443 | 24.82 | 2,336,506 | 28.68 | ||||||||||||
|
Year
ended December 31, 2006:
|
||||||||||||||||
|
Granted
|
545,660 | 6.65 | 2,978,763 | 6.29 | ||||||||||||
|
Forfeited
and canceled
|
(19,133 | ) | 38.76 | (1,644,908 | ) | 8.61 | ||||||||||
|
Outstanding
at December 31, 2006
|
762,970 | 11.48 | 3,670,361 | 19.51 | ||||||||||||
|
Year
ended December 31, 2007:
|
||||||||||||||||
|
Granted
|
293,900 | 5.28 | — | — | ||||||||||||
|
Forfeited
and canceled
|
(17,345 | ) | 7.74 | — | — | |||||||||||
|
Outstanding
at December 31, 2007
|
1,039,525 | $ | 9.79 | 3,670,361 | $ | 19.51 | ||||||||||
Summary of
options and warrants outstanding and exercisable as of December 31, 2007 is
as follows:
|
Exercise Price
|
Remaining life
|
Options
Outstanding
|
Options
Exercisable
|
Warrants
Outstanding
|
Warrants
Exercisable
|
||||||||||||||
| $40.00 |
2-3
years
|
17,500 | 13,750 | — | — | ||||||||||||||
| $30.00 |
1-2
years
|
89,500 | 89,500 | — | — | ||||||||||||||
| $30.00 |
2 -
3 years
|
31,850 | 28,567 | 1,110,556 | 1,110,556 | ||||||||||||||
| $15.00 |
2 -
3 years
|
810 | 810 | 46,085 | 46,085 | ||||||||||||||
| $11.90 |
2 -
3 years
|
21,500 | 3,000 | — | — | ||||||||||||||
| $11.50 |
1 -
2 years
|
16,750 | 16,750 | — | — | ||||||||||||||
| $11.40 |
1 -
2 years
|
2,000 | 2,000 | — | — | ||||||||||||||
| $ 9.80 |
8 -
9 years
|
37,000 | 28,250 | — | — | ||||||||||||||
| $ 9.40 |
8 -
9 years
|
32,100 | 13,700 | — | — | ||||||||||||||
| $ 8.25 |
8 -
9 years
|
14,000 | 5,667 | — | — | ||||||||||||||
| $ 7.09 |
8 -
9 years
|
3,300 | 1,100 | — | — | ||||||||||||||
| $ 7.00 |
8
- 9 years
|
35,500 | 17,750 | — | — | ||||||||||||||
| $ 6.50 |
3 -
4 years
|
— | — | 2,300,000 | 2,300,000 | ||||||||||||||
| $ 5.47 |
9
-10 years
|
257,000 | 21,500 | — | — | ||||||||||||||
| $ 5.20 |
1 -
2 years
|
8,500 | 8,500 | — | — | ||||||||||||||
| $ 5.20 |
8
-9 years
|
105,000 | 70,000 | — | — | ||||||||||||||
| $ 5.00 |
2 -
3 years
|
— | — | 213,720 | 213,720 | ||||||||||||||
| $ 5.00 |
3 -
4 years
|
75,000 | 75,000 | — | — | ||||||||||||||
| $ 5.00 |
8
-9 years
|
263,015 | 87,672 | — | — | ||||||||||||||
| $ 4.04 |
9 -
10 years
|
4,400 | — | — | — | ||||||||||||||
| $ 3.96 |
9 -
10 years
|
4,800 | 1,500 | — | — | ||||||||||||||
| $ 3.95 |
9 -
10 years
|
20,000 | 10,000 | — | — | ||||||||||||||
| 1,039,525 | 495,016 | 3,670,361 | 3,670,361 | ||||||||||||||||
F-16
NOTE 11—DERIVATIVE
INSTRUMENTS
In June
2006, Opexa evaluated the application of SFAS 133 and EITF 00-19 for all of
its financial instruments and it was determined that certain of the warrants to
purchase common stock issued by Opexa associated with the bridge note exchange
and private placement offerings in June 2005 and July 2005 were derivatives that
Opexa was required to account for as free-standing derivative instruments under
GAAP. These three series of warrants were considered at the time to be
derivatives because the liquidated damage provision in the registration rights
agreement covering each warrant resulted in the conclusion that it was more
economic to issue registered shares than to issue unregistered shares and pay
the penalty. Because issuing registered shares is outside of Opexa’s
control, Opexa concluded the warrants should be accounted for as derivative
liabilities under SFAS 133 and EITF 00-19. As a result, Opexa reported the value
of these derivatives as current liabilities on its balance sheet and reported
changes in the value of these derivatives as non-operating gains or losses on
its statements of operations in the consolidated financial statements beginning
with the year ended December 31, 2005 and re-measured and reported on a
quarterly basis thereafter based on the Black-Scholes Pricing
Model.
In
December 2006, the FASB issued FASB Staff Position No. EITF 00-19-2, Accounting
for Registration Payment Arrangements (EITF 00-19-2). EITF 00-19-2 addresses an
issuer’s accounting for registration payment arrangements. It specifies that the
contingent obligation to make future payments or otherwise transfer
consideration under a registration payment arrangement, whether issued as a
separate agreement or included as a provision of a financial instrument or other
agreement, should be separately recognized and measured in accordance with FASB
Statement No. 5, Accounting for Contingencies. The guidance in EITF 00-19-2
amends FASB Statements No. 133, Accounting for Derivative Instruments and
Hedging Activities, and No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity, and FASB
Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements
for Guarantees, including Indirect Guarantees of Indebtedness of Others, to
include scope exceptions for registration payment arrangements. EITF 00-19-2
also requires additional disclosure regarding the nature of any registration
payment arrangements, alternative settlement methods, the maximum potential
amount of consideration and the current carrying amount of the liability, if
any. This EITF is effective immediately for registration payment arrangements
and the financial instruments subject to those arrangements that are entered
into or modified subsequent to the date of issue of this EITF. For registration
payment arrangements and financial instruments subject to those arrangements
that were entered into prior to the issuance of this EITF, this is effective for
financial statements issued for fiscal years beginning after December 15,
2006, and interim periods within those fiscal years.
Opexa
evaluated the application of EITF 00-19-2 for all its financial instruments and
determined that certain warrants to purchase common stock issued by Opexa
associated with the bridge note exchange and private placement offerings in June
2005 and July 2005 no longer qualified to be classified as derivative
liabilities. In addition, Opexa accounts for registration rights agreement
penalties as contingent liabilities, applying the accounting guidance of
Financial Accounting Standard No. 5, “Accounting for Contingencies” (“FAS
5”). This accounting is consistent with views established by the FASB Staff
Positions FSP EITF 00-19-2 “Accounting for Registration Payment Arrangements”,
which was issued December 21, 2006. Accordingly, Opexa recognizes the
damages when it becomes probable that they will be incurred and amounts are
reasonably estimable.
4,600,000
shares of common stock and 2,513,720 warrants to purchase common stock are
subject to a registration payment arrangement that provides if a resale
registration statement is not effective for any period after April 13,
2007, the warrant holders may exercise their warrants on a cashless basis during
the period the resale registration statement is not effective. If Opexa fails to
register, achieve effectiveness of registration or maintain effectiveness of
registration of shares underlying the warrants and shares, they are required to
make certain liquidated damage payments of 1.5% of the aggregate amount of
proceeds of the offering per month for every month in default with a maximum of
24%. Opexa does not believe these payments are probable and thus no contingent
liability has been recorded.
1,272,356
shares of common stock and 1,714,410 shares of common stock issuable upon the
exercise of common stock purchase warrants issued in June 2005 and July 2005 are
subject to a registration payment arrangement that provides if a resale
registration statement is not effective for any period after the first
anniversary of the warrant, the warrant holders may exercise their warrants on a
cashless basis during the period the resale registration statement is not
effective. If Opexa fails to register, achieve effectiveness of registration or
maintain effectiveness of registration of shares underlying the warrants and
shares, they are required to make certain liquidated damage payments of 1.0% of
the aggregate amount of proceeds of the offering per month for the first
calendar month of registration default and 2% for every month in default after
the first month. Opexa does not believe these payments are probable and thus no
contingent liability has been recorded.
F-17
The impact
of implementing EITF 00-19-2 for the year ended December 31, 2007 resulted in a
cumulative effect of a change in accounting principle with a decrease in the
derivative liability of $6,656,677 and a decrease to beginning retained earnings
of $4,001,819 reversing gains posted to date and a reclassification of the
original value of the warrants from liability to equity of
$10,658,496.
For the
years ended December 31, 2006 and 2005 the impact of the application of SFAS 133
and EITF 00-19 on the balance sheets and the statements of operations and the
period from inception through December 31, 2006 is as follows:
|
As
of
12/31/2005
|
As
of
12/31/2006
|
Gain
(Loss)
Year
Ended 12/31/2005
|
Gain
(Loss)
Year
Ended
12/31/2006
|
Gain
(Loss)
Inception
Through
12/31/2006
|
||||||||||||||||
|
Series
A Warrants
|
$ | -- | $ | -- | $ | 332,440 | $ | -- | $ | 332,440 | ||||||||||
|
Series
B Warrants
|
264,957 | -- | 640,882 | 264,957 | 905,839 | |||||||||||||||
|
Series
C Warrants
|
6,496,698 | 6,656,677 | 2,923,519 | (159,979 | ) | 2,763,540 | ||||||||||||||
|
Totals
|
$ | 6,761,655 | $ | 6,656,677 | $ | 3,896,841 | $ | 104,978 | $ | 4,001,819 | ||||||||||
NOTE
12—LICENSES AND GAIN ON EXTINGUISHMENT OF DEBT
University
of Chicago License Agreement
In 2004,
Opexa entered into an agreement with the University of Chicago (“University”)
for the worldwide license to technology developed at Argonne National
Laboratory, a U.S. Department of Energy Laboratory operated by the University.
The license was later amended granting Opexa an exclusive, non-transferable
worldwide license to the University’s stem cell technology. In consideration for
the license and amendment, Opexa paid the University a total of $232,742 and
issued the University 53,462 shares of common stock valued at $2,295,461. Opexa
also agreed to pay the University $1.5 million and to issue the University
21,623 shares of Opexa common stock. In April 2007, the $1.5 million cash
payment obligation was extended until July 31, 2007 and the obligation to
issue shares of Opexa’s common stock was extended until July 31, 2007, with
$112,440 accrued as of June 30, 2007.
On July
31, 2007, Opexa entered into a second amended and restated license agreement
with the University of Chicago that eliminated the obligations under the prior
agreement for the payment of $1.5 million due July 31, 2007 and the obligation
to issue 21,623 shares of Opexa common stock. These obligations were recorded as
an intangible asset, with the liabilities recorded as a notes payable—current
portion of $1.5 million and a stock payable of $112,440. As a result of the
amendment and restatement of the license agreement with the University of
Chicago $1,612,440 was reported as a gain on extinguishment of liability. Opexa
applied the accounting guidance of Financial Accounting Standard No. 140,
“Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities” (“FAS 140”) and EITF 96-19 “Debtor’s Accounting for a
Modification or Exchange of Debt Instruments”.
Shanghai
Institute for Biological Science License Agreement
In January
2006, Opexa acquired an exclusive worldwide license for the intellectual
property rights and research results of an autologous T cell vaccine for
rheumatoid arthritis from the Shanghai Institute for Biological Science, China
Academy of Science of the People’s Republic of China. In exchange for a payment
of $125,000 and an agreed running royalty from the sale of commercialized
products, Opexa receives all information and data related to all clinical trials
on all patient controls and patients with rheumatoid arthritis with the T cell
vaccine. This includes all clinical, cell procurement and manufacturing
protocols, complete patient data sheets, all laboratory materials, methods and
results and manufacturing records and documents and any other data related to
the intellectual property. The first payment under the license occurred in April
2006 upon the delivery of materials pursuant to the terms of the licensing
agreement.
F-18
Restatement
Costs
associated with the acquisition of these two licenses were originally accounted
for as an intangible asset. In November 2007, Opexa re-evaluated its accounting
for acquired research and development and determined that these assets did not
have an alternative future use at the date of acquisition. Thus, they had no
separate economic value and should be accordingly expensed to research and
development in the period acquired. Opexa restated its financial statements for
the 2006 and 2005 annual periods in November 2007. See Note 3 for more
details.
NOTE
13 – PURCHASE OF OPEXA PHARMACEUTICALS
In October
2004, Opexa acquired all of the outstanding stock of Opexa Pharmaceuticals, Inc.
The acquisition was accounted for under the purchase method, where all of Opexa
Pharmaceuticals, Inc.’s assets are restated to their fair market value on the
acquisition date. The 250,000 shares of Opexa were valued at their then fair
value of $23,750,000 or $95.00 per share. The results of operations for Opexa
from November 6, 2004 through December 31, 2005 are included in the Statements
of Operations and the Statements of Cash Flows.
The
following table summarizes the estimated fair values of the assets acquired and
the liabilities assumed at the date of acquisition:
|
Current
assets
|
$ | 55,387 | ||
|
Property,
plant and equipment, net
|
639,160 | |||
|
Acquired
in process research and development
|
23,991,128 | |||
|
Current
liabilities assumed
|
(935,675 | ) | ||
|
Total
allocation of purchase price
|
$ | 23,750,000 |
The
estimated fair value of acquired in process research and development of
$23,991,128 was determined by our management. Management considered a number of
factors in determining the value of the acquired in process research and
development, including the results of an independent valuation performed by a
third-party valuation specialist. The purchased represents Opexa
Pharmaceuticals’ incomplete research and development programs that had not yet
reached technological feasibility and had no alternative future uses as of the
acquisition date and, therefore, was expensed upon acquisition within our
Consolidated Statements of Expenses.
NOTE 14—STOCK PURCHASE
AGREEMENT
In June
2004, Pharma was acquired by Sportan United Industries, Inc. in a transaction
accounted for as a reverse acquisition. Pharma’s shareholders were issued
6,386,439 Sportan shares in exchange for 100 percent of the outstanding common
shares of Pharma. Immediately following this transaction, Sportan changed its
name to Pharma and 7,383,838 shares were outstanding.
NOTE
15—SUBSEQUENT EVENT
On
February 13, 2008, Opexa entered into an Underwriting Agreement with MDB Capital
Group LLC, for itself and as representative of the several underwriters,
relating to the public offering of 3,500,000 shares of Opexa’s common stock and
3,500,000 Series E warrants, each warrant to purchase one share of common stock
at an exercise price of $2.00 per share. Pursuant to the Underwriting Agreement,
Opexa granted the underwriters a 30-day option to purchase up to an additional
525,000 shares of common stock and 525,000 warrants to cover over-allotments.
The closing for the sale of shares of common stock and warrants took place on
February 19, 2008. The underwriters exercised their over-allotment option as to
the warrants only, and Opexa sold an aggregate of 3,500,000 shares and 4,025,000
warrants.
The public
offering price for each share was $2.00, and the public offering price for each
warrant was $0.15. Each share and each warrant was sold to the underwriters at
the public offering price of each security less an underwriting discount of 10%.
The Company received approximately $7.6 million in gross proceeds from the
offering. The Company paid the underwriters a non-accountable expense
allowance of 1% of the gross proceeds of the offering (excluding the
over-allotment option). The net proceeds to Opexa, after underwriter
discounts and commissions but before expenses was approximately $6.8
million. As additional compensation, the Company issued warrants to
the underwriter to purchase 350,000 shares of common stock at a price of $2.40
per share and to acquire 350,000 Series E warrants at a price of $0.18 per
Series E warrant.
F-19