PLx Pharma Winddown Corp. - Quarter Report: 2016 June (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x      Quarterly Report PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2016

 

or

 

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

 

For the transition period from                          to                         

 

Commission File Number:  001-36351

 

DIPEXIUM PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

(212) 269-2834

(Registrant’s Telephone Number, Including Area Code)

 

N/A

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

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.  x Yes  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  x Yes  No o

 

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

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o Yes  x No

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.  o Yes  o

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of August 3, 2016:  10,398,078

 

 

Table of Contents

 

Dipexium Pharmaceuticals, Inc.

FORM 10-Q

For period ended June 30, 2016

 

INDEX

 

PART I— FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)		3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		20
Item 4.	Controls and Procedures		20
PART II— OTHER INFORMATION
Item 1.	Legal Proceedings		21
Item 1A.	Risk Factors		22
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		22
Item 3.	Defaults Upon Senior Securities		22
Item 4.	Mine Safety Disclosures		22
Item 5.	Other Information		22
Item 6.	Exhibits		22
SIGNATURES			23

 

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PART I - FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

The accompanying condensed financial statements have been prepared by the Company and are unaudited.  In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary to state fairly the Company’s financial position as of June 30, 2016, the results of operations for the three and six months ended June 30, 2016 and 2015, the changes in shareholders’ equity for the six months ended June 30, 2016, and cash flows for the six months ended June 30, 2016 and 2015, have been made.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted.  It is suggested that these condensed financial statements be read in conjunction with the audited annual financial statements and notes thereto included in the Company’s Annual Report for the year ended December 31, 2015 on Form 10-K, filed with the United States Securities and Exchange Commission on March 22, 2016.  The results of operations for the three and six months ended June 30, 2016 are not necessarily indicative of the operating results for the full year.

 

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DIPEXIUM PHARMACEUTICALS, INC.

CONDENSED BALANCE SHEETS

 

		June 30,			December 31,
		2016			2015
		(unaudited)			(Note 1)
ASSETS
CURRENT ASSETS
Cash		$	7,586,270		$	5,234,953
Short-term Investments		14,983,711			26,977,362
Prepaid Expenses		207,559			146,145
TOTAL CURRENT ASSETS		22,777,540			32,358,460
OTHER ASSETS
Security Deposit		56,630			49,385
TOTAL OTHER ASSETS		56,630			49,385
TOTAL ASSETS		$	22,834,170		$	32,407,845
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses		$	945,357		$	1,606,307
TOTAL LIABILITIES		945,357			1,606,307
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ EQUITY
Common Stock: $.001 par value, 30,000,000 shares authorized, 10,351,613 and 10,301,114 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively		10,351			10,301
Additional paid-in capital		74,164,907			71,852,692
Accumulated deficit		(52,286,445		)	(41,061,455		)
TOTAL SHAREHOLDERS’ EQUITY		21,888,813			30,801,538
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	22,834,170		$	32,407,845

 

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

 

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DIPEXIUM PHARMACEUTICALS, INC.

CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2016			2015			2016			2015
REVENUES		$	—		$	—		$	—		$	—
EXPENSES
OPERATING EXPENSES
Research and Development Expenses		3,700,913			2,290,266			7,284,581			3,999,665
Selling, General and Administrative Expenses		1,722,230			1,744,257			3,969,438			4,222,684
TOTAL OPERATING EXPENSES		5,423,143			4,034,523			11,254,019			8,222,349
LOSS FROM OPERATIONS		(5,423,143		)	(4,034,523		)	(11,254,019		)	(8,222,349		)
Interest Income		14,786			2,615			29,029			3,208
NET LOSS		$	(5,408,357	)	$	(4,031,908	)	$	(11,224,990	)	$	(8,219,141	)
LOSS PER SHARE
Basic and diluted net loss per common share		$	(0.52	)	$	(0.47	)	$	(1.09	)	$	(0.96	)
Weighted average common shares outstanding basic and diluted		10,339,514			8,584,554			10,327,620			8,568,441

 

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

 

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DIPEXIUM PHARMACEUTICALS, INC.

CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

 

		Common Stock								Accumulated			Total
		Shares		Amount			Additional Paid-In Capital			Deficit			Shareholders’ Equity
Balance at December 31, 2015		10,301,114		$	10,301		$	71,852,692		$	(41,061,455	)	$	30,801,538
Share-Based Payment to Vendor		36,499		36			342,697						342,733
Share-Based Compensation		14,000		14			1,969,518						1,969,532
Net Loss										(11,224,990		)	(11,224,990		)
Balance at June 30, 2016 (unaudited)		10,351,613		$	10,351		$	74,164,907		$	(52,286,445	)	$	21,888,813

 

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

 

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DIPEXIUM PHARMACEUTICALS, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Six Months Ended June 30,
		2016			2015
Operating Activities:
Net Loss		$	(11,224,990	)	$	(8,219,141	)
Adjustments to reconcile net loss to net cash used in operating activities:
Share-Based Compensation		1,969,532			2,187,776
Share-Based Payments to Vendors		342,733			158,495
Amortization of short-term investment interest income		(28,812		)	(2,271		)
Change In:
Prepaid Expenses		(61,414		)	(109,419		)
Security Deposit		(7,245		)	—
Accounts Payable and Accrued Expenses		(660,950		)	(247,493		)
Net Cash Used In Operating Activities		(9,671,146		)	(6,232,053		)
Investing Activities:
Proceeds from Short-term Investments		23,000,000			—
Purchase of Short-term Investments		(10,977,537		)	(11,989,678		)
Net Cash Provided By (Used In) Investing Activities		12,022,463			(11,989,678		)
Financing Activities:
Proceeds from issuance of Common Stock, net of issuance costs		—			19,870,664
Net Cash Provided By Financing Activities		—			19,870,664
Net Increase In Cash		2,351,317			1,648,933
Cash at Beginning of Period		5,234,953			27,040,325
Cash at End of Period		$	7,586,270		$	28,689,258
SUPPLEMENTAL DISCLOSURE:
NONCASH OPERATING ACTIVITY
Accrued financing issuance costs		$	—		$	156,051

 

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

 

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DIPEXIUM PHARMACEUTICALS, INC.

NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS

 

NOTE 1 — NATURE OF OPERATIONS and SIGNIFICANT ACCOUNTING POLICIES

 

Business

 

Dipexium Pharmaceuticals, Inc. (the “Company”), a Delaware corporation, formerly Dipexium Pharmaceuticals, LLC, is a late stage pharmaceutical company focused on the development and commercialization of Locilex® (pexiganan cream 0.8%).  The Company was formed on January 14, 2010.

 

The Company has experienced net losses and negative cash flows from operations since inception and expects these conditions to continue for the foreseeable future.  The Company has needed to raise capital from sales of its securities to sustain operations.  In March 2014, the Company completed an initial public offering (“IPO”) of common stock with proceeds, net of issuance costs, of approximately $34.5 million.  In June 2015, the Company completed an additional public offering of common stock with net proceeds of approximately $19.7 million.  As of June 30, 2016, the Company had cash and short-term investments totaling approximately $22.6 million.  Based on the Company’s projected expenditures for 2016 and 2017, management currently believes that its current cash and short-term investment balances should be sufficient to fund the Company’s operations through 2017.  However, if the Company’s assumptions underlying its estimated expenses prove to be wrong, it may have to raise additional capital sooner than anticipated.

 

There can be no assurance that the Company’s research and development will be successfully completed or that the Company’s product candidate, or any future product candidate(s) the Company could acquire, will be approved or commercially viable.  The Company is subject to risks common to companies in the biopharmaceutical industry including, but not limited to, dependence on collaborative arrangements, development by the Company or its competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, development of sales and marketing infrastructure and compliance with Food and Drug Administration (“FDA”) and other governmental regulations and approval requirements.

 

Unaudited Condensed Interim Financial Data

 

The accompanying interim condensed financial statements are unaudited.  These unaudited condensed financial statements have been prepared in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for interim financial information.  Accordingly, they do not include all the information and footnotes required by Generally Accepted Accounting Principles (“GAAP”) for complete financial statements.  These unaudited interim condensed financial statements should be read in conjunction with the audited financial statements and accompanying notes for the year ended December 31, 2015.  The unaudited interim condensed financial statements have been prepared on the same basis as the annual financial statements included in the Company’s Annual Report for the year ended December 31, 2015, and, in the opinion of management, reflect all the adjustments (consisting of normal recurring adjustments) necessary to state fairly the Company’s financial position as of June 30, 2016, the results of operations for the three and six months ended June 30, 2016 and 2015, the changes in shareholders’ equity for the six months ended June 30, 2016, and cash flows for the six months ended June 30, 2016 and 2015.  The December 31, 2015 balance sheet included herein was derived from the audited financial statements, but may not include all disclosures required by GAAP for complete financial statements.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period.  Actual results could differ from those estimates.

 

Cash, Cash Equivalents, and Short-Term Investments

 

The Company considers all highly-liquid instruments purchased with a maturity of three months or less to be cash equivalents.  Instruments with maturities greater than three months, but less than twelve months are included in short-term investments.  The Company purchases United States Treasury bills with maturities ranging from six to twelve months which are classified as being held to maturity and are carried at amortized cost.  Securities classified as held to maturity securities are those securities that management has the intent and ability to hold to maturity.

 

The Company maintains its cash balance in one financial institution.  The balance is insured up to the maximum allowable by the Federal Deposit Insurance Company (“FDIC”).  The Company has not experienced any losses in such accounts and does not believe it is exposed to any significant risk of loss on cash.  At times, the cash balance may exceed the maximum limit of the FDIC.

 

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Research and Development

 

In accordance with Accounting Standards Codification (“ASC”) 730, Accounting for Research and Development Costs, the Company expenses research and development costs when incurred.  At times, the Company may make cash advances for research and development services.  These amounts are capitalized and expensed in the period the service is provided.  The Company incurred net research and development expenses in the amounts of $3,700,913 and $2,290,266 for the three months ended June 30, 2016 and 2015, respectively, and $7,284,581 and $3,999,665 for the six months ended June 30, 2016 and 2015, repsectively.

 

Although the Company manages the conduct of its clinical trials, it relies on third parties to conduct its clinical and preclinical studies and to provide services, including data management, statistical analysis and electronic compilation for clinical trials, as well as for the manufacture of clinical trial supplies. At the end of each reporting period, the Company compares the payments made to each service provider to the estimated progress towards completion of the related project. Factors that are considered in preparing these estimates include the number of subjects enrolled in studies, milestones achieved and other criteria related to the efforts of the vendors. These estimates are subject to change as additional information becomes available. Depending on the timing of payments to vendors and estimated services provided, the Company records net prepaid or accrued expenses related to these costs.

 

Share-Based Compensation

 

The Company accounts for the cost of services performed by officers and directors received in exchange for an award of Company membership interests, common stock, or stock options, based on the grant-date fair value of the award.  In accordance with ASC 718, Stock Compensation, the Company recognizes compensation expense, net of estimated forfeitures, on a straight-line basis over the service period.

 

Share-Based Payments to Vendors

 

The Company accounts for the cost of services performed by vendors in exchange for an award of common stock of the Company based on the grant-date fair value of the award or fair value of the services rendered, whichever is more readily determinable and adjusted to fair value at each reporting date.  Such fair value is measured as of the earlier of the date the other party becomes committed to provide goods or services or the date performance by the other party is complete.  The Company recognizes the expense in the same period and in the same manner as if the Company had paid cash for the services.

 

Income Taxes

 

The Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities and the expected benefits of net operating loss carryforwards. The impact of changes in tax rates and laws on deferred taxes, if any, applied during the years in which temporary differences are expected to be settled, is reflected in the financial statements in the period of enactment. The measurement of deferred tax assets is reduced, if necessary, if, based on weight of the evidence, it is more likely than not that some, or all, of the deferred tax assets will not be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that such tax rate changes are enacted. The Company had no material amounts recorded for uncertain tax positions, interest or penalties in the accompanying financial statements. The Company currently estimates an annual effective tax rate of 0% as the Company incurred losses for the year ended December 31, 2015 and for the six months ended June 30, 2016, respectively, for both financial statement and tax purposes.  Therefore, no Federal or state income tax expense has been recorded in the financial statements for the year ended December 31, 2015 and for the six months ended June 30, 2016, respectively.

 

Based on the Company’s history of generating operating losses and its anticipation of operating losses continuing in the foreseeable future, the Company has determined that it is more likely than not that the tax benefits from these net operating losses would not be realized and a full valuation allowance against all deferred tax assets has been recorded at June 30, 2016 and December 31, 2015, respectively.  In the event the Company becomes profitable for a period of two or more years, with future expectations at that time of profitability for future years prior to any significant change in its equity capitalization, the Company would have an opportunity to realize benefit from the deferred tax asset at such time in the future.

 

Recent Accounting Pronouncements

 

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, in an effort to simplify accounting for certain aspects of income tax accounting and accounting for forfeitures.  The amendments of this ASU are effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years.  Early adoption is permitted.  The Company is currently assessing the potential impact this ASU will have on the financial statements and related disclosures.

 

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In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which includes amendments that require lessees to recognize a lease liability for all long-term leases (lease terms more than 12 months) at the commencement date. The lease liability is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis.  The amendments also require lessees to recognize a right-of-use asset for all long-term leases. The right-of-use asset is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset to not recognize lease assets and lease liabilities.  If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term.  The amendments in this ASU require qualitative disclosures along with specific quantitative disclosures.  The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early application is permitted.  Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements.  The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented.  The Company is currently evaluating the provisions of this ASU.

 

In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740), which requires that all deferred income tax assets and liabilities be presented as noncurrent in the statement of financial position. The pronouncement is effective for financial statements issued for annual periods beginning after December 15, 2018 with early application permitted.  The adoption of this guidance is not expected to have a material impact on our financial statements.

 

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements—Going Concern, which requires management of an entity to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued or available to be issued. This update will become effective beginning January 1, 2017, with early adoption permitted. The Company is currently evaluating the provisions of this amendment.

 

NOTE 2 — FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The carrying amount of certain of the Company’s financial instruments, including cash and accounts payable, is shown at cost, which approximates fair value.  Short-term investments with maturities ranging from six to twelve months are classified as being held to maturity and are carried at amortized cost.  The cost, gross unrealized gains, and the fair value of related securities at June 30, 2016 and December 31, 2015 were as follows:

 

		Total (maturities within 12 months)
		Cost			Unrealized Gain			Fair Value
Held to Maturity:
Debt Securities:
U.S. Government sponsored bonds at June 30, 2016		$	14,965,584		$	23,706		$	14,989,290
U.S. Government sponsored bonds at December 31, 2015		$	26,958,214		$	4,646		$	26,962,860

 

The Company had total amortized interest income for the three month periods ended June 30, 2016 and 2015 of $14,686 and $2,271, respectively and $28,812 and $2,271 for the six month periods ended June 30, 2016 and 2015, respectively.  The carrying values of $14,983,711 and $26,977,362 as of June 30, 2016 and December 31, 2015 are equal to the cost of the securities plus the accumulated amortized interest income of $18,127 and $19,148 on the remaining bonds held at June 30, 2016 and December 31, 2015, respectively.

 

NOTE 3 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses at June 30, 2016 and December 31, 2015 are as follows:

 

		June 30, 2016			December 31, 2015
Accrued compensation expense		$	263,264		$	663,404
Accrued research and development		643,853			859,053
Accrued professional fees		6,250			55,787
Other accounts payable and accrued expenses		31,990			28,063
Totals		$	945,357		$	1,606,307

 

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NOTE 4 — SHARE-BASED COMPENSATION and STOCK OPTIONS

 

Prior to the Company’s initial public offering, the Company granted awards of restricted Class A Membership Interests to board members in exchange for services.  These membership interests awards, which were converted to restricted common shares (7:1 ratio) at the time of the corporate conversion in March 2014, were originally scheduled to vest over a period of either 3 or 4 years with the first year beginning on the date the member joined the board.  In each case, the restricted common shares involved accelerated vesting upon a change of control or other business combination.  The fair value of the membership interests, at the time they were granted, was equal to the per-membership interest value of the most recent private placement ($50 per membership interest on a pre-conversion basis).  Total compensation expense in the amount of $25,000 has been recognized as director fees for the three months ended June 30, 2016 and 2015, respectively, and $50,000 for each of the six month periods ended June 30, 2016 and 2015, respectively.

 

The following table summarizes the restricted common stock at June 30, 2016:

 

		Restricted Common Stock
Nonvested at January 1, 2016		28,000
Granted		—
Forfeited		—
Vested		(14,000	)
Nonvested at June 30, 2016		14,000

 

As of June 30, 2016, there was $70,833 of total unrecognized compensation expense related to these awards. That expense is expected to be recognized over a weighted average period of 0.75 years.

 

In November 2013, the board of directors adopted the 2013 Equity Incentive Plan.  The plan became effective as of the completion of the corporate conversion and the closing of the IPO.  The 2013 Equity Incentive Plan currently reserves 2,141,169 common shares, of which 741,382 are still available for issuance.  The purpose of the plan is to attract and retain directors, officers, and employees whose services are considered valuable to the Company.

 

In January 2015, the Company granted stock options to purchase 251,000 common shares to its five employees, outside directors, and certain non-employee consultants.  The options were issued pursuant to the 2013 Equity Incentive Plan at an exercise price of $11.35, with one-half of the options vesting upon issuance and the balance vesting evenly over the subsequent 24 months. A portion of the January stock option grant, 35,000 fully vested options, were granted to non-employees for services rendered.  As such, the Company expensed $353,150, the entire portion of those non-employee grants, at the grant date.

 

In January 2016, the Company granted stock options to purchase 287,500 common shares to its employees, outside directors, and certain non-employee consultants.  The options were issued pursuant to the 2013 Equity Incentive Plan at an exercise price of $10.16, with one-half of the options vesting upon issuance and the balance vesting evenly over the subsequent 24 months. A portion of the January stock option grant, 27,500 fully vested options, were granted to non-employees for services rendered.  As such, the Company expensed $181,775, the entire portion of those non-employee grants, at the grant date

 

Compensation expense associated with these awards is recognized over the vesting period based on the fair value of the option at the grant date determined based on the Black-Scholes model. Option valuation models require the input of highly subjective assumptions including the expected price volatility.  The Company’s employee stock options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimate.

 

Because there is no public market for the Company’s stock options and very little historical experience with the Company’s stock, similar public companies were used for comparison and expectations as to the price volatility assumptions required for fair value computation using the Black-Scholes methodology.

 

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The Company determined the fair value of the option awards using the Black-Scholes option pricing model and the following weighted average assumptions for options issued during the respective periods:

 

		Six Months Ended		Six Months Ended
		June 30, 2016		June 30, 2015
Expected term		5.55 years		5.65 years
Volatility		63.3	%	62.1	%
Dividend yield		0	%	0	%
Risk free interest rate		1.54	%	1.58	%

 

ASC 718 requires stock compensation expense to be recorded net of estimated forfeitures.  The Company currently estimates there will be no forfeitures of options.

 

A summary of the Company’s stock option activity is as follows:

 

				Weighted Average
		Number of Options		Exercise Price
Outstanding at the beginning of the period		1,112,287		$	13.32
Granted		287,500		$	10.16
Forfeited		—
Outstanding and expected to vest at June 30, 2016		1,399,787		$	12.67

 

Compensation expense relating to options for the three months ended June 30, 2016 and 2015 was $591,441 and $519,066, respectively, and $1,919,532 and $2,137,776 for the six months ended June 30, 2016 and 2015, respectively.  The total compensation expense not yet recognized as of June 30, 2016 was $1,893,271.  The weighted average vesting period over which the total compensation expense will be recorded related to unvested options not yet recognized as of June 30, 2016 was approximately 0.9 years. The weighted average grant date fair value of options granted during the period was $4.66 and $7.61 as of June 30, 2016 and 2015, respectively. The intrinsic value of the stock options was $0 and $360,820, as of June 30, 2016 and 2015, respectively, with a remaining weighted average contractual life of 5.60 years.  Total options excercisable at June 30, 2016 were 1,033,434.

 

NOTE 5 — SHARE-BASED PAYMENTS TO VENDORS

 

In the ordinary course of business, the Company may issue restricted stock for services rendered by a vendor.  The vesting of restricted stock and the associated expense for the services rendered are recorded over the term of the related contract.  Research and development expenses resulting from vendor equity issuances for the three months ended June 30, 2016 and 2015 were $197,713 and $79,661, respectively, and $342,733 and $158,495 for the six months ended June 30, 2016 and 2015, respectively

 

NOTE 6— LEASE OF OFFICE SPACE

 

In January 2016, the Company entered into a lease for office space commencing in March 2016.  The term of the lease is for five years and five months with total minimum lease payments of approximately $1.28 million.  The future minimum lease payments under this lease are as follows:

 

Year ending December 31:
2016		$	113,142
2017			231,534
2018			238,004
2019			244,658
2020			251,522
2021			150,347
Total		$	1,229,207

 

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NOTE 7 — LEGAL MATTERS

 

The Company and its two original executives were three of some 30 defendants in a lawsuit filed by a former stockholder of Genaera Corporation, which was the predecessor of the Genaera Liquidating Trust, the party from which the Company purchased the worldwide rights to pexiganan, the active pharmaceutical ingredient of the Product Locilex® , on April 8, 2010. The complaint was filed on June 8, 2012 in the United States District Court for the Eastern District of Pennsylvania (Civil Action No. 12-3265) by Alan W. Schmidt, individually and on behalf of former Genaera Corporation shareholders. Among others, the suit was filed against the Company, as well as John A. Skolas and Argyce, LLC, who were responsible for the administration of the Trust and who sold pexiganan to the Company via a public auction. The defendants listed in the complaint included several individuals and companies formerly associated with Genaera Corporation, the Trust and/or Argyce, LLC. Also included in the defendant group were several other pharmaceutical companies that were involved in acquiring the former drug-related assets of the Genaera Corporation.

 

The complaint alleged, among other things, the Company and its two executives aided and abetted a breach of fiduciary duty alleged to have been committed by the former director and officers of Genaera Corporation before it was approved for dissolution by its shareholders and also Argyce, LLC, the trustee of the Liquidating Trust. Plaintiff claims that the Company, and its executives, aided and abetted a breach of the duties of the board of directors and the trustee under common law and under a certain trust agreement allegedly signed between Argyce, LLC, as the trustee, and the Liquidating Trust. With regard to the claims made against the Company and its two executives, the plaintiff alleged, in pertinent part, that the Company’s acquisition of the pexiganan rights was for alleged inadequate consideration, and that the Company and its management aided and abetted a breach of fiduciary duty by the Genaera Corporation defendants who were formerly associated with Genaera Corporation and/or the Trust.

 

The Company and its two executives filed a motion to dismiss the complaint within the prescribed time period. All of the other defendants in this litigation also filed motions to dismiss, and a court order by the Federal District Court granted each and every motion to dismiss, with prejudice, without leave to refile, on August 12, 2013 based on the argument that Plaintiff’s claims were time barred. A subsequent motion to reconsider such dismissal was denied by the Federal District Court.  Plaintiff appealed the dismissal to the United States Third Circuit Court of Appeals seeking reversal of the dismissal and the Third Circuit Court granted Plaintiff’s appeal.  On October 17, 2014, the Third Circuit Appellate Court, in a 2-1 decision with a strong dissenting opinion, reversed the trial court’s dismissal of Plaintiff’s claims based on the expiration of the applicable statutes of limitation. In a 2-1 decision, the Third Circuit held that more information was necessary to determine when Plaintiff should have been on notice of his claims to determine the applicability of the discovery rule, which could serve to extend the time frame in which Plaintiff could bring his claims. Due to the strong dissent, all Defendants filed the necessary documents requesting a petition for rehearing en banc, by the majority of the Third Circuit justices who are in active service. The Third Circuit denied the request for en banc hearing and remanded this case to District Court.

 

Upon remand to the Federal District Court, all Defendants moved to dismiss the complaint for reasons other than being time barred.  The Company and its two executives moved for dismissal based on Plaintiff’s inability to make a case for aiding and abetting a breach of fiduciary duty because there was no underlying breach and such an aiding and abetting claim requires an element of knowing participation in the fiduciary breach which cannot be established by Plaintiff.

 

The District Court held a hearing on this in September 2015 and the District Court delivered an Order on November 10, 2015 pursuant to which the District Court granted the Motion to Dismiss filed by each and every defendant including the Company and its two executives.  In December 2015, Plaintiff appealed the Federal District Court’s decision to the Third Circuit Appellate Court and the Company anticipates a decision on whether to grant Plaintiff’s appeal by the Third Circuit Appellate Court in the second half of 2016.  The Company will continue to vigorously defend against Plaintiff’s claims on the factual record, which it believes will prove that neither the Company nor its executives is liable to the Plaintiff in any regard.

 

NOTE 8 — RELATED PARTY TRANSACTIONS

 

The Company engaged the consulting services of Drug Development Advisors (“DDA”) pursuant to which DDA performed detailed analysis on a number of the Company’s preclinical studies in connection with the NDA process.  DDA is owned and operated by a member of the Company’s board of directors.  The Company incurred expenses for services provided by DDA in the amounts of $2,062 and $7,571 for the three months ended June 30, 2016 and 2015, respectively, and $7,229 and $14,237 for the six months ended June 30, 2016 and 2015, respectively,  all of which were recorded in research and development expenses.

 

NOTE 9 — NET LOSS PER SHARE

 

Basic and diluted net loss per common share for the three and six months ended June 30, 2016 and 2015 was determined by dividing net loss by the weighted average common shares outstanding during the period.  The Company’s potentially dilutive shares, which include 1,399,787 stock options, 14,000 unvested common shares, and 19,600 warrants, have not been included in the computation of diluted net loss per share for all periods as the result would be antidilutive.

 

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

FORWARD-LOOKING STATEMENT NOTICE

 

This Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  For this purpose, any statements contained in this Form 10-Q that are not statements of historical fact may be deemed to be forward-looking statements.  Without limiting the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “estimate” or “continue” or comparable terminology are intended to identify forward-looking statements.  These statements by their nature involve substantial risks and uncertainties, and actual results may differ materially depending on a variety of factors, many of which are not within our control.  These factors include but are not limited to economic conditions generally and in the industries in which we may participate; competition within our chosen industry, including competition from much larger competitors; technological advances and failure to successfully develop business relationships.  Unless the context indicates otherwise, as used in this report, the terms “Dipexium,” “we,” “us,” “our,” “our company” and “our business” refer, prior to the corporate conversion discussed herein, to Dipexium Pharmaceuticals, LLC, and after the corporate conversion to Dipexium Pharmaceuticals, Inc.

 

Description of Business

 

Dipexium Pharmaceuticals, LLC (“Dipexium LLC”) was incorporated under the laws of the State of Delaware in January 2010. In March 2014, we effected a corporate conversion pursuant to which we succeeded to the business of Dipexium LLC and the holders of membership interests of Dipexium LLC became our stockholders.

 

We are a late stage pharmaceutical company focused on the development and commercialization of Locilex® (pexiganan cream 0.8%), a novel, first-in-class, broad spectrum, topical antibiotic. Locilex® is a chemically synthesized, 22-amino acid peptide isolated from the skin of the African Clawed Frog. Its novel mechanism of action kills microbial targets by disrupting the bacterial cell membrane; a process known as cell membrane permeability. Locilex® is initially being targeted for the treatment of mild infections of diabetic foot ulcers (or Mild DFI). In 2017, the market for diabetic foot infection therapeutics worldwide is estimated to be $1.58 billion. Our primary objective is to establish Locilex® as the standard of care for the treatment of patients with Mild DFI. Thereafter, our growth strategy includes potentially expanding the indications for Locilex® to include moderate infections of diabetic foot ulcers (or Moderate DFI) and certain other mild or moderate skin and skin structure infections in superficial wounds.

 

We believe that we have a clear clinical and regulatory pathway in both the United States and Europe for the regulatory approval of Locilex®.  We have reached agreement with the FDA through a special protocol assessment (or SPA) for our Phase 3 program which enrolled patients at nearly 60 clinical trial centers in the U.S. We completed our enrollment objectives in the OneStep-1 and OneStep-2, our two pivotal Phase 3, double blind, placebo-controlled superiority studies, in Q2 2016.  We anticipate announcing top-line data from both pivotal Phase 3 clinical trials in Q3 of 2016.  We also conducted two separate Phase 1 skin irritation and skin sensitization studies and we reported data on the first of these two Phase 1 studies in Q3 2014 and reported data on the second Phase 1 study in Q1 2015.  If the data from our Phase 3 studies are sufficient to meet the primary endpoint, we expect to submit our new drug application (or NDA) for Locilex® to the FDA in the first half of 2017.   We expect to receive a response from the FDA within six months of our NDA submission.

 

In Europe, we received formal clinical and regulatory guidance from the European Medicines Agency (or EMA) in May 2015.  Based on this formal guidance, if the data from our Phase 3 studies are favorable, we anticipate filing a marketing authorization application (or MAA) for approval in Europe under the centralized process soon after the NDA submission to the FDA with related European approval anticipated in the first half of 2018.

 

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Plan of Operation

 

Our primary objective is to establish Locilex® as the standard of care to treat patients with Mild DFI. The key elements of our strategy are as follows:

 

·                  Obtain the data from the recently completed pivotal Phase 3 program for Locilex®.  As a result of our SPA for Locilex®, we believe the clinical pathway for Locilex® is clear. Working with our key third party vendors, we commenced our Phase 3 program in the third quarter of 2014 and completed the enrollment objectives in the first half of 2016. We anticipate reporting top-line data from the pivotal Phase 3 trials in Q3 2016;

 

·                  Obtain FDA approval of Locilex® for Mild DFI.  If our Phase 3 trials meet their primary endpoint, we plan to submit our NDA for Locilex®in the first half of 2017. We believe that Locilex® may be approved by the FDA within 6 months of filing a NDA amendment with the FDA;

 

·                  Commercially launch Locilex® in the U.S.  If FDA approved, we plan to utilize a small specialty sales force to launch Locilex® in the U.S., initially targeting podiatrists and potentially expanding to other specialty healthcare providers;

 

·                  Expand Locilex®’s FDA-approved uses.  If we are able to obtain FDA approval in Mild DFI, we will consider obtaining additional FDA approvals that will enable us to expand the Locilex® label to include patients with Moderate DFI and certain other mild or moderate skin and skin structure infections in superficial wounds;

 

·                  Obtain EMA approval of Locilex® in Europe.  Based upon European regulatory advice received to date, if our pivotal Phase 3 clinical trials are completed successfully, we plan to file our Marketing Authorization Application (“MAA”) in the E.U. under the centralized process promptly following submission of our NDA in the U.S.

 

We will rely on our strong management team, board of directors and scientific advisors to execute our strategy. The individuals on our management team, board of directors and scientific advisors will contribute their significant business development, regulatory, finance and commercial experiences to the development and commercialization of Locilex®.

 

Drug Development Strategy

 

In Q2 2016, we completed enrollment in our two pivotal Phase 3 clinical trials of Locilex® for the treatment of Mild DFI. The trials are referred to as OneStep-1 and OneStep-2.

 

We have an SPA with the FDA relating to the trial design for our Phase 3 studies. The SPA calls for us to conduct two identical placebo-controlled pivotal Phase 3 studies, but does not require us to demonstrate equivalence to oral antibiotics. Both trials are randomized, placebo-controlled double blind, multi-center trials of 180 evaluable patients in each trial.  These trials are designed to establish the superiority of Locilex® over placebo-cream in the treatment of Mild DFI.

 

The OneStep-1 and OneStep-2 trials were conducted at nearly 60 clinical sites in the U.S. The primary endpoint of the trials is clinical success, defined as resolution of infection per the clinical judgment of each treating physician using the 2012 Infectious Diseases Society of America Clinical Practice Guideline for the Diagnosis and Treatment of Diabetic Foot Infections.  Microbiological success, defined as complete microbiological response, is being assessed as one of the secondary endpoints. All of the primary and secondary endpoints will be assessed for each patient on the 28th day following entry into the study.  Furthermore, the FDA has agreed that data from the Locilex® arm of the two prior Phase 3 non-inferiority studies conducted by Locilex®’s prior sponsor can be used to supplement our safety database.

 

We anticipate announcing top-line data from both pivotal Phase 3 clinical trials in Q3 2016 and we are currently targeting a New Drug Application (NDA) submission with the FDA and a MAA submission with the European Medicines Agency in the first half of 2017.

 

We completed our Phase 1 skin irritation study in Q2 2014 and reported top line data in Q3 2014.  We also completed our Phase 1 skin sensitization study in Q4 2014 and reported top line data in Q1 2015.

 

Research Pharmaceutical Services, Inc. (a division of PRA International) is the contract research organization conducting our Phase 3 studies for Locilex®. This work is being performed under the auspices of RRD, which is managing all aspects of our scientific, clinical and regulatory development including the OneStep-1 and OneStep-2 trials.

 

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We are a late-stage pharmaceutical company and have never generated revenue.   Currently we do not have a stable recurring source of revenue sufficient to cover our operating costs. We incurred net losses of $5.4 million and $11.2 million for the three and six months ended June 30, 2016, respectively.

 

Opportunities, Challenges and Risks

 

Our business and ability to execute our business strategy are subject to a number of risks and challenges including, without limitation, the following:

 

· We are heavily dependent on attaining regulatory approval for and, if approved, successfully commercializing Locilex®. Locilex® is our only product candidate. As such, all of our resources and efforts have been and are expected for the foreseeable future to be dedicated to the development and commercialization of Locilex®. As such, we are subject to the risk of dependency on this sole product, and if our efforts fail to gain FDA or other regulatory approvals for Locilex® (for example, for use in treating mild or moderate skin and skin structure infections in superficial wounds), our viability would be materially impacted unless we were able to develop or acquire other product candidates.

 

· The regulatory approval process for Locilex® may be lengthy and is inherently unpredictable. Although we anticipate certain time frames for our regulatory pathway for Locilex®, the approval process of the FDA and comparable foreign regulatory authorities may be lengthy and time consuming. The process also is inherently unpredictable, and if we are ultimately unable to obtain regulatory approval for Locilex®, our business will be substantially harmed.

 

· Manufacturing issues may prevent Locilex® from receiving regulatory approval.  Although we believe that we have successfully resolved the manufacturing issues encountered by Locilex®’s prior sponsor and previously identified by the FDA, to the extent that such issues are not resolved or to the extent new issues arise, regulatory approval for Locilex® may be delayed or withheld, and we may not be able to meet the developmental milestones necessary to continue our business.

 

· Even if Locilex® is approved, the market may not accept it as a viable treatment option. Even if Locilex® is approved, there is a risk that it may not be accepted in the marketplace for a variety of reasons. If we are unable to generate substantial revenue from sales of Locilex®, our business will be substantially harmed.

 

Results of Operations

 

Three Months Ended June 30, 2016 Compared to the Three Months Ended June 30, 2015

 

Summary Table

 

The following table presents a summary of the changes in our results of operations for the three months ended June 30, 2016 compared with the three months ended June 30, 2015:

 

		Three Months Ended June 30,						Percentage
		2016			2015			Increase (Decrease)
		(in thousands)
Research and Development Expenses		$	3,701		$	2,290		62	%
Selling, General and Administrative Expenses		$	1,722		$	1,745		(1	)%
Total Operating Expenses		$	5,423		$	4,035		34	%
Interest Income		$	15		$	3		400	%
Net Loss		$	5,408		$	4,032		34	%

 

Research and Development Expenses

 

Research and development expenses were $3.7 million for the three months ended June 30, 2016, and $2.3 million for the three months ended June 30, 2015, an increase of $1.4 million. The increase was due to $0.9 million of increased Phase 3 clinical trial enrollment and related clinical trial expenses, and $0.5 million of increased manufacturing expenses relating to validation batches.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses were $1.7 million for the three months ended June 30, 2016, and $1.7 million for the three months ended June 30, 2015.

 

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Net Loss

 

Net loss was $5.4 million for the three months ended June 30, 2016, and $4.0 million for the three months ended June 30, 2015, an increase of $1.4 million, primarily due to $1.4 million increase in research and development expenses due to the reasons stated above.

 

Six Months Ended June 30, 2016 Compared to the Six Months Ended June 30, 2015

 

Summary Table

 

The following table presents a summary of the changes in our results of operations for the six months ended June 30, 2016 compared with the six months ended June 30, 2015:

 

		Six Months Ended June 30,						Percentage
		2016			2015			Increase (Decrease)
		(in thousands)
Research and Development Expenses		$	7,285		$	4,000		82	%
Selling, General and Administrative Expenses		$	3,969		$	4,222		(6	)%
Total Operating Expenses		$	11,254		$	8,222		37	%
Interest Income		$	29		$	3		867	%
Net Loss		$	11,225		$	8,219		37	%

 

Research and Development Expenses

 

Research and development expenses were $7.3 million for the six months ended June 30, 2016, and $4.0 million for the six months ended June 30, 2015, an increase of $3.3 million. Research and development expenses increased due to $2.7 million of increased Phase 3 clinical trial enrollment and related clinical trial expenses, and a $0.6 million increase in manufacturing expenses relating to the manufacture of our first validation batch of product supply.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses were $3.9 million for the six months ended June 30, 2016, and $4.2 million for the six months ended June 30, 2015, a decrease of $0.3 million. The decrease in selling, general and administrative expenses is primarily attributable to a $0.2 million decrease in stock-based non-cash compensation related expenses and a $0.1 million decrease in professional fees.

 

Net Loss

 

Net loss was $11.2 million for the six months ended June 30, 2016, and $8.2 million for the six months ended June 30, 2015, an increase of $3.0 million, primarily due to a $3.3 million increase in research and development expenses partially offset by a $0.3 million decrease in selling, general, and administrative expenses due to the reasons stated above.

 

Liquidity and Capital Resources

 

Overview

 

We have generated no revenue from operations and we have incurred cumulative losses of approximately $52.3 million since inception. We have funded our operations primarily from equity issuances.  On March 18, 2014, we closed an initial public offering of 3,162,500 shares of our common stock at a public offering price of $12.00 per share. Gross proceeds raised by us in the offering were approximately $38.0 million, and net proceeds to us were approximately $34.5 million.

 

On June 30, 2015, the Company completed a stock offering issuing 1,702,000 shares of common stock at a price of $12.50 per share, resulting in gross proceeds of $21.3 million and net proceeds of $19.7 million after deducting underwriting discounts of $1.3 million and offering costs of approximately $0.3 million.

 

We believe that we have sufficient cash and short-term investments to fund our operations through 2017.

 

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As of June 30, 2016, we had working capital of approximately $21.8 million, consisting primarily of $22.6 million of cash and short-term investments, offset by $0.9 million of accounts payable and accrued expenses.

 

The following tables sets forth selected cash flow information for the periods indicated:

 

		For the six months ended June 30,
		2016			2015
		(in thousands)
Net cash used in operating activities		$	(9,671	)	$	(6,232	)
Net cash provided by (used in) investing activities		12,022			(11,990		)
Net cash provided by financing activities		—			19,871
Net increase in cash		$	2,351		$	1,649

 

Net Cash Used in Operating Activities

 

Net cash used in operating activities was $9.7 million for the six months ended June 30, 2016.  The net loss for this period was greater than the net cash used in operating activities by $1.5 million, which was primarily attributable to $2.3 million of share-based compensation offset by a $0.7 million decrease in accounts payable and accrued expenses and a $0.1 million increase in prepaid expenses.

 

Net cash used in operating activities was $6.2 million for the three months ended June 30, 2015. The net loss for this period was greater than the net cash used in operating activities by $2.0 million, which was primarily attributable to $2.3 million of share-based compensation offset by a $0.3 million decrease in accounts payable and accrued expenses.

 

Net Cash Provided by Investing Activities

 

Net cash provided by investing activities for the six months ended June 30, 2016 was $12.0 million, which was attributable to the Company’s net investments and maturities of United States Treasury Bills.

 

Net cash used in investing activities for the six months ended June 30, 2015 was $12.0 million, which was attributable to the Company’s net investments and maturities of United States Treasury Bills.

 

Net Cash Provided by Financing Activities

 

Net cash provided by financing activities for the six months ended June 30, 2015 was $19.9 million, which was attributable to the net proceeds from the Company’s June 2015 public offering.

 

Contractual Obligations

 

In January 2016, the Company entered into a lease for office space commencing in March 2016.  The term of the lease is for five years and five months with total minimum lease payments of approximately $1.28 million.

 

Recent Accounting Pronouncements

 

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, in an effort to simplify accounting for certain aspects of income tax accounting and accounting for forfeitures.  The amendments of this ASU are effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years.  Early adoption is permitted.  The Company is currently assessing the potential impact this ASU will have on the financial statements and related disclosures.

 

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In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which includes amendments that require lessees to recognize a lease liability for all long-term leases (lease terms more than 12 months), at the commencement date. The lease liability is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis.  The amendments also require lessees to recognize a right-of-use asset for all long-term leases. The right-of-use asset is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset to not recognize lease assets and lease liabilities.  If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term.  The amendments in this ASU require qualitative disclosures along with specific quantitative disclosures.   The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early application is permitted.  Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases), must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements.  The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented.  The Company is currently evaluating the provisions of this ASU.

 

In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740), which requires that all deferred income tax assets and liabilities be presented as noncurrent in the statement of financial position. The pronouncement is effective for financial statements issued for annual periods beginning after December 15, 2018 with early application permitted.  The adoption of this guidance is not expected to have a material impact on our financial statements.

 

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements—Going Concern, which requires management of an entity to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued or available to be issued. This update will become effective beginning January 1, 2017, with early adoption permitted. The Company is currently evaluating the provisions of this amendment.

 

Critical Accounting Policies and Estimates

 

On April 5, 2012, the JOBS Act was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company,” we may, under Section 7(a)(2)(B) of the Securities Act of 1933 (or Securities Act), delay adoption of new or revised accounting standards applicable to public companies until such standards would otherwise apply to private companies. We may take advantage of this extended transition period until the first to occur of the date that we (i) are no longer an “emerging growth company” or (ii) affirmatively and irrevocably opt out of this extended transition period. We have elected to take advantage of the benefits of this extended transition period. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards. Until the date that we are no longer an “emerging growth company” or affirmatively and irrevocably opt out of the exemption provided by Securities Act Section 7(a)(2)(B), upon issuance of a new or revised accounting standard that applies to our financial statements and that has a different effective date for public and private companies, we will disclose the date on which adoption is required for non-emerging growth companies and the date on which we will adopt the recently issued accounting standard. Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. On an ongoing basis, we evaluate these estimates and judgments, including those described below. We base our estimates on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results and experiences may differ materially from these estimates.

 

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Share-Based Compensation

 

We account for the cost of services performed by employees and directors received in exchange for common stock, or stock options, based upon the grant date fair value of the award. In accordance with the Accounting Standards Codification, we recognize compensation expense, net of estimated forfeitures, on a straight-line basis over the vesting period.

 

We account for the cost of services performed by vendors in exchange for an award of membership interests or common stock based upon the grant date fair value of the award or fair value of the services rendered, whichever is more readily determinable. In accordance with the Accounting Standards Codification, we recognize the expense in the same period and in the same manner as if we had paid cash for the services.

 

Research and Development Expenses

 

Although the Company manages the conduct of our own clinical trials, we rely on third parties to conduct our preclinical studies and to provide services, including data management, statistical analysis and electronic compilation for our clinical trials, as well as for the manufacture of our clinical trial supplies. At the end of each reporting period, the Company compares the payments made to each service provider to the estimated progress towards completion of the related project. Factors that are considered in preparing these estimates include the number of subjects enrolled in studies, milestones achieved and other criteria related to the efforts of our vendors. These estimates are subject to change as additional information becomes available. Depending on the timing of payments to vendors and estimated services provided, the Company records net prepaid or accrued expenses related to these costs.

 

Off-Balance Sheet Arrangements

 

We did not have, during the periods presented, and we are currently not party to, any off-balance sheet arrangements.

 

Seasonality

 

We do not have a seasonal business cycle. Our operating results are generally derived evenly throughout the calendar year.

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Not required by smaller reporting companies.

 

ITEM 4.  CONTROLS AND PROCEDURES.

 

Evaluation of Disclosure Controls and Procedures.  We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer, and principal financial and accounting officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the ‘‘Exchange Act’’). Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive, and principal financial and accounting officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based upon our evaluation, our principal executive officer, and principal financial and accounting officer concluded that our disclosure controls and procedures are effective as of June 30, 2016, in ensuring that material information that we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.

 

Changes in Internal Control over Financial Reporting.  There were no changes in our system of internal controls over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II — OTHER INFORMATION

 

ITEM 1.  LEGAL PROCEEDINGS

 

From time to time, we may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm business.

 

The Company and its two original executives were three of some 30 defendants in a lawsuit filed by a former stockholder of Genaera Corporation, which was the predecessor of the Genaera Liquidating Trust, the party from which the Company purchased the worldwide rights to pexiganan, the active pharmaceutical ingredient of the Product Locilex® on April 8, 2010. The complaint was filed on June 8, 2012 in the United States District Court for the Eastern District of Pennsylvania (Civil Action No. 12-3265) by Alan W. Schmidt, individually and on behalf of former Genaera Corporation shareholders. Among others, the suit was filed against the Company, as well as John A. Skolas and Argyce, LLC, who were responsible for the administration of the Trust and who sold pexiganan to the Company via a public auction. The defendants listed in the complaint included several individuals and companies formerly associated with Genaera Corporation, the Trust and/or Argyce, LLC. Also included in the defendant group were several other pharmaceutical companies that were involved in acquiring the former drug-related assets of the Genaera Corporation.

 

The complaint alleged, among other things, the Company and its two executives aided and abetted a breach of fiduciary duty alleged to have been committed by the former director and officers of Genaera Corporation before it was approved for dissolution by its shareholders and also Argyce, LLC, the trustee of the Liquidating Trust. Plaintiff claims that the Company, and its executives, aided and abetted a breach of the duties of the board of directors and the trustee under common law and under a certain trust agreement allegedly signed between Argyce, LLC, as the trustee, and the Liquidating Trust. With regard to the claims made against the Company and its two executives, the plaintiff alleged, in pertinent part, that the Company’s acquisition of the pexiganan rights was for alleged inadequate consideration, and that the Company and its management aided and abetted a breach of fiduciary duty by the Genaera Corporation defendants who were formerly associated with Genaera Corporation and/or the Trust.

 

The Company and its two executives filed a motion to dismiss the complaint within the prescribed time period. All of the other defendants in this litigation also filed motions to dismiss, and a court order by the Federal District Court granted each and every motion to dismiss, with prejudice, without leave to refile, on August 12, 2013 based on the argument that Plaintiff’s claims were time barred. A subsequent motion to reconsider such dismissal was denied by the Federal District Court.  Plaintiff appealed the dismissal to the United States Third Circuit Court of Appeals seeking reversal of the dismissal and the Third Circuit Court granted Plaintiff’s appeal.  On October 17, 2014, the Third Circuit Appellate Court, in a 2-1 decision with a strong dissenting opinion, reversed the trial court’s dismissal of Plaintiff’s claims based on the expiration of the applicable statutes of limitation. In a 2-1 decision, the Third Circuit held that more information was necessary to determine when Plaintiff should have been on notice of his claims to determine the applicability of the discovery rule, which could serve to extend the time frame in which Plaintiff could bring his claims. Due to the strong dissent, all Defendants filed the necessary documents requesting a petition for rehearing en banc, by the majority of the Third Circuit justices who are in active service. The Third Circuit denied the request for en banc hearing and remanded this case to District Court.

 

Upon remand to the Federal District Court, all Defendants moved to dismiss the complaint for reasons other than being time barred.  The Company and its two executives moved for dismissal based on Plaintiff’s inability to make a case for aiding and abetting a breach of fiduciary duty because there was no underlying breach and such an aiding and abetting claim requires an element of knowing participation in the fiduciary breach which cannot be established by Plaintiff.

 

The District Court held a hearing on this in September 2015 and the District Court delivered an Order on November 10, 2015 pursuant to which the District Court granted the Motion to Dismiss filed by each and every defendant including the Company and its two executives.  In December 2015, Plaintiff appealed the Federal District Court’s decision to the Third Circuit Appellate Court and we anticipate a decision on whether to grant Plaintiff’s appeal by the Third Circuit Appellate Court in the second half of 2016.  The Company will continue to vigorously defend Plaintiff’s claims on the factual record, which it believes will prove that neither the Company nor its executives is liable to the Plaintiff in any regard.

 

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ITEM 1A.  RISK FACTORS

 

Not Applicable to a smaller reporting company.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

None

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

None

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not Applicable.

 

ITEM 5. OTHER INFORMATION.

 

None

 

ITEM 6. EXHIBITS

 

Copies of the following documents are included as exhibits to this report pursuant to Item 601 of Regulation S-K.

 

 

* The Exhibit attached to this Form 10-Q shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”) or otherwise subject to liability under that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as expressly set forth by specific reference in such filing.

 

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SIGNATURES

 

Pursuant to the requirements 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.

 

	DIPEXIUM PHARMACEUTICALS, INC.
Date: August 3, 2016
	By:	/s/ David P. Luci
		David P. Luci
		President and Chief Executive Officer (Duly Authorized Officer and Principal Executive Officer)
	By:	/s/ Robert G. Shawah
		Robert G. Shawah
		Chief Accounting Officer and Treasurer (Duly Authorized Officer and Principal Financial and Accounting Officer)

 

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