TENAX THERAPEUTICS, INC. - Annual Report: 2018 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington
D.C., 20549
FORM
10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the fiscal year ended December 31, 2018
Commission
File No. 001-34600
TENAX
THERAPEUTICS, INC.
(Exact
name of registrant as specified in its charter)
|
Delaware
|
26-2593535
|
|
(State
or other jurisdiction of Incorporation or
organization)
|
(I.R.S.
Employer Identification No.)
|
ONE
Copley Parkway, Suite 490, Morrisville, NC 27560
(Address
of Principal Executive Offices) (Zip Code)
Registrant’s
Telephone Number and area code: (919) 855-2100
Securities
registered pursuant to Section 12(b) of the Act:
|
Title
of Each Class
|
Name
of Each Exchange on Which Registered
|
|
Common Stock,
$0.0001 par value per share
|
The Nasdaq Stock
Market LLC
|
Securities
registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check
mark if the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act. Yes ☐ No
☒
Indicate by check
mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes ☐
No ☒
Indicate by check
mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past
90 days. Yes ☒ No ☐
Indicate by check
mark whether the registrant has submitted electronically every
Interactive Data File required to be submitted 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 such files). Yes ☒ No
☐
Indicate by check
mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be
contained, to the best of 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. ☐
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, smaller reporting
company, or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated
filer”, “smaller reporting company” and "emerging
growth company" in Rule 12b-2 of the Exchange
Act.
|
Large accelerated filer
|
☐
|
Accelerated filer
|
☐
|
|
Non-accelerated
filer
|
☒
|
Smaller reporting company
|
☒
|
|
|
|
Emerging
growth company
|
☐
|
If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check
mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ☒ No
State the aggregate
market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the
common equity was last sold as of June 30, 2018, the last business
day of the registrant’s most recently completed second fiscal
quarter: $9,050,692.
The number of
shares outstanding of the registrant’s class of $0.0001 par
value common stock as of March 27, 2019 was 6,154,434.
DOCUMENTS
INCORPORATED BY REFERENCE:
Portions of the
registrant’s proxy statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A in connection
with the registrant’s 2019 Annual Meeting of Stockholders,
which will be filed subsequent to the date hereof, are incorporated
by reference into Part III of this Form 10-K. Such proxy statement
will be filed with the Securities and Exchange Commission not later
than 120 days following the end of the registrant’s fiscal
year ended December 31, 2018.
TABLE
OF CONTENTS
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PART I
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1
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ITEM
1—BUSINESS
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1
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ITEM
1A—RISK FACTORS
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7
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ITEM
1B—UNRESOLVED STAFF COMMENTS
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20
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ITEM
2—PROPERTIES
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20
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ITEM
3—LEGAL PROCEEDINGS
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20
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ITEM
4— MINE SAFETY DISCLOSURES
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20
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PART
II
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20
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ITEM
5—MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
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20
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ITEM
6—SELECTED FINANCIAL DATA
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21
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ITEM
7—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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21
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ITEM
7A—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
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30
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ITEM
8—CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
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30
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ITEM
9—CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
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55
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ITEM
9A—CONTROLS AND PROCEDURES
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55
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ITEM
9B—OTHER INFORMATION
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56
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PART III
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56
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PART IV
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57
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PART I
FORWARD-LOOKING STATEMENTS
This
Annual Report on Form 10-K contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as
amended, which are subject to the “safe harbor” created
by those sections. Forward-looking statements are based on our
management’s beliefs and assumptions and on information
currently available to them. In some cases, you can identify
forward-looking statements by terminology such as
“may”, “will”, “should”,
“expects”, “plans”,
“anticipates”, “believes”,
“estimates”, “predicts”,
“potential” or “continue” or the negative
of such terms or other comparable terminology. These statements are
only predictions and involve known and unknown risks, uncertainties
and other factors, including, but not limited to, progress in our
product development activities, obtaining financing for operations,
development of new technologies and other competitive pressures,
legal and regulatory initiatives affecting our products, conditions
in the capital markets, the risks discussed in Item 1A –
“Risk Factors,” and the risks discussed elsewhere in
this report that may cause our or our industry’s actual
results, levels of activity, performance or achievements to be
materially different from any future results, levels of activities,
performance or achievements expressed or implied by such
forward-looking statements.
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 such statements. We are under no duty to update any
of the forward-looking statements after the date of filing of this
report or to conform such statements to actual results, except as
may be required by law.
All
references in this Annual Report to “Tenax
Therapeutics”, “we”, “our” and
“us” means Tenax Therapeutics, Inc.
ITEM
1—BUSINESS
Tenax
Therapeutics was originally formed as a New Jersey corporation in
1967 under the name Rudmer, David & Associates, Inc., and
subsequently changed its name to Synthetic Blood International,
Inc. Effective June 30, 2008, we changed the domiciliary state of
the corporation to Delaware and changed the company name to Oxygen
Biotherapeutics, Inc. On September 19, 2014, we changed the company
name to Tenax Therapeutics, Inc.
We are
a specialty pharmaceutical company focused on identifying,
developing and commercializing products that address
cardiovascular and pulmonary diseases of high unmet medical
need. On November 13, 2013, through our wholly owned
subsidiary, Life Newco, Inc., or Life Newco, we acquired a license
granting Life Newco an exclusive, sublicenseable right to develop
and commercialize pharmaceutical products containing levosimendan,
2.5 mg/ml concentrate for solution for infusion / 5ml vial
in the United States and
Canada.
Business Strategy
Our
principal business objective is to identify, develop, and
commercialize novel therapeutic products for disease indications
that represent significant areas of clinical need and commercial
opportunity. The key elements of our business strategy are outlined
below.
Efficiently conduct clinical development to establish clinical
proof of concept with our current product candidate.
Levosimendan represents novel therapeutic modalities for the
treatment of pulmonary hypertension and other cardiovascular and
pulmonary diseases of high unmet medical need. We are
conducting clinical development with the intent to establish proof
of concept in several important disease areas where these
therapeutics would be expected to have benefit. Our focus is on
conducting well-designed studies to establish a robust foundation
for subsequent development, partnership and expansion into
complementary areas.
1
Efficiently explore new high potential therapeutic applications,
leveraging third-party research collaborations and our results from
related areas. Our product candidate has shown promise in
multiple disease areas. We are committed to exploring potential
clinical indications where our therapies may achieve best-in-class
profile, and where we can address significant unmet medical needs.
In order to achieve this goal, we have established collaborative
research relationships with investigators from research and
clinical institutions and our strategic partners. These
collaborative relationships have enabled us to cost effectively
explore where our product candidates may have therapeutic
relevance, and how it may be utilized to advance treatment over
current clinical care. Additionally, we believe we will be able to
leverage clinical safety data and preclinical results from some
programs to support accelerated clinical development efforts in
other areas, saving substantial development time and resources
compared to traditional drug development.
Continue to expand our intellectual property portfolio. Our
intellectual property is important to our business and we take
significant steps to protect its value. We have ongoing research
and development efforts, both through internal activities and
through collaborative research activities with others, which aim to
develop new intellectual property and enable us to file patent
applications that cover new applications of our existing
technologies or product candidates.
Enter into licensing or product co-development arrangements in
certain areas, while out-licensing opportunities in non-core
areas. In addition to our internal development efforts, an
important part of our product development strategy is to work with
collaborators and partners to accelerate product development,
reduce our development costs, and broaden our commercialization
capabilities. We believe this strategy will help us to develop a
portfolio of high-quality product development opportunities,
enhance our clinical development and commercialization
capabilities, and increase our ability to generate value from our
proprietary technologies.
Our Current Programs
Levosimendan Background
Levosimendan
was discovered and developed by Orion Corporation, a Finnish
company, or Orion. Levosimendan is a calcium sensitizer/K-ATP activator
developed for intravenous use in hospitalized patients with acutely
decompensated heart failure. It is currently approved in over 60
countries for this indication and not available in the United
States or Canada. It is estimated that to date over 1,000,000
patients have been treated worldwide with levosimendan.
Levosimendan
is a novel, first in class calcium
sensitizer/K-ATP activator. The therapeutic effects of
levosimendan are mediated through:
●
Increased cardiac
contractility by calcium sensitization of troponin C, resulting in
a positive inotropic effect which is not associated with
substantial increases in oxygen demand.
●
Opening of
potassium channels in the vasculature smooth muscle, resulting in a
vasodilatory effect on all vascular beds.
●
Opening of
mitochondrial potassium channels in cardiomyocytes, resulting in a
cardioprotective effect.
This
triple mechanism of action helps to preserve heart function during
cardiac surgery. Several studies have demonstrated that
levosimendan protects the heart and improves tissue perfusion while
minimizing tissue damage during cardiac surgery.
In
2013, we acquired certain assets of Phyxius Pharma, Inc., or
Phyxius, including its North American rights to develop and
commercialize levosimendan for any indication in the United States
and Canada. In the countries where levosimendan is marketed,
levosimendan is indicated for the short-term treatment of acutely
decompensated severe chronic heart failure in situations where
conventional therapy is not sufficient, and in cases where
inotropic support is considered appropriate. In acute decompensated heart failure patients,
levosimendan has been shown to significantly improve
patients’ symptoms as well as acute hemodynamic measurements
such as increased cardiac output, reduced preload and reduced
afterload.
2
The European Society of Cardiology, or the ESC, recommends
levosimendan as a preferable agent over dobutamine to reverse the
effect of beta blockade if it is thought to be contributing to
hypotension. The ESC guidelines also state that levosimendan is not
appropriate for patients with systolic blood pressure less than
85mmHg or in patients in cardiogenic shock unless it is used in
combination with other inotropes or vasopressors.
Other unique properties of
levosimendan include sustained efficacy through the formation of a
long acting metabolite, lack of impairment of diastolic function,
and evidence of better compatibility with beta blockers than
dobutamine.
Levosimendan Development for Pulmonary Hypertension
Patients
We are
currently initiating a Phase 2 clinical trial of levosimendan in
North America for the treatment of patients with pulmonary
hypertension associated with heart failure with preserved ejection
fraction, or PH-HFpEF. PH-HFpEF is defined hemodynamically by
a pulmonary artery pressure, or mPAP, ≥25 mmHg, a pulmonary
capillary wedge pressure, or PCWP, >15 mmHg, and a diastolic
pressure gradient, or diastolic PAP – PCWP, >7mmHg.
Pulmonary hypertension in these patients initially develops from a
passive backward transmission of elevated filling pressures from
left-sided heart failure. These mechanical components of pulmonary
venous congestion may trigger pulmonary vasoconstriction, decreased
nitric oxide availability, increased endothelin expression,
desensitization to natriuretic peptide induced vasodilation, and
vascular remodeling. Finally, these changes often lead to
advanced pulmonary vascular disease, increased right ventricle, or
RV, afterload, and RV failure.
PH-HFpEF
is a common form of pulmonary hypertension with an estimated US
prevalence exceeding 1.5 million patients. Currently, no
pharmacologic therapies are approved for treatment of
PH-HFpEF. Despite the fact that many therapies have been
studied in PH-HFpEF patients, including therapies approved to treat
pulmonary arterial hypertension patients, no therapies have been
shown to be effective in treating PH-HFpEF patients.
Published
pre-clinical and clinical studies indicate that levosimendan may
provide important benefits to patients with pulmonary hypertension.
Data from these published trials indicate that levosimendan may
reduce pulmonary vascular resistance and improve important
cardiovascular hemodynamics such as reduced pulmonary capillary
wedge pressure in patients with pulmonary hypertension. In
addition, several published studies provide evidence that
levosimendan may improve right ventricular dysfunction which is a
common comorbidity in patients with pulmonary hypertension. While
none of these studies have focused specifically on PH-HFpEF
patients, the general hemodynamic improvements in these published
studies of various types of pulmonary hypertension provide an
indication that levosimendan may be beneficial in PH-HFpEF
patients.
In
March 2018, we met with the United States Food and Drug
Administration, or FDA, to discuss development of levosimendan in
PH-HFpEF patients. The FDA agreed with our planned Phase 2 design,
patient entry criteria, and endpoints. The study may be conducted
under the existing investigational new drug application with no
additional nonclinical studies required to support full
development. The FDA recognized there were no approved drug
therapies to treat PH-HFpEF patients and acknowledged this provided
an opportunity for a limited Phase 3 clinical program. This topic
will be discussed further at the End-of-Phase 2 Meeting following
completion of the planned Phase 2 study in PH-HFpEF patients. We
initiated the first of our expected 10-12 clinical sites in
November 2018 and the first of 36 patients was enrolled in the
study in March 2019.
Levosimendan Development for Cardiac Surgery Patients
Low
cardiac output syndrome, or LCOS, is generally defined as a
patient’s inability to maintain a cardiac index >2.2
L/min/m2 and hence requiring use of inotropic agents and/or
mechanical assist devices such as an intra-aortic balloon pump or a
left ventricular assistance device. LCOS in the cardiac surgery
setting is reported to occur in 5-10% of patients undergoing
cardiac surgery and is associated with 10-15-fold higher mortality
or severe sequelae as a result of poor organ
perfusion.
Currently,
no pharmacologic therapies are approved for management or
prevention of post-cardiotomy LCOS. While conventional inotropes
are used to manage cardiac hemodynamics in the peri-operative
setting, none have been shown to improve outcomes.
Substantial
published scientific research indicates that levosimendan may
provide important benefits to cardiac surgery patients, including
35 published prospectively designed clinical trials and multiple
published meta-analyses. Many of these publications indicate that
levosimendan provides substantial mortality and or morbidity
benefits to cardiac surgery patients, particularly those at risk of
developing LCOS.
3
In
2014, we initiated a Phase 3 trial (LEVO-CTS) to investigate the
safety and efficacy of pre-operative administration of levosimendan
treatment to reduce the mortality and morbidity in cardiac surgery
patients at risk for developing LCOS. The Phase 3 trial was
conducted under an FDA approved Special Protocol Assessment, or
SPA, and with FDA granted Fast Track status for the development of
levosimendan to reduce mortality and morbidity in cardiac surgery
patients at risk of LCOS. Pursuant to our license to levosimendan,
we are required to use the “Simdax®”
trademark to commercialize this product.
The
LEVO-CTS trial design was guided by the published literature,
including important dosing refinements and inclusion of patients
with low preoperative ejection fraction. In addition, we relied
heavily on the input of European clinicians who have significant
personal clinical experience with the use of levosimendan in
treating cardiac surgery patients.
Current
data in cardiac surgery suggest that levosimendan is superior to
traditional inotropes (dobutamine, phosphodiesterase
[PDE]-inhibitors) as it achieves:
●
sustained
hemodynamic improvement;
●
diminished
myocardial injury;
●
improved tissue
perfusion;
●
better outcomes and
fewer hospital days;
●
effects most
favorable in patients with low left ventricular ejection fraction
(LVEF) (< 40%); and
●
opportunity to
initiate therapy pre-operatively due to increased cardiac
contractility without increasing intracellular calcium, without
increasing oxygen consumption, or affecting cardiac rhythm and
relaxation.
The
Phase 3 trial was conducted in approximately 60 major cardiac
surgery centers in North America. The trial enrolled patients
undergoing coronary artery bypass grafts, or CABG, and/or mitral
valve surgery, and CABG with aortic valve surgery who are at risk
for developing LCOS. The trial was designed as a double blind,
randomized, placebo-controlled study seeking to enroll 760
patients. During 2016 we made the decision to increase enrollment
in the LEVO-CTS trial to 880 patients. These additional patients
were necessary to ensure sufficient powering and were necessary due
to:
●
a small percentage
of patients who were randomized but did not receive the study
drug;
●
a small percentage
of patients who were missing one or more component measurements of
the primary endpoint; and
●
a slightly lower
primary endpoint event rate than we originally
projected.
Enrollment began in the third quarter of calendar year 2014 and was
completed in December of 2016. On January 31, 2017, we announced
top-line results from the Phase 3 LEVO-CTS trial. Levosimendan,
given prophylactically prior to cardiac surgery to patients with
reduced left ventricular function, had no effect on the co-primary
outcomes. The study did not achieve statistically significant
reductions in the dual endpoint of death or use of a mechanical
assist device at 30 days, nor in the quad endpoint of death,
myocardial infarction, need for dialysis, or use of a mechanical
assist device at 30 days.
However, the study results demonstrated statistically significant
reductions in two of three secondary endpoints including reduction
in LCOS and a reduction in postoperative use of secondary
inotropes. Additionally, levosimendan was found to be safe with no
clinically significant increases in hypotension or cardiac
arrhythmias and the clinical data showed a non-significant
numerical reduction in 90-day mortality.
A post hoc analysis on patients in whom isolated CABG surgery was
performed (66% of the patients) revealed that levosimendan improved
90-day survival significantly (p=0.0017). This was accompanied with
a significant improvement in postoperative cardiac index, in the
frequency of LCOS and in the need for further inotropic support.
Accordingly, the reductions in the incidence of LCOS were
associated with a substantial improvement in mortality. However,
there was essentially no effect on any of these endpoints in those
LEVO-CTS patients receiving valve surgeries.
4
In the second and third quarters of 2017 we explored the
opportunity for submitting a new drug application, or NDA, for use
of levosimendan in CABG surgery patients on the basis of the robust
reduction in 90-day mortality observed in the LEVO-CTS trial.
However, the FDA advised that another study in CABG surgery
patients would be required that prospectively tests
levosimendan’s effectiveness in improving
mortality.
Accordingly, we have suspended development of levosimendan for use
in CABG patients due to the scope of the repeat study, as required
by the FDA. The incidence of 90-day mortality in CABG surgery
patients is low (~8%). The repeat study would need to randomize
approximately 1200 CABG surgery patients with low LVEF (<35%) to
demonstrate a >50% risk reduction in mortality. Based on this
analysis, we determined the cost and timing of this study would
outweigh the likely benefit.
Suppliers
Pursuant
to the terms of our license for levosimendan, Orion is our sole
manufacturing source for levosimendan.
Intellectual Property
We rely
on a combination of patent applications, patents, trade secrets,
proprietary know-how, trademarks, and contractual provisions to
protect our proprietary rights. We believe that to have a
competitive advantage, we must develop and maintain the proprietary
aspects of our technologies. Currently, we require our officers,
employees, consultants, contractors, manufacturers, outside
scientific collaborators and sponsored researchers, and other
advisors to execute confidentiality agreements in connection with
their employment, consulting, or advisory relationships with us,
where appropriate. We also require our employees, consultants, and
advisors who we expect to work on our products to agree to disclose
and assign to us all inventions conceived during the work day,
developed using our property, or which relate to our
business.
To
date, we own or in-license the rights to six U.S. and foreign
patents. In addition, we have one U.S. patent application pending
related to a product candidate and proprietary process, method and
technology. Our issued and in-licensed patents, as well as our
pending patents, expire between 2023 and 2038.
We
have:
●
one U.S. patent
(8,404,752), one Australian Patent (209,271,530) and one European
patent (EPO9798325.8) held jointly with Virginia Commonwealth
University Intellectual Property Foundation for the treatment of
traumatic brain injury;
●
one Israeli patent
(215516) and numerous patent applications, including one U.S.
patent application, for the formulation of perfluorocarbon emulsion
with an average remaining life of approximately 13 years;
and
●
two U.S. patents
(6,730,673 and 6,943,164) for the intravenous formulation of
levosimendan as in-licensed patent rights for our development and
commercialization of levosimendan in the United States and
Canada.
Our
patent and patent applications include claims covering all various
uses of levosimendan, our lead product candidate currently under
development, as well as the manufacturing and use of our
perfluorocarbon emulsion formulation.
The
U.S. trademark registration for Simdax® is owned by
Orion and is licensed to us for sales and marketing purposes for
any pharmaceutical products containing levosimendan that are
commercialized in the United States and Canada.
Competition
The
pharmaceutical and biotechnology industries are intensely
competitive. Many companies, including biotechnology, chemical and
pharmaceutical companies, are actively engaged in activities
similar to ours, including research and development of drugs for
the treatment of rare medical conditions. Many of these companies
have substantially greater financial and other resources, larger
research and development staffs, and more extensive marketing and
manufacturing organizations than we do. In addition, some of them
have considerable experience in preclinical testing, clinical
trials and other regulatory approval procedures. In addition, there
are also academic institutions, governmental agencies and other
research organizations that are conducting research in areas in
which we are working. We expect to encounter significant
competition for any of the pharmaceutical products we plan to
develop.
5
We
believe the concept of using levosimendan to treat patients with
PH-HFpEF is novel. Because no therapies are approved to treat
PH-HFpEF, our ability to succeed in the market is dependent on our
ability to change the established practice paradigm, which is never
an easy task. Key factors on which we will compete with regards to
the development and marketing of levosimendan for the treatment of
pulmonary hypertension include, among others, the ability to obtain
adequate efficacy data, safety data, cost effectiveness data and
hospital formulary approval, as well as sufficient distribution and
handling. Furthermore, while we believe the mechanism of action of
levosimendan is novel, other low priced generically available
products possess some similar qualities, which could present
competition in the form of therapeutic substitution.
In
order to compete successfully in this and other therapeutic areas,
we must develop proprietary positions in patented drugs for
therapeutic markets that have not been satisfactorily addressed by
conventional research strategies. Our product candidates, even if
successfully tested and developed, may not be adopted by physicians
over other products and may not offer economically feasible
alternatives to other therapies.
Government Regulation
The
manufacture and distribution of levosimendan will require the
approval of United States government authorities as well as those
of foreign countries. In the United States, the FDA regulates
medical products. The Federal Food, Drug and Cosmetic Act and the
Public Health Service Act govern the testing, manufacture, safety,
effectiveness, labeling, storage, record keeping, approval,
advertising and promotion of our medical products. In addition to
FDA regulations, we are also subject to other federal and state
regulations, such as the Occupational Safety and Health Act and the
Environmental Protection Act. Product development and approval
within this regulatory framework requires a number of years and
involves the expenditure of substantial funds.
Preclinical
tests include evaluation of product chemistry and studies to assess
the safety and effectiveness of the product and its formulation.
The results of the preclinical tests are submitted to the FDA as
part of the application. The goal of clinical testing is the
demonstration in adequate and well-controlled studies of
substantial evidence of the safety and effectiveness of the product
in the setting of its intended use. The results of preclinical and
clinical testing are submitted to the FDA from time to time
throughout the trial process. In addition, before approval for the
commercial sale of a product can be obtained, results of the
preclinical and clinical studies must be submitted to the FDA. The
testing and approval process requires substantial time and effort
and there can be no assurance that any approval will be granted on
a timely basis, if at all. The approval process is affected by a
number of factors, including the severity of the condition being
treated, the availability of alternative treatments and the risks
and benefits demonstrated in clinical trials. Additional
preclinical studies or clinical trials may be requested during the
FDA review process and may delay product approval. After FDA
approval for its initial indications, further clinical trials may
be necessary to gain approval for the use of a product for
additional indications. The FDA may also require post-marketing
testing, which can involve significant expense, to monitor for
adverse effects.
The ongoing HELP study in PH-HFpEF patients incorporates FDA
advice. An End of Phase 2 Meeting with the FDA is planned in 2020
to review results of the HELP study and Phase 3 study design in
development of levosimendan for treatment of PH-HFpEF
patients.
Employees
We
believe that our success will be based on, among other things, the
quality of our clinical programs, our ability to invent and develop
superior and innovative technologies and products, and our ability
to attract and retain capable management and other personnel. We
have assembled a high-quality team of clinical development managers
and executives with significant experience in the biotechnology and
pharmaceutical industries.
As of
December 31, 2018, we had nine full-time employees and one
part-time employee. In addition to our employees, we also use the
service and support of outside consultants and advisors. None of
our employees are represented by a union, and we believe
relationships with our employees are good.
Available Information
Our
website address is www.tenaxthera.com, and our investor relations
website is located at http://investors.tenaxthera.com. Information
on our website is not incorporated by reference herein. Copies of
our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and our Proxy Statements for our annual
meetings of stockholders, and any amendments to those reports, as
well as Section 16 reports filed by our insiders, are available
free of charge on our website as soon as reasonably practicable
after we file the reports with, or furnish the reports to, the
Securities and Exchange Commission, or the SEC. Our SEC filings are
also publicly available on the SEC’s website located at
www.sec.gov, which contains reports, proxy and information
statements, and other information regarding issuers that file
electronically with the SEC.
6
ITEM
1A—RISK FACTORS
Risks Related to Our Financial Position and Need for Additional
Capital
We have a limited operating history, and we expect a number of
factors to cause our operating results to fluctuate on a quarterly
and annual basis, which may make it difficult to predict our future
performance.
Our
operations, to date, have been primarily limited to organizing and
staffing our company, licensing our technology from Orion and
undertaking preclinical studies and clinical trials of our product
candidates. We have not yet obtained regulatory approvals for any
of our clinical product candidates. Consequently, any predictions
you make about our future success or viability may not be as
accurate as they could be if we had a longer operating
history.
Specifically,
our financial condition and operating results have varied
significantly in the past and will continue to fluctuate from
quarter-to-quarter and year-to-year in the future due to a variety
of factors, many of which are beyond our control. Factors relating
to our business that may contribute to these fluctuations include
the following factors, among others:
–
our ability to
obtain additional funding to develop our product candidates, and
any further product candidate which we may develop or in license in
the future;
–
the need to obtain
regulatory approval of our product candidates;
–
potential risks
related to any collaborations we may enter into for our product
candidates;
–
delays in the
commencement, enrollment and completion of clinical testing, as
well as the analysis and reporting of results from such clinical
testing;
–
the success of
clinical trials of our product candidates;
–
any delays in
regulatory review and approval of product candidates in
development;
–
our ability to
establish an effective sales and marketing
infrastructure;
–
competition from
existing products or new products that may emerge;
–
the ability to
receive regulatory approval or commercialize our
products;
–
potential side
effects of our product candidates that could delay or prevent
commercialization;
–
potential product
liability claims and adverse events;
–
potential
liabilities associated with hazardous materials;
–
our ability to
maintain adequate insurance policies;
–
our dependency on
third-party manufacturers to supply or manufacture our
products;
–
our ability to
establish or maintain collaborations, licensing or other
arrangements;
–
our ability, our
partners’ abilities, and third parties’ abilities to
protect and assert intellectual property rights;
–
costs related to
and outcomes of potential litigation;
–
compliance with
obligations under intellectual property licenses with third
parties;
–
our ability to
adequately support future growth; and
–
our ability to
attract and retain key personnel to manage our business
effectively.
Due to
the various factors mentioned above, and others, the results of any
prior quarterly or annual periods should not be relied upon as
indications of our future operating performance.
We may need additional funding and if we are unable to raise
capital when needed, we would be forced to delay, reduce or
eliminate our product development programs.
Developing
biopharmaceutical products, including conducting preclinical
studies and clinical trials and establishing manufacturing
capabilities, is expensive. We expect our research and development
expenses to increase in connection with our ongoing activities. In
addition, our expenses could increase beyond expectations if
applicable regulatory authorities, including the FDA, require that
we perform additional studies to those that we currently
anticipate, in which case the timing of any potential product
approval may be delayed. As of December 31, 2018, we had $12.4
million of cash and cash equivalents, including the fair value of
our marketable securities on hand. Based on our current operating
plans, we believe that our existing cash and cash equivalents will
be sufficient to fund our projected operating requirements through
the first quarter of calendar year 2020. We will need substantial
additional capital in the future in order to complete the
regulatory approval and commercialization of levosimendan and to
fund the development and commercialization of future product
candidates. Until we can generate a sufficient amount of product
revenue, if ever, we expect to finance future cash needs through
public or private equity offerings, debt financings or corporate
collaboration and licensing arrangements. Such funding, if needed,
may not be available on favorable terms, if at all. In the event we
are unable to obtain additional capital, we may delay or reduce the
scope of our current research and development programs and other
expenses. As a result of our historical operating losses and
expected future negative cash flows from operations, we have
concluded that there is substantial doubt about our ability to
continue as a going concern. Similarly, the report of our
independent registered public accounting firm on our December 31,
2018 Consolidated Financial Statements includes an explanatory
paragraph indicating that there is substantial doubt about our
ability to continue as a going concern. Substantial doubt about our
ability to continue as a going concern may materially and adversely
affect the price per share of our common stock and make it more
difficult to obtain financing.
7
If
adequate funds are not available, we may also be required to
eliminate one or more of our clinical trials, delaying approval of
levosimendan or our commercialization efforts. To the extent that
we raise additional funds by issuing equity securities, our
stockholders may experience additional significant dilution, and
debt financing, if available, may involve restrictive covenants. To
the extent that we raise additional funds through collaboration and
licensing arrangements, it may be necessary to relinquish some
rights to our technologies or our product candidates or to grant
licenses on terms that may not be favorable to us. We may seek to
access the public or private capital markets whenever conditions
are favorable, even if we do not have an immediate need for
additional capital at that time. We may also consider strategic
alternatives, including a sale of our company, merger, other
business combination or recapitalization.
Our
forecast of the period of time through which our financial
resources will be adequate to support our operations is a
forward-looking statement and involves risks and uncertainties, and
actual results could vary as a result of a number of factors,
including the factors discussed elsewhere in this “Risk
Factors” section. We have based this estimate on assumptions
that may prove to be wrong, and we could utilize our available
capital resources sooner than we currently expect. Our future
funding requirements will depend on many factors, including, but
not limited to:
–
the scope, rate of
progress and cost of our clinical trials and other research and
development activities;
–
the costs and
timing of regulatory approval;
–
the costs of
filing, prosecuting, defending and enforcing any patent claims and
other intellectual property rights;
–
the effect of
competing technological and market developments;
–
the terms and
timing of any collaboration, licensing or other arrangements that
we may establish;
–
the cost and timing
of completion of clinical and commercial-scale manufacturing
activities; and
–
the costs of
establishing sales, marketing and distribution capabilities for any
product candidates for which we may receive regulatory
approval.
Risks Related to Commercialization and Product
Development
We are limited in the number of products we can simultaneously
pursue and therefore our survival depends on our success with a
small number of product opportunities.
We have
limited financial resources, so at present we are primarily
focusing these resources on developing levosimendan for the
treatment of pulmonary hypertension, in addition to exploring
strategic alternatives in order to maximize stockholder value. On
January 31, 2017, we announced top-line results from the Phase 3
LEVO-CTS trial for the treatment of LCOS. The study did not achieve
statistically significant reductions in the dual endpoint of death
or use of a mechanical assist device at 30 days, nor in the quad
endpoint of death, myocardial infarction, need for dialysis, or use
of a mechanical assist device at 30 days. Nevertheless, the study
demonstrated statistically significant reductions in two of three
secondary endpoints including reduction in LCOS and a reduction in
postoperative use of secondary inotropes. Additionally, we observed
a non-significant numerical reduction in 90-day mortality. At
present, we intend to commit most of our resources to advancing
levosimendan to the point it receives regulatory approval for the
treatment of pulmonary hypertension. If as a consequence of the
results of our Phase 3 LEVO-CTS trial or our Phase 2 trial in
PH-HFpEF that we plan to conduct, we are unable to receive
regulatory approval of levosimendan, then we may not have resources
to pursue development of any other products and our business could
terminate.
We currently have no approved drug products for sale, and we cannot
guarantee that we will ever have marketable drug
products.
We
currently have no approved drug products for sale. The research,
testing, manufacturing, labeling, approval, selling, marketing, and
distribution of drug products are subject to extensive regulation
by the FDA and other regulatory authorities in the United States
and other countries, with regulations differing from country to
country. We are not permitted to market our product candidates in
the United States until we receive approval of an NDA from the FDA
for each product candidate. We have not submitted an NDA or
received marketing approval for any of our product candidates, and
obtaining approval of an NDA is a lengthy, expensive and uncertain
process. In addition, markets outside of the United States also
have requirements for approval of drug candidates which we must
comply with prior to marketing. Accordingly, we cannot guarantee
that we will ever have marketable drug products.
8
Prior
to obtaining approval to commercialize a product candidate in the
United States or abroad, we or our collaborators must demonstrate
with substantial evidence from well-controlled clinical trials, and
to the satisfaction of the FDA, that such product candidates are
safe and effective for their intended uses. Results from
preclinical studies and clinical trials can be interpreted in
different ways. Even if we believe the preclinical or clinical data
for our product candidates are promising, such data may not be
sufficient to support approval by the FDA and other regulatory
authorities. Additionally, the FDA may also require us to conduct
additional preclinical studies or clinical trials for our product
candidates either prior to or post-approval, or it may object to
elements of our clinical development program.
The development of levosimendan is subject to a high level of
technological risk.
We have
devoted a substantial portion of our financial and managerial
resources to pursue Phase 3 clinical trials for levosimendan. The
biomedical field has undergone rapid and significant technological
changes. Technological developments may result in our products
becoming obsolete or non-competitive before we are able to recover
any portion of the research and development and other expenses we
have incurred to develop and clinically test levosimendan. As our
opportunity to generate substantial product revenues within the
next three to four years is most likely dependent on successful
testing and commercialization of levosimendan for pulmonary
hypertension, any such occurrence would have a material adverse
effect on our operations and could result in the cessation of our
business.
We are required to conduct additional clinical trials in the
future, which are expensive and time consuming, and the outcome of
the trials is uncertain.
We
expect to commit a substantial portion of our financial and
business resources over the next three years to clinical testing of
levosimendan and advancing this product to regulatory approval for
use in one or more medical applications. All of these clinical
trials and testing will be expensive and time consuming and the
timing of the regulatory review process is uncertain. The
applicable regulatory agencies may suspend clinical trials at any
time if they believe that the subjects participating in such trials
are being exposed to unacceptable health risks. We cannot ensure
that we will be able to complete our clinical trials successfully
or obtain FDA or other governmental or regulatory approval of
levosimendan, or that such approval, if obtained, will not include
limitations on the indicated uses for which levosimendan may be
marketed. Our business, financial condition and results of
operations are critically dependent on obtaining capital to advance
our testing program and receiving FDA and other governmental and
regulatory approvals of our products. A significant delay in or
failure of our planned clinical trials or a failure to achieve
these approvals would have a material adverse effect on us and
could result in major setbacks or jeopardize our ability to
continue as a going concern.
The market may not accept our products.
Even if
regulatory approval is obtained, there is a risk that the efficacy
and pricing of our products, considered in relation to our
products’ expected benefits, will not be perceived by health
care providers and third-party payers as cost-effective, and that
the price of our products will not be competitive with other new
technologies or products. Our results of operations may be
adversely affected if the price of our products is not considered
cost-effective or if our products do not otherwise achieve market
acceptance.
Any collaboration we enter with third parties to develop and
commercialize any future product candidates may place the
development of our product candidates outside our control, may
require us to relinquish important rights or may otherwise be on
terms unfavorable to us.
We may
enter into collaborations with third parties to develop and
commercialize future product candidates. Our dependence on future
partners for development and commercialization of our product
candidates would subject us to a number of risks,
including:
–
we may not be able
to control the amount and timing of resources that our partners may
devote to the development or commercialization of our product
candidates or to their marketing and distribution;
–
partners may delay
clinical trials, provide insufficient funding for a clinical trial
program, stop a clinical trial or abandon a product candidate,
repeat or conduct new clinical trials or require a new formulation
of a product candidate for clinical testing;
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–
disputes may arise
between us and our partners that result in the delay or termination
of the research, development or commercialization of our product
candidates or that result in costly litigation or arbitration that
diverts management’s attention and resources;
–
partners may
experience financial difficulties;
–
partners may not
properly maintain or defend our intellectual property rights, or
may use our proprietary information, in such a way as to invite
litigation that could jeopardize or invalidate our intellectual
property rights or proprietary information or expose us to
potential litigation;
–
business
combinations or significant changes in a partner’s business
strategy may adversely affect a partner’s willingness or
ability to meet its obligations under any arrangement;
–
a partner could
independently move forward with a competing product candidate
developed either independently or in collaboration with others,
including our competitors; and
–
the collaborations
with our partners may be terminated or allowed to expire, which
would delay the development and may increase the cost of developing
our product candidates.
Delays in the enrollment and completion of clinical testing could
result in increased costs to us and delay or limit our ability to
obtain regulatory approval for our product candidates.
Delays
in the enrollment and completion of clinical testing could
significantly affect our ability to gain FDA approval of
levosimendan and any other future product development costs. The
completion of clinical trials requires us to identify and maintain
a sufficient number of trial sites, many of which may already be
engaged in other clinical trial programs for the same indication as
our product candidates or may be required to withdraw from our
clinical trial as a result of changing standards of care or may
become ineligible to participate in clinical studies. The
enrollment and completion of clinical trials can be delayed for a
variety of other reasons, including delays related to:
–
reaching agreements
on acceptable terms with prospective trial sites, the terms of
which can be subject to extensive negotiation and may vary
significantly among trial sites;
–
obtaining
institutional review board, or IRB, approval to conduct a clinical
trial at numerous prospective sites;
–
recruiting and
enrolling patients to participate in clinical trials for a variety
of reasons, including meeting the enrollment criteria for our study
and competition from other clinical trial programs for the same
indication as our product candidates;
–
maintaining and
supplying clinical trial material on a timely basis;
and
–
collecting,
analyzing and reporting final data from the clinical
trials.
In
addition, a clinical trial may be suspended or terminated by us,
the FDA or other regulatory authorities due to a number of factors,
including:
–
failure to conduct
the clinical trial in accordance with regulatory requirements or
our clinical protocols;
–
inspection of the
clinical trial operations or trial sites by the FDA or other
regulatory authorities resulting in the imposition of a clinical
hold;
–
unforeseen safety
issues or any determination that a trial presents unacceptable
health risks; and
–
lack of adequate
funding to continue the clinical trial, including unforeseen costs
due to enrollment delays, requirements to conduct additional trials
and studies and increased expenses associated with the services of
our contract research organizations, or CROs, and other third
parties.
Changes
in regulatory requirements and guidance may occur and we may need
to amend clinical trial protocols to reflect these changes with
appropriate regulatory authorities. Amendments may require us to
resubmit our clinical trial protocols to IRBs for re-examination,
which may impact the costs, timing or successful completion of a
clinical trial. If we experience delays in the completion of, or if
we terminate, our clinical trials, the commercial prospects for our
product candidates will be harmed, and our ability to generate
product revenues will be delayed. In addition, many of the factors
that cause, or lead to, a delay in the commencement or completion
of clinical trials may also ultimately lead to the denial of
regulatory approval of a product candidate. Even if we are able to
ultimately commercialize our product candidates, other therapies
for the same or similar indications may have been introduced to the
market and established a competitive advantage.
10
Risks Relating to Regulatory Matters
Our activities are and will continue to be subject to extensive
government regulation, which is expensive and time consuming, and
we will not be able to sell our products without regulatory
approval.
Our
development, marketing and distribution of levosimendan is, and
will continue to be, subject to extensive regulation, monitoring
and approval by the FDA and other regulatory agencies. There are
significant risks at each stage of the regulatory
scheme.
Product approval stage
During
the product approval stage, we attempt to prove the safety and
efficacy of our product for its indicated uses. There are numerous
problems that could arise during this stage,
including:
–
the data obtained
from laboratory testing and clinical trials are susceptible to
varying interpretations, which could delay, limit or prevent FDA
and other regulatory approvals;
–
adverse events
could cause the FDA and other regulatory authorities to halt
trials;
–
at any time, the
FDA and other regulatory agencies could change policies and
regulations that could result in delay and perhaps rejection of our
products;
–
if a prolonged
government shutdown occurs, it could significantly impact the
ability of the FDA to timely review and process our regulatory
submission; and
–
even after
extensive testing and clinical trials, there is no assurance that
regulatory approval will ever be obtained for any of our
products.
Post-commercialization stage
Discovery
of previously unknown problems with our products, or unanticipated
problems with our manufacturing arrangements, even after FDA and
other regulatory approvals of our products for commercial sale may
result in the imposition of significant restrictions, including
withdrawal of the product from the market.
Additional
laws and regulations may also be enacted that could prevent or
delay regulatory approval of our products, including laws or
regulations relating to the price or cost-effectiveness of medical
products. Any delay or failure to achieve regulatory approval of
commercial sales of our products is likely to have a material
adverse effect on our financial condition, results of operations
and cash flows.
The FDA
and other regulatory agencies continue to review products even
after they receive agency approval. If and when the FDA or another
regulatory agency outside the United States approves one of our
products, its manufacture and marketing will be subject to ongoing
regulation, which could include compliance with current good
manufacturing practices, adverse event reporting requirements and
general prohibitions against promoting products for unapproved or
“off-label” uses. We are also subject to inspection and
market surveillance by the FDA for compliance with these and other
requirements. Any enforcement action resulting from failure, even
by inadvertence, to comply with these requirements could affect the
manufacture and marketing of levosimendan or our other products. In
addition, the FDA or other regulatory agencies could withdraw a
previously approved product from the market upon receipt of newly
discovered information. The FDA or another regulatory agency could
also require us to conduct additional, and potentially expensive,
studies in areas outside our approved indicated uses.
We must continually monitor the safety of our products once
approved and marketed for signs that their use may elicit serious
and unexpected side effects and adverse events, which could
jeopardize our ability to continue marketing the products. We may
also be required to conduct post-approval clinical studies as a
condition to licensing a product.
As with
all pharmaceutical products, the use of our products could
sometimes produce undesirable side effects or adverse reactions or
events (referred to cumulatively as adverse events). For the most
part, we would expect these adverse events to be known and occur at
some predicted frequency. When adverse events are reported to us,
we will be required to investigate each event and circumstances
surrounding it to determine whether it was caused by our product
and whether it implies that a previously unrecognized safety issue
exists. We will also be required to periodically report summaries
of these events to the applicable regulatory
authorities.
11
In
addition, the use of our products could be associated with serious
and unexpected adverse events, or with less serious reactions at a
greater than expected frequency. This may be especially true when
our products are used in critically ill or otherwise compromised
patient populations. When these unexpected events are reported to
us, we will be required to make a thorough investigation to
determine causality and implications for product safety. These
events must also be specifically reported to the applicable
regulatory authorities. If our evaluation concludes, or regulatory
authorities perceive, that there is an unreasonable risk associated
with the product, we would be obligated to withdraw the impacted
lot(s) of that product. Furthermore, an unexpected adverse event of
a new product could be recognized only after extensive use of the
product, which could expose us to product liability risks,
enforcement action by regulatory authorities and damage to our
reputation and public image.
A
serious adverse finding concerning the risk of our products by any
regulatory authority could adversely affect our reputation,
business and financial results.
When a
new product is approved, the FDA or other regulatory authorities
may require post-approval clinical trials, sometimes called Phase 4
clinical trials. If the results of such trials are unfavorable,
this could result in the loss of the license to market the product,
with a resulting loss of sales.
After our products are commercialized, we expect to spend
considerable time and money complying with federal and state laws
and regulations governing their sale, and, if we are unable to
fully comply with such laws and regulations, we could face
substantial penalties.
Health
care providers, physicians and others will play a primary role in
the recommendation and prescription of our clinical products. Our
arrangements with third-party payers and customers may expose us to
broadly applicable fraud and abuse and other health care laws and
regulations that may constrain the business or financial
arrangements and relationships through which we will market, sell
and distribute our products. Applicable federal and state health
care laws and regulations are expected to include, but not be
limited to, the following:
–
the federal
anti-kickback statute is a criminal statute that makes it a felony
for individuals or entities knowingly and willfully to offer or
pay, or to solicit or receive, direct or indirect remuneration, in
order to induce the purchase, order, lease, or recommending of
items or services, or the referral of patients for services, that
are reimbursed under a federal health care program, including
Medicare and Medicaid;
–
the federal False
Claims Act imposes liability on any person who knowingly submits,
or causes another person or entity to submit, a false claim for
payment of government funds, with penalties that include three
times the government’s damages plus civil penalties for each
false claim; in addition, the False Claims Act permits a person
with knowledge of fraud, referred to as a qui tam plaintiff, to
file a lawsuit on behalf of the government against the person or
business that committed the fraud, and, if the action is
successful, the qui tam plaintiff is rewarded with a percentage of
the recovery;
–
Health Insurance
Portability and Accountability Act imposes obligations, including
mandatory contractual terms, with respect to safeguarding the
privacy, security and transmission of individually identifiable
health information;
–
the Social Security
Act contains numerous provisions allowing the imposition of a civil
money penalty, a monetary assessment, exclusion from the Medicare
and Medicaid programs, or some combination of these penalties;
and
–
many states have
analogous state laws and regulations, such as state anti-kickback
and false claims laws, which, in some cases, these state laws
impose more strict requirements than the federal laws and may
require pharmaceutical companies to comply with certain price
reporting and other compliance requirements.
Our
failure to comply with any of these federal and state health care
laws and regulations, or health care laws in foreign jurisdictions,
could have a material adverse effect on our business, financial
condition, result of operations and cash flows.
12
Health care reform and controls on health care spending may limit
the price we can charge for our products and the amount we can
sell.
As a
result of the Patient Protection and Affordable Care Act and the
Health Care and Education Affordability Reconciliation Act of 2010,
collectively, the ACA, enacted in March 2010, substantial changes
have occurred and are expected to continue to occur in the system
for paying for health care in the United States, including changes
made in order to extend medical benefits to those who currently
lack insurance coverage. This comprehensive health care reform
legislation also included provisions to control health care costs
and improve health care quality. Together with ongoing statutory
and budgetary policy developments at a federal level, this health
care reform legislation could include changes in Medicare and
Medicaid payment policies and other health care delivery
administrative reforms that could potentially negatively impact our
business. Because not all the administrative rules implementing
health care reform under the legislation have been finalized, and
because of ongoing federal fiscal budgetary pressures not yet
resolved for federal health programs, the full impact of the ACA
and of further statutory actions to reform healthcare payment on
our business is unknown, but there can be no assurances that health
care reform legislation will not adversely impact either our
operational results or the manner in which we operate our business.
There have been judicial and Congressional challenges to the ACA
and there may be additional challenges and amendments to the ACA in
the future, particularly in light of the current presidential
administration and U.S. Congress. For example, the Tax Cuts and
Jobs Act enacted on December 22, 2017, repealed the shared
responsibility payment for individuals who fail to maintain minimum
essential coverage under section 5000A of the Internal Revenue
Code, commonly referred to as the individual mandate, beginning in
2019, and on October 13, 2017, President Trump signed an executive
order terminating the cost-sharing subsidies that reimburse the
insurers under the ACA. We expect that the ACA, as well as other
healthcare reform measures that may be adopted in the future, may
result in more rigorous coverage criteria and lower reimbursement,
and in additional downward pressure on the price that we receive
for any approved product. Cost of care could be reduced by reducing
the level of reimbursement for medical services or products
(including those biopharmaceuticals that we intend to produce and
market), or by restricting coverage (and, thereby, utilization) of
medical services or products. In either case, a reduction in the
utilization of, or reimbursement for, our products could have a
materially adverse impact on our financial performance. Moreover,
recently there has been heightened governmental scrutiny over the
manner in which manufacturers set prices for their commercial
products. We cannot predict what healthcare reform initiatives may
be adopted in the future.
Uncertainty of third-party reimbursement could affect our future
results of operations.
Sales
of medical products largely depend on the reimbursement of
patients’ medical expenses by governmental health care
programs and private health insurers. We will be required to report
detailed pricing information, net of included discounts, rebates
and other concessions, to the Centers for Medicare and Medicaid
Services, or CMS, for the purpose of calculating national
reimbursement levels, certain federal prices, and certain federal
rebate obligations. If we report pricing information that is not
accurate to the federal government, we could be subject to fines
and other sanctions that could adversely affect our business. In
addition, the government could change its calculation of
reimbursement, federal prices, or federal rebate obligations which
could negatively impact us. There is no guarantee that government
health care programs or private health insurers will reimburse for
the sales of our products or permit us to sell our products at high
enough prices to generate a profit.
Governments outside the United States tend to impose strict price
controls and reimbursement approval policies, which may adversely
affect our prospects for generating revenue outside the United
States.
Although
we only have distribution rights in the United States and Canada
for levosimendan, in some countries, particularly European Union
countries and Canada, the pricing of prescription pharmaceuticals
is subject to governmental control. In these countries, pricing
negotiations with governmental authorities can take considerable
time after the receipt of marketing approval for a product. In
addition, there can be considerable pressure by governments and
other stakeholders on prices and reimbursement levels, including as
part of cost containment measures. Political, economic and
regulatory developments may further complicate pricing
negotiations, and pricing negotiations may continue after
reimbursement has been obtained. To obtain or maintain
reimbursement or pricing approval in some countries with respect to
any product candidate that achieves regulatory approval, we may be
required to conduct a clinical trial that compares the
cost-effectiveness of our product candidate to other available
therapies. If reimbursement of our products upon approval, if at
all, is unavailable or limited in scope or amount, or if pricing is
set at unsatisfactory levels, our prospects for generating revenue,
if any, could be adversely affected which would have a material
adverse effect on our business and results of operations. Further,
if we achieve regulatory approval of any product, we must
successfully negotiate product pricing for such product in
individual countries. As a result, the pricing of our products, if
approved, in different countries may vary widely, thus creating the
potential for third-party trade in our products in an attempt to
exploit price differences between countries. This third-party trade
of our products could undermine our sales in markets with higher
prices.
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Risks Relating to Our Dependence on Third Parties
We depend on third parties to manufacture our
products.
We do
not own or operate any manufacturing facilities for the
commercial-scale production of our products. Pursuant to the terms
of our license for levosimendan, Orion is our sole manufacturing
source for levosimendan. Accordingly, our business is
susceptible to disruption, and our results of operations can be
adversely affected, by any disruption in supply or other adverse
developments in our relationship with Orion. If supply from
Orion is delayed or terminated, or if its facilities suffer any
damage or disruption, we may need to successfully qualify an
alternative supplier in a timely manner in order to not disrupt our
business. If we cannot obtain an alternate manufacturer in a
timely manner, we would experience a significant interruption in
supply of levosimendan, which could negatively affect our financial
condition, results of operations and cash flows.
We depend on the services of a limited number of key
personnel.
Our
success is highly dependent on the continued services of a limited
number of scientists and support personnel. The loss of any of
these individuals could have a material adverse effect on us. In
addition, our success will depend, among other factors, on the
recruitment and retention of additional highly skilled and
experienced management and technical personnel. There is a risk
that we will not be able to retain existing employees or to attract
and retain additional skilled personnel on acceptable terms given
the competition for such personnel among numerous large and
well-funded pharmaceutical and health care companies, universities,
and non-profit research institutions, which could negatively affect
our financial condition, results of operations and cash
flows.
We have no experience in the sale and marketing of medical
products.
We have
no experience in the sale and marketing of approved medical
products and marketing the licensing of such products before FDA or
other regulatory approval. We have not decided upon a
commercialization strategy in these areas. We do not know of any
third party that is prepared to distribute our products should they
be approved. If we decide to establish our own commercialization
capability, we will need to recruit, train and retain a marketing
staff and sales force with sufficient technical expertise. We do
not know whether we can establish a commercialization program at a
cost that is acceptable in relation to revenue or whether we can be
successful in commercializing our product. Factors that may inhibit
our efforts to commercialize our products directly and without
strategic partners include:
–
our inability to
recruit and retain adequate numbers of effective sales and
marketing personnel;
–
the inability of
sales personnel to obtain access to or persuade adequate numbers of
physicians to prescribe our products;
–
the lack of
complementary products to be offered by sales personnel, which may
put us at a competitive disadvantage relative to companies with
more extensive product lines; and
–
unforeseen costs
and expenses associated with creating and sustaining an independent
sales and marketing organization.
Failure
to successfully commercialize our products or to do so on a
cost-effective basis would likely result in failure of our
business.
We may enter into distribution arrangements and marketing alliances
for certain products and any failure to successfully identify and
implement these arrangements on favorable terms, if at all, may
impair our ability to commercialize our product
candidates.
We do
not anticipate having the resources in the foreseeable future to
develop sales and marketing capabilities for all of the products we
develop, if any. We may pursue arrangements regarding the sales and
marketing and distribution of one or more of our product candidates
and our future revenues may depend, in part, on our ability to
enter into and maintain arrangements with other companies having
sales, marketing and distribution capabilities and the ability of
such companies to successfully market and sell any such products.
Any failure to enter into such arrangements and marketing alliances
on favorable terms, if at all, could delay or impair our ability to
commercialize our product candidates and could increase our costs
of commercialization. Any use of distribution arrangements and
marketing alliances to commercialize our product candidates will
subject us to a number of risks, including the
following:
–
we may be required
to relinquish important rights to our products or product
candidates;
14
–
we may not be able
to control the amount and timing of resources that our distributors
or collaborators may devote to the commercialization of our product
candidates;
–
our distributors or
collaborators may experience financial difficulties;
–
our distributors or
collaborators may not devote sufficient time to the marketing and
sales of our products; and
–
business
combinations or significant changes in a collaborator’s
business strategy may adversely affect a collaborator’s
willingness or ability to complete its obligations under any
arrangement.
We may
need to enter into additional co-promotion arrangements with third
parties where our own sales force is neither well situated nor
large enough to achieve maximum penetration in the market. We may
not be successful in entering into any co-promotion arrangements,
and the terms of any co-promotion arrangements we enter into may
not be favorable to us.
Risks Relating to Intellectual Property
It is difficult and costly to protect our proprietary rights, and
we may not be able to ensure their protection.
Our
commercial success will depend in part on obtaining and maintaining
patent protection and trade secret protection of our future product
candidates, if any, and the methods used to manufacture them, as
well as successfully defending these patents against third-party
challenges. Our ability to stop third parties from making, using,
selling, offering to sell or importing our products is dependent
upon the extent to which we have rights under valid and enforceable
patents or trade secrets that cover these activities.
We
license certain intellectual property from Orion that covers our
product candidate levosimendan. The principal United States patents
that we license from Orion expire in September 2020. We rely on
Orion to file, prosecute and maintain patent applications and
otherwise protect the intellectual property to which we have a
license, and we have not had and do not have primary control over
these activities for certain of these patents or patent
applications and other intellectual property rights. We cannot be
certain that such activities by third parties have been or will be
conducted in compliance with applicable laws and regulations or
will result in valid and enforceable patents and other intellectual
property rights. Our enforcement of certain of these licensed
patents or defense of any claims asserting the invalidity of these
patents would also be subject to the cooperation of the third
parties.
The
patent positions of pharmaceutical and biopharmaceutical companies
can be highly uncertain and involve complex legal and factual
questions for which important legal principles remain unresolved.
No consistent policy regarding the breadth of claims allowed in
biopharmaceutical patents has emerged to date in the United States.
The biopharmaceutical patent situation outside the United States is
even more uncertain. Changes in either the patent laws or in
interpretations of patent laws in the United States and other
countries may diminish the value of our intellectual property.
Accordingly, we cannot predict the breadth of claims that may be
allowed or enforced in the patents we own or to which we have a
license from a third-party. Further, if any of our patents are
deemed invalid and unenforceable, it could impact our ability to
commercialize or license our technology.
The
degree of future protection for our proprietary rights is uncertain
because legal means afford only limited protection and may not
adequately protect our rights or permit us to gain or keep our
competitive advantage. For example:
–
others may be able
to make compositions or formulations that are similar to our
product candidates but that are not covered by the claims of our
patents;
–
we might not have
been the first to make the inventions covered by our issued patents
or pending patent applications;
–
we might not have
been the first to file patent applications for these
inventions;
–
others may
independently develop similar or alternative technologies or
duplicate any of our technologies;
–
it is possible that
our pending patent applications will not result in issued
patents;
–
our issued patents
may not provide us with any competitive advantages, or may be held
invalid or unenforceable as a result of legal challenges by third
parties;
–
we may not develop
additional proprietary technologies that are patentable;
or
–
the patents of
others may have an adverse effect on our business.
15
We also
may rely on trade secrets to protect our technology, especially
where we do not believe patent protection is appropriate or
obtainable. However, trade secrets are difficult to protect.
Although we use reasonable efforts to protect our trade secrets,
our employees, consultants, contractors, outside scientific
collaborators and other advisors may unintentionally or willfully
disclose our information to competitors. Enforcing a claim that a
third party illegally obtained and is using any of our trade
secrets is expensive and time consuming, and the outcome is
unpredictable. In addition, courts outside the United States are
sometimes less willing to protect trade secrets. Moreover, our
competitors may independently develop equivalent knowledge, methods
and know-how.
We rely on confidentiality agreements that, if breached, may be
difficult to enforce and could have a material adverse effect on
our business and competitive position.
Our
policy is to enter agreements relating to the non-disclosure and
non-use of confidential information with third parties, including
our contractors, consultants, advisors and research collaborators,
as well as agreements that purport to require the disclosure and
assignment to us of the rights to the ideas, developments,
discoveries and inventions of our employees and consultants while
we employ them. However, these agreements can be difficult and
costly to enforce. Moreover, to the extent that our contractors,
consultants, advisors and research collaborators apply or
independently develop intellectual property in connection with any
of our projects, disputes may arise as to the proprietary rights to
the intellectual property. If a dispute arises, a court may
determine that the right belongs to a third party, and enforcement
of our rights can be costly and unpredictable. In addition, we rely
on trade secrets and proprietary know-how that we seek to protect
in part by confidentiality agreements with our employees,
contractors, consultants, advisors or others. Despite the
protective measures we employ, we still face the risk
that:
–
these agreements
may be breached;
–
these agreements
may not provide adequate remedies for the applicable type of
breach; or
–
our trade secrets
or proprietary know-how will otherwise become known.
Any
breach of our confidentiality agreements or our failure to
effectively enforce such agreements would have a material adverse
effect on our business and competitive position.
We may incur substantial costs as a result of litigation or other
proceedings relating to patent and other intellectual property
rights and we may be unable to protect our rights to, or use, our
technology.
If we
or our partners choose to go to court to stop someone else from
using the inventions claimed in our patents, that individual or
company has the right to ask the court to rule that these patents
are invalid and/or should not be enforced against that third party.
These lawsuits are expensive and would consume time and other
resources even if we were successful in stopping the infringement
of these patents. In addition, there is a risk that the court will
decide that these patents are not valid and that we do not have the
right to stop the other party from using the inventions. There is
also the risk that, even if the validity of these patents is
upheld, the court will refuse to stop the other party on the ground
that such other party’s activities do not infringe our rights
to these patents.
Furthermore,
a third party may claim that we or our manufacturing or
commercialization partners are using inventions covered by the
third party’s patent rights and may go to court to stop us
from engaging in our normal operations and activities, including
making or selling our product candidates. These lawsuits are costly
and could affect our results of operations and divert the attention
of managerial and technical personnel. There is a risk that a court
would decide that we or our commercialization partners are
infringing the third party’s patents and would order us or
our partners to stop the activities covered by the patents. In
addition, there is a risk that a court will order us or our
partners to pay the other party damages for having violated the
other party’s patents. We have agreed to indemnify certain of
our commercial partners against certain patent infringement claims
brought by third parties. The biotechnology industry has produced a
proliferation of patents, and it is not always clear to industry
participants, including us, which patents cover various types of
products or methods of use. The coverage of patents is subject to
interpretation by the courts, and the interpretation is not always
uniform. If we are sued for patent infringement, we would need to
demonstrate that our products or methods of use either does not
infringe the patent claims of the relevant patent and/or that the
patent claims are invalid, and we may not be able to do this.
Proving invalidity, in particular, is difficult since it requires a
showing of clear and convincing evidence to overcome the
presumption of validity enjoyed by issued patents.
16
Because
some patent applications in the United States may be maintained in
secrecy until the patents are issued, because patent applications
in the United States and many foreign jurisdictions are typically
not published until eighteen months after filing and because
publications in the scientific literature often lag behind actual
discoveries, we cannot be certain that others have not filed patent
applications for technology covered by our issued patents or our
pending applications, or that we were the first to invent the
technology. Our competitors may have filed, and may in the future
file, patent applications covering technology similar to ours. Any
such patent application may have priority over our patent
applications or patents, which could further require us to obtain
rights to issued patents by others covering such technologies. If
another party has filed a U.S. patent application on inventions
similar to ours, we may have to participate in an interference
proceeding declared by the U.S. Patent and Trademark Office, or
USPTO, to determine priority of invention in the United States. The
costs of these proceedings could be substantial, and it is possible
that such efforts would be unsuccessful if, unbeknownst to us, the
other party had independently arrived at the same or similar
invention prior to our own invention, resulting in a loss of our
U.S. patent position with respect to such inventions.
Some of
our competitors may be able to sustain the costs of complex patent
litigation more effectively than we can because they have
substantially greater resources. In addition, any uncertainties
resulting from the initiation and continuation of any litigation
could have a material adverse effect on our ability to raise the
funds necessary to continue our operations.
Our collaborations with outside scientists and consultants may be
subject to restriction and change.
We work
with chemists, biologists and other scientists at academic and
other institutions, and consultants who assist us in our research,
development, regulatory and commercial efforts, including the
members of our scientific advisory board. These scientists and
consultants have provided, and we expect that they will continue to
provide, valuable advice on our programs. These scientists and
consultants are not our employees, may have other commitments that
would limit their future availability to us and typically will not
enter into non-compete agreements with us. If a conflict of
interest arises between their work for us and their work for
another entity, we may lose their services. In addition, we will be
unable to prevent them from establishing competing businesses or
developing competing products. For example, if a key scientist
acting as a principal investigator in any of our clinical trials
identifies a potential product or compound that is more
scientifically interesting to his or her professional interests,
his or her availability to remain involved in our clinical trials
could be restricted or eliminated.
Under current law, we may not be able to enforce all
employees’ covenants not to compete and therefore may be
unable to prevent our competitors from benefiting from the
expertise of some of our former employees.
We have
entered into non-competition agreements with certain of our
employees. These agreements prohibit our employees, if they cease
working for us, from competing directly with us or working for our
competitors for a limited period. Under current law, we may be
unable to enforce these agreements against certain of our employees
and it may be difficult for us to restrict our competitors from
gaining the expertise our former employees gained while working for
us. If we cannot enforce our employees’ non-compete
agreements, we may be unable to prevent our competitors from
benefiting from the expertise of our former employees.
We may infringe or be alleged to infringe intellectual property
rights of third parties.
Our
products or product candidates may infringe on, or be accused of
infringing on, one or more claims of an issued patent or may fall
within the scope of one or more claims in a published patent
application that may be subsequently issued and to which we do not
hold a license or other rights. Third parties may own or control
these patents or patent applications in the United States and
abroad. These third parties could bring claims against us or our
collaborators that would cause us to incur substantial expenses
and, if successful against us, could cause us to pay substantial
damages. Further, if a patent infringement suit were brought
against us or our collaborators, we or they could be forced to stop
or delay research, development, manufacturing or sales of the
product or product candidate that is the subject of the
suit.
If we
are found to infringe the patent rights of a third party, or in
order to avoid potential claims, we or our collaborators may choose
or be required to seek a license from a third party and be required
to pay license fees or royalties or both. These licenses may not be
available on acceptable terms, or at all. Even if we or our
collaborators were able to obtain a license, the rights may be
nonexclusive, which could result in our competitors gaining access
to the same intellectual property. Ultimately, we could be
prevented from commercializing a product, or be forced to cease
some aspect of our business operations, if, as a result of actual
or threatened patent infringement claims, we or our collaborators
are unable to enter into licenses on acceptable terms.
17
There
have been substantial litigation and other proceedings regarding
patent and other intellectual property rights in the pharmaceutical
and biotechnology industries. In addition to infringement claims
against us, we may become a party to other patent litigation and
other proceedings, including interference proceedings declared by
the USPTO and opposition proceedings in the European Patent Office,
regarding intellectual property rights with respect to our
products. Our products, after commercial launch, may become subject
to Paragraph IV certification under the Hatch-Waxman Act, thus
forcing us to initiate infringement proceedings against such
third-party filers. The cost to us of any patent litigation or
other proceeding, even if resolved in our favor, could be
substantial. Some of our competitors may be able to sustain the
costs of such litigation or proceedings more effectively than we
can because of their substantially greater financial resources.
Uncertainties resulting from the initiation and continuation of
patent litigation or other proceedings could have a material
adverse effect on our ability to compete in the marketplace. Patent
litigation and other proceedings may also absorb significant
management time.
Many of
our employees were previously employed at universities or other
biotechnology or pharmaceutical companies, including our
competitors or potential competitors. We try to ensure that our
employees do not use the proprietary information or know-how of
others in their work for us. We may, however, be subject to claims
that we or these employees have inadvertently or otherwise used or
disclosed intellectual property, trade secrets or other proprietary
information of any such employee’s former employer.
Litigation may be necessary to defend against these claims and,
even if we are successful in defending ourselves, could result in
substantial costs to us or be distracting to our management. If we
fail to defend any such claims, in addition to paying monetary
damages, we may lose valuable intellectual property rights or
personnel.
Product liability lawsuits against us could cause us to incur
substantial liabilities, limit sales of our existing products and
limit commercialization of any products that we may
develop.
Our
business exposes us to the risk of product liability claims that
are inherent in the manufacturing, distribution, and sale of
biotechnology products. We face an inherent risk of product
liability exposure related to the testing of our product candidates
in human clinical trials and an even greater risk when we
commercially sell any products. If we cannot successfully defend
ourselves against claims that our product candidates or products
caused injuries, we could incur substantial liabilities. Regardless
of merit or eventual outcome, liability claims may result
in:
–
decreased demand
for our products and any product candidates that we may
develop;
–
injury to our
reputation;
–
withdrawal of
clinical trial participants;
–
costs to defend the
related litigation;
–
substantial
monetary awards to trial participants or patients;
–
loss of revenue;
and
–
the inability to
commercialize any products that we may develop.
We
currently maintain limited product liability insurance coverage for
our clinical trials in the total amount of $3 million. However, our
profitability will be adversely affected by a successful product
liability claim in excess of our insurance coverage. There can be
no assurance that product liability insurance will be available in
the future or be available on reasonable terms.
Our business and operations would suffer in the event of computer
system failures, cyber-attacks or deficiencies in our
cyber-security.
Despite
the implementation of security measures, our internal computer
systems, and those of third parties on which we rely, are
vulnerable to damage from computer viruses, malware, natural
disasters, terrorism, war, telecommunication and electrical
failures, cyber-attacks or cyber-intrusions over the Internet,
attachments to emails, persons inside our organization, or persons
with access to systems inside our organization. The risk of a
security breach or disruption, particularly through cyber-attacks
or cyber intrusion, including by computer hackers, foreign
governments, and cyber terrorists, has generally increased as the
number, intensity and sophistication of attempted attacks and
intrusions from around the world have increased. If such an event
were to occur and cause interruptions in our operations, it could
result in a material disruption of our product development
programs. For example, the loss of clinical trial data from
completed or ongoing or planned clinical trials could result in
delays in our regulatory approval efforts and significantly
increase our costs to recover or reproduce the data. To the extent
that any disruption or security breach was to result in a loss of
or damage to our data or applications, or inappropriate
disclosure of confidential or proprietary information, we could
incur material legal claims and liability, and damage to our
reputation, and the further development of our product candidates
could be delayed.
18
Our
disclosure controls and procedures address cybersecurity and
include elements intended to ensure that there is an analysis of
potential disclosure obligations arising from security breaches. We
also maintain compliance programs to address the potential
applicability of restrictions against trading while in possession
of material, nonpublic information generally and in connection with
a cyber-security breach. However, a breakdown in existing controls and
procedures around our cyber-security environment may prevent us
from detecting, reporting or responding to cyber incidents
in a timely manner and could have a material adverse effect
on our financial position and value of our
stock.
Risks Related to Owning Our Common Stock
Our share price has been volatile and may continue to be volatile
which may subject us to securities class action litigation in the
future.
Our
stock price has in the past been, and is likely to be in the
future, volatile. The stock market in general has experienced
extreme volatility that has often been unrelated to the operating
performance of particular companies. As a result of this
volatility, our existing stockholders may not be able to sell their
stock at a favorable price. The market price for our common stock
may be influenced by many factors, including:
–
actual or
anticipated fluctuations in our financial condition and operating
results;
–
status and/or
results of our clinical trials;
–
status of ongoing
litigation;
–
results of clinical
trials of our competitors’ products;
–
regulatory actions
with respect to our products or our competitors’
products;
–
actions and
decisions by our collaborators or partners;
–
actual or
anticipated changes in our growth rate relative to our
competitors;
–
actual or
anticipated fluctuations in our competitors’ operating
results or changes in their growth rate;
–
competition from
existing products or new products that may emerge;
–
issuance of new or
updated research or reports by securities analysts;
–
fluctuations in the
valuation of companies perceived by investors to be comparable to
us;
–
share price and
volume fluctuations attributable to inconsistent trading volume
levels of our shares;
–
market conditions
for biopharmaceutical stocks in general;
–
status of our
search and selection of future management and leadership;
and
–
general economic
and market conditions.
On
December 31, 2018 the last closing price of our common stock was
$1.21, as compared to $9.80 as of December 31, 2017. During the
year ended December 31, 2018, the lowest closing price for our
common stock was $1.07 and the highest closing price was $10.60.
All stock prices are as adjusted for the 1-for-20 reverse stock
split effective on February 23, 2018.
Some
companies that have had volatile market prices for their securities
have had securities class action lawsuits filed against them. Such
lawsuits, should they be filed against us in the future, could
result in substantial costs and a diversion of management’s
attention and resources. This could have a material adverse effect
on our business, results of operations and financial
condition.
Our failure to maintain compliance with Nasdaq’s continued
listing requirements could result in the delisting of our common
stock.
Our
common stock is currently listed on The Nasdaq Capital Market. In
order to maintain this listing, we must satisfy minimum financial
and other requirements. In the past, we have received a
notification letter from Nasdaq indicating that we were not in
compliance with listing requirements because the minimum bid price
of our common stock closed below $1.00 per share for 30 consecutive
business days. As part of our plan to regain compliance with the
minimum bid price requirement, we effected a 1-for-20 reverse stock
split on February 23, 2018. If we fail to satisfy Nasdaq’s
listing requirements in the future, we expect to take actions to
regain compliance, but we can provide no assurance that any such
action would prevent our common stock from dropping below the
Nasdaq minimum bid price requirement or prevent future
non-compliance with Nasdaq’s listing requirements. If our
common stock is delisted from Nasdaq, the delisting could
substantially decrease trading in our common stock and adversely
affect the market liquidity of our common stock; adversely affect
our ability to obtain financing on acceptable terms, if at all; and
may result in the potential loss of confidence by investors,
suppliers, customers, and employees and fewer business development
opportunities. Additionally, the market price of our common stock
may decline further, and stockholders may lose some or all of their
investment.
19
We are likely to attempt to raise additional capital through
issuances of debt or equity securities, which may cause our stock
price to decline, dilute the ownership interests of our existing
stockholders, and/or limit our financial flexibility.
Historically
we have financed our operations through the issuance of equity
securities and debt financings, and we expect to continue to do so
for the foreseeable future. As of December 31, 2018, we had $12.4
million of cash and cash equivalents on hand. Based on our current
operating plans, we believe our existing cash and cash equivalents
are sufficient to continue to fund operations through the first
quarter of calendar year 2020. To the extent that we raise
additional funds by issuing equity securities, our stockholders may
experience significant dilution of their ownership interests. Debt
financing, if available, may involve restrictive covenants that
limit our financial flexibility or otherwise restrict our ability
to pursue our business strategies. Additionally, if we issue shares
of common stock, or securities convertible or exchangeable for
common stock, the market price of our existing common stock may
decline. There can be no assurance that we will be successful in
obtaining any additional capital resources in a timely manner, on
favorable terms, or at all.
We have issued in the past, and may issue in the future,
substantial amounts of instruments that are convertible into or
exercisable for common stock, and our existing stockholders may
face substantial dilution if such instruments are converted or
exercised.
As of
March 27, 2019, we
had outstanding preferred stock, warrants, options, securities
purchase agreements, and other instruments that are convertible
into or exercisable for an aggregate of 11,437,056 shares of our
common stock, which, if converted or exercised, would represent
approximately 186%
of our current outstanding common stock. These instruments carry a
wide variety of different terms and prices, and there can be no
assurance as to when or whether exercises of these instruments may
occur. If all or any substantial portion of these instruments are
converted or exercised, our existing stockholders may face
substantial dilution of their ownership
interests.
ITEM
1B—UNRESOLVED STAFF COMMENTS
Not
applicable.
ITEM
2—PROPERTIES
We own
no real property. We lease our principal executive office at ONE
Copley Parkway, Suite 490, Morrisville, North Carolina 27560. The
current rent is approximately $9,600 per month for the
facility.
ITEM
3—LEGAL PROCEEDINGS
We are
subject to litigation in the normal course of business, none of
which management believes will have a material adverse effect on
our Consolidated Financial Statements.
ITEM
4— MINE SAFETY DISCLOSURES
Not
applicable
PART II
ITEM
5—MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Market Information and Number of Stockholders
Our
common stock is listed on the Nasdaq Capital Market under the
symbol “TENX.”
As of
March 27, 2019,
there were 1,342
holders of record of our common stock. In addition, we believe that
a significant number of beneficial owners of our common stock hold
their shares in nominee or in “street name” accounts
through brokers, and any such beneficial owners are not included in
this number of holders of record.
Dividend Policy
Since
our inception, we have not paid dividends on our common stock. We
intend to retain any earnings for use in our business activities,
so it is not expected that any dividends on our common stock will
be declared and paid in the foreseeable future.
20
Repurchases of Common Stock
None.
Unregistered Sales of Equity Securities
During
the year ended December 31, 2018, we did not issue or sell any
unregistered securities not previously disclosed in a Quarterly
Report on Form 10-Q or in a Current Report on Form
8-K.
ITEM
6—SELECTED FINANCIAL DATA
Not
applicable.
ITEM
7—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis together with
the Consolidated Financial Statements and the related notes to
those statements included in “Item 8 – Consolidated
Financial Statements and Supplementary Data.” This discussion
contains forward-looking statements that involve risks and
uncertainties. As a result of many factors, such as those set forth
under “Risk Factors” and elsewhere in this Annual
Report on Form 10-K, our actual results may differ materially from
those anticipated in these forward-looking statements.
Results of operations- Comparison of the years ended December 31,
2018 and 2017
Overview
Strategy
We are
currently initiating a Phase 2 clinical trial of levosimendan in
North America for the treatment of patients with pulmonary
hypertension associated with heart failure with preserved ejection
fraction, or PH-HFpEF. PH-HFpEF is defined hemodynamically by
a pulmonary artery pressure, or mPAP, ≥25 mmHg, a pulmonary
capillary wedge pressure, or PCWP, >15 mmHg, and a diastolic
pressure gradient, or diastolic PAP – PCWP, >7mmHg.
Pulmonary hypertension in these patients initially develops from a
passive backward transmission of elevated filling pressures from
left-sided heart failure. These mechanical components of pulmonary
venous congestion may trigger pulmonary vasoconstriction, decreased
nitric oxide availability, increased endothelin expression,
desensitization to natriuretic peptide induced vasodilation, and
vascular remodeling. Finally, these changes often lead to
advanced pulmonary vascular disease, increased right ventricle, or
RV, afterload, and RV failure.
PH-HFpEF
is a common form of pulmonary hypertension with an estimated US
prevalence exceeding 1.5 million patients. Currently, no
pharmacologic therapies are approved for treatment of
PH-HFpEF. Despite the fact that many therapies have been
studied in PH-HFpEF patients, including therapies approved to treat
pulmonary arterial hypertension patients, no therapies have been
shown to be effective in treating PH-HFpEF patients.
Published
pre-clinical and clinical studies indicate that levosimendan may
provide important benefits to patients with pulmonary hypertension.
Data from these published trials indicate that levosimendan may
reduce pulmonary vascular resistance and improve important
cardiovascular hemodynamics such as reduced pulmonary capillary
wedge pressure in patients with pulmonary hypertension. While none
of these studies have focused specifically on PH-HFpEF patients,
the general hemodynamic improvements in these published studies of
various types of pulmonary hypertension provide an indication that
levosimendan may be beneficial in PH-HFpEF patients.
In
March 2018, we met with the United States Food and Drug
Administration, or FDA, to discuss development of levosimendan in
PH-HFpEF patients. The FDA agreed with our planned Phase 2 design,
patient entry criteria, and endpoints. The study may be conducted
under the existing investigational new drug application with no
additional nonclinical studies required to support full
development. The FDA recognized there were no approved drug
therapies to treat PH-HFpEF patients and acknowledged this provided
an opportunity for a limited Phase 3 clinical program. This topic
will be discussed further at the End-of-Phase 2 Meeting following
completion of the planned Phase 2 study in PH-HFpEF patients. We
activated the first of our expected 10-12 clinical sites in
November 2018 and we enrolled the first of 36 planned patients in
March 2019.
21
Additionally,
our Board of Directors continues to review strategic alternatives
focused on maximizing stockholder value. This process may not
result in any transaction and we do not intend to disclose
additional details unless and until we determine further disclosure
is appropriate or required.
Opportunities and Trends
As we focus on the development of our existing product candidate,
we also continue to position ourselves to execute upon licensing
and other partnering opportunities. To do so, we will need to
continue to maintain our strategic direction, manage and deploy our
available cash efficiently and strengthen our collaborative
research development and partner relationships.
During 2019, we are focused on the following
initiatives:
–
Working
with collaborators and partners to accelerate product development,
reduce our development costs, and broaden our commercialization
capabilities; and
–
Identifying
strategic alternatives, including, but not limited to, the
potential acquisition of additional products or product
candidates.
Financial Overview
General and Administrative Expenses
General
and administrative expenses consist primarily of compensation for
executive, finance, legal and administrative personnel, including
stock-based compensation. Other general and administrative expenses
include facility costs not otherwise included in research and
development expenses, legal and accounting services, other
professional services, and consulting fees. General and
administrative expenses and percentage changes for the years ended
December 31, 2018 and 2017, respectively, are as
follows:
|
|
Year ended December 31,
|
Increase/ (Decrease)
|
% Increase/ (Decrease)
|
|
|
|
2018
|
2017
|
|
|
|
Personnel
costs
|
$3,473,068
|
$3,315,303
|
$157,765
|
5%
|
|
Legal
and professional fees
|
1,386,299
|
1,737,574
|
(351,275)
|
(20)%
|
|
Other
costs
|
643,058
|
472,518
|
170,540
|
36%
|
|
Facilities
|
144,100
|
142,769
|
1,331
|
1%
|
|
Depreciation
and amortization
|
7,455
|
10,417
|
(2,962)
|
(28)%
|
Personnel costs:
Personnel
costs increased approximately $158,000 for the year ended December 31, 2018 compared to the
prior year. The increase was due primarily to an increase of
approximately $581,000 in the salaries and bonuses paid and an
increase of approximately $103,000 in the recognized expense for
the vesting of outstanding stock option awards, partially offset by
a decrease of approximately $526,000 in severance costs as compared
to the prior year.
Legal and professional fees:
Legal and professional fees consist of the costs incurred for legal
fees, accounting fees, consulting fees, recruiting costs and
investor relations services, as well as fees paid to our Board of
Directors. Legal and professional fees decreased
approximately $351,000 for the year
ended December 31, 2018 compared to the prior year. This
decrease was due primarily to decreases in costs incurred for
consulting, legal fees and fees paid to our Board of Directors,
partially offset by an increase in costs incurred for investor
relations services.
22
–
Costs associated
with investor relations and communication increased approximately
$69,000 in the current year. This increase was due primarily to
fees paid for investor conferences and presentations as well as
costs associated with our Special Meeting of Stockholders in the
current year which were not incurred in the prior
year.
–
Consulting fees
decreased approximately $209,000 in the current period. This
decrease was due primarily to the fees paid to third-party firms
for FDA and other regulatory submissions and costs incurred to
support the Board of Directors Strategic Alternatives Committee in
the prior year that were not incurred in the current
period.
–
Board of Directors
fees decreased in the current period by approximately $58,000. This
decrease was due primarily to a member of the Board of Directors
accepting the position of CEO in the current period, and a
reduction in the recognized expense for the vesting of stock
options awarded in the current year as compared to the recognized
expense for stock options awarded in the prior year.
–
Legal fees
decreased in the current year by approximately $142,000. This
decrease was due primarily to additional costs incurred in the
prior year related to our evaluation of strategic alternatives as
directed by our Board of
Directors which were not incurred in the current year,
partially offset by the costs incurred for the filings associated
with our Special Meeting of Stockholders as well as an increase in
costs associated with levosimendan intellectual property in the
current year as compared to the prior year.
Other costs:
Other costs include costs incurred for travel, supplies, insurance
and other miscellaneous charges. The approximately $171,000
increase in other costs for the year
ended December 31, 2018 was due primarily to an increase of
approximately $73,000 in franchise taxes paid, an increase of
approximately $66,000 in travel related costs, an increase of
approximately $18,000 in insurance costs incurred and approximately
$30,000 in relocation costs, partially offset by a reduction in
bank fees associated with the management of our investments in
marketable securities and other miscellaneous charges in the
current year as compared to the prior year.
Facilities:
Facilities
expenses include costs paid for rent and utilities at our corporate
headquarters in North Carolina. Facilities costs remained
relatively consistent for the years
ended December 31, 2018 and 2017.
Depreciation and Amortization:
Depreciation
and amortization costs remained relatively consistent for the years
ended December 31, 2018 and
2017.
Research and Development
Expenses
Research
and development expenses include, but are not limited to,
(i) expenses incurred under agreements with CROs and
investigative sites, which conduct our clinical trials and a
substantial portion of our pre-clinical studies; (ii) the cost
of supplying clinical trial materials; (iii) payments to
contract service organizations, as well as consultants;
(iv) employee-related expenses, which include salaries and
benefits; and (v) facilities, depreciation and other allocated
expenses, which include direct and allocated expenses for rent and
maintenance of facilities and equipment, depreciation of leasehold
improvements, equipment, and other supplies. All research and
development expenses are expensed as incurred. Research and
development expenses and percentage changes for the years ended
December 31, 2018 and 2017, respectively, are as
follows:
|
|
Year ended December 31,
|
Increase/ (Decrease)
|
% Increase/ (Decrease)
|
|
|
|
2018
|
2017
|
|
|
|
Clinical
and preclinical development
|
$1,022,035
|
$3,227,523
|
$(2,205,488)
|
(68)%
|
|
Personnel
costs
|
193,036
|
177,614
|
15,422
|
9%
|
|
Consulting
|
6,934
|
113,386
|
(106,452)
|
(94)%
|
|
Other
costs
|
15,734
|
5,590
|
10,144
|
181%
|
|
Depreciation
|
1,561
|
3,204
|
(1,643)
|
(51)%
|
23
Clinical and preclinical development:
Clinical
and preclinical development costs include the costs associated with
our development and clinical trials for levosimendan. The decrease
of approximately $2.2 million in clinical and preclinical
development costs for the year ended
December 31, 2018, compared to the prior year, was primarily
due to a decrease of approximately $3.3 million in expenditures for
CRO costs to manage the Phase 3 LEVO-CTS clinical trial, partially
offset by approximately $872,000 in costs incurred for our Phase 2
HELP clinical trial and approximately $103,000 in costs incurred
for nonclinical development of levosimendan.
Personnel costs:
Personnel
costs increased approximately $15,000 for the year ended December 31, 2018 compared to
the prior year. This increase was primarily due to an increase in
headcount in the current year to manage the Phase 2 HELP clinical
trial.
Consulting fees:
Consulting
fees decreased approximately $106,000 for the year ended December
31, 2018 compared to the prior year, primarily due to a decrease in
fees paid to third-party consulting firms for services provided for
report-writing and regulatory submissions in support of our Phase 3
LEVO-CTS clinical trial in the prior year which were not incurred
in the current year.
Other costs:
Other
costs increased approximately $10,000 for the year ended December 31, 2018 as compared to the
prior year due primarily to an increase in travel related costs in
the current year.
Depreciation:
Depreciation
costs remained relatively consistent for the years ended December 31, 2018 and
2017.
Other income, net
Other
income includes non-operating income and expense items not
otherwise recorded in our consolidated statement of operations and
comprehensive loss. These items include, but are not limited to,
revenue earned under sublease agreements for our California
facility, changes in the fair value of financial assets and
liabilities, interest income earned and fixed asset disposals.
Other income for the years ended
December 31, 2018 and 2017, respectively, is as
follows:
|
|
Year ended December 31,
|
(Increase)/ Decrease
|
|
|
|
2018
|
2017
|
|
|
Other
income, net
|
$(79,835)
|
$(366,216)
|
$286,381
|
Other
income decreased approximately $286,000 for the year ended December
31, 2018 compared to the prior year. This decrease is due primarily
to the reclassification of our Series C warrants into equity in the
current year and a reduction in the interest earned on our
investment in marketable securities as compared to the year ended
December 31, 2017.
During the year ended December 31, 2018, in accordance with ASU
2017-11, we did not record a derivative gain or loss for our Series
C warrants which compared to a derivative gain of approximately
$192,000 in the prior year. These charges to income are derived
from the free-standing Series C warrants which are measured at
their fair market value each period using the Monte Carlo
simulation model.
During
the year ended December 31,
2018, we recorded interest income of approximately $80,000
from our investments in marketable securities. This income is
derived from approximately $168,000 in bond interest received,
partially offset by approximately $91,000 in charges for
amortization of premiums paid and fair-value adjustments measured
each period, which compares to approximately $353,000 in bond
interest received, partially offset by approximately $188,000 in
charges for amortization of premiums paid and fair-value
adjustments during the year ended December 31, 2017.
24
Liquidity, capital resources and plan of operation
We have
incurred losses since our inception and as of December 31, 2018, we
had an accumulated deficit of approximately $228 million. We will
continue to incur losses until we generate sufficient revenue to
offset our expenses, and we anticipate that we will continue to
incur net losses for at least the next several years. We expect to
incur additional expenses related to our development and potential
commercialization of levosimendan for pulmonary hypertension and
other potential indications, as well as identifying and developing
other potential product candidates, and as a result, we will need
to generate significant net product sales, royalty and other
revenues to achieve profitability.
Liquidity
We have
financed our operations since September 1990 through the issuance
of debt and equity securities and loans from stockholders. We had
total current assets of $13,320,240 and $8,062,893 and working
capital of $11,754,571 and $7,054,053 as of December 31, 2018 and
December 31, 2017, respectively. Our practice is to invest excess
cash, where available, in short-term money market investment
instruments and high quality corporate and government
bonds.
Clinical and Preclinical Product Development
We are
currently initiating a Phase 2 clinical trial of levosimendan in
North America for the treatment of pulmonary hypertension. Our
ability to continue to pursue development of our product beyond the
first quarter of calendar year 2020 will depend on obtaining
license income or outside financial resources. There is no
assurance that we will obtain any license agreement or outside
financing or that we will otherwise succeed in obtaining any
necessary resources.
Financings
On December 7, 2018, we entered into an underwriting agreement with
Ladenburg Thalmann & Co. Inc., or the Underwriter,
pursuant to which we agreed to issue and sell 5,181,346 units, or
the Units, with each Unit consisting of (a) one share of
Series A convertible preferred stock, par value $0.0001 per
share, or the Series A Preferred Stock, (b) a two-year warrant to
purchase one share of common stock, exercisable at a price of
$1.93, or the Series 1 Warrants, and (c) a five-year warrant to
purchase one share of common stock, exercisable at a price of
$1.93, or the Series 2 Warrants and collectively with the Series 1
Warrants, the Warrants, with
each Unit to be offered at an offering price of $1.93 per Unit. The
initial conversion price of the Series A Preferred Stock is $1.93
per share. We agreed to pay the Underwriter an aggregate fee equal
to 8.0% of the gross proceeds received in the offering and to
reimburse the Underwriter for up to $95,000 of expenses incurred by
the Underwriter in connection with the offering. The offering
closed on December 11, 2018.
We offered the Units pursuant to a registration statement
on Form S-1, which was declared effective by the SEC on
December 7, 2018.
The net proceeds from the offering, after deducting Underwriter
fees and other direct offering expenses was approximately
$9 million. We currently intend to use the net proceeds
to further our clinical trials and efforts to obtain regulatory
approval of levosimendan, for research and development and for
general corporate purposes, including working capital and
potential acquisitions.
We have an effective shelf registration statement on Form S-3 on
file with the SEC that allows us to periodically offer and sell,
individually or in any combination, shares of common stock, shares
of preferred stock, debt securities, warrants to purchase shares of
common stock or preferred stock or of debt securities, and units
consisting of any combination of the foregoing types of securities,
up to a total of $75.0 million, but not to exceed one-third of our
public float in any 12-month period. As of March
27, 2019, our public float (which is the aggregate
market value of our outstanding common stock held by
non-affiliates) is $11.1 million. Our ability to issue securities under the
shelf registration statement is also subject to market
conditions.
25
Cash Flows
The
following table shows a summary of our cash flows for the periods
indicated:
|
|
Year ended December 31,
|
|
|
|
2018
|
2017
|
|
Net
cash used in operating activities
|
$(5,499,461)
|
$(12,140,517)
|
|
Net
cash provided by investing activities
|
7,354,798
|
3,749,372
|
|
Net
cash provided by financing activities
|
8,907,174
|
-
|
Net cash used in operating activities. Net cash used
in operating activities was $5.5 million for the year ended
December 31, 2018 compared to net cash used in operating activities
of $12.1 million for the year ended December 31, 2017. The decrease
in cash used for operating activities of $6.6 million was due
primarily to a reduction in the costs incurred for the Phase 3
clinic trials for LCOS, which were completed in the prior year,
partially offset by the costs incurred to initiate our Phase 2 HELP
clinical trial for PH-HFpEF patients in the current
year.
Net cash provided by investing activities. Net cash
provided by investing activities was $7.4 million for the year
ended December 31, 2018 compared to net cash provided by investing
activities of $3.7 million for the year ended December 31, 2017.
The increase in cash provided by investing activities was due
primarily to an increase in the sale of marketable securities in
the current year.
Net cash provided by financing activities. Net cash
provided by financing activities was $9.0 million for the year
ended December 31, 2018 compared to no net cash provided by
financing activities for the year ended December 31, 2017. The
increase in cash provided by financing activities resulted from the
closing of the offering of Series A Preferred Stock and Warrants as
described above in the current year.
Operating Capital and Capital Expenditure Requirements
Our
future capital requirements will depend on many factors that
include, but are not limited to the following:
–
the
initiation, progress, timing and completion of clinical trials for
our product candidate and potential product
candidates;
–
the
outcome, timing and cost of regulatory approvals and the regulatory
approval process;
–
delays
that may be caused by changing regulatory
requirements;
–
the
number of product candidates that we pursue;
–
the
costs involved in filing and prosecuting patent applications and
enforcing and defending patent claims;
–
the
timing and terms of future collaboration, licensing, consulting or
other arrangements that we may enter into;
–
the
cost and timing of establishing sales, marketing, manufacturing and
distribution capabilities;
–
the
cost of procuring clinical and commercial supplies of our product
candidates;
–
the
extent to which we acquire or invest in businesses, products or
technologies; and
–
the
possible costs of litigation.
26
Based
on our working capital at December 31, 2018 we believe we have
sufficient capital on hand to continue to fund operations through
the first quarter of calendar year 2020.
We will
need substantial additional capital in the future in order to
complete the regulatory approval and commercialization of
levosimendan and to fund the development and commercialization of
other future product candidates. Until we can generate a sufficient
amount of product revenue, if ever, we expect to finance future
cash needs through public or private equity offerings, debt
financings or corporate collaboration and licensing arrangements.
Such funding, if needed, may not be available on favorable terms,
if at all. In the event we are unable to obtain additional capital,
we may delay or reduce the scope of our current research and
development programs and other expenses. As a result of our
historical operating losses and expected future negative cash flows
from operations, we have concluded that there is substantial doubt
about our ability to continue as a going concern. Similarly, the
report of our independent registered public accounting firm on our
December 31, 2018 Consolidated Financial Statements includes an
explanatory paragraph indicating that there is substantial doubt
about our ability to continue as a going concern. Substantial doubt
about our ability to continue as a going concern may materially and
adversely affect the price per share of our common stock and make
it more difficult to obtain financing.
If
adequate funds are not available, we may also be required to
eliminate one or more of our clinical trials, delaying approval of
levosimendan or our commercialization efforts. To the extent that
we raise additional funds by issuing equity securities, our
stockholders may experience additional significant dilution, and
debt financing, if available, may involve restrictive covenants. To
the extent that we raise additional funds through collaboration and
licensing arrangements, it may be necessary to relinquish some
rights to our technologies or our product candidates or grant
licenses on terms that may not be favorable to us. We may seek to
access the public or private capital markets whenever conditions
are favorable, even if we do not have an immediate need for
additional capital at that time. We may also consider strategic
alternatives, including a sale of our company, merger, other
business combination or recapitalization.
Off-Balance Sheet Arrangements
Since
our inception, we have not engaged in any off-balance sheet
arrangements, including the use of structured finance, special
purpose entities or variable interest entities.
Summary of Critical Accounting Policies
Use of Estimates—The preparation of the accompanying
Consolidated Financial Statements in conformity with accounting
principles generally accepted in the United States of America, or
GAAP, requires management to make certain estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
Consolidated Financial Statements and reported amounts of expenses
during the reporting period. Actual results could differ from those
estimates.
Preclinical Study and Clinical Accruals—We estimate
our preclinical study and clinical trial expenses based on the
services received pursuant to contracts with several research
institutions and CROs that conduct and manage preclinical and
clinical trials on our behalf. The financial terms of the
agreements vary from contract to contract and may result in uneven
expenses and payment flows. Preclinical study and clinical trial
expenses include the following:
–
fees
paid to CROs in connection with clinical trials;
–
fees
paid to research institutions in conjunction with preclinical
research studies; and
–
fees
paid to contract manufacturers and service providers in connection
with the production and testing of active pharmaceutical
ingredients and drug materials for use in preclinical studies and
clinical trials.
Stock-Based Compensation—We account for stock-based
awards to employees in accordance with Accounting Standards
Codification, or ASC, 718 Compensation — Stock Compensation,
which provides for the use of the fair value-based method to
determine compensation for all arrangements where shares of stock
or equity instruments are issued for compensation. Fair values of
equity securities are determined by management based predominantly
on the trading price of our common stock. The values of these
awards are based upon their grant-date fair value. That cost is
recognized over the period during which the employee is required to
provide service in exchange for the reward.
27
We
account for equity instruments issued to non-employees in
accordance with ASC 505-50 Accounting for Equity Instruments That
Are Issued to Other Than Employees for Acquiring, or in Conjunction
with Selling, Goods or Services. Equity instruments issued to
non-employees are recorded at their fair value on the measurement
date and are subject to periodic adjustment as the underlying
equity instruments vest.
Fair market value accounting (derivative warrant
liability)—A significant
estimate that could have a material effect on net (loss) gain is
the fair market value accounting for our derivative
liability. Our derivative liability consists of free-standing
warrants that are recorded as liabilities due to the price
protection anti-dilution provisions in the event of a subsequent
equity sale. As a result, the warrants must be recorded as a
liability at fair value. The changes in fair value are posted
in other (income) expense. We utilize the Monte Carlo method
to estimate the fair value of our warrants. The three most
significant factors in the Monte Carlo method are (i) our
stock price, (ii) the volatility of our stock price and
(iii) the remaining term of the warrants.
As of January 1, 2018, we early adopted ASU 2017-11, which revised
the guidance for instruments with down round provisions. As such we
treat outstanding warrants as free-standing equity linked
instruments that will be recorded to equity in the Consolidated
Balance Sheet. During the year ending December 31, 2018, we
posted a cumulative adjustment to Accumulated Deficit of $158,409
and $192,082 to Additional Paid in Capital upon adoption of the new
accounting standard. See Note B to the financial statements for
further discussion.
Recent Accounting Pronouncements
In July
2017, the Financial Accounting
Standards Board, or the FASB, issued an accounting standard
that changes the classification analysis of certain equity-linked
financial instruments (or embedded features) with down round
features. When determining whether certain financial instruments
should be classified as liabilities or equity instruments, a down
round feature no longer precludes equity classification when
assessing whether the instrument is indexed to an entity’s
own stock. The amendments also clarify existing disclosure
requirements for equity-classified instruments. As a result, a
freestanding equity-linked financial instrument (or embedded
conversion option) no longer would be accounted for as a derivative
liability at fair value as a result of the existence of a down
round feature. The standard will be effective on January 1, 2019.
Early adoption is permitted, including adoption in an interim
period.
As of January 1, 2018, we early adopted this accounting standard,
which revised the guidance for our outstanding instruments with
down round provisions. As such we treat outstanding warrants as
free-standing equity linked instruments that will be recorded to
equity in the Consolidated Balance Sheet. Early adoption of this
accounting standard did not have a material impact on our financial
statements and related disclosures. See Note B to the financial
statements for further discussion.
In May 2014, the FASB issued an accounting standard that supersedes
nearly all existing revenue recognition guidance under GAAP. The
standard is principles-based and provides a five-step model to
determine when and how revenue is recognized. The core principle of
the standard is that revenue should be recognized when a company
transfers promised goods or services to customers in an amount that
reflects the consideration to which we expect to be entitled in
exchange for those goods or services. In March 2016, the FASB
issued a standard to clarify the implementation guidance on
principal versus agent considerations, and in April 2016, the FASB
issued a standard to clarify the implementation guidance on
identifying performance obligations and licensing. The standard also requires disclosure of
qualitative and quantitative information surrounding the amount,
nature, timing and uncertainty of revenues and cash flows arising
from contracts with customers. In July 2015, the FASB agreed to
defer the effective date of the standard from annual periods
beginning after December 15, 2016, to annual periods beginning
after December 15, 2017. Early application prior to the original
effective date was not permitted. The standard permits the use of
either the retrospective or cumulative effect transition method. We
adopted this standard on January 1, 2018, and the adoption of this
standard did not have a material impact on our consolidated
financial statements and related disclosures.
In February 2016, the FASB issued an accounting standard intended
to improve financial reporting regarding leasing transactions. The
standard will require us to recognize on the balance sheet the
assets and liabilities for the rights and obligations created by
all leased assets. The standard will also require us to provide
enhanced disclosures designed to enable users of financial
statements to understand the amount, timing, and uncertainty of
cash flows arising from all leases, operating and capital, with
lease terms greater than 12 months. The standard is effective for
financial statements beginning after December 15, 2018, and interim
periods within those annual periods.
28
We will
adopt and implement this standard on January 1, 2019, using
the required modified-retrospective approach as of the effective
date. We will elect the package of practical expedients permitted
under the transition guidance within the new standard, which among
other things, allows us to carryforward the historical lease
classification. We will make an accounting policy election to
account for leases with an initial term of 12 months or less
similar to existing guidance for operating leases today. We will
recognize those lease payments in the Consolidated Statements of
Operations and Comprehensive Loss on a straight-line basis over the
lease term. We are substantially complete with its implementation
to the new leasing standard and believes that the transition will
not have a material impact on its consolidated balance sheet. As
disclosed in Note E – Commitments and Contingencies, we have
approximately $300,000 in future minimum lease commitments as of
the year ended December 31, 2018. Upon adoption, our lease
liability will generally be based on the present value of such
payments and the related right-of-use asset will generally be based
on the lease liability.
We
estimate that adoption of the standard will result in the
recognition of right-of-use lease assets and related liabilities of
approximately $275,000. We do not believe that adoption of the
standard will materially affect consolidated net
income.
In June
2016, the FASB issued an
accounting standard that amends how credit losses are measured and
reported for certain financial instruments that are not accounted
for at fair value through net income. This standard will require
that credit losses be presented as an allowance rather than as a
write-down for available-for-sale debt securities and will be
effective for interim and annual reporting periods beginning
January 1, 2020, with early adoption permitted, but not
earlier than annual reporting periods beginning January 1,
2019. A modified retrospective approach is to be used for certain
parts of this guidance, while other parts of the guidance are to be
applied using a prospective approach. We do not believe adoption of this standard will
have a material impact on our consolidated financial statements and
related disclosures.
29
ITEM
7A—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Not applicable.
ITEM
8—CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
CONSOLIDATED BALANCE SHEETS
|
32
|
|
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
LOSS
|
33
|
|
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
|
34
|
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
35
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
36
|
30
TENAX THERAPEUTICS, INC.
Report of Independent Registered Public Accounting
Firm
To the
Board of Directors and
Stockholders
of Tenax Therapeutics, Inc.
Opinion on the Financial Statements
We have
audited the accompanying consolidated balance sheets of Tenax
Therapeutics, Inc. and Subsidiary (the “Company”) as of
December 31, 2018 and 2017, and the related consolidated statements
of operations and comprehensive loss, stockholders’ equity,
and cash flows for each of the years in the two-year period ended
December 31, 2018, and the related notes (collectively referred to
as the “financial statements”). In our opinion, the
financial statements present fairly, in all material respects, the
financial position of the Company as of December 31, 2018 and 2017,
and the results of its operations and its cash flows for each of
the years in the two-year period ended December 31, 2018, in
conformity with accounting principles generally accepted in the
United States of America.
Going Concern Uncertainty
The
accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note
A to the financial statements, the Company has an accumulated
deficit and has experienced negative operating cash flows for the
year ended December 31, 2018. These conditions raise substantial
doubt about the Company’s ability to continue as a going
concern. Management’s plans concerning these matters are
described in Note B to the financial statements. The financial
statements do not include any adjustments that might result from
the outcome of this uncertainty.
Basis for Opinion
These
financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a
public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (“PCAOB”)
and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting.
As part of our audits, we are required to obtain an understanding
of internal control over financial reporting, 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.
Our
audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis
for our opinion.
/s/
CHERRY BEKAERT LLP
We have
served as the Company’s auditor since 2009.
Raleigh,
North Carolina
April
1, 2019
31
TENAX THERAPEUTICS, INC.
CONSOLIDATED BALANCE SHEETS
|
|
December
31,
2018
|
December
31,
2017
|
|
ASSETS
|
|
|
|
Current
assets
|
|
|
|
Cash
and cash equivalents
|
$12,367,321
|
$1,604,810
|
|
Marketable
securities
|
494,633
|
6,122,400
|
|
Accounts
receivable
|
-
|
50,171
|
|
Prepaid
expenses
|
458,286
|
285,512
|
|
Total
current assets
|
13,320,240
|
8,062,893
|
|
Marketable
securities
|
-
|
1,809,428
|
|
Property
and equipment, net
|
8,525
|
9,945
|
|
Other
assets
|
8,435
|
8,435
|
|
Total
assets
|
$13,337,200
|
$9,890,701
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
Current
liabilities
|
|
|
|
Accounts
payable
|
$749,814
|
$611,861
|
|
Accrued
liabilities
|
815,855
|
363,306
|
|
Warrant
liabilities
|
-
|
33,673
|
|
Total
current liabilities
|
1,565,669
|
1,008,840
|
|
Total
liabilities
|
1,565,669
|
1,008,840
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies; see Note E
|
|
|
|
Stockholders'
equity
|
|
|
|
Preferred
stock, undesignated, authorized 4,818,654 and 10,000,000 shares;
respectively, See Note D.
|
|
|
|
Series
A Preferred stock, par value $.0001, issued 5,181,346 shares;
outstanding 2,854,593 and 0, respectively
|
285
|
-
|
|
Common stock, par
value $.0001 per share; authorized 400,000,000 shares; issued and
outstanding 3,792,249 and 1,411,840, respectively
|
379
|
141
|
|
Additional
paid-in capital
|
239,572,094
|
222,397,198
|
|
Accumulated
other comprehensive gain (loss)
|
516
|
(16,193)
|
|
Accumulated
deficit
|
(227,801,743)
|
(213,499,285)
|
|
Total
stockholders’ equity
|
11,771,531
|
8,881,861
|
|
Total
liabilities and stockholders' equity
|
$13,337,200
|
$9,890,701
|
The
accompanying notes are an integral part of these Consolidated
Financial Statements
32
TENAX THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
LOSS
|
|
Year
ended December 31,
|
|
|
|
2018
|
2017
|
|
Operating
expenses
|
|
|
|
General
and administrative
|
5,653,980
|
5,678,581
|
|
Research
and development
|
1,239,300
|
3,527,317
|
|
Total
operating expenses
|
6,893,280
|
9,205,898
|
|
|
|
|
|
Net
operating loss
|
6,893,280
|
9,205,898
|
|
|
|
|
|
Other
income
|
(79,835)
|
(366,216)
|
|
Deemed
dividend on preferred stock
|
7,330,604
|
-
|
|
Net
loss
|
$14,144,049
|
$8,839,682
|
|
|
|
|
|
Unrealized
gain on marketable securities
|
(16,709)
|
(2,525)
|
|
Total
comprehensive loss
|
$14,127,340
|
$8,837,157
|
|
|
|
|
|
Net
loss per share, basic and diluted
|
$(9.04)
|
$(6.27)
|
|
Weighted
average number of common shares outstanding, basic and
diluted
|
1,564,773
|
1,410,630
|
The
accompanying notes are an integral part of these Consolidated
Financial Statements
33
TENAX THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
|
|
Preferred
Stock
|
Common
Stock
|
|
|
|
|
||
|
|
Number
of Shares
|
Amount
|
Number
of Shares
|
Amount
|
Additional
paid-in capital
|
Accumulated
other comprehensive gain (loss)
|
Accumulated
deficit
|
Total
stockholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
December 31, 2016
|
-
|
$-
|
1,406,002
|
$2,812
|
$221,816,447
|
$(18,718)
|
$(204,659,603)
|
$17,140,938
|
|
Compensation on options
and restricted stock issued
|
|
|
5,838
|
12
|
578,068
|
|
|
578,080
|
|
Unrealized gain on
marketable securities
|
|
|
|
|
|
2,525
|
|
2,525
|
|
Par value adjustment
due to reverse stock split
|
|
|
|
(2,683)
|
2,683
|
|
|
-
|
|
Net
loss
|
|
|
|
|
|
|
(8,839,682)
|
(8,839,682)
|
|
Balance at
December 31, 2017
|
-
|
$-
|
1,411,840
|
$141
|
$222,397,198
|
$(16,193)
|
$(213,499,285)
|
$8,881,861
|
|
Preferred stock sold,
net of offering costs
|
5,181,346
|
518
|
|
|
8,906,656
|
|
|
8,907,174
|
|
Common stock issued for
convertible preferred stock
|
(2,326,753)
|
(233)
|
2,326,753
|
233
|
-
|
|
|
-
|
|
Compensation on options
and restricted stock issued
|
|
|
37,420
|
4
|
645,193
|
|
|
645,197
|
|
Common stock issued for
services rendered
|
|
|
10,241
|
1
|
100,361
|
|
|
100,362
|
|
Deemed dividend on
preferred stock
|
|
|
|
|
7,330,604
|
|
|
7,330,604
|
|
Unrealized gain on
marketable securities
|
|
|
|
|
|
16,709
|
|
16,709
|
|
Fractional shares of
common stock due to reverse stock split
|
|
|
5,995
|
|
|
|
|
-
|
|
Adoption of ASU
2017-11: Reclassification of equity related financial
instruments
|
|
|
|
|
192,082
|
|
(158,409)
|
33,673
|
|
Net
loss
|
|
|
|
|
|
|
(14,144,049)
|
(14,144,049)
|
|
Balance at
December 31, 2018
|
2,854,593
|
$285
|
3,792,249
|
$379
|
$239,572,094
|
$516
|
$(227,801,743)
|
$11,771,531
|
The
accompanying notes are an integral part of these Consolidated
Financial Statements
34
TENAX THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Year
ended December 31,
|
|
|
|
2018
|
2017
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
Net
Loss
|
$(14,144,049)
|
$(8,839,682)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities
|
|
|
|
Depreciation
and amortization
|
9,016
|
13,621
|
|
Loss
(Gain) on disposal of property and equipment
|
-
|
76
|
|
Issuance
and vesting of compensatory stock options and warrants
|
316,260
|
498,491
|
|
Issuance
of common stock for services rendered
|
100,362
|
-
|
|
Issuance
of common stock as compensation
|
190,083
|
79,589
|
|
Deemed
dividend on preferred stock
|
7,330,604
|
-
|
|
Change
in the fair value of warrants
|
-
|
(192,419)
|
|
Amortization
of premium on marketable securities
|
91,511
|
187,513
|
|
Changes
in operating assets and liabilities
|
|
|
|
Accounts
receivable, prepaid expenses and other assets
|
(122,605)
|
1,110,272
|
|
Accounts
payable and accrued liabilities
|
729,357
|
(4,997,978)
|
|
Net
cash used in operating activities
|
(5,499,461)
|
(12,140,517)
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
Purchase
of marketable securities
|
(493,822)
|
(299,172)
|
|
Sale
of marketable securities
|
7,856,215
|
4,053,081
|
|
Purchase
of property and equipment
|
(7,595)
|
(4,537)
|
|
Net
cash provided by investing activities
|
7,354,798
|
3,749,372
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
Proceeds
for issuance of convertible preferred stock, net of issuance
costs
|
8,907,174
|
-
|
|
Net
cash provided by financing activities
|
8,907,174
|
-
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
10,762,511
|
(8,391,145)
|
|
Cash
and cash equivalents, beginning of period
|
1,604,810
|
9,995,955
|
|
Cash
and cash equivalents, end of period
|
$12,367,321
|
$1,604,810
|
|
|
|
|
|
Non-cash
financing activity
|
|
|
|
Adoption
of ASU 2017-11: Reclassification of equity related financial
instruments
|
$33,673
|
$-
|
The
accompanying notes are an integral part of these Consolidated
Financial Statements
35
TENAX THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A—DESCRIPTION OF BUSINESS
Description
of Business—Tenax Therapeutics, Inc. (the
“Company”) was originally formed as a New Jersey
corporation in 1967 under the name Rudmer, David & Associates,
Inc., and subsequently changed its name to Synthetic Blood
International, Inc. On June 17, 2008, the stockholders of Synthetic
Blood International approved the Agreement and Plan of Merger dated
April 28, 2008, between Synthetic Blood International and Oxygen
Biotherapeutics, Inc., a Delaware corporation. Oxygen
Biotherapeutics was formed on April 17, 2008, by Synthetic Blood
International to participate in the merger for the purpose of
changing the state of domicile of Synthetic Blood International
from New Jersey to Delaware. Certificates of Merger were filed with
the states of New Jersey and Delaware, and the merger was effective
June 30, 2008. Under the Plan of Merger, Oxygen Biotherapeutics was
the surviving corporation and each share of Synthetic Blood
International common stock outstanding on June 30, 2008 was
converted to one share of Oxygen Biotherapeutics common stock. On
September 19, 2014, the Company changed its name to Tenax
Therapeutics, Inc.
On October 18, 2013, the Company created a wholly owned subsidiary,
Life Newco, Inc., a Delaware corporation (“Life
Newco”), to acquire certain assets of Phyxius Pharma, Inc., a
Delaware corporation (“Phyxius”), pursuant to an Asset
Purchase Agreement, dated October 21, 2013 (the “Asset
Purchase Agreement”), by and among the Company, Life Newco,
Phyxius and the stockholders of Phyxius (the “Phyxius
Stockholders”). On November 13, 2013, under the terms and
subject to the conditions of the Asset Purchase Agreement, Life
Newco acquired certain assets, including a license granting Life
Newco an exclusive, sublicenseable right to develop and
commercialize pharmaceutical products containing levosimendan, 2.5
mg/ml concentrate for solution for infusion / 5ml vial in the
United States and Canada.
Reverse Stock Split
The
Company initiated a 1-for-20 reverse stock split effective February
23, 2018 at 5:00 p.m. All shares and per share amounts in these
Consolidated Financial Statements and notes thereto have been
retroactively adjusted to give effect to the reverse stock
split.
Going Concern
Management
believes the accompanying financial statements have been prepared
in conformity with accounting principles generally accepted in the
United States of America (“GAAP”), which contemplate
continuation of the Company as a going concern. The Company has an
accumulated deficit of $227,801,743 and $213,499,285 at December
31, 2018 and 2017, respectively, and used cash in operations of
$5,499,461 and $12,140,517 during the years ended December 31, 2018
and 2017, respectively. The Company requires substantial additional
funds to complete clinical trials and pursue regulatory approvals.
Management is actively seeking additional sources of equity and/or
debt financing; however, there is no assurance that any additional
funding will be available.
In view
of the matters described above, recoverability of a major portion
of the recorded asset amounts shown in the accompanying December
31, 2018 balance sheet is dependent upon continued operations of
the Company, which in turn is dependent upon the Company’s
ability to meet its financing requirements on a continuing basis,
to maintain present financing, and to generate cash from future
operations. These factors, among others, raise substantial doubt
about the Company’s ability to continue as a going concern.
The financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts or
amounts and classification of liabilities that might be necessary
should the Company be unable to continue in existence.
NOTE B—SUMMARY OF CRITICAL ACCOUNTING POLICIES
Use of Estimates
The
preparation of the accompanying consolidated financial statements
in conformity with GAAP requires management to make certain
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements
and reported amounts of expenses during the reporting period.
Actual results could differ from those estimates.
36
On an
ongoing basis, management reviews its estimates to ensure that
these estimates appropriately reflect changes in the
Company’s business and new information as it becomes
available. If historical experience and other factors used by
management to make these estimates do not reasonably reflect future
activity, the Company’s results of operations and financial
position could be materially impacted.
Principles of Consolidation
The
accompanying consolidated financial statements include the accounts
and transactions of Tenax Therapeutics, Inc. and Life Newco, Inc. All material intercompany
transactions and balances have been eliminated in
consolidation.
Cash and Cash Equivalents
The
Company considers all highly liquid instruments with a maturity
date of three months or less, when acquired, to be cash
equivalents.
Cash Concentration Risk
The
Federal Deposit Insurance Corporation (the “FDIC”)
insurance limits are $250,000 per depositor per insured bank. The
Company had cash balances of $11,876,765 and $849,851 uninsured by
the FDIC as of December 31, 2018 and 2017,
respectively.
Liquidity and Capital Resources
The
Company has financed its operations since September 1990 through
the issuance of debt and equity securities and loans from
stockholders. The Company had total current assets of $13,320,240
and $8,062,893 and working capital of $11,754,571 and $7,054,053 as
of December 31, 2018 and 2017, respectively.
Cash
resources, including the fair value of the Company’s
available for sale marketable securities as of December 31, 2018
were approximately $12.9 million, compared to approximately $9.5
million as of December 31, 2017.
The
Company expects to continue to incur expenses related to
development of levosimendan for pulmonary hypertension and other
potential indications, as well as identifying and developing other
potential product candidates. Based on its resources at December
31, 2018, the Company believes that it has sufficient capital to
fund its planned operations through the first quarter of calendar
year 2020. However, the Company will need substantial additional
financing in order to fund its operations beyond such period and
thereafter until it can achieve profitability, if ever. The Company
depends on its ability to raise additional funds through various
potential sources, such as equity and debt financing, or to license
its product candidates to another pharmaceutical company. The
Company will continue to fund operations from cash on hand and
through sources of capital similar to those previously described.
The Company cannot assure that it will be able to secure such
additional financing, or if available, that it will be sufficient
to meet its needs.
To the
extent that the Company raises additional funds by issuing shares
of its common stock or other securities convertible or exchangeable
for shares of common stock, stockholders will experience dilution,
which may be significant. In the event the Company raises
additional capital through debt financings, the Company may incur
significant interest expense and become subject to covenants in the
related transaction documentation that may affect the manner in
which the Company conducts its business. To the extent that the
Company raises additional funds through collaboration and licensing
arrangements, it may be necessary to relinquish some rights to its
technologies or product candidates or grant licenses on terms that
may not be favorable to the Company. Any or all of the foregoing
may have a material adverse effect on the Company’s business
and financial performance.
Deferred financing costs
Deferred
financing costs represent legal, due diligence and other direct
costs incurred to raise capital or obtain debt. Direct costs
include only “out-of-pocket” or incremental costs
directly related to the effort, such as a finder’s fee and
accounting and legal fees. These costs will be capitalized if the
efforts are successful or expensed when unsuccessful. Indirect
costs are expensed as incurred. Deferred financing costs related to
debt are amortized over the life of the debt. Deferred financing
costs related to issuing equity are charged to Additional Paid-in
Capital.
37
Derivative financial instruments
The
Company does not use derivative instruments to hedge exposures to
cash flow, market or foreign currency risk. Terms of convertible
promissory note instruments and other convertible equity
instruments are reviewed to determine whether or not they contain
embedded derivative instruments that are required under Financial
Accounting Standards Board (“FASB”) Accounting
Standards Codification (“ASC”) 815, Derivatives and
Hedging (“ASC 815”) to be accounted for separately from
the host contract and recorded on the balance sheet at fair value.
The fair value of derivative liabilities, if any, is required to be
revalued at each reporting date, with corresponding changes in fair
value recorded in current period operating results.
Freestanding
warrants issued by the Company in connection with the issuance or
sale of debt and equity instruments are considered to be derivative
instruments and are evaluated and accounted for in accordance with
the provisions of ASC 815.
Preclinical Study and Clinical Accruals
The
Company estimates its preclinical study and clinical trial expenses
based on the services received pursuant to contracts with several
research institutions and contract research organizations
(“CROs”) that conduct and manage preclinical and
clinical trials on its behalf. The financial terms of the
agreements vary from contract to contract and may result in uneven
expenses and payment flows. Preclinical study and clinical trial
expenses include the following:
–
fees
paid to CROs in connection with clinical trials,
–
fees
paid to research institutions in conjunction with preclinical
research studies, and
–
fees
paid to contract manufacturers and service providers in connection
with the production and testing of active pharmaceutical
ingredients and drug materials for use in preclinical studies and
clinical trials.
Property and Equipment, Net
Property
and equipment are stated at cost, subject to adjustments for
impairment, less accumulated depreciation and amortization.
Depreciation and amortization are computed using the straight-line
method over the following estimated useful lives:
|
Laboratory
equipment
|
3
– 5 years
|
|
Office
equipment
|
5
years
|
|
Office
furniture and fixtures
|
7
years
|
|
Computer
equipment and software
|
3
years
|
|
Leasehold
improvements
|
Shorter
of useful life or remaining lease term
|
Maintenance
and repairs are charged to expense as incurred, and improvements to
leased facilities and equipment are capitalized.
Research and Development Costs
Research
and development costs include, but are not limited to, (i) expenses
incurred under agreements with CROs and investigative sites, which
conduct our clinical trials and a substantial portion of our
preclinical studies; (ii) the cost of manufacturing and supplying
clinical trial materials; (iii) payments to contract service
organizations, as well as consultants; (iv) employee-related
expenses, which include salaries and benefits; and (v) facilities,
depreciation and other allocated expenses, which include direct and
allocated expenses for rent and maintenance of facilities and
equipment, depreciation of leasehold improvements, equipment,
laboratory and other supplies. All research and development
expenses are expensed as incurred.
Income Taxes
Deferred
tax assets and liabilities are recorded for differences between the
financial statement and tax bases of the assets and liabilities
that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in
which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income
tax expense is recorded for the amount of income tax payable or
refundable for the period increased or decreased by the change in
deferred tax assets and liabilities during the period.
38
Stock-Based Compensation
Loss Per Share
Basic
loss per share, which excludes antidilutive securities, is computed
by dividing net loss by the weighted-average number of common
shares outstanding for that particular period. In contrast, diluted
loss per share considers the potential dilution that could occur
from other equity instruments that would increase the total number
of outstanding shares of common stock. Such amounts include shares
potentially issuable under outstanding options, restricted stock
and warrants.
The
following outstanding options, restricted stock grants, convertible
preferred shares and warrants were excluded from the computation of
basic and diluted net loss per share for the periods presented
because including them would have had an anti-dilutive
effect.
|
|
Year ended December 31,
|
|
|
|
2018
|
2017
|
|
Warrants
to purchase common stock
|
10,690,718
|
120,773
|
|
Convertible
preferred shares outstanding
|
2,854,593
|
-
|
|
Options
to purchase common stock
|
241,735
|
188,744
|
|
Restricted
stock grants
|
19,914
|
-
|
Operating Leases
The
Company maintains operating leases for its office and laboratory
facilities. The lease agreements may include rent escalation
clauses and tenant improvement allowances. The Company recognizes
scheduled rent increases on a straight-line basis over the lease
term beginning with the date the Company takes possession of the
leased space. Differences between rental expense and actual rental
payments are recorded as deferred rent liabilities and are included
in “Other liabilities” on the consolidated balance
sheets.
Recent Accounting Pronouncements
In July
2017, the FASB, issued an accounting standard that changes the
classification analysis of certain equity-linked financial
instruments (or embedded features) with down round features. When
determining whether certain financial instruments should be
classified as liabilities or equity instruments, a down round
feature no longer precludes equity classification when assessing
whether the instrument is indexed to an entity’s own stock.
The amendments also clarify existing disclosure requirements for
equity-classified instruments. As a result, a freestanding
equity-linked financial instrument (or embedded conversion option)
no longer would be accounted for as a derivative liability at fair
value as a result of the existence of a down round feature. The
standard will be effective on January 1, 2019. Early adoption is
permitted, including adoption in an interim period.
As of January 1, 2018, the Company early adopted this accounting
standard, which revised the guidance for its outstanding
instruments with down round provisions. As such the Company treats
outstanding warrants as free-standing equity linked instruments
that will be recorded to equity in the Consolidated Balance Sheet.
Early adoption of this accounting standard did not have a material
impact on the Company’s consolidated financial statements and
related disclosures. See below for further discussion.
In
August 2016, the FASB issued an accounting standard that clarifies
how companies present and classify certain cash receipts and cash
payments in the statement of cash flows where diversity in practice
exists. The standard is effective in the Company’s first
quarter of fiscal 2018. The adoption
of this standard did not have a material impact on its consolidated
financial statements and related disclosures.
39
In June
2016, the FASB issued an
accounting standard that amends how credit losses are measured and
reported for certain financial instruments that are not accounted
for at fair value through net income. This standard will require
that credit losses be presented as an allowance rather than as a
write-down for available-for-sale debt securities and will be
effective for interim and annual reporting periods beginning
January 1, 2020, with early adoption permitted, but not
earlier than annual reporting periods beginning January 1,
2019. A modified retrospective approach is to be used for certain
parts of this guidance, while other parts of the guidance are to be
applied using a prospective approach. The Company does not believe adoption of this
standard will have a material impact on its consolidated financial
statements and related disclosures.
In May 2014, the FASB issued an accounting standard that supersedes
nearly all existing revenue recognition guidance under GAAP. The
standard is principles-based and provides a five-step model to
determine when and how revenue is recognized. The core principle of
the standard is that revenue should be recognized when a company
transfers promised goods or services to customers in an amount that
reflects the consideration to which the Company expects to be
entitled in exchange for those goods or services. In March 2016,
the FASB issued a standard to clarify the implementation
guidance on principal versus agent considerations, and in April
2016, the FASB issued a standard to clarify the implementation
guidance on identifying performance obligations and licensing.
The standard also requires disclosure
of qualitative and quantitative information surrounding the amount,
nature, timing and uncertainty of revenues and cash flows arising
from contracts with customers. In July 2015, the FASB agreed to
defer the effective date of the standard from annual periods
beginning after December 15, 2016, to annual periods beginning
after December 15, 2017. Early application prior to the original
effective date was not permitted. The standard permits the use of
either the retrospective or cumulative effect transition
method.
The Company adopted this standard on January 1, 2018 and the
adoption of this standard did not have a material impact on its
consolidated financial statements and related
disclosures.
In February 2016, the FASB issued an accounting standard intended
to improve financial reporting regarding leasing transactions. The
standard will require the Company to recognize on the balance sheet
the assets and liabilities for the rights and obligations created
by all leased assets. The standard will also require it to provide
enhanced disclosures designed to enable users of financial
statements to understand the amount, timing, and uncertainty of
cash flows arising from all leases, operating and capital, with
lease terms greater than 12 months. The standard is effective for
financial statements beginning after December 15, 2018, and interim
periods within those annual periods.
The
Company will adopt and implement this standard on January 1,
2019, using the required modified-retrospective approach as of the
effective date. The Company will elect the package of practical
expedients permitted under the transition guidance within the new
standard, which among other things, allows it to carryforward the
historical lease classification. The Company will make an
accounting policy election to account for leases with an initial
term of 12 months or less similar to existing guidance for
operating leases today. The Company will recognize those lease
payments in the Consolidated Statements of Operations and
Comprehensive Loss on a straight-line basis over the lease term.
The Company is substantially complete with its implementation to
the new leasing standard and believes that the transition will not
have a material impact on its consolidated balance sheet. As
disclosed in Note E – Commitments and Contingencies, the
Company has approximately $300,000 in future minimum lease
commitments as of the year ended December 31, 2018. Upon
adoption, the Company’s lease liability will generally be
based on the present value of such payments and the related
right-of-use asset will generally be based on the lease
liability.
The
Company estimates that adoption of the standard will result in the
recognition of right-of-use lease assets and related liabilities of
approximately $275,000. The Company does not believe that adoption
of the standard will materially affect consolidated net
loss.
Fair Value
The
Company determines the fair value of its financial assets and
liabilities in accordance with the FASB ASC 820 Fair Value
Measurements. The Company’s balance sheet includes the
following financial instruments: cash and cash equivalents,
investments in marketable securities and warrant liabilities. The
Company considers the carrying amount of its cash and cash
equivalents and short-term notes payable to approximate fair value
due to the short-term nature of these instruments.
40
Accounting
for fair value measurements involves a single definition of fair
value, along with a conceptual framework to measure fair value,
with a fair value defined as “the price that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement
date.” The fair value measurement hierarchy consists of three
levels:
|
Level
one
|
Quoted
market prices in active markets for identical assets or
liabilities;
|
|
Level
two
|
Inputs
other than level one inputs that are either directly or indirectly
observable; and
|
|
Level
three
|
Unobservable
inputs developed using estimates and assumptions; which are
developed by the reporting entity and reflect those assumptions
that a market participant would use.
|
The
Company applies valuation techniques that (1) place greater
reliance on observable inputs and less reliance on unobservable
inputs and (2) are consistent with the market approach, the
income approach and/or the cost approach, and include enhanced
disclosures of fair value measurements in the Company’s
consolidated financial statements.
Investments in Marketable Securities
The
Company classifies all of its investments as available-for-sale.
Unrealized gains and losses on investments are recognized in
comprehensive income/(loss), unless an unrealized loss is
considered to be other than temporary, in which case the unrealized
loss is charged to operations. The Company periodically reviews its
investments for other than temporary declines in fair value below
cost basis and whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The
Company believes the individual unrealized losses represent
temporary declines primarily resulting from interest rate changes.
Realized gains and losses are reflected in other income (expense)
in the Consolidated Statements of Operations and Comprehensive Loss
and are determined using the specific identification method with
transactions recorded on a settlement date basis.
The
Company recognized a loss of $10,439 and a gain of $422 for the
years ended December 31, 2018 and 2017, respectively.
Investments
with original maturities at date of purchase beyond three months
and which mature at or less than 12 months from the balance sheet
date are classified as current. Investments with a maturity beyond
12 months from the balance sheet date are classified as long-term.
At December 31, 2018, the Company believes that the costs of its
investments are recoverable in all material respects.
The
following tables summarize the fair value of the Company’s
investments by type. The estimated fair value of the
Company’s fixed income investments is classified as Level 2
in the fair value hierarchy as defined in GAAP. These fair values
are obtained from independent pricing services which utilize Level
2 inputs:
|
|
December 31, 2018
|
||||
|
|
Amortized Cost
|
Accrued Interest
|
Gross Unrealized Gains
|
Gross Unrealized losses
|
Estimated Fair Value
|
|
Obligations
of U.S. Government and its agencies
|
$118,719
|
$379
|
$333
|
$-
|
$119,431
|
|
Corporate
debt securities
|
373,201
|
1,818
|
293
|
(110)
|
375,202
|
|
Total
investments
|
$491,920
|
$2,197
|
$626
|
$(110)
|
$494,633
|
41
The
following table summarizes the scheduled maturity for the
Company’s investments at December 31, 2018 and 2017,
respectively:
|
|
December 31,
2018
|
December 31,
2017
|
|
Maturing
in one year or less
|
$494,633
|
$6,122,400
|
|
Maturing
after one year through three years
|
-
|
1,809,428
|
|
Total
investments
|
$494,633
|
$7,931,828
|
Warrant liability
On July 23, 2013, the Company issued common stock warrants in
connection with the issuance of Series C 8% Preferred Stock (the
“Series C Warrants”). As part of the offering, the
Company issued 137,668 Series C Warrants at an exercise price of
$52.00 per share and contractual term of six years. On
November 11, 2013, the Company satisfied certain contractual
obligations pursuant to the Series C offering which caused
certain “down-round” price
protection clauses in the outstanding warrants to become effective
on that date. In accordance with ASC 815-40-35-9,
the Company reclassified these
warrants as a current liability and recorded a warrant liability of
$1,380,883, which represents the fair market value of the warrants
at that date. The initial fair value recorded as warrants within
stockholders’ equity of $233,036 was reversed and the
subsequent changes in fair value are recorded as a component of
other expense.
Financial
assets or liabilities are considered Level 3 when their fair
values are determined using pricing models, discounted cash flow
methodologies or similar techniques and at least one significant
model assumption or input is unobservable. The Series C Warrants
are measured using the Monte Carlo valuation model which is based,
in part, upon inputs for which there is little or no observable
market data, requiring the Company to develop its own
assumptions. The assumptions used in calculating the
estimated fair value of the Series C Warrants represent the
Company’s best estimates; however, these estimates involve
inherent uncertainties and the application of management
judgment. As a result, if factors change and different
assumptions are used, the warrant liabilities and the change in
estimated fair value of the Series C Warrants could be materially
different.
Inherent
in the Monte Carlo valuation model are assumptions related to
expected stock-price volatility, expected life, risk-free interest
rate and dividend yield. The Company estimates the volatility
of its common stock based on historical volatility that matches the
expected remaining life of the Series C Warrants. The
risk-free interest rate is based on the U.S. Treasury zero-coupon
yield curve on the grant date for a maturity similar to the
expected remaining life of the Series C Warrants. The
expected life of the Series C Warrants is assumed to be equivalent
to their remaining contractual term. The dividend rate is
based on the historical rate, which the Company anticipates
remaining at zero.
The
Monte Carlo model is used for the Series C Warrants to
appropriately value the potential future exercise price adjustments
triggered by the anti-dilution provisions. This requires Level 3
inputs which are based on the Company’s estimates of the
probability and timing of potential future financings and
fundamental transactions.
The Company recorded a gain of $192,419 for the change in fair
value as a component of other expense on the consolidated statement
of comprehensive loss for the year ended December 31,
2017.
The
other assumptions used by the Company are summarized in the
following table for the Series C Warrants that were outstanding as
of December 31, 2017:
|
Series C Warrants
|
December 31, 2017
|
|
Closing
stock price
|
$9.80
|
|
Expected
dividend rate
|
0%
|
|
Expected
stock price volatility
|
81.26%
|
|
Risk-free
interest rate
|
1.83%
|
|
Expected
life (years)
|
1.56
|
42
As of
January 1, 2018, the Company early adopted ASU 2017-11, which
revised the guidance for instruments with down round provisions. As
such the Company treats outstanding warrants as free-standing
equity linked instruments that will be recorded to equity in the
Consolidated Balance Sheet.
In
accordance with the guidance presented in ASU 2017-11, the fair
value of the derivative liability balance as of December 31, 2017
of $33,673 was reclassified by means of a cumulative-effect
adjustment to equity as of January 1, 2018.
The
table below illustrates the impact of the adoption of ASU 2017-11
on equity:
|
|
Preferred stock
|
Common stock
|
Additional paid in capital
|
Accumulated other comprensive loss / gain
|
Accumulated deficit
|
Totoal stockholder's deficit
|
|
Balance
- December 31, 2017
|
$-
|
$141
|
$222,397,198
|
$(16,193)
|
$(213,499,285)
|
$8,881,861
|
|
|
|
|
|
|
|
|
|
Balance
- December 31, 2018 before effect of ASU
2017-11
|
285
|
379
|
239,380,012
|
516
|
(227,643,334)
|
11,737,858
|
|
Effect
of ASU 2017-11
|
-
|
-
|
192,082
|
-
|
(158,409)
|
33,673
|
|
Balance
- December 31, 2018
|
$285
|
$379
|
$239,572,094
|
$516
|
$(227,801,743)
|
$11,771,531
|
As of
December 31, 2018, 12,035 Series C Warrants were
outstanding.
The
following tables summarize information regarding assets and
liabilities measured at fair value on a recurring basis as of
December 31, 2018 and December 31, 2017:
|
|
|
Fair Value Measurements at Reporting Date Using
|
||
|
|
Balance as of December 31, 2018
|
Quoted prices in Active Markets for Identical Securities
(Level 1)
|
Significant Other Observable Inputs (Level 2)
|
Significant Unobservable Inputs (Level 3)
|
|
Current
Assets
|
|
|
|
|
|
Cash
and cash equivalents
|
$12,367,321
|
$12,367,321
|
$-
|
$-
|
|
Marketable
securities
|
$494,633
|
$-
|
$494,633
|
$-
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
||
|
|
Balance as of December 31, 2017
|
Quoted prices in Active Markets for Identical Securities
(Level 1)
|
Significant Other Observable Inputs (Level 2)
|
Significant Unobservable Inputs (Level 3)
|
|
Current
Assets
|
|
|
|
|
|
Cash
and cash equivalents
|
$1,604,810
|
$1,604,810
|
$-
|
$-
|
|
Marketable
securities
|
$6,122,400
|
$-
|
$6,122,400
|
$-
|
|
|
|
|
|
|
|
Long-term
Assets
|
|
|
|
|
|
Marketable
securities
|
$1,809,428
|
$-
|
$1,809,428
|
$-
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
Warrant
liabilities
|
$33,673
|
$-
|
$-
|
$33,673
|
There
were no significant transfers between levels during the year ended
December 31, 2018.
43
NOTE C—BALANCE SHEET COMPONENTS
Property and equipment, net
Property
and equipment consist of the following:
|
|
December 31,
2018
|
December 31,
2017
|
|
Laboratory
equipment
|
$354,861
|
$354,861
|
|
Computer
equipment and software
|
96,593
|
88,998
|
|
Office
furniture and fixtures
|
130,192
|
130,192
|
|
|
581,646
|
574,051
|
|
Less:
Accumulated depreciation
|
(573,121)
|
(564,106)
|
|
|
$8,525
|
$9,945
|
Depreciation
and amortization expense were $9,015 and $13,621 for the years
ended December 31, 2018 and 2017, respectively.
Accrued liabilities
Accrued
liabilities consist of the following:
|
|
December 31,
2018
|
December 31,
2017
|
|
Operating
costs
|
$244,456
|
$39,252
|
|
Employee
related
|
571,399
|
324,054
|
|
|
$815,855
|
$363,306
|
NOTE D—STOCKHOLDERS’ EQUITY
Preferred Stock
Under
the Company’s Certificate of Incorporation, the Board of
Directors is authorized, without further stockholder action, to
provide for the issuance of up to 10,000,000 shares of preferred
stock, par value $0.0001 per share, in one or more series, to
establish from time to time the number of shares to be included in
each such series, and to fix the designation, powers, preferences
and rights of the shares of each such series and the
qualifications, limitations and restrictions thereof.
Series A Stock
On
December 11, 2018, the Company closed its underwritten offering of
5,181,346 units for net proceeds of approximately $9 million. Each
unit consists of (a) one share of the Company’s Series A
convertible preferred stock, par value $0.0001 per share (the
“Series A Stock”), (b) a two-year warrant to purchase
one share of common stock at an exercise price of $1.93 (the
“Series 1 Warrants”), and (c) a five-year warrant to
purchase one share of common stock at an exercise price of $1.93
(the “Series 2 Warrants”). In accordance with ASC
480, the estimated fair-value of $1,800,016 for the beneficial
conversion feature was recognized as a deemed dividend on the
Series A Stock during the year ended December 31,
2018.
The
table below sets forth a summary of the designation, powers,
preferences and rights of the Series A Stock.
|
Conversion
|
Subject to the ownership limitations described below, the Series A
Stock is convertible at any time at the option of the holder into
shares of the Company’s common stock at a conversion ratio
determined by dividing the stated value of the Series A Stock by a
conversion price of $1.93 per share. The conversion price is
subject to adjustment in the case of stock splits, stock dividends,
combinations of shares and similar recapitalization
transactions.
|
44
|
|
Until such time that 85% of the aggregate number of shares of
Series A Stock issued to all holders on the original issue date
have been converted to common stock, the Series A Stock has full
ratchet price-based anti-dilution protection, subject to customary
carve-outs, in the event of a down-round financing at a price per
share below the conversion price of the Series A Stock. If during
any 30 consecutive trading days (a “Measurement
Period”) the volume weighted average price of the
Company’s common stock exceeds 300% of the then-effective
conversion price of the Series A Stock and the daily dollar trading
volume for each trading day during such period exceeds $175,000,
the anti-dilution protection in the Series A Stock will expire and
cease to apply. Additionally, subject to certain exceptions, at any
time after the issuance of the Series A Stock, and subject to the
beneficial ownership limitations described below, the Company has
the right to cause each holder of the Series A Stock to convert all
or part of such holder’s Series A Stock in the event that (i)
the volume weighted average price of the Company’s common
stock for any Measurement Period exceeds 300% of the initial
conversion price of the Series A Stock (subject to adjustment for
forward and reverse stock splits, recapitalizations, stock
dividends and similar transactions), (ii) the average daily trading
volume for such Measurement Period exceeds $175,000 per trading day
and (iii) the holder is not in possession of any information that
constitutes or might constitute, material non-public information
which was provided by the Company.
The
Company will not affect any conversion of the Series A Stock, nor shall a holder convert
its shares of Series A Stock,
to the extent that such conversion would cause the holder to have
acquired, through conversion of the Series A Stock or otherwise, beneficial
ownership of a number shares of common stock in excess of 4.99%
(or, at the election of the holder prior to the issuance of any
shares of Series A Stock, 9.99%) of the common stock outstanding
after giving effect to such exercise.
|
|
Dividends
|
In the event the Company pays dividends on its shares of common
stock, the holders of the Series A Stock will be entitled to
receive dividends on shares of Series A Stock equal, on an
as-if-converted basis, to and in the same form as paid on the
common stock. No other dividends will be paid on the shares of
Series A Stock.
|
|
Liquidation
|
Upon any liquidation, dissolution or winding up of the Company
after payment or provision for payment of debts and other
liabilities of the Company, the holders of Series A Stock shall be
entitled to be paid out of the assets of the Company available for
distribution to its stockholders an amount equal to the amount that
a holder of common stock would receive if the Series A Stock were
fully converted to common stock, which amounts will be paid pari
passu with all holders of common stock.
|
|
Voting rights
|
Shares
of Series A Stock will generally have no voting rights, except as
required by law and except that the consent of holders of a
majority of the then outstanding Series A Stock will be required to
amend the terms of the Series A Stock or to take other action that
adversely affects the rights of the holders of Series A
Stock.
|
During
the year ended December 31, 2018, 2,326,753 shares of Series A Stock were converted into
2,326,753 shares of common stock. As of December 31, 2018, there were
2,854,593 shares of Series A
Stock outstanding.
Common Stock
The
Company’s Certificate of Incorporation authorizes it to issue
400,000,000 shares of $0.0001 par value common stock. As of
December 31, 2018, and December 31, 2017 there were 3,792,249 and
1,411,840 shares of common stock issued and outstanding,
respectively.
Warrants
Series 1 Warrants
As part of the offering of Series A Stock, the Company issued
5,181,346 Series 1 Warrants at an exercise price of $1.93 per share
and contractual term of two years. In accordance with ASC
480, these warrants are classified as equity and their relative
fair-value of $2,621,810 was recognized as a deemed dividend on the
Series A Stock during the year ended December 31, 2018. The estimated fair value is determined using
the Black-Scholes Option Pricing Model which is based on the value of the underlying
common stock at the valuation measurement date, the remaining
contractual term of the warrants, risk-free interest rates,
expected dividends and expected volatility of the price of the
underlying common stock.
45
Series 2 Warrants
As part of the offering of Series A Stock, the Company issued
5,181,346 Series 2 Warrants at an exercise price of $1.93 per share
and contractual term of five years. In accordance with ASC
480, these warrants are classified as equity and their relative
fair-value of $2,908,778 was recognized as a deemed dividend on the
Series A Stock during the year ended December 31, 2018. The estimated fair value is determined using
the Black-Scholes Option Pricing Model which is based on the value of the underlying
common stock at the valuation measurement date, the remaining
contractual term of the warrants, risk-free interest rates,
expected dividends and expected volatility of the price of the
underlying common stock.
Warrants Issued for Services
In connection with the offering of Series A Stock described above,
the Company entered into an Underwriting Agreement (the
“Underwriting Agreement”) with Ladenburg Thalmann &
Co. Inc. (the “Underwriter”) pursuant to which, on
December 7, 2018, the Company issued to the Underwriter a warrant
to purchase 207,253 shares of common stock at an exercise price of
$2.4125 per share and contractual term of five years. In
accordance with ASC 815, this warrant is classified as equity and
its relative fair-value of $183,433 was recognized as additional
paid in capital during the year ended December 31, 2018. The estimated fair value is determined using
the Black-Scholes Option Pricing Model which is based on the value of the underlying
common stock at the valuation measurement date, the remaining
contractual term of the warrant, risk-free interest rates, expected
dividends and expected volatility of the price of the underlying
common stock.
On
November 11, 2014, the Company issued common stock warrants in
connection with the execution of a service agreement for investor
relations and corporate communications. As part of the compensation
under the agreement, the Company issued up to 8,750 warrants at an
exercise price of $80.00 per share and contractual term of five
years. The warrants were initially exercisable for 1,250 shares of
common stock, and the number of shares of common stock exercisable
under these warrants would be automatically increased by 2,500 upon
the first occurrence of market price goals of $120.00, $160.00 and
$200.00, respectively, during the 18-month period beginning on the
effective date. Effective May 11, 2016, the additional 7,500
warrants were no longer exercisable as none of the market price
goals were achieved. In accordance with ASC 815, these warrants are
classified as equity and their estimated fair-value of $478,115 was
recorded as an operating expense in the consolidated statement of
operations and as additional paid in capital during the fiscal year
ended April 30, 2015. The estimated fair value was determined using
the Black-Scholes Option Pricing Model which is based on the value
of the underlying common stock at the valuation measurement date,
the remaining contractual term of the warrants, risk-free interest
rates, expected dividends and expected volatility of the price of
the underlying common stock. As of December 31, 2018, 1,250 of
these warrants are outstanding.
Series D Warrants
On August 22, 2013, the Company closed its private placement of an
aggregate of $4.6 million shares of the Company’s Series D
Stock to OXBT Fund. In connection with the purchase of
shares of Series D Stock, OXBT Fund received the Series D Warrant
to purchase 117,949 shares of common stock at an exercise price
equal to $52.00 and contractual term of six years. In
accordance with ASC 815, these warrants are classified as equity
and their relative fair-value of $1,531,167 was recognized as a
deemed dividend on the Series D Stock during the prior fiscal year
ended April 30, 2014. The estimated
fair value is determined using the Black-Scholes Option
Pricing Model which is based on the
value of the underlying common stock at the valuation measurement
date, the remaining contractual term of the warrants, risk-free
interest rates, expected dividends and expected volatility of the
price of the underlying common
stock.
The Series D Warrant is
exercisable beginning on the date of issuance and expires on August
22, 2019. The exercise price and the number of shares
issuable upon exercise of Series D Warrant is subject to appropriate adjustment in
the event of recapitalization events, stock dividends, stock
splits, stock combinations, reclassifications, reorganizations or
similar events affecting the Company’s common stock, and also
upon any distributions of assets, including cash, stock or other
property to the Company’s stockholders. In
addition, if stockholder approval for the transaction is obtained,
the Series D Warrant will be
subject to anti-dilution provisions until such time that for 25
trading days during any 30 consecutive trading day period, the
volume weighted average price of the Company’s common stock
exceeds $130.00 and the daily dollar trading volume exceeds
$350,000 per trading day.
46
The Series D Warrant was issued
and sold without registration under the Securities Act in reliance
on the exemptions provided by Section 4(a)(2) of the Securities Act
and/or Regulation D promulgated thereunder and in reliance on
similar exemptions under applicable state
laws. Accordingly, OXBT Fund may exercise the Series D
Warrant and sell the Series D Stock and underlying shares only pursuant to an
effective registration statement under the Securities Act covering
the resale of those securities, an exemption under Rule 144 under
the Securities Act or another applicable exemption under the
Securities Act.
As of
December 31, 2018, 107,488 Series D Warrants are
outstanding.
Series C Warrants
On July 23, 2013, as part of the offering of Series C Stock, the
Company issued 137,668 Series C Warrants at an exercise price of
$52.00 per share and contractual term of six years. In
accordance with ASC 815, these warrants are classified as equity
and their relative fair-value of $1,867,991 was recognized as a
deemed dividend on the Series C Stock during the prior fiscal year
ended April 30, 2014. The estimated
fair value is determined using the Black-Scholes Option
Pricing Model which is based on the
value of the underlying common stock at the valuation measurement
date, the remaining contractual term of the warrants, risk-free
interest rates, expected dividends and expected volatility of the
price of the underlying common stock.
As of
December 31, 2018, 12,035 Series C Warrants are
outstanding.
In accordance with ASC 815-40-35-8, the Company reassessed the
classification of the remaining Series C Warrants. On
November 11, 2013, the Company satisfied certain contractual
obligations pursuant to the Series C offering which caused
certain “down-round” price
protection clauses in the outstanding warrants to become effective
on that date. In accordance with ASC 815-40-35-9, on November 11,
2013, the Company reclassified
these warrants as a current liability and recorded a warrant
liability of $1,082,941 which represented the fair market value of
the warrants at that date. The initial fair value recorded as
warrants within stockholders’ equity of $233,036 was reversed
and the change in fair value was recorded as a component of other
expense.
As of
January 1, 2018, the Company early adopted ASU 2017-11, which
revised the guidance for instruments with down round provisions. As
such the Company treats outstanding warrants as free-standing
equity linked instruments that will be recorded to equity in the
Consolidated Balance Sheet.
In
accordance with the guidance presented in the ASU, the fair value
of the derivative liability balance as of December 31, 2017 of
$33,673 was reclassified by means of a cumulative-effect adjustment
to equity as of January 1, 2018. See Note B above for further
discussion.
As of
December 31, 2018, the Company has 10,690,718 warrants outstanding.
During the years ended December 31, 2018 and 2017, no warrants were
exercised.
The
following table summarizes the Company’s warrant activity for
the year ended December 31, 2018 and December 31,
2017:
|
|
Warrants
|
Weighted Average
Exercise Price
|
|
Outstanding
at December 31, 2016
|
120,794
|
$52.71
|
|
Issued
|
-
|
-
|
|
Exercised
|
-
|
-
|
|
Forfeited
|
(21)
|
2,460.00
|
|
Outstanding
at December 31, 2017
|
120,773
|
$52.29
|
|
Issued
|
10,569,945
|
1.94
|
|
Exercised
|
-
|
-
|
|
Forfeited
|
-
|
-
|
|
Outstanding
at December 31, 2018
|
10,690,718
|
$2.45
|
47
Stock Options
The
following table summarizes all options outstanding as of December
31, 2018:
|
|
Options Outstanding at December 31, 2018
|
Options Exercisable and Vested at December 31, 2018
|
||
|
Exercise Price
|
Number of Options
|
Weighted Average Remaining Contractual Life (Years)
|
Number of Options
|
Weighted Average Exercise Price
|
|
$6.10 to $11.20
|
66,000
|
9.2
|
5,500
|
$10.87
|
|
$41.40 to $96.40
|
40,251
|
5.3
|
30,503
|
$60.94
|
|
$113.00 to $860.00
|
135,413
|
1.3
|
68,423
|
$114.68
|
|
$1,012.00 to $2,580.00
|
71
|
1.1
|
71
|
$1,798.59
|
|
|
241,735
|
4.4
|
104,497
|
$94.67
|
The
following table summarizes options outstanding that have vested and
are expected to vest based on options outstanding as of December
31, 2018:
|
|
Number of Option Shares
|
Weighted Average Exercise Price
|
Aggregate Intrinsic Value (1)
|
Weighted Average Remaining Contractual Life (Years)
|
|
Vested
|
104,497
|
$94.67
|
$-
|
3.3
|
|
Vested
and expected to vest
|
226,640
|
$76.56
|
$-
|
4.4
|
|
(1)
|
Amount
represents the difference between the exercise price and $1.21, the
closing price of Tenax Therapeutics’ stock on December 31,
2018, as reported on the Nasdaq Capital Market, for all
in-the-money options outstanding.
|
2016 Stock Incentive Plan
In June
2016, the Company adopted the 2016 Stock Incentive Plan (the
“2016 Plan”). Under the 2016 Plan, with the
approval of the Compensation Committee of the Board of Directors,
the Company may grant stock options, stock appreciation rights,
restricted stock, restricted stock units, performance shares,
performance units, cash-based awards or other stock-based awards.
On June 16, 2016, the Company’s stockholders approved the
2016 Plan and authorized for issuance under the 2016 Plan a total
of 150,000 shares of common stock. As of December 31, 2018, the
Company had 100,000 shares of common stock available for grant
under the 2016 Plan.
The
following table summarizes the shares available for grant under the
Plan for the years ended December 31, 2018:
|
|
Shares Available for Grant
|
|
Balances, at December 31, 2017
|
150,000
|
|
Options
granted
|
(50,000)
|
|
Balances, at December 31, 2018
|
100,000
|
|
|
|
48
2016 Plan Stock Options
Stock
options granted under the 2016 Plan may be either incentive stock
options (“ISOs”), or nonqualified stock options
(“NSOs”). ISOs may be granted only to employees. NSOs
may be granted to employees, consultants and directors. Stock
options under the 2016 Plan may be granted with a term of up to ten
years and at prices no less than fair market value at the time of
grant. Stock options granted generally vest over three to four
years.
The following table summarizes the outstanding stock options under
the 2016 Plan for the year ended December 31,
2018:
|
|
Outstanding
Options
|
|
|
|
|
Number of
Shares
|
Weighted Average Exercise Price
|
Aggregate Intrinsic Value
|
|
Balances at December 31, 2017
|
-
|
$-
|
|
|
Options
granted
|
50,000
|
$6.10
|
|
|
Options
cancelled
|
-
|
$-
|
|
|
Balances at December 31, 2018
|
50,000
|
$6.10
|
$-(1)
|
|
(1)
|
Amount
represents the difference between the exercise price and $1.21, the
closing price of Tenax Therapeutics’ stock on December 31,
2018, as reported on the Nasdaq Capital Market, for all
in-the-money options outstanding.
|
The
Company chose the “straight-line” attribution method
for allocating compensation costs of each stock option over the
requisite service period using the Black-Scholes Option Pricing
Model to calculate the grant date fair value.
The
Company used the following assumptions to estimate the fair value
of options granted under the 2016 Plan for the years ended December
31, 2018 and 2017:
|
|
|
For the year ended December 31,
|
||
|
|
|
2018
|
|
2017
|
|
Risk-free interest rate (weighted average)
|
|
2.85%
|
|
0.00%
|
|
Expected volatility (weighted average)
|
|
102.37%
|
|
0.00%
|
|
Expected term (in years)
|
|
7
|
|
0
|
|
Expected dividend yield
|
|
0.00%
|
|
0.00%
|
|
Risk-Free Interest Rate
|
The
risk-free interest rate assumption was based on U.S. Treasury
instruments with a term that is consistent with the expected term
of the Company’s stock options.
|
|
Expected Volatility
|
The
expected stock price volatility for the Company’s common
stock was determined by examining the historical volatility and
trading history for its common stock over a term consistent with
the expected term of its options.
|
|
Expected Term
|
The
expected term of stock options represents the weighted average
period the stock options are expected to remain outstanding. It was
calculated based on the Company’s historical experience with
its stock option grants.
|
|
Expected Dividend Yield
|
The
expected dividend yield of 0% is based on the Company’s
history and expectation of dividend payouts. The Company has not
paid and does not anticipate paying any dividends in the near
future.
|
49
|
Forfeitures
|
As
stock-based compensation expense recognized in the statement of
operations for the years ended December 31, 2018 and 2017 is based
on awards ultimately expected to vest, it has been reduced for
estimated forfeitures. ASC 718 requires forfeitures to be estimated
at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates.
Forfeitures were estimated based on the Company’s historical
experience.
|
The
weighted-average grant-date fair value of options granted during
the year ended December 31, 2018 was $5.20.
The Company recorded compensation expense for these stock options
grants of $89,194 and $0 for the years ended December 31, 2018 and
2017, respectively.
As of
December 31, 2018, there were unrecognized compensation costs of
approximately $156,000 related to non-vested stock option awards
under the 2016 Plan that will be recognized on a straight-line
basis over the weighted average remaining vesting period of 1.92
years.
1999 Amended Stock Plan
In
October 2000, the Company adopted the 1999 Stock Plan, as amended
and restated on June 17, 2008 (the “1999 Plan”).
Under the 1999 Plan, with the approval of the Compensation
Committee of the Board of Directors, the Company could grant stock
options, restricted stock, stock appreciation rights and new shares
of common stock upon exercise of stock options. On March 13, 2014,
the Company’s stockholders approved an amendment to the 1999
Plan which increased the number of shares of common stock
authorized for issuance under the 1999 Plan to a total of 200,000
shares, up from 15,000 previously authorized. On September 15,
2015, the Company’s stockholders approved an additional
amendment to the 1999 Plan which increased the number of shares of
common stock authorized for issuance under the 1999 Plan to a total
of 250,000 shares, up from 200,000 previously authorized. The 1999
Plan expired on June 17, 2018 and no new grants may be made under
that plan after that date. However, unexpired awards granted under
the 1999 Plan remain outstanding and subject to the terms of the
1999 Plan.
1999 Plan Stock Options
Stock
options granted under the 1999 Plan may be ISOs or NSOs. ISOs may
be granted only to employees. NSOs may be granted to employees,
consultants and directors. Stock options under the 1999 Plan may be
granted with a term of up to ten years and at prices no less than
fair market value for ISOs and no less than 85% of the fair market
value for NSOs. Stock options granted generally vest over one to
three years.
The following table summarizes the outstanding stock options under
the 1999 Plan for the years ended December 31, 2018 and
2017:
|
|
Outstanding
Options
|
|
|
|
|
Number of
Shares
|
Weighted Average Exercise Price
|
Aggregate Intrinsic
Value
|
|
Balances at December 31, 2016
|
236,706
|
$99.74
|
|
|
Options
granted
|
13,000
|
$11.06
|
|
|
Options
cancelled
|
(60,962)
|
$94.75
|
|
|
Balances at December 31, 2017
|
188,744
|
$95.24
|
|
|
Options
granted
|
3,000
|
$6.23
|
|
|
Options
cancelled
|
(9)
|
$2,760.00
|
|
|
Balances at December 31, 2018
|
191,735
|
$93.72
|
$-(1)
|
|
(1)
|
Amount
represents the difference between the exercise price and $1.21, the
closing price of Tenax Therapeutics’ stock on December 31,
2018, as reported on the Nasdaq Capital Market, for all
in-the-money options outstanding.
|
50
The
Company chose the “straight-line” attribution method
for allocating compensation costs of each stock option over the
requisite service period using the Black-Scholes Option Pricing
Model to calculate the grant date fair value.
The
Company used the following assumptions to estimate the fair value
of options granted under the 1999 Plan for the years ended December
31, 2018 and 2017:
|
|
|
For the year ended December 31,
|
||
|
|
|
2018
|
|
2017
|
|
Risk-free interest rate (weighted average)
|
|
2.91%
|
|
2.19%
|
|
Expected volatility (weighted average)
|
|
102.63%
|
|
99.59%
|
|
Expected term (in years)
|
|
7
|
|
7
|
|
Expected dividend yield
|
|
0.00%
|
|
0.00%
|
|
Risk-Free Interest Rate
|
The
risk-free interest rate assumption was based on U.S. Treasury
instruments with a term that is consistent with the expected term
of the Company’s stock options.
|
|
Expected Volatility
|
The
expected stock price volatility for the Company’s common
stock was determined by examining the historical volatility and
trading history for its common stock over a term consistent with
the expected term of its options.
|
|
Expected Term
|
The
expected term of stock options represents the weighted average
period the stock options are expected to remain outstanding. It was
calculated based on the historical experience that the Company has
had with its stock option grants.
|
|
Expected Dividend Yield
|
The
expected dividend yield of 0% is based on the Company’s
history and expectation of dividend payouts. The Company has not
paid and do not anticipate paying any dividends in the near
future.
|
|
Forfeitures
|
As
stock-based compensation expense recognized in the statement of
operations for the years ended December 31, 2018 and 2017 is based
on awards ultimately expected to vest, it has been reduced for
estimated forfeitures. ASC 718 requires forfeitures to be estimated
at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates.
Forfeitures were estimated based on the Company’s historical
experience.
|
The
weighted-average grant-date fair value of options granted during
the years ended December 31, 2018 and 2017 was $5.19 and $8.66,
respectively.
The Company recorded compensation expense for these stock options
grants of $227,066 and $498,491 for the years ended December 31,
2018 and 2017, respectively.
As of
December 31, 2018, there were unrecognized compensation costs of
approximately $145,000 related to non-vested stock option awards
that will be recognized on a straight-line basis over the weighted
average remaining vesting period of 1.2 years. Additionally, there
were unrecognized compensation costs of approximately $5.9 million
related to non-vested stock option awards subject to
performance-based vesting milestones with a weighted average
remaining life of 1.3 years. As of December 31, 2018, none of these
milestones have been achieved.
51
Restricted Stock Grants
The following table summarizes the outstanding restricted stock
under the 1999 Plan for the years ended December 31, 2018 and
2017:
|
|
Outstanding Restricted Stock Grants
|
|
|
|
Number of Shares
|
Weighted Average Grant Date Fair Value
|
|
Balances, at December 31, 2016
|
12
|
$54.40
|
|
Restricted
stock granted
|
10,691
|
$13.60
|
|
Restricted
stock vested
|
(5,838)
|
$13.60
|
|
Restricted
stock cancelled
|
(4,865)
|
$13.60
|
|
Balances, at December 31, 2017
|
-
|
$-
|
|
Restricted
stock granted
|
85,900
|
$5.82
|
|
Restricted
stock vested
|
(37,420)
|
$5.69
|
|
Restricted
stock cancelled
|
(28,566)
|
$5.66
|
|
Balances, at December 31, 2018
|
19,914
|
$6.29
|
The Company recorded compensation expense for these restricted
stock grants of $250,009 and $560 for the years ended December 31,
2018 and 2017, respectively.
As of
December 31, 2018, there were no unrecognized compensation costs
related to the non-vested restricted stock grants that will be
recognized on a straight-line basis over the remaining vesting
period.
NOTE E—COMMITMENTS AND CONTINGENCIES
Operating Leases
The
Company leases its office space under an operating lease that
includes fixed annual increases and expires in June 2021. Total
rent expense was $115,220 and $112,431 for the years ended December
31, 2018 and 2017, respectively.
The
future minimum payments for the long-term, non-cancelable lease are
as follows:
|
Year ending December 31,
|
|
|
2019
|
118,117
|
|
2020
|
121,084
|
|
2021
|
61,803
|
|
|
$301,004
|
Simdax license agreement
On November 13, 2013 the Company acquired that certain License
Agreement (the “License”), dated September 20, 2013, by
and between Phyxius and Orion Corporation, a global healthcare
company incorporated under the laws of Finland
(“Orion”), which granted it an exclusive,
sublicenseable right to develop and commercialize pharmaceutical
products containing levosimendan in the United States and
Canada. Pursuant to the License, the Company must use
the “Simdax®” trademark owned by Orion to
commercialize pharmaceutical products containing levosimendan, 2.5
mg/ml concentrate for solution for infusion / 5ml vial (the
“Product”). The License also grants to the
Company a right of first refusal to commercialize new developments
of the Product, including developments as to the formulation,
presentation, means of delivery, route of administration, dosage or
indication.
Orion’s ongoing role under the License includes sublicense
approval, serving as the sole source of manufacture, holding a
first right to enforce intellectual property rights in the United
States and Canada (the “Territory”), and certain
regulatory participation rights. Additionally, the
Company must grant back to Orion a broad non-exclusive license to
any patents or clinical trial data related to the Product developed
by the Company under the License. The License has a
15-year term, provided, however, that the License will continue
after the end of the 15-year term in each country in the Territory
until the expiration of Orion’s patent rights in the Product
in such country.
52
The License includes the following development milestones for which
the Company shall make non-refundable payments to Orion no later
than twenty-eight (28) days after the occurrence of the applicable
milestone event: (i) $2.0 million upon the grant of FDA approval,
including all registrations, licenses, authorizations and necessary
approvals, to develop and/or commercialize the Product in the
United States; and (ii) $1.0 million upon the grant of regulatory
approval for the Product in Canada. Once commercialized, the
Company is obligated to make certain non-refundable
commercialization milestone payments to Orion, aggregating up to
$13.0 million, contingent upon achievement of certain cumulative
net sales amounts in the Territory. The Company must
also pay Orion tiered royalties based on net sales of the Product
in the Territory made by the Company and its sublicensees. After
the end of the Term, the Company must pay Orion a royalty based on
net sales of the Product in the Territory for as long as the
Company sells the Product in the Territory.
As of
December 31, 2018, the Company has not met any of the developmental
milestones and, accordingly, has not recorded any liability for the
contingent payments due to Orion.
Litigation
The
Company is subject to litigation in the normal course of business,
none of which management believes will have a material adverse
effect on the Company’s consolidated financial
statements.
NOTE F—401(k) BENEFIT PLAN
The
Company sponsors a 401(k) Retirement Savings Plan (the
“401(k) Plan”) for all eligible employees. Full-time
employees over the age of 18 are eligible to participate in the
401(k) Plan after 90 days of continuous employment. Participants
may elect to defer earnings into the 401(k) Plan up to the annual
IRS limits and the Company provides a matching contribution up to
5% of the participants’ annual salary in accordance with the
401(k) Plan documents. The 401(k) Plan is managed by a third-party
trustee.
For the
years ended December 31, 2018 and 2017, the Company recorded
$63,647 and $74,990 for matching contributions expense,
respectively.
NOTE G—INCOME TAXES
The
Company has not recorded any income tax expense or benefit for the
years ended December 31, 2018 and 2017 due to its history of net
operating losses.
The
reconciliation of income tax expenses (benefit) at the statutory
federal income tax rate of 21% and 34% for the periods ended
December 31, 2018 and December 31, 2017 is as follows:
|
|
December 31,
|
|
|
|
2018
|
2017
|
|
U.S.
federal tax benefit at statutory rate
|
$(2,970,250)
|
$(3,005,491)
|
|
State
income tax benefit, net of federal benefit
|
(246,376)
|
(346,057)
|
|
Stock
compensation
|
68,249
|
169,312
|
|
Interest
|
1,667,118
|
-
|
|
Other
nondeductible, including goodwill impairment
|
1,257
|
(71,044)
|
|
Change
in state tax rate
|
45,864
|
(426,159)
|
|
Change
in the federal tax rate
|
-
|
17,474,188
|
|
Federal
and state net operating loss adjustments
|
451,652
|
774,875
|
|
Other,
including effect of tax rate brackets
|
(31,810)
|
(265,181)
|
|
Change
in valuation allowance
|
1,014,296
|
(14,304,443)
|
|
|
$-
|
$-
|
53
The tax
effects of temporary differences and carry forwards that give rise
to significant portions of the deferred tax assets are as
follows:
|
|
December 31,
|
|
|
Deferred
Tax Assets
|
2018
|
2017
|
|
Net
operating loss carryforwards
|
$33,283,250
|
$32,239,768
|
|
Accruals
and other
|
509,069
|
567,090
|
|
Capital
loss carryforwards
|
16,708
|
16,466
|
|
Valuation
allowance
|
(33,796,295)
|
(32,781,999)
|
|
Net
deferred tax assets
|
12,732
|
41,325
|
|
Deferred
Tax Liabilities
|
|
|
|
Other
liabilities
|
(12,732)
|
(41,325)
|
|
Net
Deferred Tax Liabilities
|
$-
|
$-
|
The
Company has established a valuation allowance against net deferred
tax assets due to the uncertainty that such assets will be
realized. The Company periodically evaluates the recoverability of
the deferred tax assets. At such time that it is determined that it
is more likely than not that deferred tax assets will be
realizable, the valuation allowance will be reduced. The net
increase in the valuation allowance during 2018 was approximately
$1.0 million.
On
December 22, 2017, the Tax Cuts and Jobs Act was enacted into law,
which reduced the federal corporate income tax rate to 21% for tax
years beginning after December 31, 2017. As a result of the new
enacted tax rate, the Company adjusted its deferred tax assets as
of December 31, 2017, by applying the new 21% rate, which resulted
in a decrease to the net deferred tax asset of approximately $17.5
million.
The SEC
staff issued SAB 118 which will allow the Company to record
provisional amounts related to accounting for the tax legislation
during a measurement period which is similar to the measurement
period used when accounting for business combinations. The
measurement period has ended and the Company's accounting related
to the 2017 Tax Cuts and Jobs Act is complete. The Company did not
make any measurement-period adjustments related to the provisional
items recorded as of December 31, 2017 but will continue to assess
the impact of the Tax Reform Act on its business and consolidated
financial statements as additional guidance or interpretations are
released.
As of
December 31, 2018, the Company had federal and state net operating
loss carryforwards of approximately $137.9 million and $109.4
million available to offset future federal and state taxable
income, respectively. Federal net operating losses of $131.4
million begin to expire in 2019, while the remaining $6.5 million
carryforward indefinitely. State net operating losses begin to
expire in 2024.
Utilization
of the net operating loss carryforwards may be subject to an annual
limitation due to the ownership percentage change limitations
provided by the Internal Revenue Code of 1986 and similar state
provisions. The annual limitations may result in the expiration of
the net operating losses before utilization.
Management
has evaluated all other tax positions that could have a significant
effect on the financial statements and determined the Company had
no uncertain income tax positions at December 31,
2018.
The
Company files U.S. and state income tax returns with varying
statutes of limitations. The tax years 1999 and forward remain open
to examination due to the carryover of unused net operating losses
or tax credits.
NOTE H—SUBSEQUENT EVENTS
Subsequent
to the year ended December 31, 2018, an additional 2,299,990 shares
of Series A Stock were
converted into 2,299,990 shares of common stock. As of March 28, 2019, there were
554,603 shares of Series A
Stock outstanding, which represents approximately 11% of the
aggregate number of shares of Series A
Stock issued to all holders on the original issue
date.
In
accordance with the Series A Stock Certificate of Designations,
following the conversion of 85% of the
aggregate number of shares of Series A Stock issued to all holders
on the original issue date, the full ratchet price-based anti-dilution protection
in the event of a down-round financing at a price per share below
the conversion price of the Series A Stock is no longer in effect
for the remaining shares. See Note D above for additional
discussion.
54
ITEM
9—CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
ITEM
9A—CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our
disclosure controls and procedures, as defined in Rule 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as
amended, or the Exchange Act, are designed to ensure that
information required to be disclosed in reports filed or submitted
under the Exchange Act is recorded, processed, summarized, and
reported within the time periods specified in rules and forms
adopted by the SEC, and that such information is accumulated and
communicated to management, including the Chief Executive Officer
and Chief Financial Officer, to allow timely decisions regarding
required disclosures.
Management,
with the participation of our Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of our
disclosure controls and procedures as of the end of the period
covered by this Form 10-K. Based on such evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that, as of
December 31, 2018, our disclosure controls and procedures were
effective at the reasonable assurance level.
Changes in Internal Controls over Financial Reporting
From
time to time, we may review and make changes to our internal
control over financial reporting that are intended to enhance the
effectiveness of our internal control over financial reporting and
which do not have a material effect on our overall internal control
over financial reporting. During the three months ended December
31, 2018, we made no changes to our internal control over financial
reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act, that we believe materially affected, or are
reasonably likely to materially affect, our internal control over
financial reporting.
Management’s Annual Report on Internal Control over Financial
Reporting
Our
management is responsible for establishing and maintaining adequate
internal control over financial reporting. Internal control over
financial reporting, as defined in rules promulgated under the
Exchange Act, is a process designed by, or under the supervision
of, our Chief Executive Officer and Chief Financial Officer and
affected by our Board of Directors, management and other personnel
to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of Consolidated Financial
Statements for external purposes in accordance with GAAP. Internal
control over financial reporting includes those policies and
procedures that:
–
Pertain
to the maintenance of records that in reasonable detail accurately
and fairly reflect the transactions and dispositions of our
assets;
–
Provide
reasonable assurance that transactions are recorded as necessary to
permit preparation of Consolidated Financial Statements in
accordance with GAAP, and that our receipts and expenditures are
being made only in accordance with authorizations of our management
and our Board of Directors; and
–
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that
could have a material effect on our Consolidated Financial
Statements.
Internal
control over financial reporting cannot provide absolute assurance
of achieving financial reporting objectives because of its inherent
limitations. Internal control over financial reporting is a process
that involves human diligence and compliance and is subject to
lapses in judgment and breakdowns resulting from human failures.
Internal control over financial reporting can also be circumvented
by collusion or improper override. Because of such limitations,
there is a risk that material misstatements may not be prevented or
detected on a timely basis by internal control over financial
reporting. However, these inherent limitations are known features
of the financial reporting process, and it is possible to design
into the process safeguards to reduce, though not eliminate, this
risk.
Our
management assessed the effectiveness of our internal control over
financial reporting as of December 31, 2018. In making its
assessment, management used the criteria established by the
Committee of Sponsoring Organizations of the Treadway Commission,
or COSO, in its 2013 Internal
Control — Integrated Framework. Based on its
assessment, management has concluded that our internal control over
financial reporting was effective as of December 31,
2018.
55
ITEM
9B—OTHER INFORMATION
There
is no information to report under this item for the quarter ended
December 31, 2018.
PART III
ITEM
10— DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE
GOVERNANCE
The
information required by this item is incorporated by reference to
our Proxy Statement for our 2019 Annual Meeting of Stockholders,
which will be filed with the SEC within 120 days after the end of
fiscal 2018.
ITEM
11— EXECUTIVE COMPENSATION
The
information required by this item is incorporated by reference to
our Proxy Statement for our 2019 Annual Meeting of Stockholders,
which will be filed with the SEC within 120 days after the end of
fiscal 2018.
ITEM
12— SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The
information required by this item is incorporated by reference to
our Proxy Statement for our 2019 Annual Meeting of Stockholders,
which will be filed with the SEC within 120 days after the end of
fiscal 2018.
ITEM
13— CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND
DIRECTOR INDEPENDENCE
The
information required by this item is incorporated by reference to
our Proxy Statement for our 2019 Annual Meeting of Stockholders,
which will be filed with the SEC within 120 days after the end of
fiscal 2018.
ITEM
14— PRINCIPAL ACCOUNTANT FEES AND SERVICES
The
information required by this item is incorporated by reference to
our Proxy Statement for our 2019 Annual Meeting of Stockholders,
which will be filed with the SEC within 120 days after the end of
fiscal 2018.
56
PART IV
ITEM
15—EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A)(1)
The Consolidated Financial Statements and information listed below
are included in this report in Part II, Item 8.
–
Report
of Independent Registered Public Accounting Firm.
–
Consolidated
Balance Sheets as of December 31, 2018 and December 31,
2017.
–
Consolidated
Statements of Operations and Comprehensive Loss for the years ended
December 31, 2018 and 2017.
–
Consolidated
Statements of Stockholders’ Equity for the years ended
December 31, 2018 and 2017.
–
Consolidated
Statements of Cash Flows for the years ended December 31, 2018 and
2017.
–
Notes
to the Consolidated Financial Statements.
(A)(2)
No schedules have been included because they are not applicable, or
the required information is shown in our Consolidated Financial
Statements or our notes thereto.
(A)(3)
The following exhibits have been or are being filed herewith and
are numbered in accordance with Item 601 of Regulation
S-K:
|
Exhibit No.
|
|
Exhibits Required by Item 601 of Regulation S-K
|
|
|
Agreement and Plan
of Merger between Synthetic Blood International, Inc. and Oxygen
Biotherapeutics, Inc. dated April 28, 2008 (incorporated herein by
reference to Exhibit 2.01 to our current report on Form 8-K filed
with the SEC on June 30, 2008)
|
|
|
|
|
|
|
|
Asset
Purchase Agreement by and between Oxygen Biotherapeutics, Inc.,
Life Newco, Inc., Phyxius Pharma, Inc., and the stockholders of
Phyxius Pharma, Inc. dated October 21, 2013 (incorporated herein by
reference to Exhibit 2.1 to our current report on Form 8-K filed
with the SEC on October 25, 2013)
|
|
|
|
|
|
|
|
Certificate of
Incorporation (incorporated herein by reference to Exhibit 3.01 to
our current report on Form 8-K filed with the SEC on June 30,
2008)
|
|
|
|
|
|
|
Certificate of
Amendment of the Certificate of Incorporation (incorporated herein
by reference to Exhibit 3.1 to our current report on Form 8-K filed
with the SEC on November 13, 2009)
|
||
|
|
|
|
|
Certificate of
Amendment of the Certificate of Incorporation (incorporated herein
by reference to Exhibit 3.1 to our current report on Form 8-K filed with the SEC on
May 15, 2013)
|
||
|
|
|
|
|
Certificate of
Amendment of the Certificate of Incorporation (incorporated herein
by reference to Exhibit 3.4 to our quarterly report on Form 10-Q
filed with the SEC on December 15, 2014)
|
||
|
|
|
|
|
Certificate of
Amendment of the Certificate of Incorporation (incorporated herein
by reference to Exhibit 3.1 to our current report on Form 8-K filed
with the SEC on February 23, 2018)
|
||
|
|
|
|
|
Certificate of
Designation of Series A Convertible Preferred Stock (incorporated
herein by reference to Exhibit 4.1 to our current report on Form
8-K filed with the SEC on December 11, 2018)
|
||
|
|
|
|
|
|
Third
Amended and Restated Bylaws (incorporated herein by reference to
Exhibit 3.1 to our quarterly report on Form 10-Q filed with the SEC
on September 9, 2015)
|
|
|
|
|
|
|
|
Specimen Stock
Certificate (incorporated herein by reference to Exhibit 4.1 to our
annual report on Form 10-K filed with the SEC on July 23,
2010)
|
|
|
|
|
|
57
|
Agreement with
Leland C. Clark, Jr., Ph.D. dated November 20, 1992 with
amendments, Assignment of Intellectual Property/ Employment
(incorporated herein by reference to Exhibit 10.1 to our annual
report on Form 10-K filed with the SEC on August 13,
2004)
|
||
|
|
|
|
|
Agreement between
the Registrant and Keith R. Watson, Ph.D. Assignment of Invention
(incorporated herein by reference to Exhibit 10.2 to our annual
report on Form 10-K filed with the SEC on August 13,
2004)
|
||
|
|
|
|
|
Children’s
Hospital Research Foundation License Agreement dated February 28,
2001 (incorporated herein by reference to Exhibit 10.3 to our
annual report on Form 10-K filed with the SEC on August 13,
2004)
|
||
|
|
|
|
|
1999
Amended Stock Plan (as amended and restated in 2008) (incorporated
herein by reference to Exhibit 10.15 to our annual report on Form
10-K with the SEC on August 13, 2008) +
|
||
|
|
|
|
|
Amendment No. 1 to
Oxygen Biotherapeutics, Inc. 1999 Amended Stock Plan (incorporated
herein by reference to Exhibit 10.19 to our annual report on Form
10-K filed with the SEC on July 29, 2014) +
|
||
|
|
|
|
|
Amendment No. 2 to
Oxygen Biotherapeutics, Inc. 1999 Amended Stock Plan (incorporated
herein by reference to Exhibit 10.20 to our annual report on Form
10-K filed with the SEC on July 29, 2014) +
|
||
|
|
|
|
|
Form of
Option issued to Executive Officers and Directors (incorporated
herein by reference to Exhibit 10.5 to our annual report on Form
10-K filed with the SEC on August 13, 2004) +
|
||
|
|
|
|
|
Form of
Option issued to Employees (incorporated herein by reference to
Exhibit 10.6 to our annual report on Form 10-K filed with the SEC
on August 13, 2004) +
|
||
|
|
|
|
|
Form of
Option Agreement with Form of Notice of Grant (incorporated herein
by reference to Exhibit 10.9 to our annual report on Form 10-K
filed with the SEC on March 16, 2017) +
|
||
|
|
|
|
|
Restricted Stock
Award Agreement ((incorporated herein by reference to Exhibit 10.9
to our quarterly report on Form 10-Q filed with the SEC on December
15, 2011) +
|
||
|
|
|
|
|
2016
Stock Incentive Plan (incorporated herein by reference to Exhibit
10.1 to our quarterly report on Form 10-Q filed with the SEC on
August 9, 2016) +
|
||
|
|
|
|
|
Form of
Option issued to Non-Employee Directors under 2016 Stock Incentive
Plan (incorporated herein by reference to Exhibit 10.2 to our
quarterly report on Form 10-Q filed with the SEC on August 14,
2018) +
|
||
|
|
|
|
|
Form of
Option issued to Employees and Contractors under 2016 Stock
Incentive Plan (incorporated herein by reference to Exhibit 10.3 to
our quarterly report on Form 10-Q filed with the SEC on August 14,
2018) +
|
||
|
|
|
|
|
Form of
Incentive Stock Option Agreement under 2016 Stock Incentive Plan
(incorporated herein by reference to Exhibit 10.4 to our quarterly
report on Form 10-Q filed with the SEC on August 14, 2018)
+
|
||
|
|
|
|
|
Employment
Agreement with John Kelley dated November 13, 2013 (incorporated
herein by reference to Exhibit 10.1 to our current report on Form
8-K filed with the SEC on November 19, 2013) +
|
||
|
|
|
58
|
First
Amendment to Employment Agreement with John Kelley dated June 18,
2015 (incorporated herein by reference to Exhibit 10.1 to our
current report on Form 8-K filed with the SEC on June 19, 2015)
+
|
||
|
|
|
|
|
Separation and
General Release Agreement dated April 7, 2017 between Tenax
Therapeutics, Inc. and John Kelley (incorporated herein by
reference to Exhibit 10.1 to our quarterly report on Form 10-Q
filed with the SEC on August 9, 2017) +
|
||
|
|
|
|
|
Second
Amended and Restated Employment Agreement with Michael Jebsen dated
November 13, 2013 (incorporated herein by reference to Exhibit 10.2
to our current report on Form 8-K filed with the SEC on November
19, 2013) +
|
||
|
|
|
|
|
First
Amendment to Second Amended and Restated Employment Agreement with
Michael Jebsen dated June 18, 2015 (incorporated herein by
reference to Exhibit 10.2 to our current report on Form 8-K filed
with the SEC on June 19, 2015) +
|
||
|
|
|
|
|
10.20
|
Employment
Agreement with Anthony DiTonno dated June 1, 2018 (incorporated
herein by reference to Exhibit 10.36 to our annual report on Form
10-K filed with the SEC on July 15, 2011) +
|
|
|
|
|
|
|
Form of
Indemnification Agreement (incorporated herein by reference to
Exhibit 10.36 to our annual report on Form 10-K filed with the SEC
on July 15, 2011) +
|
||
|
|
|
|
|
Description of
Non-Employee Director Compensation, effective June 15, 2015
(incorporated herein by reference to Exhibit 10.1 to our quarterly
report on Form 10-Q filed with the SEC on September 9, 2015)
+
|
||
|
|
|
|
|
Amendment—Common
Stock Purchase Warrant (incorporated herein by reference to Exhibit
10.6 to our quarterly report on Form 10-Q filed with the SEC on
March 19, 2010)
|
||
|
|
|
|
|
Lease
Agreement for North Carolina corporate office (incorporated herein
by reference to Exhibit 10.6 to our quarterly report on Form 10-Q
filed with the SEC on March 21, 2011)
|
||
|
|
|
|
|
First
Amendment to Lease Agreement for North Carolina corporate office
(incorporated herein by reference to Exhibit 10.74 to our
transition report on Form 10-KT filed with the SEC on March 14,
2016)
|
||
|
|
|
|
|
Task
Order between the Company and NextPharma, dated November 15, 2011
(incorporated herein by reference to Exhibit 10.2 to our current
report on Form 8-K filed with the SEC on November 16,
2011)
|
||
|
|
|
|
|
Fluoromed Supply
Agreement (incorporated herein by reference to Exhibit 10.62 to our
annual report on Form 10-K filed with the SEC on July 25,
2012)
|
||
|
|
|
|
|
License
and Supply Agreement dated February 5, 2013, between Oxygen
Biotherapeutics, Inc. and Valor SA (incorporated herein by
reference to Exhibit 10.60 to our annual report on Form 10-K filed
with the SEC on July 29, 2014)
|
||
|
|
|
|
|
Form of
Warrant for Series C 8% Convertible Preferred Stock Offering
(incorporated herein by reference to Exhibit 4.2 to our current
report on Form 8-K filed with the SEC on July 25,
2013)
|
||
|
|
|
|
|
Warrant
for Series D 8% Convertible Preferred Stock Offering (incorporated
herein by reference to Exhibit 4.2 to our current report on Form
8-K filed with the SEC on August 26, 2013)
|
||
|
|
|
|
59
|
License
Agreement dated September 20, 2013 by and between Phyxius Pharma,
Inc. and Orion Corporation (incorporated herein by reference to
Exhibit 10.3 to our quarterly report on Form 10-Q filed with the
SEC on March 17, 2014)**
|
|||
|
|
|
||
|
Amendment to Common
Stock Purchase Agreement (incorporated herein by reference to
Exhibit 10.4 to our quarterly report on Form 10-Q filed with the
SEC on March 17, 2014)
|
|||
|
|
|
||
|
Sales
Agreement dated as of February 23, 2015, between Tenax
Therapeutics, Inc. and Cowen and Company, LLC (incorporated herein
by reference to Exhibit 10.72 to our annual report on Form 10-K
filed with the SEC on July 14, 2015)
|
|||
|
|
|
||
|
Representative’s
Warrant to Purchase Shares of Common Stock (incorporated herein by
reference to Exhibit 4.2 to our current report on Form 8-K filed
with the SEC on December 11, 2018)
|
|||
|
|
|
||
|
Form of
Warrant to Purchase Shares of Common Stock (incorporated herein by
reference to Exhibit 4.3 to our current report on Form 8-K filed
with the SEC on December 11, 2018)
|
|||
|
|
|
||
|
Warrant
Agency Agreement (incorporated herein by reference to Exhibit 4.4
to our current report on Form 8-K filed with the SEC on December
11, 2018)
|
|||
|
|
|
||
|
Subsidiaries of
Tenax Therapeutics, Inc. (incorporated herein by reference to
Exhibit 21.1 to our annual report on Form 10-K filed with the SEC
on July 14, 2015)
|
|||
|
|
|
||
|
Consent of
Independent Registered Public Accounting Firm*
|
|||
|
|
|
||
|
24.1
|
Power
of Attorney (contained on signature page)*
|
||
|
|
|
||
|
Certification of
Principal Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002*
|
|||
|
|
|
||
|
Certification of
Principal Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002*
|
|||
|
|
|
||
|
Certification of
Principal Executive Officer Pursuant to 18 U.S.C. Section
1350*
|
|||
|
|
|
||
|
Certification of
Principal Financial Officer Pursuant to 18 U.S.C. Section
1350*
|
|||
|
|
|
||
|
101.INS
|
XBRL
Instance Document
|
||
|
|
|
||
|
101.SCH
|
XBRL
Taxonomy Extension Schema Document
|
||
|
|
|
||
|
101.CAL
|
XBRL
Taxonomy Extension Calculation Linkbase Document
|
||
|
|
|
||
|
101.DEF
|
XBRL
Taxonomy Extension Definition Linkbase Document
|
||
|
|
|
||
|
101.LAB
|
XBRL
Taxonomy Extension Label Linkbase Document
|
||
|
|
|
||
|
101.PRE
|
XBRL
Taxonomy Extension Presentation Linkbase Document
|
||
________________________
*
Filed
herewith.
**
Asterisks located
within the exhibit denote information which has been redacted
pursuant to a request for confidential treatment filed with the
SEC.
+
Management contract
or compensatory plan or arrangement.
ITEM 16—FORM 10-K SUMMARY
None.
60
SIGNATURES
Pursuant to the
requirements of Section 13 or 15(d) of the Securities and Exchange
Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly
authorized.
|
|
TENAX THERAPEUTICS,
INC.
|
|
|
|
|
|
|
|
|
Date: April 1,
2019
|
By:
|
/s/ Michael B.
Jebsen
|
|
|
|
|
Michael B.
Jebsen
|
|
|
|
|
President and Chief
Financial Officer
(On
behalf of the Registrant and as Principal Financial
Officer)
|
|
POWER OF ATTORNEY
KNOW
ALL MEN BY THESE PRESENTS that each individual whose signature
appears below constitutes and appoints Michael B. Jebsen his true
and lawful attorney-in-fact and agent with full power of
substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments to
this report, and to file the same, with all exhibits thereto, and
all documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorney-in-fact and agent
full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises,
as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or his substitute, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the
requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates
indicated.
|
Name
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
|
|
/s/
Anthony DiTonno
Anthony
DiTonno
|
|
Chief
Executive Officer and Director
(Principal
Executive Officer)
|
|
April
1, 2019
|
|
|
|
|
|
|
|
|
|
/s/
Michael B. Jebsen
Michael
B. Jebsen
|
|
Chief
Financial Officer
(Principal
Financial Officer and Principal Accounting Officer)
|
|
April
1, 2019
|
|
|
|
|
|
|
|
|
|
/s/
Ronald R. Blanck
Ronald
R. Blanck, DO
|
|
Director
|
|
April
1, 2019
|
|
|
|
|
|
|
|
|
|
/s/
Gregory Pepin
Gregory
Pepin
|
|
Director
|
|
April
1, 2019
|
|
|
|
|
|
|
|
|
|
/s/
James Mitchum
James
Mitchum
|
|
Director
|
|
April
1, 2019
|
|
|
|
|
|
|
|
|
|
/s/
Chris A. Rallis
Chris
A. Rallis
|
|
Director
|
|
April
1, 2019
|
|
|
|
|
|
|
|
|
|
/s/
Gerald Proehl
Gerald
Proehl
|
|
Director
|
|
April
1, 2019
|
|
61