Theriva Biologics, Inc. - Annual Report: 2007 (Form 10-K)
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-KSB
ANNUAL
REPORT
PURSUANT
TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
|
(Mark
One)
|
||
|
ý
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
|
|
For
the fiscal year ended December 31, 2007
|
|
|
OR
|
||
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
1934
|
|
|
|
For
the transition period from______________________
to____________________________
|
|
PIPEX
PHARMACEUTICALS, INC.
(Name
of small business issuer in its charter)
|
Delaware
|
13-3808303
|
|
(State
or other jurisdiction of incorporation or organization)
|
(IRS
Employer Identification Number)
|
|
3930
Varsity Drive
Ann
Arbor, MI
|
48108
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area code:
(734)
332-7800
Securities
registered pursuant to Section 12(b) of the Act:
None.
Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, $0.001 par value per share
(Title of Class)
Indicate by check mark whether the issuer: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ý
No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of issuer’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. ý
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes
o
No ý
State issuer’s revenues for its most recent fiscal year: $0
The aggregate market value of the issuer’s common stock held by non-affiliates
of the registrant as of March 24, 2008, was approximately $7,246,715 based on
$0.89, the price at which the registrant’s common stock was last sold on that
date.
As of March 24, 2008, the issuer had 20,472,855 shares of common stock
outstanding.
Documents
incorporated by reference: None.
Transitional
Small Business Disclosure Format (Check one): Yes o No
ý
PIPEX
PHARMACEUTICALS, INC.
FORM
10-KSB
TABLE
OF CONTENTS
|
Page
|
||||||
|
PART
I.
|
||||||
|
Item
1.
|
Business
|
|
3
|
|||
|
Item
1A.
|
Risk
Factors
|
|
10
|
|||
|
Item
2.
|
Properties
|
|
24
|
|||
|
Item
3.
|
Legal
Proceedings
|
|
24
|
|||
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
|
25
|
|||
|
PART
II.
|
||||||
|
Item
5.
|
Market
for Registrant’s Common Equity and Related Stockholder
Matters
|
|
26
|
|||
|
Item
6.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
|
28
|
|||
|
Item
7.
|
Financial
Statements and Supplementary Data
|
|
33
|
|||
|
Item
8.
|
Changes
in and Discussions with Accountants on Accounting and Financial
Disclosure
|
|
55
|
|||
|
Item
8A.
|
Controls
and Procedures
|
|
55
|
|||
|
Item
8B.
|
Other
Information
|
|
55
|
|||
|
PART
III.
|
||||||
|
Item
9.
|
Directors
and Executive Officers of the Registrant
|
|
56
|
|||
|
Item
10.
|
Executive
Compensation
|
|
59
|
|||
|
Item
11.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
|
62
|
|||
|
Item
12.
|
Certain
Relationships and Related Transactions
|
|
64
|
|||
|
Item
13.
|
Principal
Accountant Fees and Services
|
|
64
|
|||
|
PART
IV.
|
||||||
|
Item
14.
|
Exhibits
and Financial Statement Schedules and Reports on Form 8-K
|
|
||||
|
SIGNATURES
|
|
67
|
||||
Forward-Looking
Statements
Most of
the matters discussed within this report include forward-looking statements on
our current expectations and projections about future events. In some cases you
can identify forward-looking statements by terminology such as “may,” “should,”
“potential,” “continue,” “expects,” “anticipates,” “intends,” “plans,”
“believes,” “estimates,” and similar expressions. These statements are based on
our current beliefs, expectations, and assumptions and are subject to a number
of risks and uncertainties. Actual results and events may vary significantly
from those discussed in the forward-looking statements.
These
forward-looking statements are made as of the date of this report, and we assume
no obligation to explain the reason why actual results may differ. In light of
these assumptions, risks, and uncertainties, the forward-looking events
discussed in this report might not occur.
ITEM
1. BUSINESS
GENERAL
Pipex
Pharmaceuticals, Inc. (together with its subsidiaries, “Pipex” or the “Company”)
is a development-stage, specialty pharmaceutical company that is developing
proprietary, late-stage drug candidates for the treatment of neurologic and
fibrotic diseases. Our strategy is to exclusively in-license proprietary,
clinical-stage drug candidates that have demonstrated preliminary efficacy in
human clinical trials and to complete the further clinical testing,
manufacturing and other regulatory requirements sufficient to seek marketing
authorizations via the filing of a New Drug Application (NDA) with the FDA and a
potential Marketing Application Authorization (MAA) with the European Medicines
Evaluation Agency (EMEA).
Our drug
candidates address the following pharmaceutical market opportunities: multiple
sclerosis, fibromyalgia, Huntington’s disease, Alzheimer’s disease, dry age
related macular degeneration (AMD), neurologic Wilson’s disease and idiopathic
pulmonary fibrosis (IPF).
Below is
a table of our product candidates, therapeutic indication(s) and their
respective stage of development:
|
Product
|
Therapeutic
Indication
|
Stage
of Development
|
|
TRIMESTATM
(oral,
once-daily estriol)
|
Relapsing
Remitting Multiple Sclerosis
|
Phase
II/III
(on-going)
|
|
EFFIRMATM
(oral
flupirtine)
|
Fibromyalgia
|
Phase
II
(planned)
|
|
Oral
TTM
(oral
tetrathiomolybdate)
|
Neurologically
Presenting
Wilson's Disease |
NDA filed
Nov. 28, 2007
FDA refusal to file Jan. 28, 2008
|
|
Oral
TTM
(oral
tetrathiomolybdate)
|
Idiopathic
Pulmonary Fibrosis (IPF)
|
Phase
II
(completed)
|
|
Oral
TTM
(oral
tetrathiomolybdate)
|
Alzheimer’s
Disease
|
Phase
II
(initiated)
|
|
Oral
TTM
(oral
tetrathiomolybdate)
|
Huntington’s
Disease
|
Preclinical
Studies
(Ongoing)
|
|
Oral
TTM
(oral
tetrathiomolybdate)
|
Primary Biliary Cirrhosis |
Phase
II
(ongoing)
|
|
Zincmonocysteine
(zinc-monocysteine)
|
Dry
Age Related Macular Degeneration
|
Phase
II
(completed)
|
|
Anti-CD4
802-2
|
Prevention
of Severe GvHD
|
Phase
I
(complete)
|
|
CORRECTATM
(clotrimazola
enema)
|
Refractory
Pouchitis
|
Phase
II
(ongoing)
|
3
Product
Summary
The
following is a summary of each of the clinical stage drug candidates that we are
developing:
TRIMESTA TM (oral, once-daily
estriol)
We are
developing TRIMESTA
TM (oral, once-daily estriol) as an oral immunomodulatory and
anti-inflammatory bio identical estrogenic agent for the North American market.
Estriol has been approved and marketed throughout Europe and Asia as a mild
estrogenic agent for over 40 years for the treatment of post-menopausal hot
flashes. Estriol is an important endogenous hormone that is produced in the
placenta by women during pregnancy. Maternal levels of estriol increase in a
linear fashion throughout the third trimester of pregnancy until birth,
whereupon they abruptly fall to near zero. Our scientific collaborator of
TRIMESTA
TM is a leading authority on the role that estriol plays in affording
immunologic privilege to the fetus so as to prevent its rejection by the mother.
It is a widely observed phenomenon that pregnant women with autoimmune diseases
(such as multiple sclerosis and rheumatoid arthritis) experience high rates of
spontaneous remission of these diseases during pregnancy (especially in the
third trimester) as well as high rates of relapse during the post-partum period
(especially in the three-month post-partum period). Based upon these insights,
our scientific collaborator of TRIMESTATM
has conducted an initial clinical trial of TRIMESTATM
in multiple sclerosis patients and has demonstrated encouraging
results.
Phase II/III Clinical Trial
of TRIMESTA
TM in
Relapsing-Remitting MS
TRIMESTATM is
currently the subject of an ongoing 150 patient double-blind phase II/III
clinical in relapsing remitting MS patients. TRIMESTATM will be
given in combination with subcutaneously injected Copaxone®, a standard
treatment for MS. The primary endpoint is evaluating effects of the treatment
combination on relapse rates using several clinical and magnetic resonance
imaging measures of disability progression. This clinical trial has received a
$5 million grant from the National Multiple Sclerosis Society (NMSS) in
partnership with the National MS Society’s Southern California chapter, with
support from the National Institutes of Health (NIH).
TRIMESTATM for
Relapsing-Remitting Multiple Sclerosis (MS)
Current Therapies for
Relapsing-Remitting MS.
There are
currently five FDA-approved therapies for the treatment of relapsing-remitting
multiple sclerosis: Betaseron ®, Rebif ®, Avonex ®, Copaxone ® and Tysabri ®. These therapies
provide only a modest benefit for patients with relapsing-remitting MS and
therefore serve to only delay progression of the disease. All of these drugs
require frequent (daily, weekly & monthly) injections (or infusions) on an
ongoing basis and are associated with unpleasant side effects (such as flu-like
symptoms), high rates of non-compliance among users, and eventual loss of
efficacy due to the appearance of resistance in approximately 30% of patients.
An estimated two-thirds of MS patients are women.
Phase II Clinical Trial
Results of TRIMESTA in Relapsing-Remitting
MS
TRIMESTATM has
completed an initial 10-patient, 16-month, single-agent, crossover, phase IIA
clinical trial in the U.S. for the treatment of MS. The results of this study
were encouraging.
Decrease in Volume and
Number of Myelin Lesions
In
relapsing-remitting MS patients treated, the total volume and number of
pathogenic gadolinium enhancing myelin lesions (an established neuroimaging
measurement of disease activity in MS) decreased during the treatment period as
compared to a six-month pre-treatment baseline period. The median total
enhancing lesion volumes decreased by 79% (p =0.02) and the number of lesions
decreased by 82% (p =0.09) within the first three months of treatment with
TRIMESTATM. Over
the next three months, lesion volumes decreased by 82% (p =0.02) and the number
of lesions decreased by 82% (p =0.02) compared to baseline. During a three-month
re-treatment phase of this clinical trial, relapsing-remitting MS patients again
showed a decrease in enhancing lesion volumes (88%) (p =0.008) and a decrease in
the number of lesions (48%) (p =0.04) compared to baseline.
Market Opportunities for
TRIMESTA
TM
Multiple
Sclerosis
MS is a
progressive neurological disease in which the body loses the ability to transmit
messages along nerve cells, leading to a loss of muscle control, paralysis, and,
in some cases, death. Currently, more than 2.5 million people worldwide
(approximately 400,000 patients in the US), mainly young adults aged 18-50, are
afflicted with MS and 66% of these patients are women. The most common form of
MS is relapsing-remitting MS, which accounts for approximately 75% of MS
patients.
4
MS exacts
a heavy toll on our healthcare system. According to a published study, the total
annual cost for all people with MS in the U.S. is estimated to be more than $9
billion. The average annual cost of MS is approximately $44,000 to $95,625 per
person. These figures include lost wages and healthcare costs (care giving,
hospital and physician costs, pharmaceutical therapy and nursing home care). The
cost of treating patients with later-stage progressive forms of MS is
approximately $65,000 per year per person. The average lifetime costs for people
with MS are more than $2.2 million per person.
During
2005, sales estimates of FDA-approved MS therapies, which include Avonex ®, Betaseron ®, Copaxone ®, and Rebif ®, totaled approximately $5.0
billion, with Avonex ®
accounting for $1.5 billion in worldwide sales ($935 million were in the
U.S.).
EFFIRMATM (oral
flupirtine)
We are
developing EFFIRMATM
(oral flupirtine), a centrally-active, non-opiate, non-addictive oral therapy
for the treatment of fibromyalgia and we plan to conduct a double blind,
placebo-controlled phase II clinical trial in this indication. Fibromyalgia is a
common, centrally-mediated pain disorder characterized by chronic diffuse pain
and other symptoms. The active ingredient of EFFIRMATM,
flupirtine, was originally developed by Asta Medica and has been approved in
Europe since 1984 for the treatment of pain, although it has never been
introduced to the U.S. market for any indication.
Our oral
flupirtine has been approved as a treatment of pain in Europe since 1984, but
has never been approved for any indication in the US. Flupirtine, a non-opiate
analgesic, has been used in Europe for more than 20 years for post-surgical
pain, cancer pain, trauma pain, pain associated with liver disease, and other
nocioceptive pain states. Preclinical data and clinical experience suggests that
flupirtine should also be effective for neuropathic pain since it acts in the
central nervous system via a mechanism of action distinguishable from most
marketed analgesics. Flupirtine is especially attractive because it operates
through non-opiate pain pathways, exhibits no known abuse potential, and lacks
withdrawal effects. In addition, no tolerance to its antinocioceptive effects
has been observed. One common link between neuroprotection, nocioception, and
flupirtine may be the NMDA (N-methyl-D-aspartate) glutamate system, a major
receptor subtype for the excitotoxic neurotransmitter, glutamate.
Flupirtine has strong inhibitory actions on NMDA-mediated
neurotransmission.
EFFIRMA
TM for
Fibromyalgia
Our
scientific collaborator has demonstrated preliminary anecdotal efficacy of
EFFIRMATM
for the treatment of Fibromyalgia in a small number of U.S. patients suffering
from fibromyalgia that were refractive to other analgesics and therapies.
EFFIRMATM
was well tolerated by patients with no untoward side effects. In addition,
substantial improvement in signs and symptoms was demonstrated in this
difficult-to-treat fibromyalgia patient population. Our scientific collaborator
filed an investigator initiated IND with the FDA to conduct a phase II clinical
trial in fibromyalgia patients with oral flupirtine. This IND was placed on hold
pending the outcome of certain chemistry, manufacturing and controls
concerns. We along with our scientific collaborator have responded to
the FDA’s concerns regarding manufacturing concerns.
Market Opportunity for
EFFIRMA
Fibromyalgia
is an arthritis-related condition that is characterized by generalized muscular
pain and fatigue. It is a chronic and debilitating condition characterized by
widespread pain and stiffness throughout the body, accompanied by severe
fatigue, insomnia and mood symptoms. It is estimated to affect between two and
four percent of the world's population and after, osteoarthritis, is the most
commonly diagnosed disorder in rheumatology clinics.
We
estimate that there are approximately 6 million Americans with fibromyalgia.
During 2007, Lyrica® which is marketed by Pfizer, is the only FDA-approved
medication for fibromyalgia, recorded $1.8 billion in sales and $1.2 billion
during its first year on the market.
oral
TTM
(oral tetrathiomolybdate)
Oral TTM
is an oral, small-molecule, anticopper agent that is highly specific for
lowering the levels of free copper in serum. Free copper in serum
represents the toxic form of copper, as opposed to the essential form of copper
which is found tightly bound to appropriate copper proteins, such as
ceruloplasmin. Free copper in serum readily crosses the blood-brain barrier
(BBB) and is generally at equilibrium with free copper levels in the
central nervous system (CNS). The brain is the organ most sensitive to the toxic
effects of free copper. By lowering the levels of toxic free copper
in serum, oral TTM demonstrated the ability to reduce toxic free copper levels
in initially presenting neurologic Wilson’s disease patients. We have also
demonstrated oral TTM’s ability to reduce levels of free copper in animal models
of other CNS diseases, such as Alzheimer’s disease and Huntington’s
disease. Oral TTM’s unique mechanism of action
and specificity for free copper may make it ideally suited for the
treatment of other CNS diseases in which abnormal serum and CNS copper
homeostasis are implicated.
5
Oral TTM for Idiopathic
Pulmonary Fibrosis (IPF)
Oral TTM
has also demonstrated an ability in various animal models to be a potent
oral antifibrotic agent. This research is based upon the observation
that the fibrotic disease process is dependent upon the availability of
endogenous free copper. Oral TTM has demonstrated the ability to
inhibit fibrosis in a number of well established animal models through the sequestration of
available copper and inhibition of key fibrotic cytokines, including secreted
protein acid rich in cysteine (SPARC), NF-kappaB, TGF-β, FGF-2, IL-1, IL-6,
IL-8, connective tissue growth factor (CTGF) and collagen.
IPF is a
fatal respiratory disease characterized by progressive loss of lung function due
to extensive fibrosis of lung tissues that are essential for respiration and
life. It affects an estimated 124,000 patients in the U.S., resulting in
approximately 30,000 deaths in the U.S. annually. This represents more deaths
annually than either breast or prostate cancer.
Phase II Clinical Trials of
oral TTM in Refractory IPF Patients
Based
upon animal experiment, a one-year, open-label, phase II clinical trial of oral
TTM was completed for the treatment of refractory IPF. The
prospectively defined primary endpoint of the study was the percentage of
patients capable of maintaining clinically stable pulmonary function as
determined by forced vital capacity (FVC), an accepted measurement of pulmonary
function in IPF. These results are being prepared for publication. This phase II
trial was partially supported by a grant from the Coalition for Pulmonary
Fibrosis, a non-profit organization.
Oral TTM for Alzheimer’s
Disease (AD)
An
increasing body of evidence points to dysfunctional copper homeostasis in the
pathogenesis of AD. Recently, a published prospective clinical study conducted
in 3718 patients in the U.S. over six years, which included subjects that
consumed a vitamin containing copper supplement (1.6mg of copper a day) when
taken together with a high saturated and trans fat diet resulted in an
equivalent of 19 years of mental decline.
A
separate European clinical study conducted in 53 patients correlated the levels
of the highly reactive “free copper” pool in serum to disease severity in AD
patients versus aged-matched control patients. These results demonstrated that
the “free copper” serum pool was highly increased in AD patients.
These
clinical studies are complemented by preclinical studies that show that AD
amyloid-a plaques when treated with copper chelating agents in-vitro loosen and
reverse fibril formation as determined by spectroscopy. Other investigations
have shown that reduction in intracellular neuronal copper levels down regulates
the expression of amyloid precursor protein (APP), a hallmark AD
protein.
Oral
TTM’s specificity and unique mechanism of action for rapidly lowering toxic free
copper levels, combined with its history of success in completed
pivotal clinical trials of neurologically presenting Wilson’s disease, may
position oral TTM as the first available therapeutic agent capable of correcting
the serum and CNS fee copper dyshomeostasis that might represent an important
fundamental cause of AD. The National Institute of Health (NIH)
granted COPREXA
TM a grant in the amount of $306,172 in February 2007 in order to support
the testing of its utility for the treatment of AD. During
November 2007, our scientific collaborator reported preliminary results of the
use of oral TTM in Alzheimer’s disease animal studies, oral TTM demonstrated a
40% reduction (p<0.05) in insoluble amyloid-beta, a key Alzheimer’s disease
protein.
During
January 2008, we initiated a phase II clinical trial with oral TTM in
Alzheimer’s disease patients. We plan to pre-select patients with elevated
levels of “free” copper. This clinical trial received partial support from the
Italian Ministry of Health. Based on the manufacturing issue raised in the
clinical hold letter, we are currently evaluating the manufacturing issues
raised within the hold letter as it relates to the oral TTM batches prepared for
this phase II study. Since receipt of the written clinical hold letter, we have
informed our clinical collaborators for this study not to enroll anyone into the
study until further notice. We cannot provide any assurances that we will be
able to readily solve the manufacturing issues in the hold letter and continue
with this clinical trial.
Oral TTM
TM in for
Neurologic Wilson’s Disease
Based
upon receipt of written clinical hold letter communicated to a collaborator's
IND from the FDA and forwarded to us on March 26, 2008, the FDA communicated
concerns previously disclosed regarding the adequacy of the evidence of clinical
efficacy, safety, study quality, data collection and overall risk/benefit
profile of oral TTM for the treatment of neurologic Wilson's disease as
represented by the two completed clinical trials of TTM for neurologic Wilson's
disease that formed the basis of the previous NDA submission. In the written
clinical hold letter for the Wilson's disease IND, the FDA raised
additional chemistry, manufacturing and controls questions, regarding the
identity, strength and purity of oral TTM that will need to be resolved to the
satisfaction of the FDA before the clinical hold is lifted. In the written
clinical hold letter the FDA also provided non-clinical hold feedback
including the reference that the clinical endpoints, design and conduct of the
dose comparator study that has enrolled 40 patients to date will not be
sufficient for a NDA of oral TTM for neurological Wilson's disease. Based
on this written FDA communication, we believe that at the present time it
appears that the FDA will not deem the three existing clinical trials of oral
TTM to be sufficient for an NDA for this indication. Pipex plans to have a
Type B meeting with the FDA to discuss next steps for oral TTM development in
neurologic Wilson's disease.
6
ANTI-CD4
802-2
We are
developing a series of small molecule and peptide based inhibitors of the T-cell
CD4 co-receptor. The CD4 co-receptor is central to a number of autoimmune
disorders such as MS.
Our lead
anti-CD4 molecule, named 802-2, has demonstrated efficacy in a number of animal
models of autoimmune disease models, and it is currently being evaluated in a
phase I/II clinical trial for the prevention of graft-vs.-host disease. Anti-CD4
802-2 may represent the first clinical stage, nonantibody-based molecule
capable of inducing immune tolerance for a variety of CD4-mediated autoimmune
diseases.
Market Opportunity for
Anti-CD4 802-2 and Small Molecule CD4 Inhibitors
From a
commercial perspective, anti-CD4 802-2 and our other anti-CD4 molecules address
an autoimmune disease market projected to be $21 billion in 2006 with an
anticipated annual growth rate of 15% thereafter. Autoimmune diseases represent
the third-largest category of illness in the industrialized world, after heart
disease and cancer. A partial list of such diseases includes MS, psoriasis, and
rheumatoid arthritis, as well as “nontypical” CD4-mediated diseases such as
allergy and asthma.
CORRECTATM
(clotrimazole enema)
We are
developing CORRECTATM, a
proprietary retention enema formulation of the widely used topical antifungal
agent clotrimazole, for the treatment of acute refractory pouchitis, a subset of
inflammatory bowel disease (IBD) and ulcerative colitis (UC) market.
CORRECTATM is
currently the subject of a double-blind, placebo-controlled, multi-center,
one-month, phase II clinical trial for acute pouchitis.
Market Opportunity for
CORRECTATM
Pouchitis
is a debilitating complication that can develop following corrective surgical
treatment of ulcerative colitis, wherein an ileal reservoir (or pouch) is
constructed to enable normal bowel movements after removal of the diseased
colon. This ileal reservoir can become inflamed, leading to debilitating
gastrointestinal symptoms including diarrhea, incontinence, bleeding, fever and
urgency. Currently, there are no approved treatments for pouchitis. Published
scientific data suggest that there are approximately 30,000 to 45,000 pouchitis
patients and between 5,000 to 10,000 refractory pouchitis patients in the
U.S.
FreeboundTM (metals diagnostic
device)
We are
developing a proprietary diagnostic device, FreeboundTM capable of measuring
levels of free and bound metals in biological samples. In order to improve the
manufacturing process of Freebound's disposable assay component while at the
same time preserving capital, in the first quarter of 2008 we suspended testing
of Freebound pursuant to the Pre-IDE protocol that we filed with the FDA in
October 2007 and have entered into a research and supply agreement with a
supplier and have initiated limited testing of these newly supplied disposable
assay components.
Intellectual
Property
Our goal
is to (a) obtain, maintain, and enforce patent protection for our products,
formulations, processes, methods, and other proprietary technologies, (b)
preserve our trade secrets, and (c) operate without infringing on the
proprietary rights of other parties, worldwide. We seek, where appropriate, the
broadest intellectual property protection for product candidates, proprietary
information, and proprietary technology through a combination of contractual
arrangements and patents.
We have
exclusively licensed from various universities issued patent and patents
applications, including foreign equivalents relating to our product candidates.
We also file patent applications for inventions invented or discovered by
us.
Some of
our products also have various regulatory exclusivities, such as “Orphan
Drug” designations including, oral TTM and CORRECTATM.
Orphan drug designations provide 7 years of market exclusivity in the U.S. and
10 years of marketing exclusivity in Europe. Specifically, we have
obtained orphan drug protection for the use of oral TTM in the treatment of
neurologic Wilson’s disease. We have also obtained orphan drug protection for
the use of CORRECTATM for the treatment of
acute pouchitis. These regulatory exclusivities combined with our patents and
patent applications provide for supplemental intellectual property protection
for our products against competitors.
7
Below is
a description of our license and development agreements relating to our product
candidates:
University
of Michigan (UM) Exclusive License Agreement
We have
entered into an exclusive worldwide license agreement with the University of
Michigan (UM) for all uses of U.S. Patent No. 6,855,340, corresponding
international applications, and a related corresponding patent application that
relates to various uses of anti-copper therapeutics, including oral TTM, to
treat inflammatory and fibrotic diseases. Pursuant to this agreement, we will
use our best efforts to commercialize oral TTM for the therapeutic
uses embodied in the issued patent and pending patent application; reimburse UM
for patent expenses; pay UM royalties equal to 2% of net sales of oral TTM for
uses covered by the UM patents; issue UM 422,314 shares of our common stock; pay
UM success-based milestone fees totaling $350,000 (the first of which
is due when we file an NDA and the second of which is due when we receive FDA
approval for oral TTM in an indication covered by the UM patents),
and indemnify UM against certain liabilities.
Collaborative
Research and Development Agreement with UM
During
September 2005, we entered into a three-year sponsored research agreement with
UM relating to expanding the therapeutic utility of oral TTM to treat other
copper mediated diseases. Pursuant to that agreement, we sponsor approximately
$450,000 per annum, payable in monthly installments. This agreement
can be extended for an additional two-year period. This agreement initially
expires August 30, 2008. As part of our corporate restructuring
during March 2008, we provided notice of termination of this
agreement.
Consulting
Agreement with Dr. George Brewer
We have
entered into a three-year consulting agreement with Dr. George Brewer, inventor
of the oral TTM technology. Pursuant to this agreement, we pay Dr. Brewer a
quarterly fee of $30,000. We also issued to Dr. Brewer options to
acquire 433,314 shares of our common stock and agreed to pay
Dr. Brewer a royalty on sales of oral TTM equal to 3% of net sales
for 17 years. This agreement has a provision for a two-year extension.
McLean
Hospital Exclusive License Agreement
We have
entered into an exclusive license agreement with the McLean Hospital, a Harvard
University hospital, relating to U.S. Patent No. 6,610,324 and its foreign
equivalents, entitled “Flupirtine in the treatment of fibromyalgia and related
conditions.” Pursuant to this agreement, we agreed to pay McLean royalties on
net sales of flupirtine equal to 3.5% of net sales of flupirtine for indications
covered by the issued patents, reduced to 1.75% if we have a license to other
intellectual property covering those indications; use our best efforts to
commercialize flupirtine for the therapeutic uses embodied in the patent
applications; reimburse back patent costs of approximately $41,830; and pay the
following milestone payments: $150,000 upon the initiation of a pivotal phase
III clinical trial of flupirtine; $300,000 upon the filing of an NDA for
flupirtine; and $600,000 upon FDA approval of flupirtine.
University
of Southern California Agreement
Through
our majority owned subsidiary Solovax we have an exclusive license agreement, as
amended, with the University of Southern California (USC) to license U.S. Patent
Application serial nos. 09/156509 and 10/773356 and its foreign equivalents
entitled “T-Cell Vaccination for the Treatment of Multiple Sclerosis.” Under
this agreement we are required to reimburse USC’s patent expenses and pay USC
royalties of 4% of net sales relating to the vaccine.
Children’s
Hospital-Boston Agreement
Our
subsidiary Effective Pharmaceuticals, Inc. (EPI), has entered into an exclusive
worldwide license agreement with Children’s Hospital Medical Corporation, an
affiliate of Children’s Hospital-Boston, relating to a certain pending patent
application covering all gastrointestinal, hepatic, and rectal uses of the
clotrimazole technology, including CORRECTATM.
Pursuant to this agreement, we owe a $150,000 upfront payment in two equal
installments, of which the first installment has been paid, as well as annual
maintenance fees, milestone payments totaling $3 million that are payable on
issuance of U.S. and European patents covering the clotrimazole technology, on
initiation of a pivotal phase III clinical trial, on filing of a New Drug
Application (NDA), and on approval of an NDA with the FDA and European Medical
Agency, as well as royalties on net sales of the clotrimazole technology covered
by the licensed patents. We may be permitted to partially pay milestone payments
in the form of equity. We also acquired rights to valuable data generated under
an investigational new drug (IND) application filing with the FDA and an orphan
drug designation. These data include all preclinical and clinical data know-how
relating to the clotrimazole technology. We would also be required to indemnify
Children’s Hospital and its employees against certain liabilities.
8
Thomas
Jefferson University License Agreement
Our
majority-owned subsidiary CD4 Biosciences Inc. has entered into an exclusive
worldwide license agreement with Thomas Jefferson University (TJU) relating to
certain U.S. and foreign issued patents and patent applications relating to all
uses of anti-CD4 802-2 and CD4 inhibitor technology. We are obligated to pay
annual maintenance fees, milestone payments upon the filing of an NDA and
approval of an NDA with the FDA, as well as royalties on net sales of anti-CD4
802-2 and other anti-CD4 molecules covered by the licensed patents. We also
received rights to valuable data generated under any IND application filing,
which includes toxicology and manufacturing information relating to anti-CD4
802-2. As partial consideration for this license, TJU was issued shares
representing 5% of the common stock of CD4 Biosciences Inc. We also agreed that
TJU would receive anti-dilution protection on those CD4 shares through the first
$2 million in financing to CD4. We also agree to indemnify TJU against certain
liabilities.
The
Regents of University of California License Agreement
We have
an exclusive worldwide license agreement with the Regents of the University of
California relating to an issued US Patent No. 6,936,599 and pending patent
applications covering the uses of the TRIMESTATM
technology. Pursuant to this agreement, we paid an upfront license fee of
$20,000, reimbursed patent expenses of $41,000 and agreed to pay a license fee
of $25,000 during 2006, as well as annual maintenance fees, milestone payments
totaling $750,000 that are payable on filing an NDA, and on approval of an NDA
with the FDA, as well as royalties on net sales of the TRIMESTA TM
technology covered by the licensed patents. If we become public or are
acquired by a public company, we may be permitted to partially pay milestone
payments in the form of equity.
Oregon
Health & Sciences License Agreement
We have
an exclusive worldwide license agreement with Oregon Health & Sciences
University relating to various doses of estrogens in combination with
immunotherapeutics for the treatment of autoimmune diseases. Pursuant to this
agreement, we paid an upfront license fee of $1,500 and reimbursed patent
expenses of $38,160. Milestone payments totaling $575,000 may be due upon the
achievement of certain milestones, as well as minimum royalty payments of
$210,000 and royalties on net sales for the technology covered by the licensed
patents. We have the ability to make these milestone payments in the form of
equity.
Maine
Medical Institute License Agreement
We have
an exclusive worldwide license agreement with Maine Medical Institute relating
to various uses of anti-copper therapies. Pursuant to this agreement, we paid in
equity, an upfront license fee of $20,000 made in two installments will
reimburse patent expenses of $45,000 over a three year period. Milestone
payments totaling $350,000 that are payable on filing an NDA, and on approval of
an NDA with the FDA, as well as royalties on net sales for the technology
covered by the licensed patents. We have the ability to make these milestone
payments in the form of equity. As part of our corporate
restructuring during March 2008, we provided notice of termination of this
agreement.
Manufacturing
We
utilize contract manufacturing firms to produce the bulk active ingredients for
oral TTM, TRIMESTATM,
Zinc-monocysteine, CORRECTATM, Anti-CD4
802-2, and EFFIRMATM in
accordance with “current good manufacturing processes” (cGMP) guidelines
outlined by the FDA. During February 2007, we leased a 17,600 square foot
facility in Ann Arbor, MI which will be used to produce oral capsule products
under GMP conditions. We have manufactured oral TTM at this
site.
Sales
and Marketing
We plan
to establish our own in-house neuroscience sales and marketing effort in the
United States to market our neurology products, specifically oral TTM and
TRIMESTA
TM. As we expand the use of our products into larger CNS
diseases, we will be able to utilize our existing marketing infrastructure to
market these products. We may choose to enter into a co-promotion or licensing
agreement for specific territories with biotechnology or pharmaceutical
companies to market CORRECTATM,
Anti-CD4 802-2, EFFIRMATM,
Zinc-monocysteine, SOLOVAX, TM and
certain uses of oral TTM.
9
ITEM
1A. RISK FACTORS
An
investment in our securities is highly speculative and involves a high degree of
risk. Therefore, in evaluating us and our business you should carefully consider
the risks set forth below, which are only a few of the risks associated with
investing in our common stock. You should be in a position to risk the loss of
your entire investment.
RISKS
RELATING TO OUR BUSINESS
We
are a development stage company. We currently have no product revenues and will
need to raise additional capital to operate our business.
We are a
development stage company that has experienced significant losses since
inception and has a significant accumulated deficit. We expect to incur
additional operating losses in the future and expect our cumulative losses to
increase. To date, we have generated no product revenues. As of December 31,
2007, we have expended approximately $17.3 million on a consolidated basis
acquiring and developing our current product candidates. Until such time as we
receive approval from the FDA and other regulatory authorities for our product
candidates, we will not be permitted to sell our drugs and will not have product
revenues. Therefore, for the foreseeable future we will have to fund all of our
operations and capital expenditures from equity and debt offerings, cash on
hand, licensing fees, and grants. We will need to seek additional sources of
financing and such additional financing may not be available on favorable terms,
if at all. If we do not succeed in raising additional funds on acceptable terms,
we may be unable to complete planned pre-clinical and clinical trials or obtain
approval of our product candidates from the FDA and other regulatory
authorities. In addition, we could be forced to discontinue product development,
reduce or forego sales and marketing efforts, and forego attractive business
opportunities. Any additional sources of financing will likely involve the
issuance of our equity or debt securities, which will have a dilutive effect on
our stockholders.
We
are not currently profitable and may never become profitable.
We have a
history of losses and expect to incur substantial losses and negative operating
cash flow for the foreseeable future. Even if we succeed in developing and
commercializing one or more of our product candidates, we expect to incur
substantial losses for the foreseeable future and may never become profitable.
We also expect to continue to incur significant operating and capital
expenditures and anticipate that our expenses will increase substantially in the
foreseeable future as we do the following:
· continue
to undertake pre-clinical development and clinical trials for our product
candidates;
· seek
regulatory approvals for our product candidates;
· implement
additional internal systems and infrastructure;
· lease
additional or alternative office facilities; and
· hire
additional personnel, including members of our management team.
We also
expect to experience negative cash flow for the foreseeable future as we fund
our technology development with capital expenditures. As a result, we will need
to generate significant revenues in order to achieve and maintain profitability.
We may not be able to generate these revenues or achieve profitability in the
future. Our failure to achieve or maintain profitability could negatively impact
the value of our common stock and underlying securities.
We
have a limited operating history on which investors can base an investment
decision.
We are a
development-stage company and have not demonstrated our ability to perform the
functions necessary for the successful commercialization of any of our product
candidates. The successful commercialization of our product candidates will
require us to perform a variety of functions, including:
· continuing
to undertake pre-clinical development and clinical trials;
· participating
in regulatory approval processes;
· formulating
and manufacturing products; and
· conducting
sales and marketing activities.
10
Our
operations have been limited to organizing and staffing our company, acquiring,
developing, and securing our proprietary technology, and undertaking
pre-clinical trials and Phase I/II, and Phase II and Phase III clinical trials
of our principal product candidates. These operations provide a limited basis
for you to assess our ability to commercialize our product candidates and the
advisability of investing in our securities.
Our
NDA for oral TTM has not been accepted for filing and/or we may not obtain the
necessary U.S. or worldwide regulatory approvals to commercialize oral TTM or
one of our product(s).
On
November 28, 2007, we filed a New Drug Application (NDA) with the Food and Drug
Administration (FDA) seeking approval to market oral TTM (oral
tetrathiomolybdate) for initially presenting neurologic Wilson's disease. On
January 28, 2008 representing sixty (60) days from the date of NDA filing we
received notification from the FDA that our NDA has not been accepted for
further review and the FDA issued a refusal to file letter ("RTF"). In the RTF
letter the FDA cited various deficiencies in the NDA filing, including, the
formatting and presentation of the data, preliminary assessments concerning the
adequacy and quality of the clinical evidence to support the safety and efficacy
of oral TTM, the necessity to conduct a Segment III preclinical reproductive
toxicology study as well as chemistry, manufacturing and controls issues
regarding the identity, strength and purity of oral TTM. Given the receipt of
the RTF letter, we will face substantial delays in our ability to prepare and
re-file a new NDA, if at all, and potential approval to market oral
TTM.
On
February 26, 2008, we completed a Type A meeting with the FDA to discuss the
deficiencies raised in the RTF letter. Based on this meeting with the FDA, Pipex
believes it reached an understanding with the FDA on a course of action to
resolve all of the filing issues raised in the RTF letter. Nevertheless, the FDA
raised concerns regarding the adequacy of the evidence of clinical efficacy,
safety, study quality, data collection and overall risk/benefit profile of oral
TTM for neurologic Wilson's disease as represented by the two completed clinical
trials of oral TTM for neurologic Wilson's disease that formed the basis of the
NDA. Even if Pipex is successful in preparing and filing a revised NDA, Pipex
cannot provide any assurances that a newly filed NDA will be accepted for filing
or that upon review of the NDA by the FDA, Pipex will be successful in
overcoming such FDA concerns and that oral TTM for initially presenting
neurologic Wilson's disease will be approved by the FDA. The clinical trials for
oral TTM which formed the basis of the NDA filing were conducted over a period
of 18 years from 1998 to 2005 prior to entering into our license agreement for
oral TTM and were conducted under an investigator initiated IND by our
scientific advisor and consultant, Dr. George Brewer under grant support from
various non-profit foundations and governmental agencies including the FDA’s
Orphan Products Group. In the event that we are able to prepare, file and obtain
FDA acceptance of a new NDA filing for oral TTM, we cannot provide any
assurances that after the FDA reviews our new submission, that the new NDA
submission will overcome the FDA's concerns raised in the RTF letter sufficient
for approval of oral TTM or that the FDA will not upon further review raise
additional concerns regarding manufacturing, clinical, or nonclinical which may
impact the potential approvability of oral TTM for the treatment of neurologic
Wilson’s disease.
In order
to enhance a resubmitted NDA filing for oral TTM for the treatment of neurologic
Wilson’s disease, at the February 26, 2008 Type A meeting Pipex discussed with
the FDA Pipex’s plans to schedule a Type B meeting with the FDA to discuss the
utility of providing the FDA with additional efficacy data from an ongoing
double-blind, comparator, dose optimization clinical trial of oral TTM for the
treatment of neurologic Wilson’s disease. To date, this third study has enrolled
and completed dosing in approximately 40 neurologically presenting Wilson’s
disease patients. At the Type B meeting to be scheduled, Pipex intends to
present potential, available pharmacokinetic and pharmacodynamic data (such as
and including oral TTM's effects on lowering serum free copper levels in
patients) from this third clinical trial as well as a summarization of the data
from the previously completed clinical trials with oral TTM for neurologic
Wilson’s disease. The feedback from this Type B meeting with the FDA will
determine the timing of any potential NDA resubmission for oral TTM for this
indication and may result in Pipex discontinuing the NDA refiling process for
oral TTM as well as potentially our planned MAA filing in Europe. Additionally,
depending on the analysis of additional data, the FDA may request a separate
pharmacokinetic study or additional clinical studies.
On March
17, 2008, Dr. George Brewer informed us that pursuant to a teleconference
between Dr. Brewer and the FDA of the same date, Dr. Brewer's physician
sponsored investigational new drug application (IND) for oral tetrathiomolybdate
for Wilson's disease had been placed on clinical hold pending the potential
resolution, if any, of items described in the RTF. The IND that is
the subject of the clinical hold includes an active dose optimization comparator
protocol of oral tetrathiomolybdate that to date has enrolled and treated
approximately 40 neurologically presenting Wilson's disease patients the data
from which we intend to collect, analyze and present to the FDA at a Type B
meeting to be requested to discuss a potential revised New Drug Application
submission. We cannot provide any assurance that Dr. Brewer will be successful
in lifting the clinical hold imposed by the FDA, that we will be successful in
preparing and filing a revised NDA, that any such newly filed NDA will be
accepted for filing or that upon review of any such NDA by the FDA, we will be
successful in overcoming the concerns raised by the FDA and that oral
tetrathiomolybdate for initially presenting neurologic Wilson's disease will be
approved by the FDA. Based upon receipt of a written clinical hold letter
communicated to Dr. Brewer from the FDA and forwarded to us on March 26, 2008,
the FDA detailed its issues and concerns that are required to be
addressed in order to lift the clinical hold, including chemistry, manufacturing
and control (CMC) issues concerning the identity, strength and purity of oral
TTM. We presently intend to assist Dr. Brewer in resolving the CMC issues raised
by the FDA and do not presently intend to initiate patient dosing in our Italian
clinical trial of oral TTM for Alzheimer's disease until such issues are
resolved to the satisfaction of the FDA. We cannot provide any assurance that we
will be successful in overcoming such CMC issues to the satisfaction of the FDA.
The written clinical hold letter also provided feedback not related to the
clinical hold per se including the reference that the clinical endpoints, design
and conduct of the dose comparator clinical study that has enrolled 40 patients
to date will most likely not be sufficient for a NDA of oral TTM for neurologic
Wilson's disease. Based on
this communication, Pipex plans to have a Type B meeting with the FDA to discuss
next steps for oral TTM development in neurologic Wilson's disease. Given
the issues raised by the FDA in its RTF letter of January 28, 2008 as well as
the FDA's written clinical hold letter to Dr. George Brewer forwarded to us on
March 26, 2008, at the present time it appears that the FDA will not deem the
three existing clinical trials of oral TTM to be sufficient for a New Drug
Application of oral TTM for initially presenting neurologic Wilson's disease.
Given the limited number of patients afflicted by this disease, an additional
clinical trial of oral TTM for this indication will necessarily take a
substantial amount of time and resources to plan, enroll and complete. The
design of such further study is also uncertain given that existing drugs
approved for Wilson's disease appear to be contraindicated for initially
presenting neurologic Wilson's disease or too slow acting for this critically
ill patient population. Should we elect to abandon our efforts to seek U.S.
and/or European approval of oral TTM for neurologically presenting Wilson's
disease we will most likely not have sufficient resources to pursue all of the
additional indications for oral TTM that are the subject of our research and
development, including, idiopathic pulmonary fibrosis, Alzheimer's disease,
primary biliary cirrhosis and Huntington's disease. We may elect to abandon our
efforts to develop oral TTM for any or all of these indications, including,
Wilson's disease.
11
We will
need FDA approval to commercialize our product candidates in the U.S. and
approvals from equivalent regulatory authorities in foreign jurisdictions to
commercialize our product candidates in those jurisdictions. In order to obtain
FDA approval for any of our product candidates, we must submit to the
FDA an NDA, demonstrating that the product candidate is safe for humans and
effective for its intended use and that the product candidate can be
consistently manufactured and is stable. This demonstration requires significant
research and animal tests, which are referred to as “pre-clinical studies,”
human tests, which are referred to as “clinical trials” as well as the ability
to manufacture the product candidate, referred to as “chemistry
manufacturing control” or “CMC.” We will also need to file additional
investigative new drug applications and protocols in order to initiate clinical
testing of our drug candidates in new therapeutic indications and delays in
obtaining required FDA and institutional review board approvals
to commence such studies may delay our initiation of such planned
additional studies.
Satisfying
the FDA’s regulatory requirements typically takes many years, depending on the
type, complexity, and novelty of the product candidate, and requires substantial
resources for research development, and testing. We cannot predict whether our
research and clinical approaches will result in drugs that the FDA considers
safe for humans and effective for indicated uses. The FDA has substantial
discretion in the drug approval process and may require us to conduct additional
pre-clinical and clinical testing or to perform post-marketing studies.
The
approval process may also be delayed by changes in government regulation, future
legislation or administrative action, or changes in FDA policy that occur prior
to or during our regulatory review. Delays in obtaining regulatory approvals may
do the following:
· delay
commercialization of, and our ability to derive product revenues from, our
product candidates;
· impose
costly procedures on us; and
· diminish
any competitive advantages that we may otherwise enjoy.
Even if
we comply with all FDA requests, the FDA may ultimately reject one or more of
our NDAs. We cannot be sure that we will ever obtain regulatory clearance for
our product candidates. Failure to obtain FDA approval of any of our product
candidates will severely undermine our business by reducing our number of
salable products and, therefore, corresponding product revenues.
In
foreign jurisdictions, we must receive approval from the appropriate regulatory
authorities before we can commercialize our drugs. Foreign regulatory approval
processes generally include all of the risks associated with the FDA approval
procedures described above. We cannot assure you that we will receive the
approvals necessary to commercialize our product candidate for sale outside the
United States.
We
may not be able to retain rights licensed to us by others to commercialize key
products and may not be able to establish or maintain the relationships we need
to develop, manufacture, and market our products.
In
addition to our own patent applications, we also currently rely on an exclusive
worldwide license agreement with the University of Michigan relating to various
uses of oral TTM. We also have an exclusive license agreement with the McLean
Hospital relating to the use of EFFIRMATM
to treat fibromyalgia syndrome; an exclusive license agreement with
Thomas Jefferson University relating to our anti-CD4 inhibitors; an
exclusive license agreement with the Regents of the University of
California relating to our TRIMESTATM
technology; an exclusive license agreement with the Children’s
Hospital-Boston relating to our CORRECTATM
technology and an exclusive license agreement to license our T-cell vaccine
program from the University of Southern California (USC). Each of
these agreements requires us to use our best efforts to commercialize each of
the technologies as well as meet certain diligence requirements and timelines in
order to keep the license agreement in effect. In the event we are not able to
meet our diligence requirements, we may not be able to retain the rights granted
under our agreements or renegotiate our arrangement with these institutions on
reasonable terms, or at all.
12
Furthermore,
we currently have very limited product development capabilities, and limited
marketing or sales capabilities. For us to research, develop, and test our
product candidates, we would need to contract with outside researchers, in most
cases those parties that did the original research and from whom we have
licensed the technologies.
We can
give no assurances that any of our issued patents licensed to us or any of our
other patent applications will provide us with significant proprietary
protection or be of commercial benefit to us. Furthermore, the issuance of a
patent is not conclusive as to its validity or enforceability, nor does the
issuance of a patent provide the patent holder with freedom to operate without
infringing the patent rights of others.
Developments
by competitors may render our products or technologies obsolete or
non-competitive.
Companies
that currently sell or are developing both generic and proprietary
pharmaceutical compounds to treat central-nervous-system,
inflammatory, autoimmune and fibrotic diseases include: Pfizer, Inc.,
Aton Pharma, GlaxoSmithKline Pharmaceuticals, Shire Pharmaceuticals, Plc., Merck
& Co., Eli Lilly & Co., Serono, SA, Biogen Idec, Inc.,
Achillion, Ltd., Active Biotech, Inc., Panteri Biosciences, Meda, Merrimack
Pharmaceuticals, Inc., Schering AG, Forest Laboratories, Inc.,
Attenuon, LLC, Cypress Biosciences, Inc., Novartis, Axcan Pharma, Inc., Teva
Pharmaceuticals, Inc., Intermune, Inc. Fibrogen, Inc., Rare Disease
Therapeutics, Inc., Prana Biotechnology, Inc., Merz & Co., AstraZeneca
Pharmaceuticals, Inc., Chiesi Pharmaceuticals, Inc., Targacept, Inc.,
and Johnson & Johnson, Inc. Alternative technologies or alternative delivery
or dosages of already approved therapies are being developed to treat
autoimmune inflammatory, Fibromyalgia, MS, fibrotic, Alzheimer’s and Wilson’s
diseases, several of which may be approved or are in early
and advanced clinical trials, such as pirfenidone, milnacipram,
Lyrica, Cymbalta, Effexor, Actimmune and other interferon preparations. Unlike
us, many of our competitors have significant financial and human resources. In
addition, academic research centers may develop technologies that compete with
our CORRECTATM,
TRIMESTA
TM, zincmonocysteine, anti-CD4 inhibitors, EFFIRMATM
and oral TTM technologies. We are aware that other companies are developing
competitive anti-copper therapies that are in various stages of clinical trials
or have been approved by regulatory authorities. For example, trientine,
d-pennicillamine and zinc based therapies, all FDA approved anti-copper
agents have been or are being tested in various treatment regiments for the
treatment of Wilson’s disease. Should clinicians or regulatory authorities view
these therapeutic regiments as or more effective than oral TTM in the treatment
of neurologic Wilson’s disease, this might delay or prevent us from obtaining
regulatory approval for oral TTM, or it might prevent us from obtaining
favorable reimbursement rates from payers, such as Medicare, Medicaid and
private insurers.
We
may not succeed in enforcing our orphan drug designations.
Oral TTM
has been designated by the FDA as an “orphan drug” for the treatment of Wilson’s
disease patients presenting with neurologic complications. CORRECTATM has
also been designated by the FDA as an “orphan drug” for the treatment of
pouchitis patients. We intend to file for “orphan drug” designations in the EMEA
(the European equivalent of the FDA) for both oral TTM and CORRECTATM for
similar uses. Pursuant to our agreements with our scientific inventors and
universities, we have acquired these designations. Orphan drug designation is an
important element of our competitive strategy because there are no composition
of matter patents for oral TTM a designated orphan drug for a rare disease
generally receives marketing exclusivity for use of that drug for the designated
condition for a period of seven years in the United States and ten years in the
European Union.
To be
successful in enforcing this designation, our new drug application would need to
be the first NDA approved to use oral TTM to treat Wilson’s disease. While we
are not aware of any other companies that have sought orphan drug designation
for oral TTM or its active ingredient, tetrathiomolybdate, for this indication,
other companies may in the future seek it and may obtain FDA marketing approval
before we do. In addition, the FDA may permit other companies to market a form
of tetrathiomolybdate to treat Wilson’s disease patients with neurologic
complication if their product demonstrates clinical superiority. This could
create a more competitive market for us.
Competitors
could develop and gain FDA approval of our products for a different
indication.
A
competitor could develop our products in a similar format, but for a different
indication. For example, other companies could manufacture and develop oral TTM
and its active ingredient, tetrathiomolybdate, and secure approvals for
different indications. We are aware that a potential competitor has an exclusive
license from the University of Michigan (UM) to an issued U.S. patent that
relates to the use of tetrathiomolybdate to treat angiogenic diseases
(the “Angiogenic Patent”) and is currently in phase I and phase II clinical
trials for the treatment of various forms of cancer. To our knowledge, this
competitor and UM have filed additional patent applications claiming various
analog structures and formulations of tetrathiomolybdate to treat various
diseases. Further, we cannot predict whether our competitor might obtain
approval in the U.S. or Europe to market tetrathiomolybdate for cancer or
another indication ahead of us. We also cannot predict whether, if issued, any
patent corresponding to the Angiogenic Patent may prevent us from conducting our
business or result in lengthy and costly litigation or the need for a license.
Furthermore, if we need to obtain a license to these or other patents in order
to conduct our business, we may find that it is not available to us on
commercially reasonable terms, or is not available to us at
all.
13
If the
FDA approves other tetrathiomolybdate products to treat indications other than
those covered by our issued or pending patent applications, physicians may elect
to prescribe a competitor’s tetrathiomolybdate to treat Wilson’s disease—this is
commonly referred to as “off-label” use. While under FDA regulations a
competitor is not allowed to promote off-label uses of its product, the FDA does
not regulate the practice of medicine and, as a result, cannot direct physicians
as to which source it should use for the tetrathiomolybdate they prescribe to
their patients. Consequently, we might be limited in our ability to prevent
off-label use of a competitor’s tetrathiomolybdate to treat Wilson’s disease or
inflammatory or fibrotic disease, even if we have orphan drug exclusivity. Our
competitor might seek FDA or EMEA approval to market tetrathiomolybdate for any
therapeutic indication, including Wilson’s disease or idiopathic pulmonary
fibrosis (IPF). If we are not able to obtain and enforce these patents, a
competitor could use tetrathiomolybdate for a treatment or use not covered by
any of our patents.
Since we
do not have composition of matter patent claims for oral TTM, EFFIRMA
TM, and TRIMESTA
TM, others may obtain approvals for other uses of these products. For
example, the active ingredients in both EFFIRMA
TM and TRIMESTA
TM have been approved for marketing in overseas countries for different
uses. Other companies, including the original developers or affiliates of these
products may seek to develop EFFIRMA
TM or TRIMESTA
TM for these uses in the US or any country we are seeking approval for.
We cannot provide any assurances that any other company may obtain FDA approval
for products that contain EFFIRMATM
or TRIMESTATM
that might adversely affect our ability to develop and market these products in
the US.
We
rely primarily on method patents and patent applications and various regulatory
exclusivities to protect the development of our technologies, and our ability to
compete may decrease or be eliminated if we are not able to protect our
proprietary technology.
Our
competitiveness may be adversely affected if we are unable to protect our
proprietary technologies. Other than anti-CD4 802-2 and zinc-monocysteine, there
are no composition of matter patents for TRIMESTATM,
EFFIRMATM,
CORRECTATM,
Solovax, oral TTM or their respective active and zinc-monocysteine ingredients
estriol, flupirtine, clotrimazole and tetrathiomolybdate. Additionally, we do
not have an issued patent for oral TTMs use to treat Wilson’s disease, although
we do have Orphan Drug Designation for this indication. Orphan Drug Designation
provides protection for seven years of marketing exclusivity for that product in
that disease indication in the U.S. We also expect to rely on patent protection
from an issued U.S. Patent for the use of oral TTM and related compounds to
treat inflammatory and fibrotic diseases (U.S. Patent No 6,855,340). These
patents have been exclusively licensed to us. We have also filed various pending
patent applications which cover various formulations, packaging, distribution
& monitoring methods for oral TTM. We rely on issued patent and pending
patent applications for use of TRIMESTATM to
treat MS (issued U.S. Patent No. 6,936,599) and various other therapeutic
indications which have been exclusively licensed to us. We have also exclusively
licensed an issued patent for the treatment of fibromyalgia with EFFIRMATM and
have pending patent applications for our uses of CORRECTA
TM.
Our zinc-monocysteine (z-monocys) product candidate is exclusively
licensed from its inventors, David A. Newsome and David Tate. Z-monocys is the
subject of two issued U.S. patents, 7,164,035 and 6,586,611 and pending U.S.
patent application ser. no. 11/621,380.
In March
2008, we received an English translation of a Russian disclosure, Zegzhda et.
al. Chemical Abstracts Vol. 85 Abstract No. 186052 (1976) that was recently
cited by the U.S. patent examiner during our prosecution of the pending U.S.
patent application Ser. No. 11/621,390. The translation of such disclosure
appears to describe an insoluble non-zinc-salt zinc monocysteine complex which
may impact the validity of claim 1 of U.S. patent 7,164,035.
We also
expect to rely on regulatory exclusivities, such as the Orphan Drug Designation
with the FDA and EMEA (“Orphan Drug”) to protect oral TTM,
CORRECTATM and our
other future products for certain therapeutic indications. Orphan Drug
protection provides for seven years of marketing exclusivity for that disease
indication in the U.S. and ten years of marketing exclusivity for that disease
indication in Europe. We have received an Orphan Drug Designation for the use of
CORRECTATM
to treat pouchitis as well as an Orphan Drug Designation for the use of oral TTM
to treat neurologically presenting Wilson’s disease and are in the process of
filing similar designations in Europe. Orphan Drug Designation is an important
element of our competitive strategy for oral TTM and CORRECTATM.
To be successful in enforcing this designation, our NDA would need to be the
first NDA approved to use oral TTM and CORRECTATM
for that indication. While we are not aware of any other companies that have
sought orphan drug designation for oral TTM and CORRECTATM
for any indication, other companies may in the future seek it and may obtain FDA
marketing approval before we do.
After the
Orphan Drug exclusivity period expires, assuming our patents are validly issued,
we still expect to rely on our issued and pending method of use patent
applications to protect our proprietary technology with respect to the
development of oral TTM, TRIMESTATM
and CORRECTATM.
The patent positions of pharmaceutical companies are uncertain and may involve
complex legal and factual questions. We may incur significant expense in
protecting our intellectual property and defending or assessing claims with
respect to intellectual property owned by others. Any patent or other
infringement litigation by or against us could cause us to incur significant
expense and divert the attention of our management.
14
We may
also rely on the United States Drug Price Competition and Patent Term
Restoration Act, commonly known as the “Hatch-Waxman Amendments,” to protect
some of our current product candidates, specifically oral TTM, TRIMESTATM,
zincmonocystine, Anti-CD4 802-2, EFFIRMATM
and other future product candidates we may develop. Once a drug containing a new
molecule is approved by the FDA, the FDA cannot accept an abbreviated NDA for a
generic drug containing that molecule for five years, although the FDA may
accept and approve a drug containing the molecule pursuant to an NDA supported
by independent clinical data. Recent amendments have been proposed that would
narrow the scope of Hatch-Waxman exclusivity and permit generic drugs to compete
with our drug.
In July 2007 our exclusively licensed European patent covering our
multivalent T-cell vaccine, SolvaxTM, was opposed and
revoked. In order to save resources, we have elected not to appeal such ruling
and may elect to abandon the license with USC.
Others
may file patent applications or obtain patents on similar technologies or
compounds that compete with our products. We cannot predict how broad the claims
in any such patents or applications will be, and whether they will be allowed.
Once claims have been issued, we cannot predict how they will be construed or
enforced. We may infringe intellectual property rights of others without being
aware of it. If another party claims we are infringing their technology, we
could have to defend an expensive and time consuming lawsuit, pay a large sum if
we are found to be infringing, or be prohibited from selling or licensing our
products unless we obtain a license or redesign our product, which may not be
possible.
We also
rely on trade secrets and proprietary know-how to develop and maintain our
competitive position. Some of our current or former employees, consultants, or
scientific advisors, or current or prospective corporate collaborators, may
unintentionally or willfully disclose our confidential information to
competitors or use our proprietary technology for their own benefit.
Furthermore, enforcing a claim alleging the infringement of our trade secrets
would be expensive and difficult to prove, making the outcome uncertain. Our
competitors may also independently develop similar knowledge, methods, and
know-how or gain access to our proprietary information through some other
means.
We
may fail to retain or recruit necessary personnel, and we may be unable to
secure the services of consultants.
As of
March 31, 2008, we have 12 full-time employees. We have also engaged regulatory
consultants to advise us on our dealings with the FDA and other foreign
regulatory authorities. We intend to recruit certain key executive officers,
including a Chief Financial Officer and Vice President of Regulatory Affairs
during 2008. Our future performance will depend in part on our ability to
successfully integrate newly hired executive officers into our management team
and our ability to develop an effective working relationship among senior
management.
Certain
of our officers, directors, (including Mr. Stergis, our Vice Chairman of the
Board and former Chief Operating Officer, Dr. Rudick, a director and former
Chief Medical Officer, Jeffrey Kraws, a director and former VP of Business
Development, Jeffrey Wolf, a director, and Dr. Kuo, a director) scientific
advisors, and consultants serve as officers, directors, scientific advisors, or
consultants of other biopharmaceutical or biotechnology companies which might be
developing competitive products to ours. None of our directors or officers is
obligated under any agreement or understanding with us to make any additional
products or technologies available to us. Similarly, we can give no assurances,
and we do not expect and stockholders should not expect, that any biomedical or
pharmaceutical product or technology identified by any of our directors or
affiliates in the future would be made available to us.
We can
expect this to also be the case with personnel that we engage in the future. We
can give no assurances that any such other companies will not have interests
that are in conflict with our interests.
Losing
key personnel or failing to recruit necessary additional personnel would impede
our ability to attain our development objectives. There is intense competition
for qualified personnel in the drug-development field, and we may not be able to
attract and retain the qualified personnel we would need to develop our
business.
We rely
on independent organizations, advisors, and consultants to perform certain
services for us, including handling substantially all aspects of regulatory
approval, clinical management, manufacturing, marketing, and sales. We expect
that this will continue to be the case. Such services may not always be
available to us on a timely basis when we need them.
We
may experience difficulties in obtaining sufficient quantities of our products
or other compounds.
In order
to successfully commercialize our product candidates, we must be able to
manufacture our products in commercial quantities, in compliance with regulatory
requirements, at acceptable costs, and in a timely manner. Manufacture of the
types of biopharmaceutical products that we propose to develop present various
risks. For example, manufacture of the active ingredient in oral TTM is a
complex process that can be difficult to scale up for purposes of producing
large quantities. This process can also be subject to delays, inefficiencies,
and poor or low yields of quality products. Furthermore, the active ingredient
of oral TTM is known to be subject to a loss of potency as a result of prolonged
exposure to moisture and other normal atmospheric conditions. We are developing
proprietary formulations and specialty packaging solutions to overcome this
stability issue, but we can give no assurances that we will be successful in
meeting the stability requirements required for approval by regulatory
authorities such as the FDA or the requirements that our new proprietary
formulations and drug product will demonstrate satisfactory comparability to
less stable formulations utilized in prior clinical trials. We may experience
delays in demonstrating satisfactory stability requirements and drug product
comparability requirements that could delay acceptance or approval of our
planned NDA for oral TTM.
15
Our
SOLOVAX T-cell vaccine technology is complex to manufacture. The vaccine is
manufactured through the procurement of a patient’s own T-cells derived from the
patient’s plasma. This manufacturing process involves incubation of T-cells,
irradiation and refrigeration of the cells. We plan to develop a revised
manufacturing procedure which will streamline quality control of the
vaccine.
Historically,
our manufacturing has been handled by contract manufacturers and compounding
pharmacies. We can give no assurances that we will be able to continue to use
our current manufacturer or be able to establish another relationship with a
manufacturer quickly enough so as not to disrupt commercialization of any of our
products, or that commercial quantities of any of our products, if approved for
marketing, will be available from contract manufacturers at acceptable
costs.
In
addition, any contract manufacturer that we select to manufacture our product
candidates might fail to maintain a current “good
manufacturing practices” (cGMP) manufacturing facility. During February 2007, we
established a commercial manufacturing facility for oral
TTM product in Ann Arbor, MI and we have hired and trained our
employees to comply with the extensive regulations applicable to such a
facility. Upon FDA inspection our facility and/or cGMP procedures may require
changes that could delay our intended product launch of oral TTM and other
products that might develop.
The cost
of manufacturing certain product candidates may make them prohibitively
expensive. In order to successfully commercialize our product candidates we may
be required to reduce the costs of production, and we may find that we are
unable to do so. We may be unable to obtain, or may be required to pay high
prices for compounds manufactured or sold by others that we need for comparison
purposes in clinical trials and studies for our product candidates.
Clinical
trials are very expensive, time-consuming, and difficult to design and
implement.
Human
clinical trials are very expensive and difficult to design and implement, in
part because they are subject to rigorous regulatory requirements. The clinical
trial process is also time-consuming. We estimate that clinical trials of our
product candidates would take at least several years to complete. Furthermore,
failure can occur at any stage of the trials, and we could encounter problems
that cause us to abandon or repeat clinical trials. Commencement and completion
of clinical trials may be delayed by several factors, including:
· unforeseen
safety issues;
· determination
of dosing;
· lack of
effectiveness during clinical trials;
· slower
than expected rates of patient recruitment;
· inability
to monitor patients adequately during or after treatment; and
· inability
or unwillingness of medical investigators to follow our clinical
protocols.
In
addition, we or the FDA may suspend our clinical trials at any time if it
appears that we are exposing participants to unacceptable health risks or if the
FDA finds deficiencies in our submissions or conduct of our trials.
The
results of our clinical trials may not support our product candidate
claims.
Even if
our clinical trials are completed as planned, we cannot be certain that the
results will support our product-candidate claims. Success in pre-clinical
testing and phase II clinical trials does not ensure that later phase II or
phase III clinical trials will be successful. We cannot be sure that the results
of later clinical trials would replicate the results of prior clinical trials
and pre-clinical testing. Clinical trials may fail to demonstrate that our
product candidates are safe for humans and effective for indicated uses. Any
such failure could cause us to abandon a product candidate and might delay
development of other product candidates. Any delay in, or termination of, our
clinical trials would delay our obtaining FDA approval for the affected product
candidate and, ultimately, our ability to commercialize that product
candidate.
Physicians
and patients may not accept and use our technologies.
Even if
the FDA approves our product candidates, physicians and patients may not accept
and use them. Acceptance and use of our product will depend upon a number of
factors, including the following:
16
· the
perception of members of the health care community, including physicians,
regarding the safety and effectiveness of our drugs;
· the
cost-effectiveness of our product relative to competing products;
· availability
of reimbursement for our products from government or other healthcare payers;
and
· the
effectiveness of marketing and distribution efforts by us and our licensees and
distributors, if any.
Because
we expect sales of our current product candidates, if approved, to generate
substantially all of our product revenues for the foreseeable future, the
failure of any of these drugs to find market acceptance would harm our business
and could require us to seek additional financing.
We
depend on researchers who are not under our control.
We depend
upon independent investigators and scientific collaborators, such as
universities and medical institutions, to conduct our pre-clinical and clinical
trials under agreements with us. These collaborators are not our employees and
we cannot control the amount or timing of resources that they devote to our
programs or the timing of their procurement of clinical-trial data. They may not
assign as great a priority to our programs or pursue them as diligently as we
would if we were undertaking those programs ourselves. Failing to devote
sufficient time and resources to our drug-development programs, or substandard
performance, could result in delay of any FDA applications and our
commercialization of the drug candidate involved.
Our oral
TTM program is highly dependent on Dr. George Brewer, Professor Emeritus at the
University of Michigan. Dr. Brewer was the principal investigator and conducted
the clinical trials over an 18 year period on the oral TTM clinical trials which
formed the basis of our NDA filing. We have retained Dr. Brewer, age 76 as an
advisor and consultant to Pipex. In the event of Dr. Brewer’s untimely death or
disability, may significantly hamper our developement capabilities of oral
TTM.
These
collaborators may also have relationships with other commercial entities, some
of which may compete with us. Our collaborators assisting our competitors at our
expense could harm our competitive position. For example, we depend on
scientific collaborators for our TRIMESTATM,
SOLOVAXTM,
CORRECTATM,
anti-CD4 802-2, EFFIRMATM
and oral TTM development programs. Specifically, all of the clinical trials have
been conducted under physician-sponsored investigational new drug applications
(INDs), not corporate-sponsored INDs. Additionally, the clinical trials for oral
TTM for the treatment of neurologic Wilson’s disease have been conducted and
completed prior to us licensing this technology from the University of Michigan.
Due to various patient privacy regulations and other administrative
matters, we have experienced delays and/or an inability to obtain clinical trial
data relating to oral TTM. As such, this delay or inability to obtain any
data might result our inability to obtain regulatory approvals for oral TTM and
our products. We are also dependent on government and private grants to fund
certain of our clinical trials for our product candidates. For example, TRIMESTA
has received a $5 million grant from the Southern Chapter of the National
Multiple Sclerosis Society which funds a majority of our ongoing phase II/III
clinical trial in relapsing remitting multiple sclerosis. If we are
unable to maintain these grants, we might be forced to scale back development of
these product candidates. We have experienced difficulty in collecting the data
or transferring these programs to corporate-sponsored INDs. Additionally, we are
aware that all of our scientific collaborators may also act as advisors to our
competitors.
We
have no experience selling, marketing, or distributing products and do not have
the capability to do so.
We
currently have no sales, marketing, or distribution capabilities. We do not
anticipate having resources in the foreseeable future to allocate to selling and
marketing our proposed products. Our success will depend, in part, on whether we
are able to enter into and maintain collaborative relationships with a
pharmaceutical or a biotechnology company charged with marketing one or more of
our products. We may not be able to establish or maintain such collaborative
arrangements or to commercialize our products in foreign territories, and even
if we do, our collaborators may not have effective sales forces.
If we do
not, or are unable to, enter into collaborative arrangements to sell and market
our proposed products, we will need to devote significant capital, management
resources, and time to establishing and developing an in-house marketing and
sales force with technical expertise. We may be unsuccessful in doing
so.
If
we fail to maintain positive relationships with particular individuals, we may
be unable to successfully develop our product candidates, conduct clinical
trials, and obtain financing.
17
If we
fail to maintain positive relationships with members of our management team or
if these individuals decrease their contributions to our company, our business
could be adversely impacted. We do not carry key employee insurance policies for
any of our key employees.
We also
rely greatly on employing and retaining other highly trained and experienced
senior management and scientific personnel. The competition for these and other
qualified personnel in the biotechnology field is intense. If we are not able to
attract and retain qualified scientific, technical, and managerial personnel, we
probably will be unable to achieve our business objectives.
We
may not be able to compete successfully for market share against other drug
companies.
The
markets for our product candidates are characterized by intense competition and
rapid technological advances. If our product candidates receive FDA approval,
they will compete with existing and future drugs and therapies developed,
manufactured, and marketed by others. Competing products may provide greater
therapeutic convenience or clinical or other benefits for a specific indication
than our products, or may offer comparable performance at a lower cost. If our
products fail to capture and maintain market share, we may not achieve
sufficient product revenues and our business will suffer.
We will
compete against fully integrated pharmaceutical companies and smaller companies
that are collaborating with larger pharmaceutical companies, academic
institutions, government agencies, or other public and private research
organizations. Many of these competitors have therapies to treat autoimmune
fibrotic and central nervous system diseases already approved or in development.
In addition, many of these competitors, either alone or together with their
collaborative partners, operate larger research-and-development programs than we
do, have substantially greater financial resources than we do, and have
significantly greater experience in the following areas:
· developing
drugs;
· undertaking
pre-clinical testing and human clinical trials;
· obtaining
FDA and other regulatory approvals of drugs;
· formulating
and manufacturing drugs; and
· launching,
marketing and selling drugs.
We
may incur substantial costs as a result of litigation or other proceedings
relating to patent and other intellectual property rights, as well as costs
associated with frivolous lawsuits.
If any
other person files patent applications, or is issued patents, claiming
technology also claimed by us in pending applications, we may be required to
participate in interference proceedings in the U.S. Patent and Trademark Office
to determine priority of invention. We, or our licensors, may also need to
participate in interference proceedings involving our issued patents and pending
applications of another entity.
We cannot
guarantee that the practice of our technologies will not conflict with the
rights of others. In some foreign jurisdictions, we could become involved in
opposition proceedings, either by opposing the validity of another’s foreign
patent or by persons opposing the validity of our foreign patents.
We may
also face frivolous litigation or lawsuits from various competitors or from
litigious securities attorneys. The cost to us of any litigation or other
proceeding relating to these areas, even if resolved in our favor, could be
substantial and could distract management from our business. Uncertainties
resulting from initiation and continuation of any litigation could have a
material adverse effect on our ability to continue our operations.
If
we infringe the rights of others we could be prevented from selling products or
forced to pay damages.
If our
products, methods, processes, and other technologies are found to infringe the
proprietary rights of other parties, we could be required to pay damages, or we
may be required to cease using the technology or to license rights from the
prevailing party. Any prevailing party may be unwilling to offer us a license on
commercially acceptable terms.
Our
ability to generate product revenues will be diminished if our drugs sell for
inadequate prices or patients are unable to obtain adequate levels of
reimbursement.
18
Our
ability to commercialize our drugs, alone or with collaborators, will depend in
part on the extent to which reimbursement is available from government and
health administration authorities, private health maintenance organizations,
health insurers, and other healthcare payers.
Significant
uncertainty exists as to the reimbursement status of newly approved healthcare
products. Healthcare payers, including Medicare, are challenging the prices
charged for medical products and services. Government and other healthcare
payers increasingly attempt to contain healthcare costs by limiting both
coverage and the level of reimbursement for drugs. Even if our product
candidates are approved by the FDA, insurance coverage may not be available, or
may be inadequate, to cover the cost of our drugs. This could affect our ability
to commercialize our products.
We
may not be able to obtain adequate insurance coverage against product liability
claims.
Our
business exposes us to the product liability risks inherent in the testing,
manufacturing, marketing, and sale of human therapeutic technologies and
products. Even if it is available, product liability insurance for the
pharmaceutical and biotechnology industry generally is expensive. Adequate
insurance coverage may not be available at a reasonable cost.
RISKS
RELATING TO OUR STOCK
We
will seek to raise additional funds in the future, which may be dilutive to
stockholders or impose operational restrictions.
We expect
to seek to raise additional capital in the future to help fund development of
our proposed products. If we raise additional capital through the issuance of
equity or debt securities, the percentage ownership of our current stockholders
will be reduced. We may also enter into strategic transactions, issue equity as
part of license issue fees to our licensors, compensate consultants using equity
that may be dilutive. Our stockholders may experience additional dilution in net
book value per share and any additional equity securities may have rights,
preferences and privileges senior to those of the holders of our common stock.
If we cannot raise additional funds, we will have to delay development
activities of our products candidates.
We
are controlled by our current officers, directors, and principal
stockholders.
Currently,
our directors, executive officers, and principal stockholders beneficially own a
majority of our common stock. As a result, they will be able to exert
substantial influence over the election of our board of directors and the vote
on issues submitted to our stockholders.
Our
shares of common stock are from time to time thinly traded, so stockholders may
be unable to sell at or near ask prices or at all if they need to sell shares to
raise money or otherwise desire to liquidate their shares.
Our
common stock has from time to time been “thinly-traded,” meaning that the number
of persons interested in purchasing our common stock at or near ask prices at
any given time may be relatively small or non-existent. This situation is
attributable to a number of factors, including the fact that we are a small
company that is relatively unknown to stock analysts, stock brokers,
institutional investors and others in the investment community that generate or
influence sales volume, and that even if we came to the attention of such
persons, they tend to be risk-averse and would be reluctant to follow an
unproven company such as ours or purchase or recommend the purchase of our
shares until such time as we became more seasoned and viable. As a consequence,
there may be periods of several days or more when trading activity in our shares
is minimal or nonexistent, as compared to a seasoned issuer which has a
large and steady volume of trading activity that will generally support
continuous sales without an adverse effect on share price. We cannot give
stockholders any assurance that a broader or more active public trading market
for our common shares will develop or be sustained, or that current trading
levels will be sustained.
Our
compliance with the Sarbanes-Oxley Act and SEC rules concerning internal
controls may be time consuming, difficult and costly.
Although
individual members of our management team have experience as officers of
publicly traded companies, much of that experience came prior to the adoption of
the Sarbanes-Oxley Act of 2002. It may be time consuming, difficult and costly
for us to develop and implement the internal controls and reporting procedures
required by Sarbanes-Oxley. We may need to hire additional financial reporting,
internal controls and other finance staff in order to develop and implement
appropriate internal controls and reporting procedures. If we are unable to
comply with Sarbanes-Oxley’s internal controls requirements, we may not be able
to obtain the independent accountant certifications that Sarbanes-Oxley Act
requires publicly-traded companies to obtain.
We
cannot assure you that the common stock will be liquid or that it will remain
listed on a securities exchange.
19
We cannot
assure you that we will be able to maintain the listing standards of the
American Stock Exchange. The American Stock Exchange requires companies to meet
certain listing criteria including certain minimum stockholders and equity
prices per share. We may not be able to maintain such minimum prices or may be
required to effect a reverse stock split to maintain such minimum
prices.
There
may be issuances of shares of preferred stock in the future.
Although
we currently do not have preferred shares outstanding, the board of directors
could authorize the issuance of a series of preferred stock that would grant
holders preferred rights to our assets upon liquidation, the right to receive
dividends before dividends would be declared to common stockholders, and the
right to the redemption of such shares, possibly together with a premium, prior
to the redemption of the common stock. To the extent that we do issue preferred
stock, the rights of holders of common stock could be impaired thereby,
including without limitation, with respect to liquidation.
We
have never paid dividends.
We have
never paid cash dividends on our common stock and do not anticipate paying any
for the foreseeable future.
RISKS
RELATED TO OUR INDUSTRY
Government
Regulation
The FDA,
comparable foreign regulators and state and local pharmacy regulators impose
substantial requirements upon clinical development, manufacture and marketing of
pharmaceutical products. These and other entities regulate research and
development and the testing, manufacture, quality control, safety,
effectiveness, labeling, storage, record keeping, approval, advertising, and
promotion of our products. The drug approval process required by the FDA under
the Food, Drug, and Cosmetic Act generally involves:
· Preclinical
laboratory and animal tests;
· Submission
of an IND, prior to commencing human clinical trials;
· Adequate
and well-controlled human clinical trials to establish safety and efficacy for
intended use;
· Submission
to the FDA of a NDA; and
· FDA
review and approval of a NDA.
The
testing and approval process requires substantial time, effort, and financial
resources, and we cannot be certain that any approval will be granted on a
timely basis, if at all.
Preclinical
tests include laboratory evaluation of the product candidate, its chemistry,
formulation and stability, and animal studies to assess potential safety and
efficacy. Certain preclinical tests must be conducted in compliance with good
laboratory practice regulations. Violations of these regulations can, in some
cases, lead to invalidation of the studies, requiring them to be replicated. In
some cases, long-term preclinical studies are conducted concurrently with
clinical studies.
We will
submit the preclinical test results, together with manufacturing information and
analytical data, to the FDA as part of an IND, which must become effective
before we begin human clinical trials. The IND automatically becomes effective
30 days after filing, unless the FDA raises questions about conduct of the
trials outlined in the IND and imposes a clinical hold, in which case, the IND
sponsor and FDA must resolve the matters before clinical trials can begin. It is
possible that our submission may not result in FDA authorization to commence
clinical trials.
Clinical
trials must be supervised by a qualified investigator in accordance with good
clinical practice regulations, which include informed consent requirements. An
independent Institutional Review Board (“IRB”) at each medical center reviews
and approves and monitors the study, and is periodically informed of the study’s
progress, adverse events and changes in research. Progress reports are submitted
annually to the FDA and more frequently if adverse events occur.
Human
clinical trials typically have three sequential phases that may
overlap:
Phase I:
The drug is initially tested in healthy human subjects or patients for safety,
dosage tolerance, absorption, metabolism, distribution, and
excretion.
20
Phase II:
The drug is studied in a limited patient population to identify possible adverse
effects and safety risks, determine efficacy for specific diseases and establish
dosage tolerance and optimal dosage.
Phase
III: When phase II evaluations demonstrate that a dosage range is effective with
an acceptable safety profile, phase III trials to further evaluate dosage,
clinical efficacy and safety, are undertaken in an expanded patient population,
often at geographically dispersed sites.
We cannot
be certain that we will successfully complete phase I, phase II, or phase III
testing of our product candidates within any specific time period, if at all.
Furthermore, the FDA, an IRB or the IND sponsor may suspend clinical trials at
any time on various grounds, including a finding that subjects or patients are
exposed to unacceptable health risk.
Concurrent
with these trials and studies, we also develop chemistry and physical
characteristics data and finalize a manufacturing process in accordance with
good manufacturing practice (“GMP”) requirements. The manufacturing process must
conform to consistency and quality standards, and we must develop methods for
testing the quality, purity, and potency of the final products. Appropriate
packaging is selected and tested, and chemistry stability studies are conducted
to demonstrate that the product does not undergo unacceptable deterioration over
its shelf-life. Results of the foregoing are submitted to the FDA as part of a
NDA for marketing and commercial shipment approval. The FDA reviews each NDA
submitted and may request additional information.
Once the
FDA accepts the NDA for filing, it begins its in-depth review. The FDA has
substantial discretion in the approval process and may disagree with our
interpretation of the data submitted. The process may be significantly extended
by requests for additional information or clarification regarding information
already provided. As part of this review, the FDA may refer the application to
an appropriate advisory committee, typically a panel of clinicians.
Manufacturing establishments often are inspected prior to NDA approval to assure
compliance with GMPs and with manufacturing commitments made in the
application.
Submission
of a NDA with clinical data requires payment of a fee (for fiscal year 2008,
$1,178,500). In return, the FDA assigns a goal of ten months for issuing its
“complete response,” in which the FDA may approve or deny the NDA, or require
additional clinical data. Even if these data are submitted, the FDA may
ultimately decide the NDA does not satisfy approval criteria. If the FDA
approves the NDA, the product becomes available for physicians prescription.
Product approval may be withdrawn if regulatory compliance is not maintained or
safety problems occur. The FDA may require post-marketing studies, also known as
phase IV studies, as a condition of approval, and requires surveillance programs
to monitor approved products that have been commercialized. The agency has the
power to require changes in labeling or prohibit further marketing based on the
results of post-marketing surveillance.
Satisfaction
of these and other regulatory requirements typically takes several years, and
the actual time required may vary substantially based upon the type, complexity
and novelty of the product. Government regulation may delay or prevent marketing
of potential products for a considerable period of time and impose costly
procedures on our activities. We cannot be certain that the FDA or other
regulatory agencies will approve any of our products on a timely basis, if at
all. Success in preclinical or early-stage clinical trials does not assure
success in later-stage clinical trials. Data obtained from pre-clinical and
clinical activities are not always conclusive and may be susceptible to varying
interpretations that could delay, limit or prevent regulatory approval. Even if
a product receives regulatory approval, the approval may be significantly
limited to specific indications or uses.
Even
after regulatory approval is obtained, later discovery of previously unknown
problems with a product may result in restrictions on the product or even
complete withdrawal of the product from the market. Delays in obtaining, or
failures to obtain regulatory approvals would have a material adverse effect on
our business.
Any
products manufactured or distributed by us pursuant to FDA approvals are subject
to pervasive and continuing FDA regulation, including record-keeping
requirements, reporting of adverse experiences, submitting periodic reports,
drug sampling and distribution requirements, manufacturing or labeling changes,
record-keeping requirements, and compliance with FDA promotion and advertising
requirements. Drug manufacturers and their subcontractors are required to
register their facilities with the FDA and state agencies, and are subject to
periodic unannounced inspections for GMP compliance, imposing procedural and
documentation requirements upon us and third-party manufacturers. Failure to
comply with these regulations could result, among other things, in suspension of
regulatory approval, recalls, suspension of production or injunctions, seizures,
or civil or criminal sanctions. We cannot be certain that we or our present or
future subcontractors will be able to comply with these
regulations.
The FDA
regulates drug labeling and promotion activities. The FDA has actively enforced
regulations prohibiting the marketing of products for unapproved uses. The FDA
permits the promotion of drugs for unapproved uses in certain circumstances,
subject to stringent requirements. We and our product candidates are subject to
a variety of state laws and regulations which may hinder our ability to market
our products. Whether or not FDA approval has been obtained, approval by foreign
regulatory authorities must be obtained prior to commencing clinical trials, and
sales and marketing efforts in those countries. These approval procedures vary
in complexity from country to country, and the processes may be longer or
shorter than that required for FDA approval. We may incur significant costs to
comply with these laws and regulations now or in the future.
21
The FDA’s
policies may change, and additional government regulations may be enacted which
could prevent or delay regulatory approval of our potential products. Increased
attention to the containment of health care costs worldwide could result in new
government regulations materially adverse to our business. We cannot predict the
likelihood, nature or extent of adverse governmental regulation that might arise
from future legislative or administrative action, either in the U.S. or
abroad.
Other
Regulatory Requirements
The U.S.
Federal Trade Commission and the Office of the Inspector General of the U.S.
Department of Health and Human Services (“HHS”) also regulate certain
pharmaceutical marketing practices. Government reimbursement practices and
policies with respect to our products are important to our success.
We are
subject to numerous federal, state and local laws relating to safe working
conditions, manufacturing practices, environmental protection, fire hazard
control, and disposal of hazardous or potentially hazardous substances. We may
incur significant costs to comply with these laws and regulations. The
regulatory framework under which we operate will inevitably change in light of
scientific, economic, demographic and policy developments, and such changes may
have a material adverse effect on our business.
European
Product Approval
Prior
regulatory approval for human healthy volunteer studies (phase I studies) is
required in member states of the European Union (E.U.). Summary data from
successful phase I studies are submitted to regulatory authorities in member
states to support applications for phase II studies. E.U. authorities typically
have one to three months (which often may be extended in their discretion) to
raise objections to the proposed study. One or more independent ethics
committees (similar to U.S. IRBs) review relevant ethical issues.
For E.U.
marketing approval, we submit to the relevant authority for review a dossier, or
MAA (Market Authorization Application), providing information on the quality of
the chemistry, manufacturing and pharmaceutical aspects of the product as well
as non-clinical and clinical data.
Approval
can take several months to several years, and can be denied, depending on
whether additional studies or clinical trials are requested (which may delay
marketing approval and involve unbudgeted costs) or regulatory authorities
conduct facilities (including clinical investigation site) inspections and
review manufacturing procedures, operating systems and personnel qualifications.
In many cases, each drug manufacturing facility must be approved, and further
inspections may occur over the product’s life.
The
regulatory agency may require post-marketing surveillance to monitor for adverse
effects or other studies. Further clinical studies are usually necessary for
approval of additional indications. The terms of any approval, including
labeling content, may be more restrictive than expected and could affect the
marketability of a product.
Failure
to comply with these ongoing requirements can result in suspension of regulatory
approval and civil and criminal sanctions. European renewals may require
additional data, resulting in a license being withdrawn. E.U. regulators have
the authority to revoke, suspend or withdraw approvals, prevent companies and
individuals from participating in the drug approval process, request recalls,
seize violative products, obtain injunctions to close non-compliant
manufacturing plants and stop shipments of violative products.
Pricing
Controls
Pricing
for products under approval applications is also subject to regulation.
Requirements vary widely between countries and can be implemented disparately
intra-nationally. The E.U. generally provides options for member states to
control pricing of medicinal products for human use, ranging from specific
price-setting to systems of direct or indirect controls on the producer’s
profitability. U.K. regulation, for example, generally provides controls on
overall profits derived from sales to the U.K. National Health Service that are
based on profitability targets or a function of capital employed in servicing
the National Health Service market. Italy generally utilizes a price monitoring
system based on the European average price over the reference markets of France,
Spain, Germany and the U.K. Italy typically establishes price within a
therapeutic class based on the lowest price for a medicine belonging to that
category. Spain generally establishes selling price based on prime cost plus a
profit margin within a range established yearly by the Spanish Commission for
Economic Affairs.
There can
be no assurance that price controls or reimbursement limitations will result in
favorable arrangements for our products.
22
Third-Party
Reimbursements
In the
U.S., the E.U. and elsewhere, pharmaceutical sales are dependent in part on the
availability and adequacy of reimbursement from third party payers such as
governments and private insurance plans. Third party payers are increasingly
challenging established prices, and new products that are more expensive than
existing treatments may have difficulty finding ready acceptance unless there is
a clear therapeutic benefit.
In the
U.S., consumer willingness to choose a self-administered outpatient prescription
drug over a different drug or other form of treatment often depends on the
manufacturer’s success in placing the product on a health plan formulary or drug
list, which results in lower out-of-pocket costs. Favorable formulary placement
typically requires the product to be less expensive than what the health plan
determines to be therapeutically equivalent products, and often requires
manufacturers to offer rebates. Federal law also requires manufacturers to pay
rebates to state Medicaid programs in order to have their products reimbursed by
Medicaid. Medicare, which covers most Americans over age 65 and the disabled,
has adopted a new insurance regime that will offer eligible beneficiarie’s
limited coverage for outpatient prescription drugs effective January 1, 2006.
The prescription drugs that will be covered under this insurance will be
specified on a formulary published by Medicare. As part of these changes,
Medicare is adopting new payment formulas for prescription drugs administered by
providers, such as hospitals or physicians, that are generally expected to lower
reimbursement.
The E.U.
generally provides options for member states to restrict the range of medicinal
products for which their national health insurance systems provide
reimbursement. Member states can opt for a “positive” or “negative” list, with
the former listing all covered medicinal products and the latter designating
those excluded from coverage. The E.U., the U.K. and Spain have negative lists,
while France uses a positive list. Canadian provinces establish their own
reimbursement measures. In some countries, products may also be subject to
clinical and cost effectiveness reviews by health technology assessment bodies.
Negative determinations in relation to our products could affect prescribing
practices. In the U.K., the National Institute for Clinical Excellence (“NICE”)
provides such guidance to the National Health Service, and doctors are expected
to take it into account when choosing drugs to prescribe. Health authorities may
withhold funding from drugs not given a positive recommendation by NICE. A
negative determination by NICE may mean fewer prescriptions. Although NICE
considers drugs with orphan status, there is a degree of tension on the
application of standard cost assessment for orphan drugs, which are often priced
higher to compensate for a limited market. It is unclear whether NICE will adopt
a more relaxed approach toward the assessment of orphan drugs.
We cannot
assure you that any of our products will be considered cost effective, or that
reimbursement will be available or sufficient to allow us to sell them
competitively and profitably.
Fraud
and Abuse Laws
The U.S.
federal Medicare/Medicaid anti-kickback law and similar state laws prohibit
remuneration intended to induce physicians or others either to refer patients,
or to acquire or arrange for or recommend the acquisition of health care
products or services. While the federal law applies only to referrals, products
or services receiving federal reimbursement, state laws often apply regardless
of whether federal funds are involved. Other federal and state laws prohibit
anyone from presenting or causing to be presented false or fraudulent payment
claims. Recent federal and state enforcement actions under these statutes have
targeted sales and marketing activities of prescription drug manufacturers. As
we begin to market our products to health care providers, the relationships we
form, such as compensating physicians for speaking or consulting services,
providing financial support for continuing medical education or research
programs, and assisting customers with third-party reimbursement claims, could
be challenged under these laws and lead to civil or criminal penalties,
including the exclusion of our products from federally-funded reimbursement.
Even an unsuccessful challenge could cause adverse publicity and be costly to
respond to, and thus could have a material adverse effect on our business,
results of operations and financial condition. We intend to consult counsel
concerning the potential application of these and other laws to our business and
to our sales, marketing and other activities to comply with them. Given their
broad reach and the increasing attention given them by law enforcement
authorities, however, we cannot assure you that some of our activities will not
be challenged.
Patent
Restoration and Marketing Exclusivity
The U.S.
Drug Price Competition and Patent Term Restoration Act of 1984 (Hatch-Waxman)
permits the FDA to approve Abbreviated New Drug Applications (“ANDAs”) for
generic versions of innovator drugs, as well as NDAs with less original clinical
data, and provides patent restoration and exclusivity protections to innovator
drug manufacturers. The ANDA
process permits competitor companies to obtain marketing approval for drugs with
the same active ingredient and for the same uses as innovator drugs, but does
not require the conduct and submission of clinical studies demonstrating safety
and efficacy. As a result, a competitor could copy any of our drugs and only
need to submit data demonstrating that the copy is bioequivalent to gain
marketing approval from the FDA. Hatch-Waxman requires a competitor that submits
an ANDA, or otherwise relies on safety and efficacy data for one of our drugs,
to notify us and/or our business partners of potential infringement of our
patent rights. We and/or our business partners may sue the company for patent
infringement, which would result in a 30-month stay of approval of the
competitor’s application. The discovery, trial and appeals process in such suits
can take several years. If the litigation is resolved in favor of the generic
applicant or the challenged patent expires during the 30-month period, the stay
is lifted and the FDA may approve the application. Hatch-Waxman also allows
competitors to market copies of innovator products by submitting significantly
less clinical data outside the ANDA context. Such applications, known as
“505(b)(2) NDAs” or “paper NDAs,” may rely on clinical investigations not
conducted by or for the applicant and for which the applicant has not obtained a
right of reference or use and are subject to the ANDA notification procedures
described above.
23
The law
also restores a portion of a product’s patent term that is lost during clinical
development and NDA review, and provides statutory protection, known as
exclusivity, against FDA approval or acceptance of certain competitor
applications. Restoration can return up to five years of patent term for a
patent covering a new product or its use to compensate for time lost during
product development and regulatory review. The restoration period is generally
one-half the time between the effective date of an IND and submission of an NDA,
plus the time between NDA submission and its approval (subject to the five-year
limit), and no extension can extend total patent life beyond 14 years after the
drug approval date. Applications for patent term extension are subject to U.S.
Patent and Trademark Office (“USPTO”) approval, in conjunction with FDA.
Approval of these applications takes at least six months, and there can be no
guarantee that it will be given at all.
Hatch-Waxman
also provides for differing periods of statutory protection for new drugs
approved under an NDA. Among the types of exclusivity are those for a “new
molecular entity” and those for a new formulation or indication for a
previously-approved drug. If granted, marketing exclusivity for the types of
products that we are developing, which include only drugs with innovative
changes to previously-approved products using the same active ingredient, would
prohibit the FDA from approving an ANDA or 505(b)(2) NDA relying on safety and
efficacy data for three years. This three-year exclusivity, however, covers only
the innovation associated with the original NDA. It does not prohibit the FDA
from approving applications for drugs with the same active ingredient but
without our new innovative change. These marketing exclusivity protections do
not prohibit FDA from approving a full NDA, even if it contains the innovative
change.
ITEM
2. PROPERTIES
Our
primary offices are located at 3930 Varsity Drive, Ann Arbor, MI 48108. We
currently rent approximately 17,675 square feet of office, laboratory and
production space for monthly rent of $14,327.62. This lease expires
on February 28, 2011 extendable at our option for an additional three years. We
believe our current offices will be adequate for the foreseeable
future. Our phone number is (734) 332-7800 and our facsimile number
is (734) 332-7878. Our website is located at www.pipexinc.com.
ITEM
3. LEGAL PROCEEDINGS
We are
not a party to any pending legal proceeding, nor are we aware of any proceeding
contemplated by any governmental authority involving us.
24
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The
following matters were submitted to a vote of our stockholders at our 2007
Annual Meeting of Stockholders held on November 2, 2007 and approved by the
requisite vote of our stockholders as follows:
|
1.
|
Election
of the following director nominees to serve for the following year and
until his successor is elected:
|
|
Number
of Shares
|
||||||||
|
Nominee
|
For
|
Withheld
|
||||||
|
Steve
H. Kanzer
|
10,788,781 | 30,698 | ||||||
|
Charles
L. Bisgaier
|
10,788,781 | 30,698 | ||||||
|
Jeffrey
J. Kraws
|
10,788,748 | 30,731 | ||||||
|
A.
Joseph Rudick
|
10,788,814 | 30,665 | ||||||
|
Nicholas
Stergis
|
10,788,814 | 30,665 | ||||||
|
Jeff
Wolf
|
10,790,381 | 29,098 | ||||||
|
Daniel
J. Dorman
|
10,790,348 | 29,131 | ||||||
|
James
S. Kuo
|
10,790,348 | 29,131 | ||||||
|
2.
|
Approval
of the Pipex Pharmaceuticals, inc. 2007 Stock Incentive
Plan:
|
|
Number
of Shares
|
||
|
For
|
Against
|
Abstain
|
|
9,397,760
|
44,850
|
1,434
|
|
3.
|
Ratification
of the selection of Berman & Company, P.A. as the Company’s
independent registered public accounting firm for our fiscal year ending
December 31, 2007:
|
|
Number
of Shares
|
||
|
For
|
Against
|
Abstain
|
|
10,794,684
|
23,594
|
1,201
|
The
number of shares of our common stock eligible to vote as of the record date of
October 9, 2007 was 16,998,076 shares.
25
ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
Our
common stock has traded on the American Stock Exchange under the symbol “PP”
since July 2007. We were previously listed on the OTC Bulletin Board under the
name “PPXP” beginning on December 18, 2006. The following table
states the range of the high and low bid-prices per share of our common stock
for each of the calendar quarters during the last two fiscal years while our
common stock was quoted on the OTC Bulletin Board and the high and sale price
while our common stock has traded on the American Stock Exchange. These
quotations represent inter-dealer prices, without retail mark-up, markdown, or
commission, and may not represent actual transactions. The last price of our
common stock as reported on the American Stock Exchange on March 24, 2008 was
$0.89 per share. As of March 24, 2008, there were approximately 386 stockholders
of record of our common stock. This number does not include beneficial owners
from whom shares are held by nominees in street name.
|
High
|
Low
|
|||||||
|
YEAR
ENDED DECEMBER 31, 2007
|
||||||||
|
Fourth
quarter
|
$ | 7.10 | $ | 4.68 | ||||
|
Third
quarter
|
$ | 8.00 | $ | 4.30 | ||||
|
Second
quarter
|
$ | 8.10 | $ | 3.71 | ||||
|
First
quarter
|
$ | 30.00 | $ | 3.06 | ||||
|
YEAR
ENDED DECEMBER 31, 2006
|
||||||||
|
Fourth
quarter
|
$ | 6.50 | $ | 0.56 | ||||
|
Third
quarter
|
$ | 1.10 | $ | 1.00 | ||||
|
Second
quarter
|
$ | 1.60 | $ | 1.25 | ||||
|
First
quarter
|
$ | 1.02 | $ | 0.01 | ||||
Dividend
Policy
We have
not paid any cash dividends on our common stock to date, and we have no
intention of paying cash dividends in the foreseeable future. Whether we declare
and pay dividends is determined by our board of directors at their discretion,
subject to certain limitations imposed under Delaware corporate law. The timing,
amount and form of dividends, if any, will depend on, among other things, our
results of operations, financial condition, cash requirements and other factors
deemed relevant by our board of directors.
Recent
Sales of Unregistered Securities; Uses of Proceeds from Registered
Securities
From
October through November 2007, the Company issued a total of 3,274,566 shares of
our common stock to a total of 50 warrant holders pursuant to a warrant
call. These warrants had been previously issued in connection with
the Company’s 2006 private placement transaction. In connection with
this warrant call, the Company appointed Noble International Investments, Inc.
(“Noble”) as the Company’s exclusive warrant solicitation agent. The
Company paid Noble $579,569 and issued Noble 327,456 warrants to purchase
327,456 share of common stock. The Warrants have a term of five years
and are exercisable at $6.36 per share. This offering and sale of shares of
common stock qualified for exemption under Section 4(2) of the Securities Act of
1933 since the issuance did not involve a public offering. The offering was not
a public offering as defined in Section 4(2) because the offer and sale was made
to an insubstantial number of persons and because of the manner of the offering.
In addition, these investors had the necessary investment intent as required by
Section 4(2) since they agreed to, and received, share certificates bearing a
legend stating that such shares are restricted. This restriction ensures that
these shares will not be immediately redistributed into the market and therefore
not be part of a public offering. This offering was done with no general
solicitation or advertising by us. Each investor made representations regarding
his or her financial sophistication and had an opportunity to ask questions of
our management.
26
From May
17, 2007 through September 30, 2007, the Registrant issued a total of 127,406
shares of our common stock to a total of three holders of our warrants upon the
exercise of those warrants. This offering and sale of shares of common stock
qualified for exemption under Section 4(2) of the Securities Act of 1933 since
the issuance did not involve a public offering. The offering was not a public
offering as defined in Section 4(2) because the offer and sale was made to an
insubstantial number of persons and because of the manner of the offering. In
addition, these investors had the necessary investment intent as required by
Section 4(2) since they agreed to, and received, share certificates bearing a
legend stating that such shares are restricted. This restriction ensures that
these shares will not be immediately redistributed into the market and therefore
not be part of a public offering. This offering was done with no general
solicitation or advertising by us. Each investor made representations regarding
his or her financial sophistication and had an opportunity to ask questions of
our management.
On
January 5, 2007, the Registrant issued 795,248 shares of its common stock, and
assumed a total of 34,685 options to purchase its common stock and a total of
68,858 warrants to purchase its common stock in connection with its acquisition
of the remaining 34.53% interest in its subsidiary EPI. This offering and sale
of securities qualified for exemption under Section 4(2) of the Securities Act
of 1933 since the issuance did not involve a public offering. The offering was
not a public offering as defined in Section 4(2) because of the manner of the
offering. The investors had the necessary investment intent as required by
Section 4(2) since they agreed to, and received, share certificates bearing a
legend stating that such shares are restricted. This restriction ensures that
these shares will not be immediately redistributed into the market and therefore
not be part of a public offering. This offering was done with no general
solicitation or advertising by the Registrant. Based on an analysis of the above
factors, the Registrant has met the requirements to qualify this offering and
sale for exemption under Section 4(2) of the Securities Act of
1933.
During
October and November of 2006, the Company completed private placements of its
stock, which resulted in the issuance of 6,900,931 shares of common stock and
3,451,524 warrants. Each unit consisted of 49,508 shares of common stock and a
warrant to purchase 24,754 shares of common stock. Of the total, 2,252,506
shares were part of the share exchange in the reverse merger in connection with
the issuance of 11,333,333 shares by Sheffield. The remaining 4,648,813 shares
of common stock reflected issuances post reverse merger. The net proceeds from
the private placements were approximately $12,766,000, which was net of cash
paid as direct offering costs totaling $1,160,418. In connection with the
private placements, the Company engaged a company, which is controlled by the
Company’s Chairman and Chief Executive Officer, as the placement agent for the
transaction. Of the total $1,160,418 in direct offering costs, the Company paid
the placement agent the sum of approximately $1,033,800. Additionally the
placement agent was paid non-cash compensation of 958,277 warrants with an
aggregate fair value of $4,555,457. In December 2006, the Company filed a
Registration Statement under the Securities Act of 1933, as amended, to register
the resale of these shares by the purchasers of such shares. The Registration
Statement was declared effective by the Securities and Exchange Commission on
February 13, 2007. The proceeds are being used to fund operations, for working
capital and for general corporate purposes, which may include capital
expenditures, clinical development, research, manufacturing and/or in-licensing
of technology.
27
ITEM
6. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The
following discussion of our financial condition and results of operations should
be read in conjunction with the audited financial statements and notes thereto
for the fiscal year ended December 31, 2007, found in this report. In addition
to historical information, the following discussion contains forward-looking
statements that involve risks, uncertainties and assumptions. Where possible, we
have tried to identify these forward looking statements by using words such as
“anticipate,” “believe,” “intends,” or similar expressions. Our actual results
could differ materially from those anticipated by the forward-looking statements
due to important factors and risks including, but not limited to, those set
forth under “Risk Factors” in Part I, Item 1A of this Report.
Overview
Since our
inception during January 2001, our efforts and resources have been focused
primarily on acquiring and developing our pharmaceutical technologies, raising
capital and recruiting personnel. We are a development stage company and have
had no product sales to date and we will not have any product sales until and
unless we receive approval from the FDA or receive approval from equivalent
foreign regulatory bodies to begin selling our pharmaceutical candidates. Our
major sources of working capital have been proceeds from equity financings from
our Chairman and Chief Executive Officer and various private financings,
primarily involving private sales of our common stock and other equity
securities.
Our
company’s current corporate structure resulted from the October 2006 merger of a
newly-created wholly owned subsidiary of Sheffield Pharmaceuticals, Inc.
(“Sheffield”), a Delaware corporation incorporated in September 1993, and Pipex
Therapeutics, Inc., a Delaware corporation (“Pipex Therapeutics”). In connection
with that transaction, a wholly owned subsidiary of Sheffield merged with and
into Pipex Therapeutics, with Pipex Therapeutics remaining as the surviving
corporation and a wholly-owned subsidiary of Sheffield. On December 11, 2006,
Sheffield changed its name to Pipex Pharmaceuticals, Inc. (“Pipex”). In exchange
for their shares of capital stock in Pipex Therapeutics, the former stockholders
of Pipex Therapeutics received shares of capital stock of Sheffield representing
approximately 98 percent of the outstanding equity of Sheffield on a primary
diluted basis after giving effect to the transaction, with Sheffield assuming
Pipex’s outstanding options and warrants. In addition, the board of directors of
Sheffield was reconstituted shortly following the effective time of the
transaction such that the directors of Sheffield were replaced by our current
directors, all of whom were previously directors of Pipex Therapeutics. Further,
upon the effective time of the merger, the business of Sheffield was abandoned
and the business plan of Pipex Therapeutics was adopted. The transaction was
therefore accounted for as a reverse acquisition with Pipex Therapeutics as the
acquiring party and Sheffield as the acquired party. Accordingly, when we refer
to our business and financial information relating to periods prior to the
merger, we are referring to the business and financial information of Pipex
Therapeutics, unless the context indicates otherwise.
Critical
Accounting Policies
In
December 2001, the SEC requested that all registrants discuss their most
“critical accounting policies” in management’s discussion and analysis of
financial condition and results of operations. The SEC indicated that a
“critical accounting policy” is one which is both important to the portrayal of
the company’s financial condition and results and requires management’s most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain. We
believe that the following discussion regarding research and development
expenses, general and administrative expenses and non-cash compensation expense
involve our most critical accounting policies.
Research
and development expenses consist primarily of manufacturing costs, license fees,
salaries and related personnel costs, fees paid to consultants and outside
service providers for laboratory development, legal expenses resulting from
intellectual property prosecution and organizational affairs and other expenses
relating to the design, development, testing, and enhancement of our product
candidates, as well as an allocation of overhead expenses incurred by the
Company. We expense our research and development costs as they are
incurred.
General
and administrative expenses consist primarily of salaries and related expenses
for executive, finance and other administrative personnel, recruitment expenses,
professional fees and other corporate expenses, including business development
and general legal activities, as well as an allocation of overhead expenses
incurred by the Company. We expense our general and administrative expenses as
they are incurred.
28
Our
results include non-cash compensation expense as a result of the issuance of
stock and stock option grants. Compensation expense for options granted to
employees represents the fair value of the award at the date of grant. All
share-based payments to employees since inception have been recorded and
expensed in the statements of operations as applicable under SFAS No. 123R
“Share-Based Payment”.
This
amount is being recorded over the respective vesting periods of the individual
stock options. The expense is included in the respective categories of expense
in the statement of operations. We expect to record additional non-cash
compensation expense in the future, which may be significant. However, because
some of the options are milestone-based, the total expense is
uncertain.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect certain reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of expenses during the
reporting period. Actual results could differ from those estimates.
Results
of Operations
Year
Ended December 31, 2007 and 2006.
Research
and Development Expenses. For the year ended December 31, 2007, research and
development expense was $6,327,726 as compared to $2,665,555 for the year ended
December 31, 2006. The increase of $3,662,171 is due primarily to an increase in
salaries and payroll taxes of approximately $1,157,000, an increase in stock
based compensation charges of approximately $1,146,000 and an increase of
approximately $952,000 associated with payments related to further the
development of our licensed clinical drug candidates.
General
and Administrative Expenses. For the year ended December 31, 2007, general and
administrative expense was $3,810,585 as compared to $1,451,522 for the year
ended December 31, 2006. The increase of $2,359,063 is due primarily to
an increase in stock based compensation charge of approximately
$791,000, an increase to professional fees of approximately $638,000 and an
increase in salaries and payroll taxes of approximately $437,000.
Other
Income (Expense), net. For the year ended December 31, 2007, other income-net
was $245,878 compared to $17,982 for the year ended December 31, 2006. For the
year ended December 31, 2007, interest income was $298,807 as compared to
$17,982 for the year ended December 31, 2006. Interest income was higher for the
period in 2007 as compared to the same period in 2006, due to the higher levels
of cash in interest bearing accounts. For the year ended December 31, 2007,
interest expense was $52,929 as compared to $0 for the year ended December 31,
2006. Interest expense for the period in 2007 relates to interest paid on the
notes payable which did not exist for the same period in 2006. These
notes were repaid in March 2008.
Net Loss.
Net loss for the year ended December 31, 2007, was $9,892,433 as compared to
$4,099,095 for the year ended December 31, 2006. This increase in net loss is
attributable primarily to an increase in research and development expenses of
$3,662,171 and an increase in general and administrative expenses of $2,359,063
as discussed above.
Net Loss
Applicable to Common Shareholders. The net loss applicable to common
shareholders for the year ended December 31, 2007 includes a non-cash charge of
$12,409,722 related to the acquisition of Effective Pharmaceuticals, Inc
(“EPI”). The net loss applicable to common shareholders for the year ended
December 31, 2006 includes a non-cash charge of $761,000 related to Series B
Preferred Stock dividends issued from EPI. The total of the non-cash charges was
reflected through equal and offsetting adjustments to additional paid-in-capital
with no net impact on stockholders’ equity. These amounts were considered in the
determination of the Company’s loss per common share amounts for the year ended
December 31, 2007 and 2006 and for the period from January 8, 2001 (inception)
to December 31, 2007.
Liquidity
and Capital Resources
During
the year ended December 31, 2007, we had a net decrease in cash of $699,624.
Total cash resources as of December 31, 2007 was $11,492,802. During the year
ended December 31, 2007 and 2006, net cash used in operating activities was
$6,606,859 and $2,365,819 respectively. This cash was used to fund our
operations for the periods, adjusted for non-cash expenses and changes in
operating assets and liabilities.
Net cash
used in investing activities for the year ended December 31, 2007 and 2006 was
$1,965,574 and $710,833, respectively. The net cash used in investing activities
for the year ended December 31, 2007 resulted from the acquisition of property
and equipment. The net cash used in investing activities for the year
ended December 31, 2006 resulted from $665,000 paid to acquire Sheffield
Pharmaceuticals, Inc. in the reverse acquisition and $45,833 for the purchase of
property and equipment.
29
Net cash
proceeds from financing activities were $7,872,809 and $14,111,288 for the years
ended December 31, 2007 and 2006, respectively. The net cash proceeds from
financing activities for the year ended December 31, 2007 resulted from
$7,552,378 for proceeds from the exercise of warrants, less $579,569 paid as
direct offering costs. In addition, the Company raised $1,100,000 in
proceeds from notes payable under term loans, less $200,000 of repayments under
these loans. The net cash proceeds from financing activities for the year ended
December 31, 2006 resulted from proceeds from the sale of common stock and
warrants in private placement offerings of $13,926,362 less cash paid as direct
offering costs of $1,160,418 and proceeds from a related party loan of
$1,365,344, less $20,000 of repayments under the loan.
Our
continued operations will depend on whether we are able to raise additional
funds through various potential sources, such as equity and debt financing. Such
additional funds may not become available on acceptable terms and there can be
no assurance that any additional funding that we do obtain will be sufficient to
meet our needs in the long term. We will continue to fund operations from cash
on hand and through the similar sources of capital previously described. We can
give no assurances that any additional capital that we are able to obtain will
be sufficient to meet our needs.
Current
and Future Financing Needs
We have
incurred an accumulated deficit of $31,076,518 through December 31, 2007. We
have incurred negative cash flow from operations since we started our business.
We have spent, and expect to continue to spend, substantial amounts in
connection with implementing our business strategy, including our planned
product development efforts, our clinical trials, and our research and discovery
efforts. Based on our current plans, we believe that our cash will be sufficient
to enable us to meet our planned operating needs at least for the next 12
months.
However,
the actual amount of funds we will need to operate is subject to many factors,
some of which are beyond our control. These factors include the
following:
• the
progress of our research activities;
• the
number and scope of our research programs;
• the
progress of our pre-clinical and clinical development activities;
• the
progress of the development efforts of parties with whom we have entered into
research and development agreements;
• our
ability to maintain current research and development programs and to establish
new research and development and licensing arrangements;
• our
ability to achieve our milestones under licensing arrangements;
• the
costs involved in prosecuting and enforcing patent claims and other intellectual
property rights; and
• the
costs and timing of regulatory approvals.
We have
based our estimate on assumptions that may prove to be wrong. We may need to
obtain additional funds sooner or in greater amounts than we currently
anticipate. Potential sources of financing include strategic relationships,
public or private sales of our shares or debt and other sources. We may seek to
access the public or private equity markets when conditions are favorable due to
our long-term capital requirements. We do not have any committed sources of
financing at this time, and it is uncertain whether additional funding will be
available when we need it on terms that will be acceptable to us, or at all. If
we raise funds by selling additional shares of common stock or other securities
convertible into common stock, the ownership interest of our existing
stockholders will be diluted. If we are not able to obtain financing when
needed, we may be unable to carry out our business plan. As a result, we may
have to significantly limit our operations and our business, financial condition
and results of operations would be materially harmed.
30
License
and Contractual Agreement Obligations
Below is
a table of our contractual obligations for the years 2008 through 2011 as of
December 31, 2007.
|
Year
|
||||||||||||||||||||
|
Agreements
|
2008
|
2009
|
2010
|
2011
|
Total
|
|||||||||||||||
|
Research
and Development
|
|
$
|
306,333
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
306,333
|
|||||
|
Lease
Agreements
|
|
$
|
141,375
|
|
$
|
145,733
|
|
$
|
150,152
|
|
$
|
25,148
|
|
$
|
462,408
|
|||||
|
License
Agreements
|
|
$
|
223,830
|
|
$
|
125,000
|
|
$
|
130,000
|
|
$
|
132,500
|
|
$
|
611,330
|
|||||
|
Consulting
Agreements
|
|
$
|
91,661
|
|
$
|
3,332
|
|
$
|
0
|
|
$
|
0
|
|
$
|
94,993
|
|||||
|
|
|
|
|
|
||||||||||||||||
|
|
$
|
763,199
|
|
$
|
274,065
|
|
$
|
280,152
|
|
$
|
157,648
|
|
$
|
1,475,064
|
||||||
|
|
|
|
|
|
||||||||||||||||
Product
Candidates
TRIMESTA TM
(oral
estriol)
In June
2007, a two year seven U.S. center, placebo controlled 150 patient phase II/III
clinical trial using TRIMESTATM for the
treatment of relapsing-remitting Multiple Sclerosis (MS) was initiated under a
$5 million grant from the Southern California Chapter of the National Multiple
Sclerosis Society and NIH. This phase II/III clinical trial builds upon our
encouraging results from an earlier phase IIa clinical trial. The primary
purpose of this study is to evaluate the safety and efficacy of TRIMESTA TM in a
larger MS patient population with a one year blinded interim analysis. The
preclinical and clinical development of TRIMESTA TM has
been primary financed by grants from the NIH and various non-profit foundations.
Through December 31, 2007, we have incurred approximately $429,000 of costs
related to our development of TRIMESTA TM of
which approximately $49,500 and $185,500 was incurred in fiscal years 2005 and
2006, respectively, and approximately $194,000 was incurred in
2007.
EFFIRMA TM (oral
flupirtine)
Our
scientific collaborator has filed an IND with the FDA to conduct a phase II
clinical trial with EFFIRMA in fibromyalgia patients. If our IND is
approved, we plan to fund the phase II clinical study. Through
December 31, 2007, we have incurred approximately $85,000 of costs related to
our development of EFFIRMA TM, all
of which was incurred during 2007.
Oral TTM (oral
tetrathiomolybate)
Through
December 31, 2007, we have incurred approximately $2,887,000 of costs related to
our development of oral TTM , of which approximately $150,000 and $1,061,000 was
incurred in fiscal years 2005 and 2006, respectively, and approximately
$1,676,000 was incurred for the year ended December 31, 2007.
During
2008, we plan to hold a Type B meeting with the FDA to discuss an approval
pathway for oral TTM. The feedback from that meeting with the FDA
will determine if we pursue an NDA filing for oral TTM in neurologic Wilson’s
disease. We plan to continue to explore additional therapeutic
indications of oral TTM through collaborative arrangements or discontinue them
altogether.
31
Anti-CD4
802-2
Through
December 31, 2007, we have incurred $1,383,000 of costs related to our
development of anti-CD4 802-2 of which $58,000, $332,000, $303,000, $295,000,
$113,000 and $161,000 was incurred in fiscal years 2001, 2002, 2003, 2004, 2005
and 2006 respectively and approximately $121,000 has been incurred in
2007.
CORRECTA TM
(clotrimazole
emema)
During
2008, we plan to continue the phase II clinical trial of CORRECTA in the
treatment of acute refractory pouchitis, a gastrointestinal disease (the
“CAPTURE study”). The primary purpose of this double blind, placebo-controlled
phase II clinical trial is to test CORRECTA’s safety and efficacy in treating
acute refractory pouchitis. The preclinical and clinical development
of CORRECTA TM has
been primarily financed by grants from the FDA’s orphan drug products group and
various non-profit foundations. Through December 31, 2007, we have incurred
approximately $246,000 of costs related to our development of CORRECTA TM of
which approximately $103,000 and $107,000 was incurred in fiscal years 2005 and
2006, respectively, and $36,000 has been incurred during 2007.
SolovaxTM (multivalent
T-cell vaccine for MS)
During
2008, we plan to further analyze the data from our phase II clinical trial of
SOLOVAX
TM in the treatment of secondary progressive MS, as well as develop a new
manufacturing procedure for SOLOVAX TM in Ann
Arbor Michigan that more closely resembles the process utilized in the initial
published clinical trial of SOLOVAX TM . On
July 11, 2007 at an opposition hearing in Munich, Germany brought by a
competitor, Opexa Therapeutics, Inc., our third auxiliary request to amend
claims to our exclusively licensed issued European patent number EP1015025 was
denied on the basis of time and as a result such patent was revoked. We intend
to vigorously continue to prosecute, defend and protect our pending
corresponding U.S. patent application and will be updating the public on our
future plans to develop SOLOVAX TM for
multiple sclerosis. On December 21, 2007 we converted our exclusive
agreement with the University of Southern California (USC) to a full exclusive
license agreement and issued to USC ten percent (10%) of the common stock of
Solovax Inc., our subsidiary that is developing our Multivalent T-cell vaccine
for MS upon issuance of the written opinion of the European Patent Office
associated with such opposition proceeding. We plan to seek a
corporate partner in the cellular therapy field to further develop the Solovax
technology.
If
successful, we may choose to initiate a phase IIb clinical study in this
disease. The preclinical and clinical development of SOLOVAX has
been primarily financed by grants from the NIH and various non-profit
foundations totaling $5.5 million. Through December 31, 2007, we have incurred
approximately $688,000 of costs related to our development of SOLOVAX of which
$107,000, $158,000, $164,000, $163,000, $67,000 and $21,000 was incurred in
fiscal 2001, 2002, 2003, 2004, 2005 and 2006, respectively, and $8,000 has been
incurred during 2007.
Z-monocys
In July
2007 licensed the rights for the manufacture, distribution and marketing of
products based on patented zinc-monocysteine complexes (“Z-monocys”). We plan to
initially develop Z-monocys as an oral treatment for dry age-related macular
degeneration (“dry AMD”). Z-monocys has completed a six month double blind
randomized placebo controlled trial in 80 dry AMD patients with statistically
significant improvements in visual acuity, contrast sensitivity and
photorecovery times. A manuscript describing these results has been submitted to
a leading peer-reviewed ophthalmic journal. Through December 31, 2007, we have
incurred approximately $154,000 of costs related to our development of Z-monocys
of which all has been incurred during 2007.
Based on
our current capital expenditures, we believe we currently have sufficient
capital to fund development activities of oral TTM, TRIMESTATM ,
anti-CD4 802-2, CORRECTA TM,
SOLOVAX TM
, Z-monocys and EFIRMATM during
2007 and 2008. However, if our business does not generate any cash flow through
corporate partnering transactions, we will need to raise additional capital to
continue development of the product beyond 2009. To the extent additional
capital is not available when we need it, we may be forced to sublicense our
rights to our product candidates, abandon our development efforts altogether, or
lose our licenses to our product candidates, any of which would have a material
adverse effect on the prospects of our business. See also the risks identified
under the section entitled “Risk Factors” in this report.
Additional
Licenses
We may
enter into additional license agreements relating to new drug candidates.
32
INDEX
TO FINANCIAL STATEMENTS
PIPEX
PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A
Development Stage Company)
TABLE
OF CONTENTS
|
|
Page
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
34
|
|
Consolidated
Balance Sheets
|
|
35
|
|
Consolidated
Statements of Operations
|
|
36
|
|
Consolidated
Statements of Changes in Stockholders’ Equity
|
|
37
|
|
Consolidated
Statements of Cash Flows
|
|
38
|
|
Notes
to Consolidated Financial Statements
|
|
39
|
33
Report
of Independent Registered Public Accounting Firm
To the
Board of Directors and Stockholders of:
Pipex
Pharmaceuticals, Inc.
We have
audited the accompanying consolidated balance sheets of Pipex Pharmaceuticals,
Inc. and Subsidiaries (a development stage company) as of December 31, 2007 and
2006 and the related consolidated statements of operations, changes in
stockholders’ equity and cash flows for the years ended December 31, 2007 and
2006 and for the period from January 8, 2001 (inception) to December 31, 2007.
These consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included the consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly
in all material respects, the consolidated financial position of Pipex
Pharmaceuticals, Inc. and Subsidiaries (a development stage company) as of
December 31, 2007 and 2006, and the consolidated results of their operations,
changes in stockholders’ equity and cash flows for the years ended December 31,
2007 and 2006, and for the period from January 8, 2001 (inception) to December
31 2007, in conformity with accounting principles generally accepted in the
United States of America.
/s/
Berman & Company, P.A.
Boca
Raton, Florida
March 11,
2008
34
Pipex
Pharmaceuticals, Inc. and Subsidiaries
(A
Development Stage Company)
Consolidated Balance
Sheets
|
December
31,
|
||||||
|
Assets
|
2007
|
2006
|
||||
|
Current
Assets
|
||||||
|
Cash
|
$
11,492,802
|
$
12,192,426
|
||||
|
Prepaid
expenses
|
63,636
|
25,702
|
||||
|
Total
Current Assets
|
11,556,438
|
12,218,128
|
||||
|
Property
and Equipment, net of accumulated depreciation of $232,564 and
$32,935
|
2,063,233
|
297,288
|
||||
|
Deposits
and other assets
|
13,381
|
-
|
||||
|
Total
Assets
|
$
13,633,052
|
$
12,515,416
|
||||
|
Liabilities and
Stockholders' Equity
|
||||||
|
Current
Liabilities:
|
||||||
|
Accounts
payable
|
$ 728,119
|
$ 540,120
|
||||
|
Accrued
liabilities
|
59,409
|
188,899
|
||||
|
Notes
payable
|
900,000
|
-
|
||||
|
Total
Current Liabilities
|
1,687,528
|
729,019
|
||||
|
Commitments
(See Note 6)
|
||||||
|
Stockholders'
Equity
|
||||||
|
Preferred
stock, $0.001 par value; 10,000,000 shares
authorized,
|
||||||
|
none
issued and outstanding
|
-
|
-
|
||||
|
Common
stock, $0.001 par value; 100,000,000 shares
authorized,
|
||||||
|
20,433,467
and 16,227,971 shares issued and outstanding
|
20,433
|
16,228
|
||||
|
Additional
paid-in capital
|
43,001,609
|
20,544,532
|
||||
|
Deficit
accumulated during the development stage
|
(31,076,518)
|
(8,774,363)
|
||||
|
Total
Stockholders' Equity
|
11,945,524
|
11,786,397
|
||||
|
Total
Liabilities and Stockholders' Equity
|
$
13,633,052
|
$
12,515,416
|
||||
|
|
|
|||||
See
accompanying notes to consolidated financial statements
35
Pipex
Pharmaceuticals, Inc. and Subsidiaries
(A
Development Stage Company)
Consolidated Statements of
Operations
|
For
the period
|
||||||||||||
|
from
January 8,
|
||||||||||||
|
2001
|
||||||||||||
|
For
the years ended December 31,
|
(inception)
to December 31,
|
|||||||||||
|
2007
|
2006
|
2007
|
||||||||||
|
Operating
Expenses:
|
||||||||||||
|
Research
and development
|
$ | 6,327,726 | $ | 2,665,555 | $ | 11,160,795 | ||||||
|
General
and administrative
|
3,810,585 | 1,451,522 | 6,845,211 | |||||||||
|
Total
Operating Expenses
|
10,138,311 | 4,117,077 | 18,006,006 | |||||||||
|
Loss
from Operations
|
(10,138,311 | ) | (4,117,077 | ) | (18,006,006 | ) | ||||||
|
Other
Income (Expense):
|
||||||||||||
|
Interest
income
|
298,807 | 17,982 | 343,389 | |||||||||
|
Interest
expense
|
(52,929 | ) | - | (52,929 | ) | |||||||
|
Total
Other Income, net
|
245,878 | 17,982 | 290,460 | |||||||||
|
Net
Loss
|
$ | (9,892,433 | ) | $ | (4,099,095 | ) | $ | (17,715,546 | ) | |||
|
Less:
Preferred stock dividend - subsidiary
|
- | (761,000 | ) | (951,250 | ) | |||||||
|
Less:
Merger dividend
|
(12,409,722 | ) | - | (12,409,722 | ) | |||||||
|
Net
Loss Applicable to Common Shareholders
|
$ | (22,302,155 | ) | $ | (4,860,095 | ) | $ | (31,076,518 | ) | |||
|
Net
Loss Per Share - Basic and Diluted
|
$ | (1.27 | ) | $ | (1.50 | ) | $ | (7.60 | ) | |||
|
Weighted
average number of shares outstanding
|
||||||||||||
|
during
the year/period - basic and diluted
|
17,597,120 | 3,244,543 | 4,089,820 | |||||||||
See
accompanying notes to consolidated financial statements
36
Pipex
Pharmaceuticals, Inc. and Subsidiaries
(A
Development Stage Company)
Consolidated Statements of
Stockholders' Equity
For the years ended December 31, 2007 and
2006 and for the period from January 8, 2001 (inception) to December 31,
2007
|
Deficit
|
||||||||||||
|
Series
A, Convertible
|
accumulated
|
|||||||||||
|
Preferred
Stock
|
Common
Stock
|
Additional
|
during
|
Total
|
||||||||
|
$0.001
Par Value
|
$0.001
Par Value
|
Paid-in
|
development
|
Stockholders'
|
||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
stage
|
Equity
|
||||||
|
Balance,
January 8, 2001 (inception)
|
-
|
$ -
|
-
|
$ -
|
$ -
|
$ -
|
$ -
|
|||||
|
Issuance
of common stock to founders in exchange for subcription receivable
($0.00003/share)
|
-
|
-
|
1,572,136
|
1,572
|
(1,222)
|
-
|
350
|
|||||
|
Issuance
of preferred stock to founder for cash ($0.055/share)
|
5,421,554
|
5,422
|
-
|
-
|
294,578
|
-
|
300,000
|
|||||
|
Issuance
of preferred and common stock to founder for cash -
subsidiaries
|
-
|
-
|
-
|
-
|
850,540
|
-
|
850,540
|
|||||
|
Net
loss for the period ended December 31, 2001
|
-
|
-
|
-
|
-
|
-
|
(277,868)
|
(277,868)
|
|||||
|
Balance,
December 31, 2001
|
5,421,554
|
5,422
|
1,572,136
|
1,572
|
1,143,896
|
(277,868)
|
873,022
|
|||||
|
Issuance
of common stock for compensation and consulting -
subsidiary
|
-
|
-
|
-
|
-
|
119
|
-
|
119
|
|||||
|
Grant
of stock options for consulting services - subsidiary
|
-
|
-
|
-
|
-
|
5,890
|
-
|
5,890
|
|||||
|
Net
loss for the year ended December 31, 2002
|
-
|
-
|
-
|
-
|
-
|
(768,508)
|
(768,508)
|
|||||
|
Balance,
December 31, 2002
|
5,421,554
|
5,422
|
1,572,136
|
1,572
|
1,149,905
|
(1,046,376)
|
110,523
|
|||||
|
Grant
of stock options for compensation - subsidiary
|
-
|
-
|
-
|
-
|
17,984
|
-
|
17,984
|
|||||
|
Net
loss for the year ended December 31, 2003
|
-
|
-
|
-
|
-
|
-
|
(719,307)
|
(719,307)
|
|||||
|
Balance,
December 31, 2003
|
5,421,554
|
5,422
|
1,572,136
|
1,572
|
1,167,889
|
(1,765,683)
|
(590,800)
|
|||||
|
Issuance
of common stock for cash - subsidiary
|
-
|
-
|
-
|
-
|
50
|
-
|
50
|
|||||
|
Grant
of stock options for consulting services - subsidiary
|
-
|
-
|
-
|
-
|
10,437
|
-
|
10,437
|
|||||
|
Net
loss for the year ended December 31, 2004
|
-
|
-
|
-
|
-
|
-
|
(602,493)
|
(602,493)
|
|||||
|
Balance,
December 31, 2004
|
5,421,554
|
5,422
|
1,572,136
|
1,572
|
1,178,376
|
(2,368,176)
|
(1,182,806)
|
|||||
|
Recognition
of stock based consulting in connection with stock options
grants
|
-
|
-
|
-
|
-
|
59,960
|
-
|
59,960
|
|||||
|
Recognition
of stock based compensation in connection with stock option
grants
|
-
|
-
|
-
|
-
|
10,493
|
-
|
10,493
|
|||||
|
Recognition
of deferred compensation - subsidiary
|
-
|
-
|
-
|
-
|
14,057
|
-
|
14,057
|
|||||
|
Issuance
of Series B, convertible preferred stock for cash -
subsidiary
|
-
|
-
|
-
|
-
|
1,902,500
|
-
|
1,902,500
|
|||||
|
Cash
paid as direct offering costs in connection with sale of Series
B,
|
||||||||||||
|
convertible
preferred stock - subsidiary
|
-
|
-
|
-
|
-
|
(152,200)
|
-
|
(152,200)
|
|||||
|
10%
in-kind Series B, convertible preferred stock dividend -
subsidiary
|
-
|
-
|
-
|
-
|
190,250
|
(190,250)
|
-
|
|||||
|
Net
loss for the year ended December 31, 2005
|
-
|
-
|
-
|
-
|
-
|
(1,355,842)
|
(1,355,842)
|
|||||
|
Balance,
December 31, 2005
|
5,421,554
|
5,422
|
1,572,136
|
1,572
|
3,203,436
|
(3,914,268)
|
(703,838)
|
|||||
|
Conversion
of related party loan to common stock ($2.02/share)
|
-
|
-
|
1,665,211
|
1,665
|
3,273,063
|
-
|
3,274,728
|
|||||
|
Issuance
of common stock for cash - private placement ($2.02/share)
|
-
|
-
|
6,900,931
|
6,901
|
13,919,462
|
-
|
13,926,363
|
|||||
|
Cash
paid as direct offering costs in private placements
|
-
|
-
|
-
|
-
|
(1,160,418)
|
-
|
(1,160,418)
|
|||||
|
Issuance
of common stock for license fees ($0.92/share)
|
-
|
-
|
422,314
|
422
|
388,269
|
-
|
388,691
|
|||||
|
Conversion
of accrued expenses to contributed capital - former related
party
|
-
|
-
|
-
|
-
|
3,017
|
-
|
3,017
|
|||||
|
Deemed
issuance to shareholders of legal acquiror and
recapitalization
|
-
|
-
|
245,824
|
246
|
(665,246)
|
-
|
(665,000)
|
|||||
|
Conversion
of Series A, convertible preferred stock to common stock
|
(5,421,554)
|
(5,422)
|
5,421,554
|
5,422
|
-
|
-
|
-
|
|||||
|
Recognition
of stock based consulting in connection with stock option
grants
|
-
|
-
|
-
|
-
|
411,310
|
-
|
411,310
|
|||||
|
Recogntion
of stock based compensation in connection with stock option
grants
|
-
|
-
|
-
|
-
|
410,639
|
-
|
410,639
|
|||||
|
10%
in-kind Series B, convertible preferred stock dividend -
subsidiary
|
-
|
-
|
-
|
-
|
190,250
|
(190,250)
|
-
|
|||||
|
30%
in-kind Series B, convertible preferred stock dividend -
subsidiary
|
-
|
-
|
-
|
-
|
570,750
|
(570,750)
|
-
|
|||||
|
Net
loss for the year ended December 31, 2006
|
-
|
-
|
-
|
-
|
-
|
(4,099,095)
|
(4,099,095)
|
|||||
|
Balance,
December 31, 2006
|
-
|
-
|
16,227,970
|
16,228
|
20,544,532
|
(8,774,363)
|
11,786,397
|
|||||
|
Recognition
of stock based compensation in connection with stock option
grants
|
-
|
-
|
-
|
-
|
1,483,123
|
-
|
1,483,123
|
|||||
|
Recognition
of stock based consulting in connection with stock option
grants
|
-
|
-
|
-
|
-
|
673,271
|
-
|
673,271
|
|||||
|
-
|
||||||||||||
|
Issuance
of common stock for consideration of common shares in EPI acquistion
($19.95/share)
|
-
|
-
|
30,161
|
30
|
601,682
|
-
|
601,712
|
|||||
|
Contributed
services - related party
|
275,645
|
-
|
275,645
|
|||||||||
|
Issuance
of common stock for license fees ($6.85/share)
|
-
|
-
|
2,920
|
3
|
19,997
|
-
|
20,000
|
|||||
|
Issuance
of common stock for milestone payment ($4.90/share)
|
-
|
-
|
5,102
|
5
|
24,995
|
-
|
25,000
|
|||||
|
Issuance
of common stock in connection with warrants exercise
($2.22/share)
|
-
|
-
|
3,401,967
|
3,402
|
7,548,976
|
-
|
7,552,378
|
|||||
|
Cash
paid as direct offering costs in private placements
|
-
|
-
|
-
|
-
|
(579,569)
|
-
|
(579,569)
|
|||||
|
Issuance
of common stock for consideration of preferred shares in EPI acquistion
($19.95/share)
|
-
|
-
|
765,087
|
765
|
12,408,957
|
(12,409,722)
|
-
|
|||||
|
Rounding
of shares due to reverse split
|
260
|
-
|
-
|
-
|
-
|
|||||||
|
Net
loss for the year ended December 31, 2007
|
-
|
-
|
-
|
-
|
-
|
(9,892,433)
|
(9,892,433)
|
|||||
|
Balance,
December 31, 2007
|
-
|
$ -
|
|
20,433,467
|
$ 20,433
|
|
$ 43,001,609
|
|
$ (31,076,518)
|
|
$ 11,945,524
|
|
See
accompanying notes to consolidated financial statements
37
Pipex
Pharmaceuticals, Inc. and Subsidiaries
(A
Development Stage Company)
Consolidated
Statements of Cash Flows
|
For the year
ended December
31, |
For
the Period from
January 8,(Inception)
to December
|
|||||||||||
|
2007
|
2006
|
31,
2007
|
||||||||||
|
Cash
Flows From Operating Activities:
|
||||||||||||
|
Net
loss
|
$ | (9,892,433 | ) | $ | (4,099,095 | ) | $ | (17,715,546 | ) | |||
|
Adjustments
to reconcile net loss to net cash
|
||||||||||||
|
used
in operating activities:
|
||||||||||||
|
Stock-based
compensation
|
1,483,123 | 410,639 | 1,936,646 | |||||||||
|
Stock-based
consulting
|
673,271 | 411,310 | 1,160,987 | |||||||||
|
Stock
issued as compensation in acquisition of subsidiary
|
601,712 | - | 601,712 | |||||||||
|
Contributed
services - related party
|
275,645 | - | 275,645 | |||||||||
|
Stock
issued for license fee
|
20,000 | 388,691 | 408,691 | |||||||||
|
Stock
issued for milestone payment
|
25,000 | - | 25,000 | |||||||||
|
Depreciation
|
199,629 | 30,675 | 232,564 | |||||||||
|
Changes
in operating assets and liabilities:
|
||||||||||||
|
Prepaid
expenses and other
|
(37,934 | ) | (25,702 | ) | (63,636 | ) | ||||||
|
Deposits
and other assets
|
(13,381 | ) | - | (13,381 | ) | |||||||
|
Accounts
payable
|
187,999 | 325,746 | 728,119 | |||||||||
|
Accrued
liabilities
|
(129,490 | ) | 191,917 | 62,427 | ||||||||
|
Net
Cash Used In Operating Activities
|
(6,606,859 | ) | (2,365,819 | ) | (12,360,772 | ) | ||||||
|
Cash
Flows From Investing Activities:
|
||||||||||||
|
Purchases
of property and equipment
|
(1,965,574 | ) | (45,833 | ) | (2,011,407 | ) | ||||||
|
Cash
paid to acquire shell in reverse merger
|
- | (665,000 | ) | (665,000 | ) | |||||||
|
Net
Cash Used In Investing Activities
|
(1,965,574 | ) | (710,833 | ) | (2,676,407 | ) | ||||||
|
Cash
Flows From Financing Activities:
|
||||||||||||
|
Proceeds
from loans payable - related party
|
- | 1,365,344 | 3,210,338 | |||||||||
|
Repayments
of loans payable - related party
|
- | (20,000 | ) | (220,000 | ) | |||||||
|
Proceeds
from note payable
|
1,100,000 | - | 1,100,000 | |||||||||
|
Repayments
of note payable
|
(200,000 | ) | - | (200,000 | ) | |||||||
|
Proceeds
from issuance of preferred and common stock
|
- | - | 1,150,590 | |||||||||
|
Proceeds
from sale of common stock and warrants in private
placements
|
- | 13,926,362 | 13,926,362 | |||||||||
|
Proceeds
from sale of common stock in connection with warrants
exercise
|
7,552,378 | - | 7,552,378 | |||||||||
|
Cash
paid as direct offering costs in warrant call and private
placements
|
(579,569 | ) | (1,160,418 | ) | (1,739,987 | ) | ||||||
|
Proceeds
from issuance of Series B, convertible preferred stock -
subsidiary
|
- | - | 1,902,500 | |||||||||
|
Direct
offering costs in connection with issuance of
|
||||||||||||
|
series
B, convertible preferred stock - subsidiary
|
- | - | (152,200 | ) | ||||||||
|
Net
Cash Provided By Financing Activities
|
7,872,809 | 14,111,288 | 26,529,981 | |||||||||
|
Net
increase (decrease) in cash
|
(699,624 | ) | 11,034,636 | 11,492,802 | ||||||||
|
Cash
at beginning of year/period
|
12,192,426 | 1,157,790 | - | |||||||||
|
Cash
at end of year/period
|
$ | 11,492,802 | $ | 12,192,426 | $ | 11,492,802 | ||||||
|
Supplemental
disclosures of cash flow information:
|
||||||||||||
|
Cash
paid for interest
|
$ | 52,929 | $ | - | $ | 52,929 | ||||||
|
Cash
paid for taxes
|
$ | - | $ | - | $ | - | ||||||
|
Supplemental
disclosure of non-cash investing and financing
activities:
|
||||||||||||
|
Exchange
of EPI preferred stock into Pipex common stock in
acquisition
|
$ | 12,409,722 | $ | - | $ | 12,409,722 | ||||||
|
Pipex
acquired equipment in exchange for a loan with a related
party
|
$ | - | $ | 284,390 | $ | 284,390 | ||||||
|
EPI
declared a 10% and 30% in-kind dividend on its Series B,
|
||||||||||||
|
convertible
preferred stock.
|
$ | - | $ | 761,000 | $ | 951,250 | ||||||
|
The
Company issued shares and warrants in connection with the
|
||||||||||||
|
conversion
of certain related party debt.
|
$ | - | $ | 3,274,728 | $ | 3,274,728 | ||||||
|
Conversion
of accrued liabilities to contributed capital - former related
party
|
$ | - | $ | 3,017 | $ | 3,017 | ||||||
See
accompanying notes to consolidated financial statements
38
Pipex
Pharmaceuticals, Inc. and Subsidiaries
(A
Development Stage Company)
Notes
to Consolidated Financial Statements
December
31, 2007 and 2006
Note 1 Organization and
Nature of Operations
(A)
Description of the Business
Pipex
Pharmaceuticals, Inc. (“Pipex”) is a development-stage pharmaceutical company
that is developing proprietary, late-stage drug candidates for the treatment of
neurologic and fibrotic diseases.
(B)
Corporate Structure, Basis of Presentation and Non-Controlling
Interest
The
Company has four subsidiaries, Pipex Thereapeutics, Inc. (“Pipex Therapeutics”),
Effective Pharmaceuticals, Inc. (“EPI”), Solovax, Inc. (“Solovax”) and CD4
Biosciences, Inc. (“CD4”) which were previously under common
control. As of December 31, 2007 EPI is wholly owned and Pipex
Therapeutics, Solovax and CD4 are majority owned. The combinations of
these entities were accounted for in a manner similar to a pooling of
interests.
For
financial reporting purposes, the outstanding preferred stock and common stock
of the Company is that of Pipex, the legal registrant. All statements of
operations, stockholders’ equity (deficit) and cash flows for each of the
entities are presented as consolidated since January 8, 2001 (inception) due to
the existence of common control since that date. All subsidiaries were
incorporated on January 8, 2001 under the laws of the State of Delaware, except
for EPI, which was incorporated on December 12, 2000.
For
financial accounting purposes, the Company’s inception is deemed January 8,
2001. The activity of EPI for the period from December 12, 2000 to January 7,
2001 was nominal. Therefore, there is no financial information presented for
this period.
The
Company’s ownership in its subsidiaries requires the Company to account for the
related non-controlling interest. Under generally accepted accounting
principles, when losses applicable to the minority interest in a subsidiary
exceed the minority interest in the equity capital of the subsidiary, the excess
is not charged to the minority interest since there is no obligation of the
minority interest to make good on such losses. The Company,
therefore, has included losses applicable to the minority interest against its
interest. Since the Company’s subsidiaries have never been profitable
and present negative equity, there has been no establishment of a positive
non-controlling interest. This value is not presented as a deficit balance in
the accompanying consolidated balance sheet.
(C)
Reverse Stock Split
In
January 2007, and effective on April 25, 2007, the Company’s Board of Directors
approved a 3 for 1 reverse stock split of all outstanding common stock, stock
options and stock warrants of Pipex. All share and per share amounts have been
retroactively restated to reflect this reverse stock split.
See Note
2(H) as it pertains to the retroactive effect of the share and per share amounts
pursuant to the reverse acquisition and recapitalization discussed in Note
1(D).
(D)
Reverse Acquisition and Recapitalization
On
October 31, 2006, Sheffield Pharmaceuticals, Inc. (“Sheffield”), a then shell
corporation, entered into a Merger Agreement (“Merger”) with Pipex Therapeutics,
a privately owned company, whereby Pipex Therapeutics was the surviving
corporation. This transaction was accounted for as a reverse acquisition.
Sheffield did not have any operations at the time of the merger, and this was
treated as a recapitalization of Pipex Therapeutics. Since Pipex Therapeutics
acquired a controlling voting interest in a public shell corporation, it was
deemed the accounting acquirer, while Sheffield was deemed the legal acquirer.
The historical financial statements of the Company are those of Pipex
Therapeutics, EPI, Solovax and CD4 since inception, and of the consolidated
entities from the date of Merger and subsequent. On December 11, 2006, Sheffield
changed its name to Pipex Pharmaceuticals, Inc.
Since the
transaction is considered a reverse acquisition and recapitalization, the
guidance in SFAS No. 141 does not apply for purposes of presenting
pro-forma financial information.
Pursuant
to the agreement, Sheffield issued 34,000,000 shares of common stock for all of
the outstanding Series A, convertible preferred and common stock of Pipex
Therapeutics, and Sheffield assumed all of Pipex Therapeutics’s outstanding
options and warrants, but did not assume the options and warrants outstanding
within any of Pipex Therapeutics’s subsidiaries (EPI, CD4 and Solovax). On
October 31, 2006, concurrent with the Merger, Pipex Therapeutics executed a
private stock purchase agreement to purchase an additional 2,426,300 shares of
common stock held by Sheffield’s sole officer and director; these shares were
immediately cancelled and retired. Aggregate consideration paid for Sheffield
was $665,000. Upon the closing of the reverse acquisition, shareholders of
Sheffield retained an aggregate 245,824 shares of common stock. As a result of
these two stock purchase transactions, Pipex Therapeutics acquired approximately
99% ownership of the issued and outstanding common shares of
Sheffield.
39
Pipex
Pharmaceuticals, Inc. and Subsidiaries
(A
Development Stage Company)
Notes
to Consolidated Financial Statements
December
31, 2007 and 2006
(E)
Contribution Agreements — Consolidation of Entities under Common
Control
1. EPI’s
Acquisition of CD4
On
December 31, 2004, EPI acquired 91.61% of the issued and outstanding common
stock of CD4 in exchange for 825,000 shares of common stock having a fair value
of $825. EPI assumed certain outstanding accounts payable and loans of CD4 of
approximately $664,000. The fair value of the exchange was equivalent to the par
value of the common stock issued. CD4 shareholders retained 119,000 shares
(8.39%) of the issued and outstanding common stock of CD4; these shareholders
comprise the non-controlling shareholder base of CD4.
2. Pipex
Therapeutic’s Acquisition of Solovax
On July
31, 2005, Pipex Therapeutics acquired 96.9% of the aggregate voting preferred
and common stock of Solovax. Pipex Therapeutics assumed all outstanding
liabilities of approximately $310,000, the transfer of 1,000,000 shares of
Series A Convertible Preferred Stock owned by Solovax’s president and 250,000
shares of common stock owned by Solovax’s COO. The fair value of the exchange
was equivalent to the par value of the common stock received pursuant to the
terms of the contribution.
3. Pipex
Therapeutic’s Acquisition of EPI/CD4
On
December 31, 2005, Pipex Therapeutics acquired 65.47% of the aggregate voting
preferred and common stock of EPI and EPI’s majority owned subsidiary CD4. In
addition, Pipex Therapeutics assumed $583,500 of outstanding liabilities of EPI.
The fair value of the exchange was equivalent to the par value of the common
stock received pursuant to the terms of the contribution.
In the
consolidated financial statements at December 31, 2007, each of these
transactions described in Notes 1(E)(1), 1(E)(2) and 1(E)(3), was analogous to a
recapitalization with no net change to equity since the entities were under
common control at the date of the transaction.
4. Pipex
Pharmaceutical’s Acquisition of EPI, Share Issuances and Paid-in Kind Merger
Dividend
On
January 5, 2007, EPI merged with and into a wholly owned subsidiary of Pipex,
Effective Acquisition Corp. In the transaction, Pipex issued an aggregate
795,248 shares of common stock having a fair value of $15,865,198 based upon the
quoted closing trading price of $19.95 per share. As consideration for the share
issuance, EPI exchanged 1,902,501 shares of Series B Convertible Preferred stock
and 75,000 shares of common stock into 765,087 and 30,161, shares of Pipex
common stock, respectively.
See
additional discussion below for the issuance of the 765,087 shares, the Company
recorded a paid-in kind/merger dividend.
In
connection with the issuance of the 30,161 shares, the Company recorded
additional compensation expense of $601,712 as the stock was issued to an
officer and director of the Company.
During
2006, EPI declared a 10% and 30% preferred stock dividend, respectively, on its
outstanding Series B, convertible preferred stock. During 2005, EPI
declared a 10% preferred stock dividend on its outstanding Series B, convertible
preferred stock. In total, 951,250 shares of additional Series B,
convertible preferred stock were issued to the holders of record at the
declaration date. These 951,250 shares of outstanding Series B
preferred stock dividend were cancelled and retired and were not contemplated in
the exchange with Pipex. EPI also cancelled and retired all of the issued and
outstanding 3,000,000 shares of Series A Convertible Preferred stock as well as
750,000 shares of common stock
In
connection with this exchange and pursuant to Securities and Exchange Commission
Regulation S-X, Rule 11-01(d) and EITF 98-3, “Determining whether a Non-Monetary
Transaction involves the receipt of Productive Assets or of a Business”
EPI was classified as a development stage company and thus was not considered a
business. As a result, SFAS No. 141 purchase accounting rules did not apply.
Additionally, the Company applied the provisions of EITF 86-32, “Early Extinguishment of a
Subsidiary’s Mandatorily Redeemable Preferred Stock” and has determined
that even though the preferred stock of EPI was not mandatorily redeemable, this
transaction is analogous to a capital transaction, and there would be no
resulting gain or loss.
40
Pipex
Pharmaceuticals, Inc. and Subsidiaries
(A
Development Stage Company)
Notes
to Consolidated Financial Statements
December
31, 2007 and 2006
Finally,
in connection with EITF Topic D-42, “The Effect on the Calculation of
Earnings Per Share for the Redemption or Induced Conversion of Preferred
Stock”, The Company has determined that the fair value of the
consideration transferred to the holders of EPI Series B, convertible preferred
stock over the carrying amount of the preferred stock represents a return to the
preferred stockholders. The difference is $12,409,722, which is included as a
component of paid in-kind dividends. This amount is included as an additional
reduction in net loss applicable to common shareholders for purposes of
computing loss per share in the accompanying financial statements for the years
ended December 31, 2007 and 2006 and for the period from January 8, 2001
(inception) to December 31, 2007.
As part
of the acquisition of EPI, the Company granted an aggregate 68,858 warrants and
34,685 options for the outstanding warrants and options held by the EPI warrant
and option holders. These new warrants and options will continue to vest
according to their original terms. Pursuant to SFAS No. 123R and fair value
accounting, the Company treated the exchange as a modification of an award of
equity instruments. As such, incremental compensation cost was measured as the
excess of the fair value of the replacement award over the fair value of the
cancelled award at the cancellation date. In substance, Pipex repurchased the
EPI instruments by issuing a new instrument of greater value.
The
Company used the following weighted average assumptions for the fair value of
the replacement award: expected dividend yield of 0%; expected volatility of
196.10%; risk-free interest rate of 4.65%, an expected life ranging from seven
to eight years and exercise prices ranging from $0.09 - $3.30.
The
Company has the following weighted average assumptions for the fair value of the
cancelled award at the cancellation date: expected dividend yield of 0%;
expected volatility of 200%; risk-free interest rate of 4.65%, an expected life
ranging from seven to eight years and exercise prices ranging from $0.09
-$3.30.
The fair
value of the replacement award required an increase in compensation expense of
approximately $352,734.
Note 2 Summary of
Significant Accounting Policies
(A)
Principles of Consolidation
The
consolidated financial statements include the accounts of Pipex Pharmaceuticals,
Inc. and its subsidiaries, Pipex Therapeutics, Solovax, EPI, and CD4. All
significant inter-company accounts and transactions have been eliminated in
consolidation.
(B)
Development Stage
The
Company’s consolidated financial statements are presented as those of a
development stage enterprise. For the period from January 8, 2001
(inception) to date, the Company has been a development stage enterprise, and
accordingly, the Company’s operations have been directed primarily toward the
acquisition and creation of intellectual properties and certain research and
development activities to improve current technological concepts. As the Company
is devoting its efforts to research and development, there have been no sales,
license fees or royalties earned. Additionally, the Company continually seeks
sources of debt or equity based funding to further its intended research and
development activities. The Company has experienced net losses since its
inception, and had an accumulated deficit of $31,076,518 at December 31,
2007.
(C)
Use of Estimates
In
preparing financial statements in conformity with generally accepted accounting
principles, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosure of contingent assets
and liabilities at the date of the financial statements, and revenues and
expenses during the periods presented. Actual results may differ from these
estimates.
Significant
estimates during 2007 and 2006 include depreciable lives of property, valuation
of warrants and stock options granted for services or compensation pursuant to
EITF No. 96-18 and SFAS No. 123R, respectively, estimates of the probability and
potential magnitude of contingent liabilities and the valuation allowance for
deferred tax assets due to continuing operating losses.
41
Pipex
Pharmaceuticals, Inc. and Subsidiaries
(A
Development Stage Company)
Notes
to Consolidated Financial Statements
December
31, 2007 and 2006
(D)
Cash
The
Company minimizes its credit risk associated with cash by periodically
evaluating the credit quality of its primary financial institution. The balance
at times may exceed federally insured limits. At December 31, 2007, the balance
exceeded the federally insured limit by $11,009,126.
(E)
Property and Equipment
Property
and equipment is stated at cost, less accumulated depreciation. Expenditures for
maintenance and repairs are charged to expense as incurred. Items of property
and equipment with costs greater than $1,000 are capitalized and depreciated on
a straight-line basis over the estimated useful lives, as follows:
|
Description
|
|
Estimated
Useful Life
|
|
Office
equipment and furniture
|
|
5
years
|
|
Laboratory
equipment
|
|
10
years
|
|
Manufacturing
equipment
|
|
10
years
|
|
Leasehold
improvements and fixtures
|
|
Lesser
of estimated useful life or life of operating
lease
|
(F)
Long Lived Assets
Long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future undiscounted net cash flows expected to be
generated by the asset. If such assets are considered impaired, the impairment
to be recognized is measured by the amount by which the carrying amount of the
assets exceeds the fair value of the assets. There were no impairment charges
taken during the years ended December 31, 2007 and 2006 and for the period from
January 8, 2001 (inception) to December 31, 2007.
(G)
Derivative Liabilities
In
connection with the reverse acquisition, all outstanding convertible preferred
stock of Pipex was cancelled and retired, as such, the provisions of EITF No.
00-19, “Accounting for
Derivative Financial Instruments Index to, and Potentially Settled in, a
Company’s Own Stock” do not apply. The Company’s majority owned
subsidiaries also contain issued convertible preferred stock; however, none of
these instruments currently contains any provisions that require the recording
of a derivative liability. In connection with the acquisition of EPI on January
5, 2007 (See Notes 1(D) and 1(E)(4), all issued and outstanding shares of Series
A and B, convertible preferred stock were cancelled and retired. As such, no
potential derivative liabilities will exist pertaining to these
instruments.
(H)
Net Loss per Share
Basic
earnings (loss) per share is computed by dividing the net income (loss) less
preferred dividends for the period by the weighted average number of common
shares outstanding. Diluted earnings per share is computed by dividing net
income (loss) less preferred dividends by the weighted average number of common
shares outstanding including the effect of share equivalents. Since the Company
reported a net loss at December 31, 2007 and 2006 and for the period from
January 8, 2001 (inception) to December 31, 2007, respectively, all common stock
equivalents would be anti-dilutive; as such there is no separate computation for
diluted earnings per share.
The
Company’s net loss per share for the years ended December 31, 2007 and 2006 and
for the period from January 8, 2001 (inception) to December 31, 2007 was
computed assuming the recapitalization associated with the reverse acquisition,
as such, all share and per share amounts have been retroactively restated.
Additionally, the numerator for computing net loss per share was adjusted for
preferred stock dividends recorded during the year ended December 31, 2006 and
the period from January 8, 2001 (inception) to December 31, 2007, in connection
with the acquisition of EPI (See Note 1(D)(4)) as well as and certain provisions
relating to the sale of EPI’s Series B, convertible preferred
stock.
(I)
Research and Development Costs
The
Company expenses all research and development costs as incurred for which there
is no alternative future use. Research and development expenses consist
primarily of manufacturing costs, license fees, salaries, stock based
compensation and related personnel costs, fees paid to consultants and outside
service providers for laboratory development, legal expenses resulting from
intellectual property prosecution and other expenses relating to the design,
development, testing and enhancement of the Company’s product candidates, as
well as an allocation of overhead expenses incurred by the Company.
42
Pipex
Pharmaceuticals, Inc. and Subsidiaries
(A
Development Stage Company)
Notes
to Consolidated Financial Statements
December
31, 2007 and 2006
(J)
Income Taxes
Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. (See Note 7)
(K)
Fair Value of Financial Instruments
The
carrying amounts of the Company’s short-term financial instruments, including
accounts payable, accrued liabilities and notes payable, approximate fair value
due to the relatively short period to maturity for these
instruments.
(L)
Stock Based Compensation
All
share-based payments to employees since inception have been recorded and
expensed in the statements of operations as applicable under SFAS No. 123R “Share-Based
Payment”.
(M)
Reclassifications
Certain
amounts in the year 2006 financial statements have been reclassified to conform
to the year 2007 presentation. The results of these reclassifications did not
materially affect the Company’s consolidated financial position, results of
operations or cash flows.
(N)
Recent Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”,
which clarifies the principle that fair value should be based on the assumptions
that market participants would use when pricing an asset or
liability. It also defines fair value and established a hierarchy
that prioritizes the information used to develop assumptions. SFAS
No. 157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007. The Company does not expect SFAS No. 157 to
have a material impact on its financial position, results of operations or cash
flows.
On
February 15, 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards No. 159, “The Fair Value
Option for Financial Assets and Financial Liabilities — Including an Amendment
of FASB Statement No. 115” (“SFAS 159”). This standard permits an entity to
measure financial instruments and certain other items at estimated fair value.
Most of the provisions of SFAS No. 159 are elective; however, the amendment
to FASB No. 115, “Accounting for Certain Investments in Debt and Equity
Securities,” applies to all entities that own trading and available-for-sale
securities. The fair value option created by SFAS 159 permits an entity to
measure eligible items at fair value as of specified election dates. The fair
value option (a) may generally be applied instrument by instrument,
(b) is irrevocable unless a new election date occurs, and (c) must be
applied to the entire instrument and not to only a portion of the instrument.
SFAS 159 is effective as of the beginning of the first fiscal year that begins
after November 15, 2007. Early adoption is permitted as of the beginning of
the previous fiscal year provided that the entity (i) makes that choice in
the first 120 days of that year, (ii) has not yet issued financial
statements for any interim period of such year, and (iii) elects to apply
the provisions of FASB 157. Management is currently evaluating the impact of
SFAS 159, if any, on the Company’s financial statements. The adoption of SFAS
No. 159 is not expected to have a material effect on its financial position,
results of operations or cash flows.
In June
2007, the Emerging Issues Task Force (“EITF”) issued EITF No. 07-01, Accounting for Collaborative
Arrangements, (“EITF 07-1”). EITF 07-1 provides guidance for companies in
the biotechnology or pharmaceutical industries that may enter into agreements
with other companies to collaboratively develop, manufacture, and market a drug
candidate (Collaboration Agreements) and is effective for fiscal years beginning
after December 15, 2007. The Company does not expect that EITF 07-01 will have
an effect on its financial condition or results of operations.
In June
2007, the EITF issued EITF No. 07-3, Accounting for Nonrefundable Advance
Payments for Goods or Services to Be Used in Future Research and Development
Activities, (“EITF 07-3”). EITF 07-3 provides guidance for upfront
payments related to goods and services of research and development costs and is
effective for fiscal years beginning after December 15, 2007. The Company is
currently evaluating the impact of EITF 07-3 on its financial
statements.
43
Pipex
Pharmaceuticals, Inc. and Subsidiaries
(A
Development Stage Company)
Notes
to Consolidated Financial Statements
December
31, 2007 and 2006
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of Accounting Research Bulletin
No 51” (SFAS 160). SFAS 160 establishes accounting and reporting standards for
ownership interests in subsidiaries held by parties other than the parent,
changes in a parent’s ownership of a noncontrolling interest, calculation and
disclosure of the consolidated net income attributable to the parent and the
noncontrolling interest, changes in a parent’s ownership interest while the
parent retains its controlling financial interest and fair value measurement of
any retained noncontrolling equity investment. SFAS 160 is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years. Early adoption is prohibited. The
adoption of SFAS No. 160 is not expected to have a material effect on its
financial position, results of operations or cash flows.
In
December 2007, the FASB issued SFAS 141R, Business Combinations (“SFAS 141R”),
which replaces FASB SFAS 141, Business Combinations. This Statement
retains the fundamental requirements in SFAS 141 that the acquisition method of
accounting be used for all business combinations and for an acquirer to be
identified for each business combination. SFAS 141R defines the acquirer as the
entity that obtains control of one or more businesses in the business
combination and establishes the acquisition date as the date that the acquirer
achieves control. SFAS 141R will require an entity to record
separately from the business combination the direct costs, where previously
these costs were included in the total allocated cost of the
acquisition. SFAS 141R will require an entity to recognize the assets
acquired, liabilities assumed, and any non-controlling interest in the acquired
at the acquisition date, at their fair values as of that date. This
compares to the cost allocation method previously required by SFAS No.
141. SFAS 141R will require an entity to recognize as an asset or
liability at fair value for certain contingencies, either contractual or
non-contractual, if certain criteria are met. Finally, SFAS 141R will
require an entity to recognize contingent consideration at the date of
acquisition, based on the fair value at that date. This Statement
will be effective for business combinations completed on or after the first
annual reporting period beginning on or after December 15,
2008. Early adoption of this standard is not permitted and the
standards are to be applied prospectively only. Upon adoption of this
standard, there would be no impact to the Company’s results of operations and
financial condition for acquisitions previously completed. The
adoption of SFAS No. 141R is not expected to have a material effect on its
financial position, results of operations or cash flows.
Other
accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies that do not require adoption until a future date and
are not expected to have a material impact on the financial statements upon
adoption.
Note 3 Property and
Equipment
Property
and Equipment consisted of the following at December 31,
|
2007
|
2006
|
|||||||
|
Manufacturing
equipment
|
$ | 1,054,289 | $ | 298,990 | ||||
|
Leasehold
Improvements
|
850,302 | - | ||||||
|
Computer
and office equipment
|
227,274 | 7,760 | ||||||
|
Laboratory
equipment
|
163,932 | 23,473 | ||||||
|
Total
|
2,295,797 | 330,223 | ||||||
|
Less
accumulated depreciation
|
(232,564 | ) | (32,935 | ) | ||||
|
Property
and equipment, net
|
$ | 2,063,233 | $ | 297,288 | ||||
Note 4 Notes
Payable
During
2007, the Company borrowed $1,100,000 and repaid $200,000. These
notes were secured by all assets of the Company as well as the stock
certificates of the subsidiaries; the notes bore interest at 9.25% (prime plus
2%) and were due March 30, 2010. These borrowings represented a 100%
concentration of debt at December 31, 2007. On March 6, 2008, all of
the outstanding principal and accrued interest totaling $834,443 was
repaid. As a result, all of the debt was classified as a current
liability at December 31, 2007. (See Note 9)
44
Pipex
Pharmaceuticals, Inc. and Subsidiaries
(A
Development Stage Company)
Notes
to Consolidated Financial Statements
December
31, 2007 and 2006
Loans Payable
– Related Party
An
affiliate of the Company’s founder, President and CEO has advanced working
capital to or on behalf of the Company. Loan activity for the Company was as
follows since inception:
|
Total
loans/ (repayments) per year
|
Amount
|
|||
|
Year
ended December 31, 2001 — loans
|
|
$
|
—
|
|
|
Year
ended December 31, 2002 — loans
|
|
130,520
|
||
|
Year
ended December 31, 2003 — loans
|
|
244,640
|
||
|
Year
ended December 31, 2004 — loans
|
|
785,281
|
||
|
Year
ended December 31, 2005 — loans
|
|
968,943
|
||
|
Year
ended December 31, 2005 — repayments
|
|
(200,000
|
)
|
|
|
Year
ended December 31, 2006 — loans
|
|
1,365,344
|
||
|
Year
ended December 31, 2006 — repayments
|
(20,000)
|
|||
|
Year
ended December 31, 2006 — conversion to equity
|
|
(3,274,728
|
)
|
|
|
|
||||
|
Balance,
December 31, 2006
|
|
$
|
—
|
|
|
|
||||
On
October 31, 2006, the non-interest bearing loans payable to the Company’s
founder, Chairman and Chief Executive Officer, which amounted to $3,274,728,
were converted into 1,665,211 shares of common stock and 832,606 warrants to
purchase common stock.
Note 5 Stockholders’
Equity
(A)
Preferred Stock Issuances
1.
For the Year Ended December 31, 2001
On
January 8, 2001, EPI issued 3,000,000 shares of Series A Convertible Preferred
Stock to the Founder serving as the CEO and Chairman of the Board of EPI in
exchange for $250,000 ($0.08 per share). On January 5, 2007, pursuant
to the acquisition of EPI, these shares were cancelled and retired.
On
January 15, 2001, Pipex Therapeutics issued 5,421,554 shares of Series A
Convertible Preferred Stock to a founder serving as CEO and Chairman of the
Board of Pipex in exchange for $300,000 ($0.055 per share). On October 31, 2006,
pursuant to the reverse acquisition with Sheffield, these shares were cancelled
and retired.
On
January 31, 2001, Solovax issued 1,000,000 shares of Series A Convertible
Preferred Stock to the Founder serving as the President, CEO and Chairman of the
Board of Solovax in exchange for $300,000 ($0.30 per share).
On
February 7, 2001, CD4 issued 1,000,000 shares of Series A Convertible Preferred
Stock, to an affiliate of a founder serving as the CEO and Chairman of the Board
of CD4 in exchange for $300,000 ($0.30 per share).
2.
For the Year Ended December 31, 2005
On March
10, 2005, EPI’s board of directors and stockholders voted to authorize the
designation of a Series B Convertible Preferred Stock. From March
through June 2005, EPI issued 1,902,500 shares of Series B Convertible Preferred
Stock, at $1 per share, for proceeds of $1,902,500. In connection with this
offering, EPI paid $152,200 of offering costs that were charged against
additional paid in capital. The Company also granted 171,225 warrants as
compensation in connection with this equity raise.
On
January 5, 2007, pursuant to the acquisition of EPI, the shares of Series B
Convertible Preferred Stock were converted into 765,087 shares of Pipex common
stock and the warrants were converted into 68,858 warrants of Pipex. (See Note
1(E)(4))
(B)
Series A Convertible Preferred Stock
The
Company and its subsidiaries has each authorized and issued Series A Convertible
Preferred Stock. (See Note 1(D) for conversion of Pipex Series A convertible
preferred stock.)
45
Pipex
Pharmaceuticals, Inc. and Subsidiaries
(A
Development Stage Company)
Notes
to Consolidated Financial Statements
December
31, 2007 and 2006
The terms of the Series A Convertible Preferred Stock for the Company and its subsidiaries is summarized below. The terms are the same for each of the entities.
1.
Dividends
Each
share of Series A Convertible Preferred Stock is entitled to receive dividends
in an amount equal to dividends declared and paid with respect to that number of
shares of common stock into which one share of Series A Convertible Preferred
Stock is then convertible. For the period from January 8, 2001 (inception) to
December 31, 2007, neither the Company, nor any of its majority owned
subsidiaries has declared any Series A Convertible Preferred Stock
dividends.
2.
Liquidation Preference
Upon
liquidation, holders of the Series A Convertible Preferred Stock will be
entitled to the greater of (1) a per share amount equal to the original purchase
price plus any dividends accrued but not paid and (2) the amount that the holder
would receive in respect of a share of Series A, preferred if immediately prior
to dissolution and liquidation, all shares of Series A Convertible Preferred
Stock were converted into shares of common stock.
3.
Conversion
Each
share of Series A Convertible Preferred Stock is immediately convertible on a
one for one basis at the option of the holder. The conversion ratio is
determined by dividing the original issue price of the Series A Convertible
Preferred Stock by the conversion price for the Series A, convertible preferred
stock in effect on the date the certificate is surrendered for conversion. The
conversion price will initially be the original issue price, which is subject to
future adjustment. At December 31, 2007, the conversion ratio is
1.00.
4.
Voting Rights
Each
holder of Series A, convertible preferred stock is entitled to one vote for each
share of common stock into which each share of Series A Convertible Preferred
Stock could then be converted.
5.
Beneficial Conversion Feature and Derivative Liability
The
Company and its subsidiaries has reviewed each of the provisions of its Series A
Convertible Preferred Stock and noted no required accounting for a beneficial
conversion feature pursuant to the guidance in EITF No.’s 98-5 or 00-27. Upon
issuance, the original issue price, its fair value, and conversion price were
equivalent.
Additionally,
there is no required accounting or financial statement impact for derivative
instruments. None of the Company or its subsidiaries Series A Convertible
Preferred Stock has embedded features requiring such treatment.
(C)
Series B Convertible Preferred Stock
Pipex
Therapeutics has authorized Series B Convertible Preferred Stock. At
December 31, 2007, Pipex Therapeutics has not issued any of its Series B
Convertible Preferred Stock. Pipex Therapeutics has not yet designated their
Series B Convertible Preferred Stock as it pertains to dividends, liquidation
preference, conversion, voting rights, and other rights and
preferences.
(D)
Common Stock Issuances of Issuer
In
December 2007, the Company issued 5,102 shares of common stock having a fair
value of $25,000 ($4.90 per share) based on the quoted closing trading price for
a milestone payment.
In
September and December of 2007, the Company issued an aggregate 2,920 shares of
common stock having a fair value of $20,000 ($6.85 per share) based on the
quoted closing trading price for license fees.
During
2007, the Company issued 3,401,972 shares of common stock in connection with the
exercise of warrants for net proceeds of $6,972,809 ($2.22 per
share).
During
October and November of 2006, the Company completed private placements of its
stock, which resulted in the issuance of 6,900,931 shares of common stock and
3,451,524 warrants. The net proceeds from the private placements were
$12,765,945, which included cash paid as direct offering costs of
$1,160,418.
46
Pipex
Pharmaceuticals, Inc. and Subsidiaries
(A
Development Stage Company)
Notes
to Consolidated Financial Statements
December
31, 2007 and 2006
On
October 31, 2006, the loans payable to the Company’s founder, President and CEO
were converted into 1,665,211 shares of common stock and 832,606
warrants. There were no gain or loss on this transaction since it was
with a related party.
During
October 2006, the Company converted all of its 5,421,554 shares of Series A,
convertible preferred stock in exchange for equivalent common shares. The fair
value of the exchange was based upon par value with a net effect of $0 to the
statement of equity.
During
October 2006, the Company issued 422,314 shares of common stock to an unrelated
third party in connection with the terms of a license agreement. The fair value
was $388,691 based upon the recent cash offering price at that time and was
charged to research and development expense.
(E)
Common Stock Issuances of Subsidiaries
During
the period from January 8, 2001 (inception) to December 31, 2007, the Company’s
majority owned subsidiaries; CD4, Solovax and EPI issued 419,000, 419,000 and
825,000 shares of common stock, respectively, for $1,663. Of the 825,000 shares
of common stock issued by EPI, 75,000 were converted into 30,161 common shares
of Pipex and the remaining 750,000 shares were cancelled and retired for no
additional consideration in the acquisition of EPI on January 5,
2007.
(F)
Stock Option Plan
On March
20, 2007, the Company’s Board of Directors approved the Company’s 2007 Stock
Incentive Plan (the “2007 Stock Plan”) for the issuance of up to 2,500,000
shares of common stock to be granted through incentive stock options,
nonqualified stock options, stock appreciation rights, dividend equivalent
rights, restricted stock, restricted stock units and other stock-based awards to
officers, other employees, directors and consultants of the Company and its
subsidiaries. The exercise price of stock options under the plan is determined
by the compensation committee of the Board of Directors, and may be equal to or
greater than the fair market value of the Company’s common stock on the date the
option is granted. Options become exercisable over various periods from the date
of grant, and generally expire ten years after the grant date. As of December
31, 2007, there are 808,011 options issued and outstanding under the 2007 Stock
Plan. This plan was approved by stockholders on November 2, 2007.
During
2001, Pipex Therapeutics’ Board and stockholders adopted the 2001 Stock
Incentive Plan (the “2001 Stock Plan”). This plan was assumed by Pipex in the
merger, in October 2006. As of the date of the merger, there were 1,489,353
options issued and outstanding. The total number of shares of stock with respect
to which stock options and stock appreciation rights may be granted to any one
employee of the Company or a subsidiary during any one-year period shall not
exceed 1,250,000. All awards pursuant to the Plan shall terminate upon the
termination of the grantee’s employment for any reason. Awards include options,
restricted shares, stock appreciation rights, performance shares and cash-based
awards (the “Awards”). The Plan contains certain anti-dilution provisions in the
event of a stock split, stock dividend or other capital adjustment, as defined
in the Plan. The Plan provides for a Committee of the Board to grant awards and
to determine the exercise price, vesting term, expiration date and all other
terms and conditions of the awards, including acceleration of the vesting of an
award at any time. As of December 31, 2007, there are 1,489,353 options issued
and outstanding under the 2001 Stock Plan.
Pursuant
to the provisions of SFAS No. 123R, in the event of termination, the Company
will cease to recognize compensation expense. There is no deferred compensation
recorded upon initial grant date, instead, the fair value of the share-based
payment is recognized ratably over the stated vesting period.
The
Company has followed fair value accounting and the related provisions of SFAS
No. 123R for all share based payment awards since inception. The fair value of
each option or warrant granted is estimated on the date of grant using the
Black-Scholes option-pricing model. The Black-Scholes assumptions used in the
years ended December 31, 2007 and 2006 are as follows:
|
Year
Ended December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Exercise
price
|
|
$0.09
- $22.50
|
|
$0.03
- $4.00
|
||||
|
Expected
dividends
|
|
0%
|
|
0%
|
||||
|
Expected
volatility
|
|
103.29%
- 200.94%
|
|
93.09%
- 200%
|
||||
|
Risk
fee interest rate
|
|
3.83%
- 5.16%
|
|
4.43%
- 4.99%
|
||||
|
Expected
life of option
|
|
5-10
years
|
|
3-10
years
|
||||
|
Expected
forfeitures
|
|
0%
|
|
0%
|
||||
47
Pipex
Pharmaceuticals, Inc. and Subsidiaries
(A
Development Stage Company)
Notes
to Consolidated Financial Statements
December
31, 2007 and 2006
All
option grants are expensed in the appropriate period based upon each awards
vesting terms, in each case with an offsetting credit to additional paid in
capital. The stock-based compensation expense recorded by the Company for the
years ended December 31, 2007 and 2006 and the period from January 8, 2001
(inception) to December 31, 2007 with respect to awards under the Plan is as
follows:
|
Year
Ended December 31,
|
|||||||||||
|
2007
|
2006
|
Inception to
December
31, 2007
|
|||||||||
|
Research
and development:
|
|||||||||||
|
employees
|
$
|
1,226,687
|
|
$
|
226,909
|
$
|
1,465,871
|
||||
|
non-employees
|
145,783
|
|
—
|
240,523
|
|||||||
|
General
and administrative:
|
|||||||||||
|
employees
|
858,148
|
|
183,730
|
1,054,153
|
|||||||
|
non-employees
|
527,488
|
|
411,310
|
938,798
|
|||||||
|
|
|||||||||||
|
$
|
2,758,106
|
|
$
|
821,949
|
$
|
3,699,345
|
|||||
|
|
|||||||||||
Pursuant
to FAS 123R, the Company records stock based compensation based upon the stated
vested provisions in the related agreements. The vesting provisions for these
agreements have various terms as follows: immediate vesting, half vesting
immediately and the remainder over three years, quarterly over three years,
annually over three years, one-third immediate vesting and remaining annually
over two years, one half immediate vesting with remaining vesting over six
months and one quarter immediate vesting with the remaining over three
years.
48
Pipex
Pharmaceuticals, Inc. and Subsidiaries
(A
Development Stage Company)
Notes
to Consolidated Financial Statements
December
31, 2007 and 2006
A summary
of stock option activity for the years ended December 31, 2007 and 2006 is as
follows:
|
Number
of Shares
|
Weighted Average Exercise Price | |||||||
|
Balance
at December 31, 2005
|
254,795 | $ | 0.09 | |||||
|
Granted
|
1,364,060 | $ | 2.19 | |||||
|
Exercised
|
— | $ | — | |||||
|
Forfeited
|
(5,000 | ) | $ | 0.90 | ||||
|
Balance
at December 31, 2006
|
1,613,855 | $ | 1.45 | |||||
|
Granted
|
700,176 | $ | 5.97 | |||||
|
Exercised
|
— | $ | — | |||||
|
Forfeited
|
(16,667 | ) | $ | 15.75 | ||||
|
Balance
at December 31, 2007
|
2,297,364 | $ | 2.72 |
The
options outstanding and exercisable at December 31, 2007 are as
follows:
|
Options
Outstanding
|
Options
Exercisable
|
|||||||||||||
|
Range
of
Exercise
Price
|
Number
Outstanding
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Weighted
Average
Exercise
Price
|
Number
Exercisable
|
|
Weighted
Average
Exercise
Price
|
||||||
|
$0.09
- $0.99
|
588,728
|
5.72
Years
|
$ 0.11
|
517,170
|
$ 0.10
|
|||||||||
|
$1.00
- $1.99
|
664,252
|
8.42
Years
|
$ 1.83
|
332,126
|
$ 1.83
|
|||||||||
|
$2.00
- $2.99
|
370,560
|
8.86
Years
|
$ 2.07
|
280,207
|
$ 2.08
|
|||||||||
|
$3.00
- $3.99
|
74,158
|
9.19
Years
|
$ 3.87
|
64,158
|
$ 3.87
|
|||||||||
|
$4.00
- $4.57
|
|
40,000
|
6.30
Years
|
$ 4.35
|
-
|
-
|
||||||||
|
$4.58
- $9.05
|
|
497,999
|
|
9.26
Years
|
|
$ 5.84
|
|
102,833
|
|
$ 5.89
|
||||
|
$9.05
-$13.54
|
|
41,667
|
|
9.01
Years
|
|
$12.00
|
|
8,334
|
|
$12.00
|
||||
|
$13.54
-$18.02
|
|
16,667
|
|
9.07
Years
|
|
$16.20
|
|
-
|
|
-
|
||||
|
$18.02
- $22.50
|
|
3,333
|
|
9.03
Years
|
|
$22.50
|
|
-
|
|
-
|
||||
|
|
|
|||||||||||||
|
|
2,297,364
|
|
7.99
Years
|
|
$ 2.72
|
|
1,304,828
|
|
$1.68
|
|||||
|
|
|
|||||||||||||
Of the
700,176 options granted in 2007, 120,111 were granted to related parties of
which all are fully vested.
(G)
Stock Warrants
During
October and November 2007, the Company issued 3,274,566 shares of common stock
in connection with the exercise of common stock warrants, pursuant to a warrant
call for $2.22/share. The warrant call had occurred due to the terms
by which the Company sold its common stock and warrants in private placement
offerings. The net proceeds from the warrant call were $6,972,809,
which included cash paid as direct offering costs of $579,569.
During
May through August 2007, the Company issued 127,406 shares of common stock in
exchange for common stock warrants for $2.22/share. The net proceeds
totaled $282,841.
In
connection with this warrant call, the Company entered into a warrant
solicitation agreement with Noble International Investments, Inc. (“Noble”). As
compensation for Noble’s services, the Company paid Noble a cash fee of $579,569
which totals 8% of the gross proceeds from the Holder’s exercise of warrants. In
addition, the Company issued Noble 327,456 common stock warrants. The warrants
have a term of five years, will contain customary anti-dilution provisions,
piggyback registration rights, and will be exercisable at a purchase price of
$6.36 per share. The Company may, at its option, call the warrants if
the average daily trading price of the Company’s common stock exceeds, for at
least 20 of 30 consecutive trading days, a price per share that is equal to or
greater than 250% of the warrant’s exercise price of $6.36 per share, and there
is an effective registration statement registering the shares of the Company’s
common stock underlying the warrant. Noble will have the right at any time
during the five-year term of the warrants to exercise the warrants at its option
on a “cashless” basis, only if the Company fails to maintain an effective
registration statement registering the shares of the Company’s common stock
underlying the warrants. Since these warrants were granted as compensation in
connection with an equity raise, the Company has treated these warrants as a
direct offering cost. The result of the warrant grant has a $0 net effect to
equity. These warrants are fully vested and non-forfeitable.
49
Pipex
Pharmaceuticals, Inc. and Subsidiaries
(A
Development Stage Company)
Notes
to Consolidated Financial Statements
December
31, 2007 and 2006
On
February 15, 2007, the Company executed an agreement with a third party to
provide certain consulting services. Pursuant to the terms of the agreement, the
Company will issue warrants to purchase 100,000 shares of common stock upon the
achievement of various milestones as well as over the life of the contract. The
warrants have an exercise price of $3.75. The fair value of the warrants totals
$374,760 and was determined by using the Black-Scholes model with the following
assumptions: expected dividend yield of 0%; expected volatility of 187.22%;
risk-free interest rate of 4.68% and an expected life of five years. As of
December 31, 2007, 41,667 warrants have been issued for which the Company has
recognized stock based consulting expense for $156,148.
On
January 5, 2007, the Company issued warrants to purchase 68,858 shares of common
stock as part of the acquisition of EPI. (See Note (1)(D)(4))
In
October and November 2006, the Company issued warrants to purchase 3,451,524
shares of common stock as part of the private placement offering. The warrants
have an exercise price of $2.22 and each warrant has a life of 5
years.
In
addition, as part of the private placements, the Company issued warrants to
purchase 958,277 shares of common stock to the placement agent, which is a
company that is controlled by the Company’s Chairman and CEO. The warrants have
an exercise price of $2.22. Since these warrants were granted as compensation in
connection with an equity raise, the Company has treated these warrants as a
direct offering cost. The result of the transaction has a $0 net effect to
equity. The warrants are fully vested and non-forfeitable.
On
October 31, 2006, the loans payable to the Company’s founder, President and CEO
were converted into 1,665,211 shares of common stock and 832,606 warrants to
purchase common stock. The warrants have an exercise price of $2.22 and a life
of 5 years. (See Note 4)
A summary
of warrant activity for the years ended December 31, 2007 and 2006 is as
follows:
|
Number
of Shares
|
|||||
|
Balance
as December 31, 2005
|
— | ||||
|
Granted
|
5,242,407 | ||||
|
Exercised
|
— | ||||
|
Forfeited
|
— | ||||
|
Balance
as December 31, 2006
|
5,242,407 | ||||
|
Granted
|
437,981 | ||||
|
Exercised
|
(3,401,972 | ) | |||
|
Forfeited
|
— | ||||
|
Balance
as December 31, 2007
|
2,278,416 | ||||
50
Pipex
Pharmaceuticals, Inc. and Subsidiaries
(A
Development Stage Company)
Notes
to Consolidated Financial Statements
December
31, 2007 and 2006
All
outstanding warrants are fully vested and exercisable.
|
Warrants
Outstanding and Exercisable
|
||||||
|
Range
of
Exercise
Price
|
Number
Outstanding
|
Weighted
Average
Remaining
Contractual
Life
|
||||
| $ | 2.22 |
588,728
|
6.37
Years
|
|||
| $ | 3.30 |
68,858
|
7.42
Years
|
|||
| $ | 3.75 |
41,667
|
8.13
Years
|
|||
| $ | 6.36 |
327,456
|
4.86
Years
|
|||
|
2,278,416
|
6.07
Years
|
|||||
(H)
Options and Warrants of Subsidiaries
CD4 has
30,000 options outstanding and exercisable, with an exercise price of $0.20 and
a remaining weighted average remaining contractual life of 2.98 years as of
December 31, 2007.
Note 6
Commitments
(A)
License Agreements
Since
inception, the Company has entered into various option and license agreements
for the use of patents and their corresponding applications. These agreements
have been entered into with various educational institutions and hospitals.
These agreements contain payment schedules or stated amounts due for (a) option
and license fees, (b) expense reimbursements, and (c) achievement of success
milestones. All expenses related to these agreements have been recorded as
research and development.
In
connection with these agreements, the Company may be obligated to make milestone
payments up to an amount of $8,425,000. Some of these payments may be fulfilled
through the issuance of the Company’s common stock, at the Company’s option. As
of December 31, 2007, the Company has achieved one milestone which the Company
fulfilled by issuing common stock having a fair value of $25,000. See Note
(5(D)). The Company can give no assurances that any other milestones
will be achieved. In addition to the milestone payments, the Company may be
obligated to make royalty payments on future sales pursuant to the agreements.
The schedule below does not include the value of these commitments.
(B)
Research Agreement
In
September 2005, the Company entered into a three-year sponsored research
agreement with a University. Pursuant to that agreement, the Company sponsors
approximately $460,000 per year, payable in monthly installments. This agreement
can be extended for an additional two-year period.
(C)
Consulting Agreements
In August
2005, Pipex entered into an agreement with an individual to provide consulting
services for the Company’s research and development. The consultant was paid
$25,000 upon the execution of the agreement. The consultant will receive annual
consulting fees of $120,000 for each of the next three years. The consultant
also received 200,000 options having a fair value $59,960 and was determined
using the Black-Scholes model with the following assumptions: expected dividend
yield of 0%, expected volatility of 200%, risk free interest rate of 1.81% and
an expected life of 10 years.
On
February 15, 2007, the Company executed an agreement with a third party to
provide certain services. Pursuant to the terms of the agreement, the Company
will pay $9,000 per month for a period of twelve months and grant 100,000 stock
warrants with a cashless exercise provision. These warrants vest upon various
milestones as well as over the life of the contract.
51
Pipex
Pharmaceuticals, Inc. and Subsidiaries
(A
Development Stage Company)
Notes
to Consolidated Financial Statements
December
31, 2007 and 2006
(D)
Employment Agreements
In
January 2005, the Company entered into a four-year employment agreement with the
Company’s Chairman and Chief Executive Officer. Pursuant to this agreement,
Pipex will pay an annual base salary of $297,000, an annual bonus equal to 30%
of base salary and a ten-year option to acquire 271,058 shares of common stock
at the completion of the Company’s private placement that occurred on October
31, 2006. As of December 31, 2007, 180,705 options have vested, with the
remainder vesting on October 31, 2008.
The fair
value of the options totaled $544,827 and was determined using the Black-Scholes
model with the following assumptions: expected dividend yield of 0%, expected
volatility of 200%, risk free interest rate of 4.61% and an expected life of 10
years. On July 20, 2007, the Board of Directors approved an amended and restated
employment agreement with the Chief Executive Officer. The amended employment
agreement provides that the Chief Executive Officer is to be paid a base salary
of $195,000 per year plus a guaranteed bonus of $100,000. The Chief Executive
Officer may also be entitled to discretionary transactional bonuses. In
addition, the amended agreement provides that the Chief Executive Officer has
waived the receipt of any salary and bonus payable under the original agreement,
which amounts to $275,645, for no additional consideration. This amount was
treated as a capital contribution to the Company in September 2007.
The
Company entered into an employment agreement with its President on May 24, 2006.
Pursuant to this agreement, Pipex will pay an annual base salary of $295,000 and
a guaranteed bonus of one-third of base salary. Pipex has also granted a
ten-year option to purchase 664,252 shares of common stock, of which 332,126
have vested as of December 31, 2007. The remainder of these options will vest
quarterly over a three-year period. In the event of a termination, the Company
will provide six-month severance, payable over a six-month period. On
March 5, 2008, the Company’s President has agreed to work for no cash
compensation until May 17, 2008 at which time his compensation will be at the
discretion of the compensation committee. The President will be
eligible to receive a contingent bonus in the event that the Company is acquired
or the stock price retraces or exceeds to the level of the share price on
January 28th 2008.
Additionally, the President agreed to eliminate severance provisions of his
agreement.
On
October 10, 2007, the Company entered into a three-year employment agreement
with its Chief Scientific Officer. The Company paid the Chief Scientific Officer
a $7,500 signing bonus and a base salary of $205,000 per year. The agreement
also provides that the Chief Scientific Officer is eligible for cash and
non-cash bonuses at the end of each of the Company’s fiscal years during the
term of the agreement at the discretion of the Company’s compensation committee
as well as additional commission-based cash and stock bonuses during each fiscal
year based on significant revenue-generating, out-licensing and merger and
acquisition transactions initiated and completed by the Chief Scientific
Officer, again at the discretion of the compensation committee. Pursuant to the
agreement, the Company granted a ten-year option to purchase 150,000 shares of
the Company’s common stock of which none have vested as of December 31, 2007.
The options will vest quarterly over a three-year period. This
agreement was terminated on March 7, 2008. (See Note 9)
52
Pipex
Pharmaceuticals, Inc. and Subsidiaries
(A
Development Stage Company)
Notes
to Consolidated Financial Statements
December
31, 2007 and 2006
(E)
Operating Lease
During
2007, the Company entered into a non-cancelable operating lease for 17,675
square feet of office, laboratory and production space. This lease
expires on February 28, 2011.
The
following schedule shows committed amounts due for the lease agreement as of
December 31, 2007:
|
2008:
|
|
$
|
141,375
|
|
|
2009:
|
|
145,733
|
||
|
2010:
|
|
150,152
|
||
|
2011:
|
|
25,148
|
||
|
|
||||
|
Total:
|
|
$
|
462,408
|
|
|
|
During
the years ended December 31, 2007 and 2006 and for the period from January 8,
2001 (inception) to December 31, 2007, the Company recognized rent expense of
$202,361, $54,813 and $590,829, respectively.
The
following schedule shows committed amounts due for license agreements, patent
cost reimbursements, sponsored research agreements and consulting fees as of
December 31, 2007:
|
2008:
|
|
$
|
621,824
|
|
|
2009:
|
|
128,332
|
||
|
2010:
|
|
130,000
|
||
|
2011:
|
|
132,500
|
||
|
2012:
|
|
132,500
|
||
|
Each
Year Thereafter:
|
|
167,500
|
||
|
|
||||
|
Total:
|
|
$
|
1,312,656
|
|
|
|
Note 7 Income
Taxes
There was
no income tax expense for the years ended December 31, 2007 and 2006 due to the
Company’s net losses.
The
Company’s tax expense differs from the “expected” tax expense for the years
ended December 31, 2007 and 2006, (computed by applying the Federal Corporate
tax rate of 34% to loss before taxes and 5.5% for State Corporate taxes, the
blended rate used was 37.63%), as follows:
|
2007
|
2006
|
|||||||
|
Computed
“expected” tax expense (benefit) - Federal
|
|
$
|
(3,178,439
|
)
|
|
$
|
(1,317,039
|
)
|
|
Computed
“expected” tax expense (benefit) - State
|
|
( 544,084
|
)
|
|
( 225,450
|
)
|
||
|
Meals
and Entertainment
|
3,097
|
-
|
||||||
|
Non-deductible
stock and stock based compensation
|
1,054,809
|
455,564
|
||||||
|
Contributed
services – related party
|
103,725
|
-
|
||||||
|
Change
in valuation allowance
|
|
2,560,892
|
|
1,542,489
|
||||
|
|
|
|||||||
|
|
$
|
-
|
|
$
|
-
|
|||
|
|
|
|||||||
During
the year ended December 31, 2006, the Company inadvertently recorded
non-deductible stock based compensation and consulting as a temporary tax
difference and thus increased the computed deferred tax
asset. However, the Company has reassessed its original position and
determined that these payments should have been recorded as non-deductible
permanent differences. The above schedule has treated the change
retroactively by showing the correct presentation of permanent and temporary
differences, as they should have been reflected for both December 31, 2007 and
2006. Since this was a management estimate affecting a fully reserved
deferred tax asset, no additional changes for financial reporting are
required.
The
effects of temporary differences that gave rise to significant portions of
deferred tax assets at December 31, 2007 and 2006 are as follows:
|
Deferred
tax assets:
|
2007
|
2006
|
||||||
|
Net
operating loss carryforward
|
$ | (5,009,698 | ) | $ | (2,448,806 | ) | ||
|
Total
gross deferred tax assets
|
(5,009,698 | ) | (2,448,806 | ) | ||||
|
Less
valuation allowance
|
5,009,698 | 2,448,806 | ||||||
|
Net
deferred tax assets
|
$ | - | $ | - | ||||
At
December 31, 2007, the Company has a net operating loss carry-forward of
$13,313,043 available to offset future taxable income expiring through 2027.
Utilization of these net operating losses may be limited due to potential
ownership changes under Section 382 of the Internal Revenue Code.
53
Pipex
Pharmaceuticals, Inc. and Subsidiaries
(A
Development Stage Company)
Notes
to Consolidated Financial Statements
December
31, 2007 and 2006
The
valuation allowance at December 31, 2006 was $2,448,806. The net change in
valuation allowance during the year ended December 31, 2007 was an increase of
$2,560,892. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred income tax assets will not be realized. The ultimate realization of
deferred income tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred income tax
liabilities, projected future taxable income, and tax planning strategies in
making this assessment. Based on consideration of these items, Management has
determined that enough uncertainty exists relative to the realization of the
deferred income tax asset balances to warrant the application of a full
valuation allowance as of December 31, 2007.
Note 8 Related Party
Transactions
During
January 2001, Pipex sold approximately $1.1 million of Series A Preferred Stock
to a company controlled by our Chairman and Chief Executive Officer. From 2002
until October 2006, we relied on non-interest bearing bridge loans from a
company controlled by our Chairman and Chief Executive Officer. During this
5-year period, the Chairman loaned us $3,274,728 for no additional
consideration. In connection with the private placement during October 2006, the
Chairman agreed to convert these loans into units in the offering. As a result
of the conversion of these loans, we issued 1,665,211 shares of common stock and
832,606 warrants to purchase common stock.
In
connection with private placements in October and November 2006, Pipex engaged a
company that is controlled by its Chairman and Chief Executive Officer as our
placement agent. At the closing of the private placement during October and
November 2006, Pipex paid the placement agent the sum of $1,033,800 as
commissions for its services. The placement agent also received a warrant to
purchase 958,277 shares of common stock. (See Note 5 (G)) Two of our directors
and officers are representatives of the placement agent.
As part
of the October 2006 private placement, the Company sold 99,104 shares of its
common stock and 49,552 warrants to purchase common stock for total proceeds of
$200,000 to entities controlled by our President. As part of the same private
placement, Pipex sold 49,552 shares of its common stock and 24,776 warrants to
purchase common stock for total proceeds of $100,000 to a related family member
of our Chairman and CEO. The terms on which their purchases were made were
identical to the terms in which the other investors in these offerings purchased
shares.
Note 9 Subsequent
Event
Corporate
Restructuring
On March
11, 2008, the Company announced that it has implemented cost reduction measures
in order to substantially reduce operating expenses given the delay in refilling
its New Drug Application for oral tetrathiomolybdate (oral TTM) for the
treatment of initially presenting neurologic Wilson’s disease. As
part of the corporate restructuring, the Company eliminated 14 positions in the
areas of manufacturing, analytical, quality control, quality assurance,
clinical, regulatory, diagnostic product development, principally relating to
the development of oral TTM and diagnostics division. The Company
also eliminated the position of Chief Scientific Officer (“CSO”), as part of the
cost cutting measures.
In
addition, the Company’s President has agreed to work for no cash compensation
until May 17, 2008, at which time his compensation will be at the discretion of
the compensation committee. The President will be eligible to receive
a contingent bonus in the event that the Company is acquired or the stock price
retraces or exceeds to the level of the share price on January 28,
2008. Additionally, the President agreed to eliminate severance
provisions of his agreement. For the period February 16, 2008 to May
17, 2008, the Company will record contributed services from a related party
totaling $73,750.
54
ITEM
8. CHANGES IN AND DISCUSSIONS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
There
have been no disagreements on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure with our
independent auditors for the period ended December 31, 2007.
ITEM
8A. CONTROLS AND PROCEDURES
Pursuant
to Rule 13a-15(b) under the Securities Exchange Act of 1934 (“Exchange Act”),
the Company carried out an evaluation, with the participation of the Company’s
management, including the Company’s Chief Executive Officer (“CEO”), of the
effectiveness of the Company’s disclosure controls and procedures (as defined
under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered
by this report. Based upon that evaluation, the Company’s CEO concluded that the
Company’s disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in the reports that the
Company files or submits under the Exchange Act, is recorded, processed,
summarized and reported, within the time periods specified in the SEC’s rules
and forms, and that such information is accumulated and communicated to the
Company’s management, including the Company’s CEO, as appropriate, to allow
timely decisions regarding required disclosure.
Management’s
Report on Internal Controls Over Financial Reporting
Internal
control over financial reporting is a process to provide reasonable assurance
regarding the reliability of consolidated financial reporting and the
preparation of financial statements for external purposes in accordance with
U.S. generally accepted accounting principles. There has been no change in
the Company’s internal control over financial reporting during the year ended
December 31, 2007 that has materially affected, or is reasonably likely to
materially affect, the Company’s internal control over financial
reporting.
The
Company’s management, including the Company’s CEO, does not expect that the
Company’s disclosure controls and procedures or the Company’s internal controls
will prevent all errors and all fraud. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the design of a
control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their costs. Because of
the inherent limitations in all control systems, no evaluation of the controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within the Company have been detected.
Management
conducted an evaluation of the effectiveness of our internal control over
financial reporting. Based on this evaluation, management concluded that the
company’s internal control over financial reporting was effective as of December
31, 2007.
The
Company is not an “accelerated filer” for the 2007 fiscal year because it is
qualified as a “small business issuer”. Hence, under current law, the internal
controls certification and attestation requirements of Section 404 of the
Sarbanes-Oxley act will not apply to the Company.
ITEM
8B. OTHER INFORMATION
Not
applicable.
55
ITEM
9. DIRECTORS AND EXECUTIVE OFFICERS
Below is
certain information regarding our directors and executive officers.
|
Name
|
Age
|
Position
|
|
Steve
H. Kanzer, CPA, Esq.
|
44
|
Chairman
and Chief Executive Officer
|
|
Charles
L. Bisgaier, Ph.D.
|
54
|
President
and Director
|
|
Jeffrey
J. Kraws
|
43
|
Director
|
|
A.
Joseph Rudick, M.D.
|
51
|
Director
|
|
Nicholas
Stergis, M.S.
|
33
|
Vice
Chairman of the Board and Director
|
|
Jeff
Wolf, Esq.
|
44
|
Director
|
|
Daniel
J. Dorman
|
45
|
Director
|
|
James
S. Kuo, M.D., M.B.A.
|
43
|
Director
|
STEVE H. KANZER, CPA, Esq. Mr.
Kanzer is our co-founder and served as our President from our inception in
February 2001 until May 2006. In September 2004, Mr. Kanzer assumed the
additional roles of Chairman and Chief Executive Officer and serves on a
full-time basis at our corporate headquarters in Ann Arbor, Michigan. Mr. Kanzer
has also been a director and officer of our subsidiaries, including Solovax,
Inc., Effective Pharmaceuticals, Inc., Putney Drug Corp. and CD4 Biosciences,
Inc. Since December 2000, he has served as co-founder and Chairman of Accredited
Ventures Inc. and Accredited Equities Inc., a venture capital firm and
FINRA-member investment bank, respectively, which both specialize in the
biotechnology industry. Mr. Kanzer was co-founder, Chairman, President and Chief
Executive Officer of Developmental Therapeutics, Inc., a cardiovascular drug
development company which was developing an oral thyroid hormone analog, DITPA,
for congestive heart failure. Developmental Therapeutics was acquired in October
2003 by Titan Pharmaceuticals, Inc., a publicly traded biopharmaceutical
company. Prior to founding Accredited Ventures and Accredited Equities in
December 2000, Mr. Kanzer served as Senior Managing Director-Head of Venture
Capital at Paramount Capital from 1991 until December 2000. While at Paramount
Capital, Mr. Kanzer was involved in the formation and financing of a number of
biotechnology companies and held various positions in these companies. From 1995
through 1999, Mr. Kanzer was founding Chairman of the Board of Discovery
Laboratories, Inc., a public biotechnology company that has a pending NDA for a
drug called SURFAXIN ® which Mr. Kanzer licensed in 1995. From 1997 until 2000,
Mr. Kanzer was founding President of PolaRx Biopharmaceuticals, Inc., a
biopharmaceutical company that licensed and developed TRISENOX ® (arsenic
trioxide), a leukemia drug that was approved by the FDA in 2000 and which
currently holds the FDA record for fastest drug ever developed from IND filing
until NDA approval (30 months). PolaRx was merged with Cell Therapeutics Inc.
(NASDAQ:CTIC) in January 2000, and Cephalon acquired the rights to TRISENOX ® in
2005 for $165 million. In March 1998, Mr. Kanzer led the privatization of the
Institute for Drug Research Kft. (IDR) in Budapest, Hungary, a 400-employee, 26
acre pharmaceutical research and development center. Since 1950, IDR operated as
the central pharmaceutical R&D center for the country of Hungary, served the
active pharmaceutical ingredients (API) needs of Eastern Europe, and performed
original drug discovery research, resulting in the registration of over 80 API
products. Mr. Kanzer served as Chief Executive Officer of IDR from March 1998
and led the sale of IDR to IVAX Corporation, a publicly traded corporation in
October 1999. Mr. Kanzer has also been a co-founder and director of 23
biotechnology companies, including Avigen, Inc., XTLBio, Boston Life Sciences,
Inc. and Titan Pharmaceuticals, Inc., all publicly traded companies. Prior to
joining Paramount Capital in 1992, Mr. Kanzer was an attorney at the law firm of
Skadden, Arps, Slate, Meagher & Flom in New York where he specialized in
mergers and acquisitions. Mr. Kanzer received his J.D. from New York University
School of Law in 1988 and a B.B.A. in Accounting from Baruch College in 1985,
where he was a Baruch Scholar. Mr. Kanzer is active in university-based
pharmaceutical technology licensing and has served as Co-Chair of the New York
Chapter of the Licensing Executives Society.
CHARLES L. BISGAIER, Ph.D. Dr.
Bisgaier is our President and a director. Prior to joining Pipex, Dr. Bisgaier
was the Senior Director of Pharmacology at Esperion Therapeutics, a Division of
Pfizer Global Research and Development in Ann Arbor, Michigan. In 1998, Dr.
Bisgaier cofounded Esperion Therapeutics and served as the Vice President
of Pharmacology, until its acquisition by Pfizer. At Esperion he played an
active role in the discovery, pre-clinical or clinical development of product
candidates, including ETC-216 (ApoA-IMilano), ETC-588, ETC-642 and small
molecule lipid regulators, that may have utility for the treatment and
prevention of cardiovascular diseases. ETC-2 16 was the first agent every to
show rapid regression of artery plaques in humans. In 2004, Esperion
Therapeutics was acquired by Pfizer for $1.3 billion.
Prior to
Esperion Therapeutics, Dr. Bisgaier was an Associate Research Fellow in the
Department of Vascular and Cardiac Disease at WarnerLambert/Parke-Davis,
where he played a role in discovery and development of pharmaceuticals that
modulate lipoprotein and cholesterol metabolism. There he participated in the
discovery and development of pharmaceutical agents including Gemfibrozil (Lopid
® ), Atorvastatin calcium (Lipitor ® ), Avasimibe and Gemcabene. He also lead
the discovery efforts for lipid regulating agents including cholesteryl ester
transfer protein inhibitors, fatty acid mimetics and cholesterol esterase
inhibitors. He has carried out basic research on HDL and its associated proteins
including studies on apolipoprotein synthesis, paraoxonase, oxidation, and
cholesteryl ester transfer protein function.
He has
published over 75 peer reviewed articles and reviews and is a named inventor on
numerous patents and patent applications. He currently holds an adjunct position
in Pharmacology at the University of Michigan. He also served as the
Editor-in-Chief of Current Medicinal Chemistry Immunology, Endocrine and
Metabolic Agents. Dr. Bisgaier serves as a board member of the Michigan Society
of Medical Research.
Dr.
Bisgaier received a B.A. (1974) in Biology from the State University College at
Oneonta, NY, and a M.S. (1977) and Ph.D. (1981) in Biochemistry from George
Washington University. Following his doctorate, he studied lipoprotein
metabolism within a Specialized Center of Research (SCOR) for atherosclerosis at
Columbia University College of Physicians and Surgeons prior to joining
Warner-Lambert/Parke-Davis in 1990.
56
JEFFREY J. KRAWS. Mr. Kraws is
Chief Executive Officer and co-founder of Crystal Research Associates. Well
known and respected on Wall Street, Mr. Kraws has received some of the most
prestigious awards in the industry. Among other awards, he was given a “5-Star
Rating” in 2001 by Zacks and was ranked the number one analyst among all
pharmaceutical analysts for stock performance in 2001 by Starmine.com. Prior
to founding Crystal Research Associates, Mr. Kraws served as co-president of The
Investor Relations Group (IRG), a firm representing primarily under-followed,
small-capitalization companies. Previously, Mr. Kraws served as a managing
director of healthcare research for Ryan Beck & Co. and as director of
research/senior pharmaceutical analyst and managing director at Gruntal &
Co., LLC (prior to its merger with Ryan Beck & Company). Mr. Kraws served as
managing director of the healthcare research group and senior pharmaceutical
analyst at First Union Securities (formerly EVEREN Securities); as senior U.S.
pharmaceutical analyst for the Swedish-Swiss conglomerate Asea Brown Boveri; and
as managing director and president of the Brokerage/Investment Banking operation
of ABB Aros Securities, Inc. He also served as senior pharmaceutical analyst at
Nationsbanc Montgomery Securities, BT Alex Brown & Sons, and Buckingham
Research. Mr. Kraws also has industry experience, having been responsible for
competitive analysis within the treasury group at Bristol-Myers-Squibb Company.
He holds an MBA from Cornell University and a B.S. degree from State University
of New York-Buffalo. During 2006 through February 2007, Mr. Kraws served as our
Vice President of Business Development, on a part-time basis.
A. JOSEPH RUDICK, M.D. Dr.
Rudick has been a director since 2004. Dr. Rudick was previously president and
chief medical officer of our subsidiary Effective Pharmaceuticals, Inc. Dr.
Rudick was our Chief Medical Officer until November 1, 2007. Dr. Rudick was
Chief Executive Officer and President of Atlantic Technology Ventures, Inc.
(Atlantic), a public drug-development company, as well as a member of it board
of directors from May 1999 until its merger with Manhattan Pharmaceuticals, Inc.
in February 2003. He was also a founder of Atlantic and two of its
majority-owned subsidiaries, Optex Opthalmalogics, Inc. and Channel
Therapeutics, Inc. During his tenure at Atlantic, he structured a corporate
partnership with Bausch & Lomb for development of Atlantic’s novel cataract
removal device, named CatarexTM , as
well as a partnership with Indevus Pharmaceuticals, Inc. for development of
their novel clinical-stage neuropathic pain compound, now known as IP-57 1. From
1994 to 2001, Dr. Rudick was a vice president of Paramount Capital, Inc., an
investment bank specializing in the biotechnology and biopharmaceutical
industries, where he participated in numerous private equity
financings.
Since
1988, he has been a partner of Associate Ophthalmologists P.C., a private
ophthalmology practice located in New York, and from 1993 to 1998 he
served as a director of Healthdesk Corporation, a publicly traded medical
information company of which he was a co-founder. Dr. Rudick earned
a B.A. in Chemistry, with the distinction of Phi Beta Kappa, from
Williams College and a Doctorate of Medicine, with the distinction of Alpha
Omega Alpha, from the University of Pennsylvania. Dr. Rudick was also
a registered representative of Accredited Equities, Inc., a company controlled
by Mr. Kanzer.
NICHOLAS STERGIS, M.S. Mr.
Stergis is our co-founder, and Vice Chairman of our board of directors. Mr.
Stergis previously served as our Chief Operating Officer from our founding
during 2001 until March 2007. Prior to co-founding Pipex, Mr. Stergis was a
co-founder, Chief Operating Officer and director of Developmental Therapeutics,
Inc., a cardiovascular drug development company, until its acquisition in
October 2003 by Titan Pharmaceuticals, Inc. (AMEX: TTP), a publicly-traded
pharmaceutical company. Mr. Stergis was also a founder of Encode
Pharmaceuticals, Inc., a drug development company until its acquisition by
Raptor Pharmaceuticals, Inc., a publicly traded company. Mr. Stergis is also a
co-founder and Managing Director of Accredited Ventures Inc., a venture capital
firm specializing in the biotechnology and pharmaceutical industries. Mr.
Stergis is also Managing Director of Accredited Equities, Inc., a FINRA member
firm. Prior to co-founding Accredited Ventures, Mr. Stergis was the Interim
Director of Corporate Development for Corporate Technology Development, Inc.
(CTD), a biopharmaceutical company based in Miami, Florida, until its merger
with DOR BioPharma, Inc. (DOR), a publicly traded biotechnology company. During
his tenure at CTD, he was responsible for all development tasks associated with
the company’s lead product, orBec ®, which has completed a pivotal Phase III
clinical trial and is pending NDA and MAA approval. He was also instrumental in
CTD’s divestiture of important botulinum toxin intellectual property to
Allergan, Inc. (NYSE:AGN), a publicly traded specialty pharmaceutical companies.
Prior to joining CTD, Mr. Stergis was a Technology Associate at Paramount
Capital, a New York based private equity, venture capital, investment banking
and asset management group specializing in the biotechnology and pharmaceutical
industries. There, he participated in the startup, acquisition and financing of
various biotechnology companies, including CTD. Mr. Stergis received his M.S. in
Biology from New York University as well as a B.S. in Biology from the
University at Albany, State University of New York. Mr. Stergis is also a
director and interim officer of several privately held biopharmaceutical
companies such as General Fiber, Inc. which are engaged in the in-licensing of
biopharmaceutical candidates. As such, Mr. Stergis devotes a portion of his time
to the business of the company.
JEFF WOLF, Esq. Mr. Wolf has
substantial experience in creating, financing, nurturing and growing new
ventures based upon breakthrough research and technology. Mr. Wolf is the
founding partner of Seed-One Ventures, LLC, a venture capital group focused on
seed-stage technology-based investments. Mr. Wolf has been a founder of Elusys
Therapeutics, Inc., an antibody-based therapeutic company, Tyrx Pharma, Inc., a
biopolymerbased company, Sensatex, Inc., a medical device company and
Generation Mobile, Inc. a telecommunications company. Prior to founding Seed-One
Ventures, Mr. Wolf served as the Managing Director of The Castle Group, Ltd., a
biomedical venture capital firm. At both organizations, Mr. Wolf was responsible
for supervising the formation and funding of new technology, biomedical, and
service oriented ventures. Mr. Wolf currently sits on the board of Elusys
Therapeutics and Netli, Inc. Mr. Wolf received his MBA from Stanford Business
School, his JD from New York University School of Law and his BA with honors in
Economics from the University of Chicago.
DANIEL J. DORMAN Mr. Dorman is
the President of D. J. Dorman & Co., Inc. and its predecessor companies
since 1989. D. J. Dorman & Co., Inc. originates, structures, acquires and
manages investments in private equity and buyout opportunities on behalf of
several entities. Mr. Dorman is also Chairman and CEO of Dorman Industries, LLC
which is a privately owned multi-industry holding company. Mr. Dorman has also
been the Chief Executive Officer of Sandston Corporation, a public company,
since April 2004. Additionally, Mr. Dorman is a director of Kux Manufacturing
Company, Inc., an architectural engineering and manufacturing company; Chairman
of Kroll International, LLC, a wholesaler of law enforcement, homeland defense
and public safety equipment; Chairman of Versatile Processing Group, Inc., a
holding company for various non-ferrous metal processing and utility service
companies serving the industrial and electric utility industries and a director
of an international private equity fund, AFA Private Equity Fund I. Mr. Dorman
is a graduate of Ferris State University where he holds a Bachelor in Business
Administration.
57
JAMES S. KUO, M.D., M.B.A. Dr.
Kuo is the Chairman and Chief Executive Officer of Duska Therapeutics, Inc., a
public biopharmaceutical company. From 2003 to 2006, he served as founder,
Chairman and Chief Executive Officer of BioMicro Systems, Inc. a private
venture-backed, microfluidics company. Prior to that time, Dr. Kuo was a
founder, President and Chief Executive Officer of Discovery Laboratories, Inc.
where he raised over $22 million in initial private funding and was instrumental
in the company going public. Dr. Kuo was also a founder and board member of
Monarch Labs, LLC, a private medical device company. Dr. Kuo is the former
Managing Director of Venture Analysis for Healthcare Ventures, LLC, which
managed $378 million in venture funds. He has also been a senior licensing and
business development executive at Pfizer, Inc., where he was directly
responsible for cardiovascular licensing and development. After studying
molecular biology and receiving his B.A. at Haverford College, Dr. Kuo
simultaneously received his M.D. from the University of Pennsylvania School of
Medicine and his M.B.A. from the Wharton School of Business.
Directors’
Term of Office
Directors
will hold office until the next annual meeting of stockholders and the election
and qualification of their successors. Officers are elected annually by our
board of directors and serve at the discretion of the board of
directors.
Audit
Committee and Audit Committee Financial Expert
The Audit
Committee is comprised of Jeff Wolf and Dr. James Kuo. The Audit Committee is
responsible for recommending the Company’s independent public accounting firm
and reviewing management’s actions in matters relating to audit functions. The
Committee reviews with the Company’s independent public accountants the scope
and results of its audit engagement and the Company’s system of internal
controls and procedures. The Committee also reviews the effectiveness of
procedures intended to prevent violations of laws. The Committee also reviews,
prior to publication, our reports on Form 10-KSB and Form 1 0-QSB. Our board has
determined that all audit committee members are independent under applicable SEC
regulations. Our board of directors has determined that Dr. Kuo qualifies as an
“audit committee financial expert” as that term is used in Section 407 of the
Sarbanes-Oxley Act of 2002.
To date,
we have conducted research and development operations and generated no revenue
since inception. In light of the foregoing, and upon evaluating our internal
controls, our board of directors determined that our internal controls are
adequate to insure that financial information is recorded, processed, summarized
and reported in a timely and accurate manner in accordance with applicable rules
and regulations of the SEC.
Our
Compensation Committee consists of Daniel Dorman and Jeff Wolf. Our Nominating
Committee consists of Jeff Wolf and Dr. James Kuo. These committees perform
several functions, including reviewing all forms of compensation provided to our
executive officers, directors, consultants and employees, including stock
compensation, and recommending appointments to the board and appointment of
executive officers.
58
ITEM
10. EXECUTIVE COMPENSATION
The
following table discloses information for the fiscal year ended December 31,
2007 regarding the total compensation we paid to our principal executive officer
and three other most highly compensated executive officers who were serving as
executive officers on December 31, 2007, and our former Chief Medical Officer
who would have been among our most highly compensated executive officers if he
had been serving as an executive officer on December 31, 2007.
|
All
Other
|
||||||||||
|
Name
and Pricipal
|
Option
|
Annual
|
||||||||
|
Position
|
Salary
($)
|
Bonus
($)
|
Awards
(1)
|
Compensation
|
Total
|
|||||
|
Steve
H. Kanzer, CPA, Esq.
|
$ 87,750
|
$ 45,205
|
$ -
|
$ -
|
$
132,955
|
|||||
|
Chairman
& Chief Executive Officer
|
||||||||||
|
Charles
Bisgaier, Ph.D.
|
$
295,000
|
$
100,000
|
$ -
|
$ -
|
$
395,000
|
|||||
|
President
|
||||||||||
|
John
Althaus
|
$
100,000
|
$ 15,000
|
$ 87,750
|
$ -
|
$
202,750
|
|||||
|
Vice
President, Advanced Technology
|
||||||||||
|
Margaret
McShane
|
$ 96,169
|
$ 15,655
|
$
708,755
|
$ -
|
$
820,579
|
|||||
|
Vice
Presient, Clinical Development
|
||||||||||
|
A.
Joseph Rudick, M.D.
|
$ 85,833
|
$ -
|
$ -
|
$ -
|
$ 85,833
|
|||||
|
Former
Chief Medical Officer
|
|
(1)
|
The
fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model. The weighted average assumptions used
for the valuation of these option awards are as follows: Expected
dividends 0%; Expected volatility 100.24% - 200.33%; Risk free interest
rate ranging from 4.31% - 4.76%; Expected life of options 10
years.
|
The
following table contains information relating to grants of stock options made
during the fiscal year ended December 31, 2007, to our senior executive
officers. No stock options were exercised by our senior executive officers
during the last fiscal year.
Option/SAR
Grants in Last Fiscal Year
|
Number
of
|
Percent
of total
|
|||||||
|
securities
|
options/SARs
|
|||||||
|
underlying
|
granted
to
|
Exercise
|
||||||
|
Name
and Principal
|
options/SARs
|
employees
in
|
Price
|
|||||
|
Position
|
granted
(#)
|
fiscal
year
|
($/Sh)
|
Expiration
date
|
||||
|
Steve
H. Kanzer, CPA, Esq.
|
-
|
-
|
-
|
-
|
||||
|
Chairman
& Chief Executive Officer
|
||||||||
|
Charles
Bisgaier, Ph.D.
|
-
|
-
|
-
|
-
|
||||
|
President
|
||||||||
|
John
Althaus
|
15,000
|
2.14%
|
$ 5.85
|
11/1/2017
|
||||
|
Vice
President, Advanced Technology
|
||||||||
|
Margaret
McShane
|
16,667
|
2.38%
|
$ 16.20
|
1/21/2017
|
||||
|
Vice
Presient, Clinical Development
|
75,000
|
10.71%
|
$ 5.85
|
11/1/2017
|
||||
|
A.
Joseph Rudick, M.D.
|
22,621
|
3.23%
|
$ 0.09
|
9/13/2014
|
||||
|
Former
Chief Medical Officer
|
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END
|
Number
of
|
Number
of
|
|||||||
|
securities
|
securities
|
|||||||
|
underlying
|
underlying
|
Option
|
Option
|
|||||
|
Name
and Principal
|
unexercised
|
unexercised
|
exercise
|
expiration
|
||||
|
Position
|
options/exercisable
|
options/unexercisable
|
price
|
date
|
||||
|
Steve
H. Kanzer, CPA, Esq.
|
180,705
|
90,353
|
$ 2.01
|
10/30/2016
|
||||
|
Chairman
& Chief Executive Officer
|
||||||||
|
Charles
Bisgaier, Ph.D.
|
387,480
|
276,772
|
$ 1.83
|
5/30/2016
|
||||
|
President
|
||||||||
|
John
Althaus
|
36,141
|
18,071
|
$ 0.18
|
2/5/2016
|
||||
|
Vice
President, Advanced Technology
|
4,688
|
10,312
|
$ 5.85
|
11/1/2017
|
||||
|
Margaret
McShane
|
5,555
|
11,112
|
$ 16.20
|
1/21/2017
|
||||
|
Vice
Presient, Clinical Development
|
23,437
|
51,563
|
$ 5.85
|
11/1/2017
|
||||
|
A.
Joseph Rudick, M.D.
|
27,106
|
-
|
$ 0.09
|
5/31/2015
|
||||
|
Former
Chief Medical Officer
|
22,621
|
-
|
$ 0.09
|
9/13/2014
|
||||
Compensation
of Directors
The
following table sets forth information for the fiscal year ended
December 31, 2007 regarding the compensation of our directors who are not
also named executive officers.
|
Fees
earned
|
Other
|
|||||||
|
Name
|
or
paid in cash
|
Option
awards (1)
|
compensation
|
Total
|
||||
|
Daniel
Dorman
|
$ 9,000
|
$ 145,498
|
$ -
|
$ 154,498
|
||||
|
Jeffrey
Kraws
|
$ 4,000
|
$ 48,748
|
$ 17,500
|
$ 70,248
|
||||
|
James
Kuo
|
$ 8,000
|
$ 145,498
|
$ -
|
$ 153,498
|
||||
|
Jeffrey
Wolf
|
$ 10,000
|
$ 103,539
|
$ -
|
$ 113,539
|
|
(1)
|
The
amounts in the “Option awards” column reflect the dollar amounts
recognized as compensation expense for the financial statement reporting
purposes for stock options for the fiscal year ended December 31, 2007 in
accordance with SFAS 123(R). The fair value of the options was determined
using the Black-Scholes model with the following assumptions: expected
dividend yield of 0%, expected volatility of 195 - 200%, risk free
interest rate of 4.31 – 4.68% and an expected life of 10
years.
|
During
the first quarter of 2007, director compensation for independent members was
approved at $2,000 per board meeting that they attend in person, $1,000 per
telephonic board meeting and $500 per committee meeting. In addition,
we also grant independent members of our board of directors upon appointment to
our board 25,000 stock options to purchase 25,000 shares of our common stock at
an exercise price equal to the fair market value of our common stock on the date
of grant, and an additional 8,333 stock options each year. We also
reimburse our directors for travel and other out-of-pocket expenses incurred in
attending board of director and committee meetings.
60
Equity
Compensation Plan Information
The
following table states certain information with respect to our equity
compensation plans as of December 31, 2007:
|
Plan
category
|
Number
of securities to
be
issued upon exercise
of
outstanding options
|
Weighted-average
exercise
price of
outstanding
options
|
Number
of securities
remaining
available for
future
issuance under
equity
compensation plans
|
|||||||||
|
2001
Stock Incentive Plan
|
1,489,353
|
$
|
1.22
|
0
|
||||||||
|
2007
Stock Incentive Plan
|
808,011
|
$
|
5.50
|
1,691,989
|
||||||||
|
Total
|
|
2,297,364
|
|
$
|
2.72
|
|
1,691,989
|
|||||
Employment
Agreements
On
October 10, 2007, the Company we entered into a three-year employment agreement
with our Chief Scientific Officer. We paid the Chief Scientific Officer a $7,500
signing bonus and a base salary of $205,000 per year. The agreement also
provides that the Chief Scientific Officer is eligible for cash and non-cash
bonuses at the end of each of the Company’s fiscal years during the term of the
agreement at the discretion of the Company’s compensation committee as well as
additional commission-based cash and stock bonuses during each fiscal year based
on significant revenue-generating, out-licensing and merger and acquisition
transactions initiated and completed by the Chief Scientific Officer, again at
the discretion of the compensation committee. Pursuant to the agreement, we
granted a ten-year option to purchase 150,000 shares of our common stock of
which none have vested as of December 31, 2007. The options will vest quarterly
over a three-year period. This agreement was terminated on March 7,
2008.
We
entered into an employment agreement with Dr. Charles L. Bisgaier on May 24,
2006. Pursuant to this agreement, we will pay Dr. Bisgaier an annual base salary
of $295,000 and a guaranteed bonus of one-third of his base salary. We also
granted Dr. Bisgaier a ten year option to purchase 664,252 shares of our common
stock, of which 387,480 have already vested. The remainder of this option will
vest quarterly over a three year period. In the event of a termination without
just cause, we will provide Dr. Bisgaier with six month severance, payable over
a six month period. On March 5, 2008, the Company’s President has
agreed to work for no cash compensation until May 17, 2008 at which time his
compensation will be at the discretion of the compensation
committee. The President will be eligible to receive a contingent
bonus in the event that the Company is acquired or the stock price retraces or
exceeds to the level of the share price on January 28th 2008.
Additionally, the President agreed to eliminate severance provisions of his
agreement.
During
January 2006, we entered into an employment letter agreement with our director
Jeffrey Kraws to serve as Vice President of Business Development, pursuant to
which we will pay him an annual base salary of $75,000 following the closing of
a financing and have granted him an option to purchase 228,773 shares of common
stock, at an exercise price of $0.09 per share, with 114,387 vested upon
execution of his employment agreement and the remainder vesting annually over
three years. During March 2007, we entered into an amended agreement with Mr.
Kraws whereby he forgo any cash compensation and continued as a director in
exchange for 38,129 options vesting.
Pursuant
to an employment letter agreement, our subsidiary EPI paid Dr. Rudick $175,000
per annum, pay life and disability insurance on behalf of Dr. Rudick and he
received an option to purchase 262,500 shares of EPI common stock. Following the
acquisition of EPI, Dr. Rudick agreed to reduce his annual base salary to
$95,000 per annum, forgo any life or disability reimbursement from us and agree
to cancel an unvested option to purchase 294,071 shares of our common stock. As
a result of the acquisition of EPI, Dr. Rudick’s vested stock options converted
into options to purchase 27,106 of Pipex common stock at an exercise price of
$0.09 per share which expire on September 13, 2014. His shares of EPI common
stock converted to 30,161 shares of Pipex common stock and his EPI warrants
converted into 42,845 warrants to purchase Pipex common stock at an exercise
price of $3.30 per share with an expiration date of May 30, 2015. During March
2007, Dr. Rudick was appointed as President and Chief Medical Officer of Pipex
Neurosciences Inc., a majority owned subsidiary in which Dr. Rudick has received
five percent equity ownership. As of November 1, 2007, Dr. Rudick is no longer
employed by the Company.
In
January 2005, we entered into a four year employment agreement with Steve H.
Kanzer to serve as our Chairman and Chief Executive Officer. We agreed to pay
him an annual base salary of $297,000, an annual bonus equal to 30% of his base
salary and issue him a ten-year option to acquire 271,0585 shares of our common
stock, vesting annually over a three year period commencing at the completion of
our private placement financing. On July 20, 2007 the Board of Directors
approved an amended and restated employment agreement with the Chief Executive
Officer. The amended employment agreement provides that the Chief Executive
Officer is to be paid a base salary of $195,000 per year plus a guaranteed bonus
of $100,000. The Chief Executive Officer may also be entitled to discretionary
transactional bonuses. In addition, the amended agreement provides that the
Chief Executive Officer has waived the receipt of any salary and bonus payable
under the original agreement for no additional consideration. This waiver
constituted a capital contribution of $275,645 to the Company.
During
November 2005, we entered into an employment agreement as amended with John
Althaus, MS, the Vice President of Advanced Technology. We currently
pay Mr. Althaus $100,000 per year and we issued him 54,212 options to acquire
our common stock.
61
ITEM
11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The
following table sets forth certain information regarding beneficial ownership of
our common stock and warrants to purchase shares of our common stock as of March
24, 2008 by (i) each person (or group of affiliated persons) who is known by us
to own more than five percent of the outstanding shares of our common stock,
(ii) each of our directors and executive officers, and (iii) all of our
directors and executive officers as a group.
Beneficial
ownership is determined in accordance with SEC rules and generally includes
voting or investment power with respect to securities. The principal address of
each of the stockholders listed below except as indicated is c/o Pipex
Pharmaceuticals, Inc., 3930 Varsity Drive, Ann Arbor, MI 48108. We believe that
all persons named in the table have sole voting and investment power with
respect to shares beneficially owned by them. All share ownership figures
include shares issuable upon exercise of options or warrants exercisable within
60 days of March 24, 2008, which are deemed outstanding and beneficially owned
by such person for purposes of computing his or her percentage ownership, but
not for purposes of computing the percentage ownership of any other
person.
All
references to the number of shares and per share amounts have been retroactively
restated to reflect a 3 for 1 reverse stock split, of all the outstanding common
stock, stock options and stock warrants of the Company, which was effective on
April 25, 2007.
Principal
Stockholders Table
|
Name
of Owner
|
Shares
Owned
|
Percentage
of Shares
Outstanding
|
||||||
|
Accredited
Venture Capital, LLC
|
|
8,300,006
|
(
1)
|
|
38.27
|
%
|
||
|
Steve
H. Kanzer
|
|
8,805,957
|
(
2)
|
|
40.27
|
%
|
||
|
Ridgeback
Capital Investment Ltd.
|
|
1,856,565
|
(
3)
|
|
9.07
|
%
|
||
|
Firebird
Capital
|
|
1,486,550
|
(
4)
|
|
7.26
|
%
|
||
|
Nicholas
Stergis
|
|
1,709,361
|
(
5)
|
|
8.21
|
%
|
||
|
Charles
Bisgaier, Ph.D.
|
|
546,136
|
(
6)
|
|
2.61
|
%
|
||
|
Jeffrey
J. Kraws
|
|
218,042
|
(
7)
|
|
1.05
|
%
|
||
|
A.
Joseph Rudick, M.D.
|
|
189,792
|
(
8)
|
|
*
|
|||
|
Jeffrey
Wolf, Esq.
|
|
33,333
|
(
9)
|
|
*
|
|||
|
Daniel
J. Dorman
|
|
794,525
|
(
10)
|
|
3.87
|
%
|
||
|
James
S. Kuo
|
|
33,333
|
(
11)
|
|
*
|
|||
|
All
officers and directors as a group (8 persons)
|
|
12,330,479
|
|
57.26
|
%
|
|||
*
represents less than 1% of our common stock
(1)
Consists of 7,086,380 shares held in the name of Accredited Venture Capital, LLC
and 1,213,626 shares issuable upon presently exercisable warrants held in the
name of Accredited Venture Capital, LLC.
(2)
Consists of the 7,086,380 shares of common stock and 1,213,626 warrants,
registered in the name of Accredited Venture Capital, LLC, and 325,246 common
shares, and 180,705 shares issuable upon stock options presently exercisable or
exercisable within 60 days held directly in Mr. Kanzer’s name. Does not include
90,353 shares issuable upon stock options held directly in Mr. Kanzer’s name
that are not presently exercisable. Pharmainvestors, LLC is the managing member
of Accredited Venture Capital, LLC, and Mr. Kanzer is the managing member of
Pharmainvestors, LLC. As such, Mr. Kanzer may be considered to have control over
the voting and disposition of the shares registered in the name of Accredited
Venture Capital, LLC. Mr. Kanzer disclaims beneficial ownership of those shares,
except to the extent of his pecuniary interest.
(3)
Consists of 1,856,565 of shares of common stock. Ridgeback Capital Investment
Ltd.’s address is 430 Park Avenue, 12th Floor, New York, New York
10022.
(4)
Consists of 743,275 shares of common stock issued to Firebird Global Master
Fund, Ltd and 743,275 shares of common stock issued to Firebird Global Master
Fund II, Ltd. Firebird’s address is 152 West 57th Street, 24th Floor, New York,
New York 10019.
(5)
Consists of 1,355,292 shares of common stock, and warrants to purchase 346,418
and 7,651 shares of common stock, issued to Mr. Stergis. Mr. Stergis’s business
address is 9100 South Dadeland Blvd., Suite 1809, Miami, Florida
33156.
62
(6)
Consists of 387,480 shares issuable stock options presently exercisable or
exercisable within 60 days, 59,552 shares of common stock and 24,776 warrants to
purchase common stock issued to Bisgaier Family LLC, a company of which Dr.
Bisgaier is the managing member; 49,552 shares of common stock and 24,776
warrants to purchase common stock issued to two trusts for which Dr. Bisgaier
has control of. Excludes 276,772 unvested options to purchase common stock that
is vesting over three years.
(7)
Assumes the exercise of a vested option to purchase 218,042 shares of our common
stock presently exercisable or exercisable within 60 days. Excludes an unvested
option to purchase 19,064 shares of common stock which will vest on January 26,
2009. Mr. Kraws’s business address is 800 Third Avenue, 17th Fl., New York, NY
10022.
(8)
Consists of 57,267 shares of common stock, an option to purchase 22,621 shares
of common stock and a warrant to purchase 109,904 shares of common stock. Dr.
Rudick’s business address is 150 Broadway, Suite 1800, New York, NY
10128.
(9)
Assumes the exercise of an option to purchase 33,333 shares of our common stock.
Mr. Wolf’s business address is c/o Seed-One Ventures, LLC, 1205 Lincoln Road,
Suite 216, Miami Beach, Florida 33139.
(10)
Consists of 18,566 shares of common stock registered in the name of Red Metal
Capital, LLC, of which Mr. Dorman is the Managing Member, 742,626 shares of
common stock registered in the name of AFA Private Equity Fund I, of which Mr.
Dorman is a partner, and 33,333 options to purchase common stock held directly
by Mr. Dorman. Mr. Dorman’s business address is 40950 Woodward
Avenue, Suite 304, Bloomfield Hills, Michigan, 48304.
(11)
Consists of 33,333 options to purchase common stock. Mr. Kuo’s
business address is 470 Nautilus St, Suite 300, La Jolla, California,
92037.
63
ITEM
12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
All
references to the number of shares and per share amounts have been retroactively
restated to reflect a 3 for 1 reverse stock split, of all the outstanding common
stock, stock options and stock warrants of the Company, which was effective on
April 25, 2007.
During
January 2001, we sold approximately $1.1 million of Series A Preferred Stock to
Accredited Venture Capital, LLC, a company controlled by Steve H. Kanzer, our
Chairman and Chief Executive Officer. From 2002 until October 2006, we relied on
non-interest bearing bridge loans from Accredited Ventures, Inc. (AVI), a
company controlled Steve H. Kanzer, our Chairman and Chief Executive Officer and
the managing member of our largest stockholder, Accredited Venture Capital, LLC.
During this 5 year period, AVI loaned us $3,363,494 for no additional
consideration. In connection with the private placement during October 2006, AVI
agreed to convert these loans into units in the offering. As a result of the
conversion of these loans, we issued 1,665,211 shares of common stock and 832,606 warrants to purchase common stock. In the
merger, all shares of preferred stock were converted into common stock of the
Registrant.
In
connection with a private placement in October and November 2006, we engaged
Accredited Equities Inc. (AEI), a company controlled by Steve H. Kanzer, our
Chairman and Chief Executive Officer as our placement agent. At the closing of
our private placement during October and November 2006, we paid AEI the sum of
approximately $639,844 as commissions for its services and the selected dealer
was paid a cash fee of $327,950. AEI also received a non-accountable expense
allowance of $75,000 and a warrant to purchase 958,277 shares of common stock.
Dr. Joseph Rudick, our director, is a registered representative of AEI. Mr.
Nicholas Stergis, our co-founder and Vice Chairman, is the managing director of
AEI and AVI.
As part
of the October 2006 private placement, Pipex sold 99,104 shares of its common
stock and 49,552 warrants to purchase common stock for total proceeds of
$200,000 to entities controlled by Dr. Charles Bisgaier, our President. As part
of the same private placement, Pipex sold 49,552 shares of its common stock and
24,776 warrants to purchase common stock for total proceeds of $100,000 to the
father of our Chairman and CEO. The terms on which their purchases were made
were identical to the terms in which the other investors in these offerings
purchased shares.
In
connection with our acquisition of Effective Pharmaceuticals Inc. (EPI),
Accredited Venture Capital, LLC and Mr. Stergis, both directors of Pipex
contributed their 65.47% equity ownership in EPI to Pipex for no additional
consideration. During 2005, EPI paid $152,200 to AEI for placement agent
services rendered in connection with the issuance of its Series B preferred
stock. EPI also issued a warrant to purchase 171,225 shares of common stock to
designees of AEI, including Mr. Kanzer, Dr. Rudick and Mr. Stergis, all members
of our board of directors. During March 2005, EPI repaid AVI for loans totaling
$200,000 and AVI agreed to defer repayment of loans totaling $513,886 until the
next financing or a merger of EPI. These EPI loans were converted into Units as
part of our October 2006 private placement. Mr. Stergis had been paid $6,000 per
month which increased to $8,166 per month on November 1, 2006, which was
increased to $12,500 per month as of March 2007. During 2006, we paid $2,150 per
month to AVI and we currently pay AVI $1,000 per month for office
space. We no longer pay rent to AVI as of March 31,
2007.
On
January 5, 2007, we acquired the remaining 34.53% interest in our subsidiary EPI
in exchange for 795,248 shares of our common stock and assumed a total of 34,685
options to purchase our common stock and 68,858 warrants to purchase our common
stock. In connection therewith, Messrs. Kanzer and Stergis each exchanged their
existing EPI warrants for 7,651 warrants to purchase our common stock, and Dr.
Rudick exchanged EPI common stock for 30,161 shares of our common stock and
exchanged his existing EPI options for 27,106 options to purchase our common
stock, all of which is vested, and exchanged his EPI warrants for 42,845
warrants to purchase our common stock.
We
entered into an agreement with Crystal Research Associates, LLC, a firm in which
Mr. Kraws one of our directors and VP of Business Development is the CEO to
write an executive information overview. Pursuant to this agreement, we have
paid Crystal Research Associates $35,000 for the generation of the
report.
We have
employment agreements with Dr. Bisgaier and Mr. Kanzer, each a director and an
executive officer of the company. See “Employment Agreements” section of this
filing for further descriptive information on employment compensation.
ITEM
13. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Berman
& Company, P.A., our independent registered public accounting firm, billed
to us $68,000 and $127,000 for the 2007 and 2006 fiscal years, respectively, for
audit fees. Audit fees consist of fees related to professional services rendered
in connection with the audit of our consolidated financial statements, the
reviews of the interim financial statements included in our quarterly reports on
Form 10-QSB and other professional services provided in connection with
statutory and regulatory filings or engagements.
64
ITEM
14. EXHIBITS AND FINANICAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K
(a) Financial
Statements
1. These
financial statements are set forth in Item 8.
2. No
financial statement schedules are required.
(b) Reports
on Form 8-K
A report on
Form 8-K was filed on March 18, 2008 under Item 8.01 Other Events.
A report on
Form 8-K was filed on March 10, 2008 under Item 5.02 Departure of Directors or
Principal Officers;
Election
of Directors; Appointment of Principal Officers; Compensatory Arrangement of
Certain Officer.
A report on
Form 8-K was filed on February 29, 2008 under Item 8.01 Other
Events.
A report on
Form 8-K was filed on January 29, 2008 under Item 8.01 Other
Events.
(c)
Exhibits
3.1
Certificate of Incorporation (1)
3.2
By-Laws (1)
4.1 Form
of Warrant Certificate (2)
4.2 2001
Stock Incentive Plan (3)
4.3 2007
Stock Incentive Plan (3)
5.1
Opinion of Lehman & Eilen LLP Re: Legality of Shares (4)
10.1
Employment Agreement with Charles L. Bisgaier (5)
10.2
Consulting Agreement with George J. Brewer (5)
10.3
License Agreement with the Regents of the University of Michigan
(5)
10.4
Research Agreement with the Regents of the University of Michigan
(5)
10.5
Option and License Agreement between University of Southern California and
Autoimmune Vaccines, Inc. (5)
10.6
First Amendment to Option and License Agreement between University of Southern
California and Solovax, Inc. (formerly Autoimmune Vaccines, Inc.)
(5)
10.7
License Agreement between Children’s Medical Center Corporation and Effective
Pharmaceuticals, Inc. (5)
10.8
License Agreement between Thomas Jefferson University and Quantas
Biopharmaceuticals, Inc. (5)
10.9
First Amendment to License Agreement between Thomas Jefferson University and CD4
Biosciences, Inc. (5)
10.10
Private Stock Purchase Agreement with Michael Manion (5)
10.11
Lock-up Agreement with Michael Manion (5)
10.12
Lock-up Agreement with Accredited Venture Capital, LLC (5)
10.13
Lock-up Agreement with Nicholas Stergis (5)
10.14
Lock-up Agreement with Joseph Rudick (5)
65
10.15
Lock-up Agreement with Jeffrey Kraws (5)
10.16
Lock-up Agreement with Jeffrey Wolf (5)
10.17
Lock-up Agreement with Charles Bisgaier (5)
10.18
Unit Purchase Agreement (2)
10.19
First Amendment to License Agreement between Children's Medical Center
Corporation and Effective Pharmaceuticals, Inc. (6)
10.20
License Agreement between Maine Medical Center and Pipex Pharmaceuticals, Inc.
(7)
31.1 Certification pursuant to Rule 13a-14(a)/15d-14(a) (8)
32.1 Certification pursuant to Section 1350 of the Sarbanes-Oxley
Act of 2002 (8)
_____________________
(1)
Incorporated by reference to the Registrant’s Form 10-KSB for the fiscal year
ended December 31, 1996.
(2)
Incorporated by reference to the Registrant’s Form 8-K filed on December 1,
2006.
(3)
Incorporated by reference to the Registrant’s Form S-8 filed on January 18,
2008.
(4)
Previously filed.
(5)
Incorporated by reference to the Registrant’s Form 8-K filed on November 6,
2006.
(6)
Incorporated by reference to the Registrant’s Form 10QSB filed on August 14,
2007.
(7)
Incorporated by reference to the Registrant’s Form 10QSB filed on November 14,
2007.
(8) Filed herewith.
66
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned.
.
| PIPEX PHARMACEUTICALS, INC | |
| By: /s/ Steve H. Kanzer | |
| Steve H. Kanzer | |
| Chairman & Chief Executive Officer | |
| (Principal Executive Officer and Principal Financial Officer) | |
| Date: March 31, 2008 |
Pursuant
to the requirements of the Securities Act of 1934, this report has been signed
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
|
Date:
March 31, 2008
|
|
By:
/s/ Steve H.
Kanzer
Steve
H. Kanzer
Chairman
and Chief Executive Office
(Principal
Executive Officer and Principal Financial Officer)
|
|
Date:
March 31, 2008
|
|
By:
/s/ Jeffrey J.
Kraws
Jeffrey
J. Kraws
Director
|
|
Date:
March 31, 2008
|
|
By:
/s/ Nicholas
Stergis
Nicholas
Stergis
Director
|
|
Date:
March 31, 2008
|
|
By:
/s/ A. Joseph
Rudick
Joseph
Rudick
Director
|
|
Date:
March 31, 2008
|
|
By:
/s/ Charles
Bisgaier
Charles
Bisgaier
Director
|
|
Date:
March 31, 2008
|
|
By:
/s/ Jeff
Wolf
Jeff
Wolf
Director
|
|
Date:
March 31, 2008
|
|
By:
Daniel
J. Dorman
Director
|
|
Date:
March 31, 2008
|
|
By:
/s/ James S.
Kuo
James
S. Kuo
Director
|
67