Timber Pharmaceuticals, Inc. - Quarter Report: 2014 June (Form 10-Q)

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

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

As of August 13, 2014, there were outstanding 10,551,001 shares of the registrant’s common stock, $.001 par value.

Documents incorporated by reference: None.

BIOPHARMX CORPORATION

Form 10-Q

Table of Contents

PART I

BioPharmX Corporation

Unaudited Condensed Consolidated Balance Sheets

as of June 30, 2014 and December 31, 2013

____________

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

BioPharmX Corporation

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss

for the three and six months ended June 30, 2014 and 2013

____________

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

BioPharmX Corporation

Unaudited Condensed Consolidated Statements of Cash Flows

for the six months ended June 30, 2014 and 2013

____________

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

BIOPHARMX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Description of Business

BioPharmX Corporation (“BioPharmX” or the “Company”) is a Silicon Valley-based company, registered in Delaware and originally incorporated on August 30, 2010 in Nevada under the name Thompson Designs, Inc. The Company has one wholly-owned subsidiary, BioPharmX, Inc., a Nevada corporation. The Company seeks to provide innovative products through unique, patented platform technologies for pharmaceutical and over-the-counter (“OTC”) applications in the fast growing dermatology and health and wellness markets.

The strategy of the Company begins with obtaining novel, patented, platform technologies through exclusive licensing, joint development or acquisition. BioPharmX then develops platform technologies that can be developed into product lines through specialized formulation and clinical protocol development with a bifurcated market penetration strategy, prescription for the high dose prescription version and OTC consumer for the low dose version. Identifying such technologies requires a strong knowledge of the markets served through technology assessment and evaluation of sell-side and buy-side opportunities through relationships with major pharmaceutical companies. BioPharmX’s products are formulated to address both market pathways to address unmet needs in well-defined, multi-billion dollar markets for licensing or direct commercialization for both pharmaceutical and OTC distribution and sales.

On January 23, 2014, the Company, BioPharmX Inc. and stockholders of BioPharmX, Inc. who collectively owned 100% of BioPharmX, Inc. (the “BioPharmX, Inc. Stockholders”) entered into and consummated transactions pursuant to a Share Exchange Agreement (the “Share Exchange Agreement,” such transaction referred to as the “Share Exchange Transaction”), whereby the Company issued to the BioPharmX, Inc. Stockholders an aggregate of 7,025,000 shares of its common stock, par value $0.001 (“Common Stock”), in exchange for 100% of the shares of BioPharmX, Inc. held by the BioPharmX, Inc. Stockholders. The shares of our Common Stock received by the BioPharmX, Inc. Stockholders in the Share Exchange Transaction constituted approximately 77.8% of our then issued and outstanding Common Stock giving effect to the issuance of shares pursuant to the Share Exchange Agreement.

As a result of the Share Exchange Transaction, BioPharmX, Inc. became a subsidiary of the Company. The acquisition was accounted for as a reverse merger and recapitalization effected by a share exchange. BioPharmX, Inc. is considered the acquirer for accounting and financial reporting purposes. The assets and liabilities of the acquired entity have been brought forward at their book value and no goodwill has been recognized.

On March 3, 2014, we completed the name change of the Company from Thompson Designs, Inc. to BioPharmX Corporation.

Effective May 16, 2014, BioPharmX Corporation, previously a Nevada corporation, was redomiciled as a Delaware corporation and effective June 26, 2014, BioPharmX, Inc, previously a Delaware corporation, was redomiciled as a Nevada corporation.

Basis of Presentation and Principles of Consolidation

These unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting and include the accounts of BioPharmX and its subsidiary. Certain information and note disclosures normally included in the consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, filed on March 31, 2014. The condensed consolidated balance sheet as of December 31, 2013, included herein, was derived from the audited consolidated financial statements as of that date.

The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the Company’s statement of financial position as of June 30, 2014 and December 31, 2013, the Company’s results of operations and its cash flows for each of the three and six months ended June 30, 2014 and 2013 and its cash flows for each of the six months ended June 30, 2014 and 2013. The results for the three and six months ended June 30, 2014 are not necessarily indicative of the results to be expected for the year ending December 31, 2014. All references to June 30, 2014 or to the three and six months ended June 30, 2014 and 2013 in the notes to the condensed consolidated financial statements are unaudited.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB” issued Accounting Standard Update (“ASU”) No. 2014-09 (ASU 2014-09), Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods and services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard will be effective for the Company on January 1, 2017. Early application is not permitted. ASU 2014-09 permits the use of either the retrospective or cumulative effect transition method. The Company has not yet selected a transition method nor has it determined the potential effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures.

In June 2014, FASB issued ASU No. 2014-10, “ Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation”. The update removes all incremental financial reporting requirements from GAAP for development stage entities. The update is effective for the annual reporting periods beginning after December 15, 2014, including interim periods within that reporting period. We have elected to adopt the provisions of this ASU early, accordingly all of the past disclosures and presentations on development stage accounting have been eliminated.

The accompanying financial statements have been prepared assuming the Company will continue as a going concern. The Company has incurred recurring losses and negative cash flows from operations since inception. The Company has not generated revenues and has funded its operating losses through the issuance of convertible notes payable and convertible preferred stock. The Company has a limited operating history and its prospects are subject to risks, expenses and uncertainties frequently encountered by companies in the industry. These risks include, but are not limited to, the uncertainty of availability of additional financing and the uncertainty of achieving future profitability. Management of the Company intends to raise additional funds through the issuance of equity securities. There can be no assurance that such financing will be available or on terms which are favorable to the Company. Failure to generate sufficient cash flows from operations, raise additional capital or reduce certain discretionary spending could have a material adverse effect on the Company’s ability to achieve its intended business objectives. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not contain any adjustments that might result from the outcome of this uncertainty.

As shown in the accompanying financial statements, the Company incurred a net loss of $3.0 million and $371,000 during the six months ended June 30, 2014 and 2013, respectively, and has an accumulated deficit of $4.6 million as of June 30, 2014. As of June 30, 2014, the Company had working capital of $75,000. As of December 31, 2013, the Company had a working capital deficit of $732,000. While management of the Company believes that it has a plan to fund on-going operations, there is no assurance that its plan will be successfully implemented.

Since 2012, the Company has obtained financing with convertible notes to invite early investors at a 20% discount to the share price in a future offering.  Additionally, during the first half of 2014, the Company has issued Series A Preferred stock and warrants resulting in gross proceeds of $2.4 million (see details in Note. 8 -- “Stockholders’ Equity”) and is looking to raise additional funds as a result of this offering prior to the end of the third quarter. While the Company has been able to secure a number of investors, there is continued risk in the Company’s ability to attract additional development-stage investors. Without access to continued funds for working capital, the Company may not be able to execute its product strategy and pursue research and development activities on its novel platform technologies.

The discovery of key raw materials to formulate novel products depends on the Company’s ability to identify, negotiate and secure procurement of such materials. This also depends on the Company’s ability to establish comprehensive and long term vendor contracts and relationships.

The Company’s ability to compete and to achieve its product platform strategy depends on its ability to protect its proprietary discoveries and technologies. The Company currently relies on a combination of copyrights, trademarks, trade secret laws and confidentiality agreements to protect its intellectual property rights. The Company also relies upon unpatented know-how and continuing technological innovation.

The Company’s continued operations are dependent upon its ability to identify, recruit and retain adequate management personnel and contractors to perform certain jobs such as research and development, patent generation, regulatory affairs and general administrative functions. The Company requires highly trained professionals of varying levels and experience along with a flexible work force.

Research and development for novel prescription or OTC based products can be very extensive and lengthy in nature; along with the clinical trial process with the Food and Drug Administration which can require significant funding and time consuming patient studies. The competitive landscape could change significantly over the time period to complete targeted product development milestones. The current competition for BioPharmX’s products could also turn into strategic partners or potential acquirers in the future.

The significant risks and uncertainties described above could have a significant negative impact on the financial viability of BioPharmX and raise substantial doubt about the Company’s ability to continue as a going concern. Management is working on the Company’s business model to increase working capital by managing its cash flow, securing financing and working towards bringing its first product to market.

These unaudited interim condensed consolidated financial statements and accompanying notes should be read in conjunction with the Company’s annual financial statements and notes thereto contained in the Annual Report on Form 10-K for the year ended December 31, 2013. There have been no significant changes in the Company’s significant accounting policies for the three months ended June 30, 2014, as compared to the significant accounting policies described in the Annual Report on Form 10-K for the year ended December 31, 2013.

Property and equipment, consisted of the following:

Depreciation expense for the six months ended June 30, 2014 and 2013 was $4,000 and $4,000.  

The company has restricted cash in the amount of $35,000 held by Bank of America in a money market account to secure the credit line of the Company’s credit cards. 

Since inception, the founding executives of the Company have made advances to cover short-term operating expenses. Additionally, since the beginning of 2014 a portion of their compensation is being deferred and is included in this balance. These advances and deferred compensation are non-interest bearing. As of June 30, 2014 and December 31, 2013, related party payables were $293,000 and $125,000, respectively.

Financing Arrangements

During the six months ended June 30, 2014, the Company issued convertible notes payable to twelve individuals in exchange for $1,020,000 in cash. The Notes carry an interest rate of 6% per annum and mature between January 2015 and March 2017, with principal and interest payable at maturity. Prior to 2014, the Company had issued $1,230,000 of convertible notes payable (the “Notes”).

The Notes automatically convert into common stock upon the Company entering into a qualified preferred stock financing at 80% of the price per share at which such preferred stock is issued in such an offering. Additionally, there is a special conversion that at maturity, unless the Company repays all outstanding principal and interest, the Notes shall be automatically converted into a number of shares of common stock of the Company at 80% of the then fair market value per share.

As a result of this beneficial conversion feature, the Company has recorded $204,000 and $246,000 as a debt discount during the six months ended June 30, 2014 and year ended December 31, 2013. The debt discount is being amortized to interest expense over the term of the Notes using the effective interest rate method. The amortization expense related to the debt discount was $6,000 and $49,000 for the three and six months ended June 30, 2014, respectively. The amortization expense related to the debt discount was $4,000 and $7,000 for the three and six months ended June 30, 2013.

The Company entered into Subscription Agreements (the “Subscription Agreements”) for a private placement of shares of our Series A convertible redeemable preferred Stock, par value $0.001 per share (“Series A”), and warrants (the “Warrants”) with two accredited investors on March 14, 2014 and April 1, 2014, respectively, whereby we sold an aggregate of 810,811 shares of Series A at a per share price of $1.85 for gross proceeds of $1,500,000 and issued to the investors for no additional consideration the Warrants to purchase in the aggregate 405,406 shares of the Company’s common stock, par value $0.001 per share, at an exercise price of $3.70 per share. The closing of the sale of the Series A and the Warrants under the Subscription Agreements occurred on April 11, 2014. See Note 9.

As a result, upon the closing, the 6% secured convertible notes in the aggregate principal amount of $2.25 million and accrued interest for one of the note holders were automatically converted into 1,526,001 shares of common stock of the Company (the “Conversion Shares”). The balance of accrued interest was waived. On April 11, 2014, the convertible notes payable balance, net of unamortized discounts, of $1,942,000 was converted to common stock. As of June 30, 2014, there were no remaining outstanding convertible notes.

Lease Arrangements

On August 23, 2013, the Company signed a lease for 10,800 square feet of office and laboratory space in Menlo Park, California. The term of the lease is 39 months from the lease commencement date of September 1, 2013. Future minimum commitments under this lease are as follows:

Legal Proceedings

We are not currently a party to any legal proceedings. We are not aware of any pending legal proceeding to which any of our officers, directors, or any beneficial holders of 5% or more of our voting securities are adverse to us or have a material interest adverse to us. 

Common Stock

As described in Note 1, on January 23, 2014, the Company issued 7,025,000 shares of its common stock to BioPharmX, Inc. stockholders.  As described in Note 7, on April 11, 2014, the Company’s convertible notes and eligible interest were converted to 1,526,001 shares of common stock upon the first closing of the offer and sale of Series A Preferred Stock. As a result, the Company has 10,551,001 shares of common stock currently issued and outstanding.

Series A Preferred Stock

During the six months ended June 30, 2014, the Company entered into a series of Subscription Agreements (the “Subscription Agreements”) for a private placement (the “Private Placement”) of shares of our Series A Preferred Stock and the Warrants with a number of accredited investors (the “Investors”), whereby we sold an aggregate of 1,270,269 shares of Series A Preferred Stock at a per share price of $1.85 for gross proceeds of $2,350,000 and issued to the investors for no additional consideration the Warrants to purchase in the aggregate 635,136 shares of the Company’s common stock, par value $0.001 per share, at an exercise price of $3.70 per share. The first closing of the sale of the Series A Preferred Stock and the Warrants under the Subscription Agreements occurred on April 11, 2014.

The Warrants with an allocated fair value of $154,000 were classified as additional paid in capital. The Company determined the fair value using the Black-Scholes option pricing model with the following assumptions: dividend rate of 0%, risk-free rate of 1.6%, contractual term of 5 years and expected volatility of 88.8%. These Warrants were immediately exercisable, and as of June 30, 2014, were all outstanding.

In connection with the Subscription Agreements, the Company, the majority shareholders of the Company and the Investors entered into an Investor Rights Agreement (the “Investor Rights Agreement”) with the Investors, whereby the Investors were granted certain rights including: (i) right to receive copies of quarterly and annual reports of the Company, (ii) right of inspection of the Company’s properties and records, (iii) right of participation in future securities offerings, (iv) tag-along rights in connection with sales of the Company’s stock by a major shareholder, and (v) board of directors representation rights for the subscribers who purchased at least 500,000 shares of Series A and hold at least 30% of such shares (the “Qualified Subscribers”). The Company made certain covenants under the agreement including: (i) uplisting to NYSE or NASDAQ within three years from the issuance shares of Series A, and (ii) increase of the board of directors to five members including one member to be appointed by the Qualified Subscribers. 

Significant terms of Series A are as follows:

Warrants

In addition to the Warrants issued in conjunction with the Subscription Agreements, the Company issued warrants on May 15, 2014, to a service provider for 316,395 shares of common stock at an exercise price of $2.035 per share, which was valued at $99,000 and expensed, and to a qualified investor as a part of his convertible loan package for 343,559 shares of common stock at an exercise price of $1.85 per share. These warrants expire after five years. The Company determined the fiar value using the Black-Scholes option pricing model with the following assumptions: dividend rate of 0%, risk-free rate of 1.6%, contractual term of 5 years and expected volatility of 88.8%. These Warrants were immediately exercisable, and as of June 30, 2014, were all outstanding.

Equity Incentive Plan

On January 23, 2014, the Company adopted the 2014 Equity Incentive Plan (the “2014 Plan”) which permits the Company to grant stock options to directors, officers or employees of the Company or others to purchase shares of common stock of the Company through awards of incentive and nonqualified stock options (“Options”), stock (“Restricted Stock” or “Unrestricted Stock”) and stock appreciation rights (“SARs”). Options previously issued under the BioPharmX, Inc. 2011 Equity Incentive Plan were cancelled, and options under the 2014 Plan were issued to replace all cancelled BioPharmX, Inc. options.

The Company currently has time-based options outstanding. The time-based options generally vest in two to four years and expire ten years from the date of grant. Total number of shares reserved and available for grant and issuance pursuant to this Plan is 2,700,000. Shares issued under the Plan will be drawn from authorized and unissued shares or shares now held or subsequently acquired by the Company. At June 30, 2014, there were 79,000 shares available for grant under the Plan. There was no incremental value recorded in relation to this exchange.

The following table summarizes the Company’s stock option activities for the six month periods ended June 30, 2014 and 2013:

The following table summarizes the stock-based compensation expenses included in our Unaudited Condensed Consolidated Statement of Operations and Comprehensive Loss:

The Company estimates the fair value of time-based stock options, if any, granted using the Black-Scholes option pricing model. The fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. Time-based and performance-based options, if any, typically have a ten-year life from date of grant and vesting periods of two to four years.

Valuation Assumptions

The fair value of stock-based awards to employees is calculated through the use of the Black-Scholes option pricing model, even though such model was developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which differ significantly from the Company’s stock option awards. This model also requires subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values.

Expected Term

The expected term represents the period that the Company’s stock-based awards are expected to be outstanding. For awards granted subject only to service vesting requirements, the Company utilizes the simplified method for estimating the expected term of the stock-based award, instead of historical exercise data.

Expected Volatility

The Company uses the historical volatility of the price of the common shares of selected public companies in the biotechnology sector.

Expected Dividend

The Company has never paid dividends on its common shares and currently does not intend to do so and, accordingly, the dividend yield percentage is zero for all periods.

Risk-Free Interest Rate

The Company bases the risk-free interest rate used in the Black-Scholes option pricing model upon the implied yield curve currently available on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term used as the assumption in the model.

During the six months ended June 30, 2014 and 2013, the Company issued options to non employees for the purchase of 175,000 and 1,020,000 shares of common stock in exchange for services. During the six months ended June 30, 2014, the options were issued with an exercise price of $1.85 per share. The options issued during the six months ended June 30, 2013, were issued with a range of exercise prices from $0.05 to $0.25 per share. These options generally vest over four years. The Company accounts for these options as variable awards. The options were valued using the Black-Scholes option pricing model. The total stock based compensation related to nonemployees amounted to $307,000 and $11,000 for the six months ended June 30, 2014 and 2013.

The Company recognizes and discloses the fair value of its assets and liabilities using a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to valuations based upon unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to valuations based upon unobservable inputs that are significant to the valuation (Level 3 measurements). Each level of input has different levels of subjectivity and difficulty involved in determining fair value.

As of June 30, 2014 and December 31, 2013, the Company held no assets or liabilities with instrument valuations measured on a recurring basis.

No federal income taxes were provided in the three and six months ended June 30, 2014 and 2013 due to the Company’s net losses. State minimum income and franchise taxes are included in general and administrative expenses and were immaterial for the periods presented.  The Company evaluates its ability to recover deferred tax assets, in full or in part, by considering all available positive and negative evidence, including past operating results and our forecast of future taxable income on a jurisdictional basis. The Company bases its estimate of current and deferred taxes on the tax laws and rates that are currently in effect in the appropriate jurisdiction. Changes in laws or rates may affect the tax provision as well as the amount of deferred tax assets or liabilities.

Current tax laws impose substantial restrictions on the utilization of net operating loss and credit carry-forwards in the event of an “ownership change,” as defined by the Internal Revenue Code. If there should be an ownership change, the Company’s ability to utilize its carry-forwards could be limited.

As of June 30, 2014 and December 31, 2013, the Company did not have any material unrecognized tax benefits. The 2013 and 2012 tax years remain open for examination by the federal and state authorities.

Basic net loss per share is computed by dividing income attributable to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities by adding other common stock equivalents, including common stock options, warrants, and convertible notes, in the weighted average number of common shares outstanding for a period, if dilutive. Potentially dilutive securities are excluded from the computation if their effect is anti-dilutive. For the three and six months ended June 30, 2014 and 2013, 5.2 million, 5.2 million, 1.0 million and 1.0 million potentially dilutive securities, respectively, were excluded from the computation of diluted loss per share because their effect on net loss per share was anti-dilutive. As a result of the net loss for each of the three and six months ended June 30, 2014 and 2013 there is no dilutive impact to the net loss per share calculation for the periods.

During July, 2014, the Company entered into a Subscription Agreement for a private placement (the “Private Placement”) of shares of our Series A Preferred Stock and the warrants to purchase common stock with an accredited investor, whereby we sold an aggregate of 70,270 shares of Series A Preferred Stock at a per share price of $1.85 for gross proceeds of $130,000 and issued to the investor for no additional consideration the warrants to purchase in the aggregate 35,135 shares of the Company’s common stock, par value $0.001 per share, at an exercise price of $3.70 per share.  

This Quarterly Report on Form 10-Q and other written reports and oral statements made from time to time by the Company may contain so-called “forward-looking statements,” all of which are subject to risks and uncertainties. One can identify these forward-looking statements by their use of words such as “expect,” “plan,” “will,” “may,” “anticipate,” “believe,” “estimate,” “should,” “intend,” “forecast,” “project” the negative or plural of these words, and other comparable terminology. One can identify them by the fact that they do not relate strictly to historical or current facts. These statements are likely to address the Company’s growth strategy, financial results and product and development programs. One must carefully consider any such statement and should understand that many factors could cause actual results to differ from the Company’s forward-looking statements. These factors include inaccurate assumptions and a broad variety of other risks and uncertainties, including some that are known and some that are not. No forward-looking statement can be guaranteed and actual future results may vary materially. The Company does not assume the obligation to update any forward-looking statement. One should carefully evaluate such statements in light of factors described in the Company’s filings with the SEC, especially the Company’s Annual Report on Form 10-K and the Company’s Quarterly Reports on Form 10-Q. In various filings the Company has identified important factors that could cause actual results to differ from expected or historic results. One should understand that it is not possible to predict or identify all such factors. Consequently, the reader should not consider any such list to be a complete list of all potential risks or uncertainties.

The following discussion is presented on a consolidated basis, and analyzes our financial condition and results of operations for the three months ended June 30, 2014 and 2013. Unless the context indicates or suggests otherwise, reference to “we”, “our”, “us” and the “Company” in this section refers to the consolidated operations of BioPharmX Corporation and BioPharmX, Inc., as defined in Note 1 —Description of Business and Basis of Presentation to the financial statements.

The following Management's Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, is intended to help the reader understand our results of operations and financial condition. MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes to the financial statements and other disclosures included in this Quarterly Report on Form 10-Q. Our financial statements have been prepared in accordance with U.S. generally accepted accounting principles and are presented in U.S. dollars.

Overview

BioPharmX Corporation, a Delaware corporation (“BioPharmX, “we,” “us” or the” Company”), was originally incorporated in Nevada on August 30, 2010 under the name “Thompson Designs, Inc.”  The business plan of the Company was originally to design and build custom signs for residential and commercial properties. Immediately after the completion of the Share Exchange Transaction (see details below), the Company discontinued its custom signs business and changed its business plan to development of novel delivery mechanisms and routes of administration for known drugs and tissues.

BioPharmX, Inc., a Nevada corporation, was originally incorporated in Delaware on August 18, 2011, and is headquartered in Menlo Park, California. It is a wholly-owned subsidiary of the Company. It is a research-based biopharmaceutical company that seeks to provide innovative products through unique, proprietary platform technologies for pharmaceutical and over-the-counter, or OTC, applications in the fast growing health and wellness markets, including women’s health, dermatology, and otolaryngology (ears, nose & throat).

We are primarily a research and development, or R&D, company focusing on the development of novel delivery mechanisms and novel routes of administration for known drugs and tissues.  We have expertise in formulation development, intellectual property generation, clinical trial execution, and regulatory strategy definition.  Our business model is to outsource much of its manufacturing and commercialization activities in order to maintain its focus on technology sourcing, acquisitions, and partner development to create new products to address unmet needs in well-defined, multi-billion dollar markets.

Redomicile

Effective May 16, 2014 BioPharmX Corporation, previously a Nevada corporation, was redomiciled as a Delaware corporation and effective June 26, 2014, BioPharmX, Inc, previously a Delaware corporation, was redomiciled as a Nevada corporation.

Share Exchange Agreement

On January 23, 2014, the Company, BioPharmX, Inc. and stockholders of BioPharmX, Inc., who collectively owned 100% of BioPharmX, Inc. (the “BioPharmX, Inc. Stockholders”) entered into and consummated transactions pursuant to a Share Exchange Agreement (the “Share Exchange Agreement,” such transaction referred to as the “Share Exchange Transaction”), whereby the Company issued to the BioPharmX, Inc. Stockholders an aggregate of 7,025,000 shares of its common stock, par value $0.001 (“Common Stock”), in exchange for 100% of the shares of BioPharmX, Inc. held by the BioPharmX, Inc. Stockholders. The shares of our Common Stock received by the BioPharmX, Inc. Stockholders in the Share Exchange Transaction constituted approximately 77.8% of our then issued and outstanding Common Stock giving effect to the issuance of shares pursuant to the Share Exchange Agreement.

Series A Preferred Stock

During the six months ended June 30, 2014, the Company entered into a series of Subscription Agreements for the Private Placement of shares of Series A Preferred Stock and the common stock warrants (“Warrants”) with a number of accredited investors (the “Investors”), whereby we sold an aggregate of 1,270,269 shares of Series A Preferred Stock at a per share price of $1.85 for gross proceeds of $2,350,000 and issued to the investors for no additional consideration the Warrants to purchase in the aggregate 635,135 shares of the Company’s common stock, at an exercise price of $3.70 per share. The first closing of the sale of the Series A Preferred Stock and the Warrants under the Subscription Agreements occurred on April 11, 2014. 

In connection with the Subscription Agreements, the Company, the majority shareholders of the Company and the Investors entered into the Investor Rights Agreement with the Investors, whereby the Investors were granted certain rights including: (i) right to receive copies of quarterly and annual reports of the Company, (ii) right of inspection of the Company’s properties and records, (iii) right of participation in future securities offerings, (iv) tag-along rights in connection with sales of the Company’s stock by a major shareholder, and (v) board of directors representation rights for the subscribers who purchased at least 500,000 shares of Series A and hold at least 30% of such shares (the “Qualified Subscribers”). The Company made certain covenants under the agreement including: (i) uplisting to NYSE or NASDAQ within three years from the issuance shares of Series A, and (ii) increase of the board of directors to five members including one member to be appointed by the Qualified Subscribers.

Upon the first closing of the Private Placement on April 11, 2014, the 6% secured convertible notes in the aggregate principal amount of $2.25 million and $8,000 in eligible accrued interest previously issued were automatically converted into 1,526,001 shares of common stock of the Company (the “Conversion Shares”).

Critical Accounting Policies

Our financial statements and related public financial information are based on the application of accounting principles generally accepted in the United States, or GAAP. GAAP requires the use of estimates; assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenues and expense amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements.  

Our significant accounting policies are summarized in Note 1 of our audited financial statements which are included in our Annual Report on Form 10-K for the year ended December 31, 2013. While all these significant accounting policies impact our financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates. Our management believes that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause effect on our results of operations, financial position or liquidity for the periods presented in this report.

We believe the following critical accounting policies and procedures, among others, affect our more significant judgments and estimates used in the preparation of our financial statements:

Results of Operations

Three and six months ended June 30, 2014 and 2013

Revenue

For June 30, 2014, we have not had any revenues.  We are in the research and development stage, but we project our molecular iodine dietary supplement product will be released in late 2014.

Research and Development Expenses 

Research and development expenses for the three months ended June 30, 2014 and 2013 increased $509,000. Headcount when comparing these periods increased by 6 scientists which increased payroll and consulting costs by approximately $323,000 and stock compensation expense by $54,000. For the same period we increased expenses of research and development supplies and overhead by $80,000 and $40,000, respectively.

Research and development expenses for the six months ended June 30, 2014 and 2013 increased $864,000. Headcount, when comparing these periods, increased by 6 scientists which increased payroll costs by approximately $450,000 and stock compensation expense by $76,000. For the same period we increased expenses of research and development supplies and consultants and overhead by $255,000 and $85,000, respectively.

As of June 30, 2014, the company had 8 full-time employees in Research and Development.

Sales and Marketing Expenses

Sales and Marketing expenses for the three months ended June 30, 2014 and 2013 increased $355,000. Consultants, agencies and stock compensation expense accounted for almost $246,000 of the increase from period to period. As a precursor to introducing our breast health supplement, we spent approximately $66,000 on programs to educate medical professionals on fibrocystic breast condition and the options for treating it. The remaining $43,000 increase was attributable to travel and overhead.

Sales and Marketing expenses for the six months ended June 30, 2014 and 2013 increased $555,000. Consultants, agencies and stock compensation expense accounted for about $298,000 of the increase from period to period. As a precursor to introducing our breast health supplement, we spent approximately $200,000 on programs to educate medical professionals on fibrocystic breast condition and the options for treating it. The remaining $58,000 increase was attributable to travel and overhead.

As of June 30, 2014, we have one employee in sales and marketing. We plan to continue to use outside consultants for most of this work, although we may hire some staff in late 2014.

General and Administrative Expenses

General and administrative expenses for the three months ended June 30, 2014 and 2013 increased $715,000. Headcount when comparing these periods increased by 3 employees and additional consultants causing a $400,000 difference, along with a $183,000 charge for stock compensation expense caused by marking to market the non-employee stock options. Also contributing to the increase was a $99,000 cost of warrants issued to a firm that assisted in the successful completion of our reverse acquisition, the remaining increase was attributable to an increase in overhead.

General and administrative expenses for the six months ended June 30, 2014 and 2013 increased $1.1 million. Headcount when comparing these periods increased by 3 employees and additional consultants causing a $800,000 difference and a $184,000 charge for stock compensation expense substantially caused by marking to market the non-employee stock options. Also contributing to the increase was a $99,000 cost of warrants issued to a firm that assisted in the successful completion of our reverse acquisition, the remaining increase was attributable to an increase in overhead.

As of June 30, 2014, the company had 3 full-time employees in General and administrative.

Loss from Operations

Loss from operations for the three months ended June 30, 2014 and 2013 was $1.8 million and $247,000, respectively.  The increase in the loss from year-to-year is due to the Company ramping up research and development, legal and audit costs related to the reverse acquisition we completed in the first quarter of 2014 and other operations.

Loss from operations for the six months ended June 30, 2014 and 2013 was $2.9 million and $351,000, respectively.  The increase in the loss from year-to-year is due to the Company ramping up research and development, legal and audit costs related to the reverse acquisition we completed in the first quarter of 2014 and other operations.

Net Loss

Net loss for the three months ended June 30, 2014 and 2013 was $1.8 million and $260,000, respectively. Net loss for the six months ended June 30, 2014 and 2013 was $3.0 million and $371,000, respectively

Inflation did not have a material impact on the Company’s operations for either of the periods. Other than the foregoing, management knows of no trends, demands, or uncertainties that are reasonably likely to have a material impact on the Company’s results of operations. 

Capital Resources and Liquidity

A summary of the sources and uses of cash and cash equivalents is as follows:

At June 30, 2014, we had working capital of $75,000.

Net cash used for operating activities for the six months ended June 30, 2014 was $2.3 million.  Cash used in operating activities was primarily due to net loss for the six months ended June 30, 2014 of $3.0 million which was partially offset by changes in operating assets and liabilities of $154,000, non-cash interest expense of $76,000 and stock-based compensation of $313,000. Cash used in investing activities was primarily due to the change in restricted cash and for acquisition of fixed assets.

Net cash used for operating activities for the six months ended June 30, 2013 was $265,000.  Cash used in operating activities was primarily due to net loss for the six months ended June 30, 2013 of $371,000 which was offset by $81,000 increase in accounts payable and accrued expenses, non-cash interest expense of $12,000 and stock-based compensation of $11,000. Cash used in investing activities was primarily for acquisition of intellectual property.

Net cash obtained through all financing activities for the six months ended June 30, 2014 and 2013 was $3.2 million and $257,000, respectively, in proceeds from issuing convertible redeemable preferred stock and convertible notes payable, respectively.

Between September 2012 and March 2014, the Company issued 6% unsecured convertible notes to investors in the aggregate principal amount of $2.3 million. In April 2014, the notes were automatically converted into common stock after the completion of the reverse acquisition and closing of a financing in the amount of $1,500,000 at a conversion price per share equal to 80% of the per share offering price of such financing.

During the second quarter of 2014, we sold an aggregate of 1,270,269 million shares of our Series A Preferred Stock at a per share price of $1.85 for gross proceeds of $2.4 million and issued to the investors for no additional consideration warrants to purchase 635,135 shares of the Company’s common stock in the aggregate at an exercise price of $3.70 per share.

Going Concern

As reflected in the accompanying financial statements, the Company has a net loss of $3.0 million and $371,000, respectively, for the six months ended June 30, 2014 and 2013, respectively and a deficit accumulated of $4.6 million as of June 30, 2014.  The net cash used in operations for the six months ended June 30, 2014 and 2013 was $2.3 million and $265,000, respectively.

The ability of the Company to continue its operations is dependent on Management's plans, which include the raising of capital through debt and/or equity markets with some additional funding from other traditional financing sources, including term notes, until such time that funds provided by operations are sufficient to fund working capital requirements.  The Company may need to incur additional liabilities with certain related parties to sustain the Company’s existence.

The Company may require additional funding to finance the growth of its current and expected future operations as well as to achieve its strategic objectives.  The Company believes its current available cash along with anticipated revenues may be insufficient to meet its cash needs for the near future if it does not receive the anticipated additional funding. There can be no assurance that financing will be available in amounts or terms acceptable to the Company, if at all. In that event, the Company would be required to change its growth strategy and seek funding on that basis, if at all.

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.  These financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.

In response to the above, management will:

To date, all of our funding has been generated from private investments. During the next twelve months, we anticipate raising funding to continue expansion; however, as of this writing, we only have sufficient funds to proceed with basic company operations only. We do not have sufficient funds to fully implement our business plan until such time that we are able to raise additional funding, to which there is no guarantee. If we do not obtain the funds necessary for us to continue our business activities we may need to curtail or cease our operations until such time as we have sufficient funds.

Pursuant to Item 305(e) of Regulation S-K the Company, as a smaller reporting company, is not required to provide the information required by this item.

Disclosure Controls and Procedures.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our company’s reports filed under the Securities Exchange Act of 1934 is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Based upon that evaluation, including our Chief Executive Officer and Chief Financial Officer, we have concluded that our disclosure controls and procedures were ineffective as of the end of the period covered by this quarterly report.

Changes in Internal Controls over Financial Reporting

No change in our system of internal control over financial reporting occurred during the three and six months ended June 30, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

We are not currently a party to any legal proceedings. We are not aware of any pending legal proceeding to which any of our officers, directors, or any beneficial holders of 5% or more of our voting securities are adverse to us or have a material interest adverse to us.

On June 30, 2014, the Company issued to accredited investors 40,540 shares of Series A Preferred Stock and warrants to purchase 20,271 shares of common stock.

On May 28, 2014, the Company issued to accredited investors 405,405 shares of Series A Preferred Stock and warrants to purchase 202,703 shares of common stock.

On August 5, 2014, the Company issued to an accredited investor 70,270 shares of Series A Preferred Stock and warrants to purchase 35,135 shares of common stock.

The foregoing issuances of the equity securities were effectuated pursuant to the exemption from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), provided by Section 4(2) of the Securities Act and/or Regulation D promulgated thereunder.

None.

None.

None.

* Incorporated by reference to our Current Report on Form 8-K filed with the SEC on January 27, 2014.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.

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