NOTES TO FINANCIAL STATEMENTS
1.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Overview of the Business
Capstone Therapeutics Corp. is a biotechnology company committed to developing a pipeline of novel peptides and other molecules aimed at helping patients with under-served medical conditions. Previously, we were focused on the development and commercialization of two product platforms: AZX100 and Chrysalin (TP508). We no longer have any interest in or rights to Chrysalin. On August 3, 2012, we entered into a joint venture, LipimetiX Development, LLC, (the “JV”) to develop Apo E mimetic peptide molecule AEM-28 and its analogs.
In 2012 we wound down internal operations, ceased clinical development of AZX100 in dermal scarring, formerly our principal drug candidate, and moved to a more virtual operating model. Certain manufacturing and regulatory activities related to AZX100 that are required either from a statutory perspective or for reporting purposes, will continue. We are also performing limited pre-clinical studies with AZX100 in fibrosis. We are currently seeking development partnering or licensing opportunities for AZX100 in dermal scarring, pulmonary fibrosis and peridural fibrosis.
The JV has a development plan to pursue regulatory approval of AEM-28 as treatment for Severe Refractory Hypercholesterolemia and Homozygous Familial Hypercholesterolemia (granted Orphan Drug Designation by FDA in 2012). The initial development plan will extend through Phase 1a and 1b/2a clinical trials and is expected to be completed in the fourth quarter of 2014. The clinical trials will have a safety primary endpoint and an efficacy endpoint targeting reduction of LDL and non-HDL cholesterol.
Regulatory filings have been made by the JV in both Canada and Australia seeking allowance to commence the proposed clinical trials. The proposed clinical trials for AEM-28 are randomized, double-blinded, placebo-controlled studies to evaluate the safety, tolerability, pharmacokinetics and pharmacodynamics of single ascending doses (Phase 1a in healthy patients) and multiple ascending doses (Phase 1b/2a in patients with Refractory Hypercholesterolemia). It is expected that the Phase 1a clinical trial will consist of 36 patients and the Phase 1b/2a will consist of 15 patients. The JV anticipates receiving allowance from regulatory authorities in Australia permitting the JV to proceed with the planned clinical trials. Based on this anticipated allowance, the JV has elected to pursue clinical trials in Australia. The JV will continue to work with Canadian regulatory authorities, and may, conditions permitting, conduct future clinical trials in Canada, the USA and other regulatory jurisdictions. The JV may also fund research or studies to investigate Apo E mimetic molecules, including AEM-28 and analogs, for treatment of acute coronary syndrome. For a description of the JV, please refer to Note 10 to our financial statements included in this Form 10-K.
The Company intends to limit its internal operations in a virtual operating model while continuing our development partnering efforts for AZX100, investigating pre-clinical, clinical or other strategic options for AZX100, monitoring and participating in the management of LipimetiX Development LLC’s AEM-28 and analogs development activities, and maintaining the required level of corporate governance and reporting required to comply with Securities and Exchange Commission rules and regulations.
Description of Prior and Current Peptide Drug Candidates.
Apo E Mimetic Peptide Molecule – AEM-28
Apolipoprotein E is a 299 amino acid protein that plays an important role in lipoprotein metabolism. AEM-28 is a 28 amino acid mimetic of Apo E that contains a domain that anchors into a lipoprotein surface while also providing the Apo E receptor binding domain, which allows clearance through the heparan sulfate proteoglycan (HSPG) receptors (Syndecan-1)in the liver. AEM-28, as an Apo E mimetic, has the potential to restore the ability of these atherogenic lipoproteins to be cleared from the plasma, completing the reverse cholesterol transport pathway, and thereby reducing cardiovascular risk. This is an important mechanism of action for AEM-28. For patients that lack LDL receptors (Homozygous Familial Hypercholesterolemia, HoFH), or have Severe Refractory Hypercholesterolemia, AEM-28 may provide a therapeutic solution. Our joint venture has an Exclusive License Agreement with the University of Alabama Birmingham Research Foundation for AEM-28 and certain of its analogs. The JV has performed pre-clinical studies with AEM-28.
AZX100
AZX100 is a novel synthetic 24-amino acid peptide and is believed to have smooth muscle relaxation and anti-fibrotic properties. AZX100 has been evaluated for medically and commercially significant applications, such as prevention of hypertrophic and keloid scarring and treatment of pulmonary and peridural fibrosis. We filed an IND for a dermal scarring indication in 2007 and completed Phase 1a and Phase 1b safety clinical trials in dermal scarring in 2008. We commenced Phase 2 clinical trials in dermal scarring following shoulder surgery and keloid scar revision in the first quarter of 2009. During 2010 we completed and reported results for our clinical trials in keloid scar revision and substantially completed our Phase 2 clinical trial in dermal scarring following shoulder surgery. We completed and reported our Phase 2 clinical trial in dermal scarring following shoulder surgery in 2011. We have an exclusive worldwide license to AZX100. In the first quarter of 2012 we ceased clinical development of AZX100, our principal drug candidate, in dermal scarring. Certain manufacturing and regulatory projects related to AZX100 that are either required from a statutory perspective or for reporting purposes will continue to their completion. We are also performing limited pre-clinical studies in fibrosis. We are currently focused on development partnering or licensing opportunities for AZX100 in dermal scarring, pulmonary fibrosis and peridural fibrosis.
Company History
Prior to November 26, 2003, we developed, manufactured and marketed proprietary, technologically advanced orthopedic products designed to promote the healing of musculoskeletal bone and tissue, with particular emphasis on fracture healing and spine repair. Our product lines included bone growth stimulation and fracture fixation devices are referred to as our “Bone Device Business.”
On November 26, 2003, we sold our Bone Device Business. Our principal business remains focused on under-served medical conditions, although through biopharmaceutical approaches rather than through the use of medical devices.
On August 5, 2004, we purchased substantially all of the assets and intellectual property of Chrysalis Biotechnology, Inc. (“CBI”), including its exclusive worldwide license for Chrysalin for all medical indications. We became a development stage entity commensurate with the acquisition. Subsequently, our efforts were focused on research and development of Chrysalin with the goal of commercializing our product candidates. (In March 2012, we returned all rights to the Chrysalin intellectual property and no longer have any interest in, or rights to, Chrysalin.
On February 27, 2006, we purchased certain assets and assumed certain liabilities of AzERx, Inc. Under the terms of the transaction, we acquired an exclusive license for the core intellectual property relating to AZX100.
On August 3, 2012, we entered into a joint venture, LipimetiX Development, LLC, (see Note 10 to these financial statements) to develop Apo E mimetic peptide molecule AEM-28 and its analogs.
Our development activities represent a single operating segment as they shared the same product development path and utilized the same Company resources. As a result, we determined that it is appropriate to reflect our operations as one reportable segment. Through December 31, 2013, we have incurred $154 million in net losses as a development stage company.
OrthoLogic Corp. commenced doing business under the trade name of Capstone Therapeutics on October 1, 2008, and we formally changed our name from OrthoLogic Corp. to Capstone Therapeutics Corp. on May 21, 2010.
In this Annual Report, references to “we”, “our”, the “Company”, “Capstone Therapeutics”, “Capstone”, and “OrthoLogic” refer to Capstone Therapeutics Corp. References to our Bone Device Business refer to our former business line of bone growth stimulation and fracture fixation devices, including the OL1000 product line, SpinaLogic®, OrthoFrame® and OrthoFrame/Mayo. References to our joint venture refer to LipimetiX Development, LLC.
Basis of presentation.
The accompanying financials statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.
Use of estimates.
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires that management make a number of assumptions and estimates that affect the reported amounts of assets, liabilities, and expenses in our financial statements and accompanying notes. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on management’s assumptions regarding current events and actions that may impact the Company in the future, actual results may differ from these estimates and assumptions.
Our Development Stage significant estimates include the Chrysalis Biotechnology, Inc. and AzERx purchase price allocations, income taxes, contingencies, accounting for stock-based compensation and accounting for the formation and consolidation of LipimetiX Development, LLC.
Fair value measurements.
We determine the fair value measurements of our applicable assets and liabilities based on a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted market prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.
Cash and cash equivalents.
Cash and cash equivalents consist of cash on hand and cash deposited with financial institutions, including money market accounts, and investments purchased with an original or remaining maturity of three months or less when acquired. Cash and cash equivalents include $2.0 million held in, and reserved for use by, LipimetiX Development, LLC.
Furniture and equipment
. Furniture and equipment are stated at cost. Depreciation is calculated on a straight-line basis over the estimated useful lives of the various assets, which range from three to seven years. Leasehold improvements are amortized over the life of the asset or the period of the respective lease using the straight-line method, whichever is the shortest.
Research and development expenses
. Research and development represents both costs incurred internally for research and development activities, as well as costs incurred to fund the research activities with which we have contracted and certain payments regarding the clinical testing of our product candidates. Research and development costs are generally expensed when incurred. Nonrefundable advance payments are capitalized and recorded as expense when the respective product or service is delivered.
Accrued Clinical.
Accrued clinical represents the liability recorded on a per subject basis of the costs incurred for our human clinical trials. Total patient costs are based on the specified clinical trial protocol, recognized over the period of time service is provided to the subject. We had no active clinical trials at December 31, 2013.
Stock-based compensation
. We account for share-based compensation arrangements in accordance with ASC Topic 718 “Compensation - Stock Compensation” (“ASC 718”). ASC 718 requires all share-based payments, including grants of stock options, restricted stock units and employee stock purchase rights, to be recognized in our financial statements based on their respective grant date fair values. Under this standard, the fair value of each grant is estimated on the date of grant using a valuation model that meets certain requirements. We use the Black-Scholes option pricing model to estimate the fair value of our share-based payment awards. The determination of the fair value of share-based payment awards utilizing the Black-Scholes model was affected by our stock price and a number of assumptions, including expected volatility, expected term, risk-free interest rate and an expected dividend yield. We used our historical volatility as adjusted for future expectations. The expected life of the stock options was based on historical data and future expectations of when the awards will be exercised. The risk-free interest rate assumption was based on observed interest rates with durations consistent with the expected terms of our stock options. The dividend yield assumption was based on our history and expectation of dividend payouts. The fair value of our restricted stock units was based on the fair market value of our common stock on the date of grant. We evaluated the assumptions used to value our share-based payment awards on a quarterly basis. For non-employees, expense was recognized as the service was provided and when performance was complete in accordance with ASC Topic 505 – 550 “Equity-Based Payments to Non-Employees.”
Effective January 1, 2006, stock-based compensation expense recognized in our financial statements has been based on awards that were ultimately expected to vest. We recognized compensation cost for an award with only service conditions that had a graded vesting schedule on a straight line basis over the requisite service period as if the award was, in-substance, a multiple award. However, the amount of compensation cost recognized at any date was at least equal to the portion of grant-date fair value of the award that was vested at that date. The amount of stock-based compensation expense is reduced for estimated forfeitures. Forfeitures were required to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differed from those estimates.
ASC 718 requires the benefits associated with tax deductions that are realized in excess of recognized compensation cost to be reported as a financing cash flow rather than as an operating cash flow as previously required. Subsequent to the adoption of ASC 718 on January 1, 2006, we have not recorded any excess tax benefit generated from option exercises, due to our net operating loss carryforwards, which cause such excess benefits to be unrealized.
The Company recorded stock-based compensation of $34,000 in 2013 and $107,000 in 2012, which increased the net loss. Loss per weighted average basic and diluted shares outstanding increased by less than $0.01 per share in 2013 and $0.01 per share in 2012 due to stock-based compensation.
Loss per common share
.
In determining loss per common share for a period, we use weighted average shares outstanding during the period for primary shares and we utilize the treasury stock method to calculate the weighted average shares outstanding during the period for diluted shares. Utilizing the treasury stock method for the year ended December 31, 2013. 765,000 shares were determined to be outstanding and excluded from the calculation of diluted loss per share because they were anti-dilutive. At December 31, 2013, options and warrants to purchase 3,389,935 shares of our common stock, at exercise prices ranging from $0.16 to $7.83 per share, were outstanding.
Income Taxes.
Under ASC Topic 740 “Income Taxes” (“ASC 740”), income taxes are recorded based on current year amounts payable or refundable, as well as the consequences of events that give rise to deferred tax assets and liabilities. We base our estimate of current and deferred taxes on the tax laws and rates that are estimated to be in effect in the periods in which deferred tax liabilities or assets are expected to be settled or realized. Pursuant to ASC 740, we have determined that the deferred tax assets at December 31, 2013 and 2012 require a full valuation allowance given that it is not “more-likely-than-not” that the assets will be recovered.
We adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109” (now ASC 740) on January 1, 2007. ASC 740 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
Based on our evaluation upon the adoption of ASC 740 on January 1, 2007 and in accordance with ASC 740, the Company recognized a cumulative-effect adjustment of $363,000 at January 1, 2007, increasing its liability for unrecognized tax benefits, interest, and penalties and increasing accumulated deficit. Subsequent to adoption of ASC 740, each period we evaluate the tax years that remain open for assessment for federal and state tax purposes. At December 31, 2013, tax years 2009 through 2013 remain open.
During 2008, the 2003 statute of limitations expired in various states, other than Arizona. As a result, the December 31, 2007 ASC 740 reserve of $363,000 was no longer required as of December 31, 2008. This has been reflected as an income tax benefit in the Statements of Operations in 2008. In 2009, the remaining tax issues were settled with the State of Arizona and the remaining unrecognized tax benefit of $638,000 was recognized.
We may, from time-to-time, be assessed interest or penalties by major tax jurisdictions, although any such assessments historically have been minimal and immaterial to our financial results. The Company recognizes accrued interest and penalties, if applicable, related to unrecognized tax benefits in income tax expense. During the years ended December 31, 2013 and 2012, the Company did not recognize a material amount in interest and penalties.
Put rights.
The put rights were considered embedded equity derivatives within our common stock under derivatives accounting standards. The fair value of the put rights has been bifurcated from the value of our potentially redeemable equity and we recognized subsequent changes in the fair value of the put rights within the statement of operations. The put rights expired on June 30, 2011.
Potentially redeemable equity.
The potential obligation at December 31, 2010, created by the put rights, to purchase shares of its common stock, assuming redemption of 100% of the Company’s outstanding shares of common stock at December 31, 2010, and using the estimated put price determined as defined in our Certificate of Incorporation, was reclassified at December 31, 2010 to potentially redeemable equity. This amount was adjusted each reporting period to reflect changes in the put right redemption obligation. The put rights expired on June 30, 2011, ending the potential redemption obligation.
Patents.
Patent license rights were recorded at $1,045,000, their estimated fair value on the date they were acquired, August 3, 2012. Their cost will be amortized on a straight-line basis over the key patent life of eighty months. At December 31, 2013, accumulated amortization totaled $222,000. If a change in conditions occurs, that indicates a material change in the future utility of the patent license rights, an evaluation will be performed to determine if impairment of the asset has occurred, and if so, the impairment will be recorded.
Joint Venture Accounting
.
The Company entered into a joint venture in which is has contributed $6,000,000, and the noncontrolling interests have contributed certain patent license rights. Neither the Company nor the noncontrolling interests have an obligation to contribute additional funds to the joint venture or to assume any joint venture liabilities or to provide a guarantee of either joint venture performance or any joint venture liability. The financial position and results of operations of the joint venture are presented on a consolidated basis with the financial position and results of operations of the Company. Intercompany transactions have been eliminated. Joint venture losses were recorded on the basis of common ownership equity interests (60% Company / 40% noncontrolling interests) until common ownership equity was reduced to $0. Subsequent joint venture losses are being allocated to the preferred ownership equity (100% Company). Subsequent to March 31, 2013, all joint venture losses are being allocated to the Company.
Legal and Other Contingencies
As discussed in Note 11 “Contingency – Legal Proceedings” the Company is subject to legal proceedings and claims that arise in the course of business. The Company records a liability when it is probable that a loss has been incurred and the amount is reasonably estimable. There is significant judgment required in both the probability determination and as to whether an exposure can be reasonably estimated. In the opinion of management, there was not at least a reasonable possibility the Company may have incurred a material loss with respect to loss contingencies. However, the outcome of legal proceedings and claims brought against the Company are subject to significant uncertainty. Therefore, if the
qui tam
legal matter is resolved against the Company in excess of management’s expectations, the Company’s financial statements could be materially adversely affected.
Legal costs related to contingencies are expensed as incurred and were not material in either 2013 or 2012.
At December 31, 2013 and December 31, 2012, investments were classified as held-to-maturity securities, as we do not intend to sell the investments and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost basis, which may be maturity. Such classification requires these securities to be reported at amortized cost unless they are deemed to be permanently or other-than-temporarily impaired in value.
As of December 31, 2013 and 2012, all investments were in investments with maturities less than 90 days and are included in cash and cash equivalents.
3.
|
FURNITURE AND EQUIPMENT
|
The components of furniture and equipment at December 31 are as follows (in thousands):
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Machinery and equipment
|
|
$
|
221
|
|
|
$
|
601
|
|
Furniture and fixtures
|
|
|
34
|
|
|
|
57
|
|
Leasehold improvements
|
|
|
-
|
|
|
|
36
|
|
|
|
|
255
|
|
|
|
694
|
|
Less accumulated depreciation and amortization
|
|
|
(252
|
)
|
|
|
(671
|
)
|
Total
|
|
$
|
3
|
|
|
$
|
23
|
|
Depreciation and leasehold improvement amortization expenses for the years ended December 31, 2013 and 2012, and for the period of August 5, 2004 through December 31, 2013 were $11,000, $47,000 and $1,374,000, respectively.
The components of deferred income taxes at December 31 are as follows (in thousands):
|
|
December 31,
|
|
|
|
2013
|
|
|
|
|
Accruals and reserves
|
|
$
|
1
|
|
|
$
|
1
|
|
Valuation allowance
|
|
|
(1
|
)
|
|
|
(1
|
)
|
Total current
|
|
|
-
|
|
|
|
-
|
|
NOL, AMT and general business
credit carryforwards
|
|
|
56,050
|
|
|
|
55,039
|
|
Difference in basis of fixed assets
|
|
|
3
|
|
|
|
114
|
|
Accruals and reserves
|
|
|
274
|
|
|
|
522
|
|
Difference in basis of intangibles
|
|
|
13
|
|
|
|
13
|
|
Valuation allowance
|
|
|
(56,340
|
)
|
|
|
(55,688
|
)
|
Total non current
|
|
|
-
|
|
|
|
-
|
|
Total deferred income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
ASC 740 requires that a valuation allowance be established when it is more-likely-than-not that all or a portion of a deferred tax asset will not be realized. Changes in valuation allowances from period-to-period are included in the tax provision in the period of change. In determining whether a valuation allowance is required, we take into account all evidence with regard to the utilization of a deferred tax asset including past earnings history, expected future earnings, the character and jurisdiction of such earnings, unsettled circumstances that, if unfavorably resolved, would adversely affect utilization of a deferred tax asset, carryback and carryforward periods, and tax strategies that could potentially enhance the likelihood of realization of a deferred tax asset. Management has evaluated the available evidence about future taxable income and other possible sources of realization of deferred tax assets and has established a valuation allowance of approximately $56 million at December 31, 2013 and 2012. The valuation allowance at both 2013 and 2012 includes approximately $2.7 million for net operating loss carry forwards that relate to stock compensation expense for income tax reporting purposes that upon realization, would be recorded as additional paid-in capital. The valuation allowance reduces deferred tax assets to an amount that management believes will more likely than not be realized.
The components of the income tax provision (benefit) are as follows (in thousands):
|
|
|
|
|
|
|
|
As a
|
|
|
|
|
|
|
|
|
|
Development
|
|
|
|
|
|
|
|
|
|
Stage Company
|
|
|
|
Years Ended December 31
|
|
|
August 5, 2004 -
|
|
|
|
2013
|
|
|
2012
|
|
|
December 31, 2013
|
|
Provision (benefit) for income taxes
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
(21
|
)
|
|
$
|
-
|
|
|
$
|
(2,482
|
)
|
Deferred
|
|
|
-
|
|
|
|
-
|
|
|
|
1,106
|
|
Income tax provision (benefit)
|
|
$
|
(21
|
)
|
|
$
|
-
|
|
|
$
|
(1,376
|
)
|
The 2013 income tax benefit results from Arizona state income tax legislation passed in 2010 that provides for the refund of seventy five percent of the 2012 Arizona state research and development tax credit for entities that would otherwise not be able to utilize their 2012 Arizona research and development tax credits to reduce 2012 Arizona state income taxes currently payable.
The results of the Company’s Phase 3 Chrysalin fracture repair human clinical trial, which were received in 2006, resulted in a change in our planned clinical pathway and timeline for our Chrysalin fracture repair indication. This change, when factored with our current significant net operating loss carryforwards and current period net loss, resulted in a revision of our estimate of the need for a valuation allowance for the previously recorded deferred tax asset related to an AMT credit carryover from tax year 2003. Due to the uncertainty that the deferred tax asset would be realized, we recorded a valuation allowance for the full amount of the deferred tax asset ($1,106,000) at December 31, 2006. Federal tax legislation enacted in the fourth quarter of 2009, allowed for the carryback of net operating losses incurred in 2008 to the 2003 tax year and eliminated for 2003, the AMT limit on use of more than 90% of a net operating loss to offset currently taxable income. This change generated a refund of $1,009,000 for the AMT tax paid for tax year 2003 and a reversal of the previously established valuation allowance for the 2003 AMT credit and was recorded in income taxes at December 31, 2009.
We have accumulated approximately $143 million in federal and $43 million in state net operating loss carryforwards (“NOLs”) and approximately $6 million of research and development and alternative minimum tax credit carryforwards. The federal NOLs expire between 2023 and 2033. The Arizona state NOL’s expire between 2014 and 2033. The availability of these NOL’s to offset future taxable income could be limited in the event of a change in ownership, as defined in Section 382 of the Internal Revenue Code.
The AzERx and CBI acquisitions were treated as tax free reorganizations under Internal Revenue Code Section 368 and therefore resulted in a carryover basis and no income tax benefit for the related acquisition costs, including in-process research and development costs.
A reconciliation of the difference between the provision (benefit) for income taxes and income taxes at the statutory U.S. federal income tax rate is as follows for the years ended December 31, 2013 and 2012 and for the period of August 5, 2004 through December 31, 2013 (in thousands):
|
|
|
|
|
|
|
|
As a
|
|
|
|
|
|
|
|
|
|
Development
|
|
|
|
|
|
|
|
|
|
Stage Company
|
|
|
|
Years Ended December 31
|
|
|
August 5, 2004 -
|
|
|
|
2013
|
|
|
2012
|
|
|
December 31, 2013
|
|
Income tax provision (benefit) at statutory rate
|
|
$
|
(1,333
|
)
|
|
$
|
(1,217
|
)
|
|
$
|
(53,531
|
)
|
State income taxes
|
|
|
(138
|
)
|
|
|
(165
|
)
|
|
|
(6,096
|
)
|
Purchased in-process
|
|
|
|
|
|
|
|
|
|
|
|
|
research and development
|
|
|
-
|
|
|
|
-
|
|
|
|
12,533
|
|
Research credits
|
|
|
(74
|
)
|
|
|
9
|
|
|
|
(6,013
|
)
|
Change in uncertain tax position reserve
|
|
|
-
|
|
|
|
-
|
|
|
|
(363
|
)
|
Expiration of state NOL
|
|
|
548
|
|
|
|
450
|
|
|
|
4,029
|
|
Other
|
|
|
324
|
|
|
|
472
|
|
|
|
2,345
|
|
Change in valuation allowance
|
|
|
652
|
|
|
|
451
|
|
|
|
45,720
|
|
Net provision (benefit)
|
|
$
|
(21
|
)
|
|
$
|
-
|
|
|
$
|
(1,376
|
)
|
The number of common shares reserved for issuance under the OrthoLogic 1987 option plan was 4,160,000 shares. This plan expired during October 1997. In May 1997, our stockholders adopted a new stock option plan (the “1997 Plan”). The 1997 Plan reserved for issuance 1,040,000 shares of Common Stock. Subsequent to its original adoption, the Board of Directors and stockholders approved amendments to the 1997 Plan that increased the number of shares of common stock reserved for issuance to 4,190,000. The 1997 Plan expired in March 2007. In May 2006, our stockholders approved the 2005 Equity Incentive Plan (the “2005 Plan”) and reserved 2,000,000 shares of our common stock for issuance. In May 2009, our stockholders approved the reservation of an additional 1,250,000 shares of common stock for issuance under the 2005 Plan, which increased the total shares available for grant under the 2005 Plan to 3,250,000 shares. At December 31, 2013, 48,519 shares remained available to grant under the 2005 Plan (the 1997 plan and the 2005 plan are collectively referred to as “The Plans”). Two types of options may be granted under the Plans: options intended to qualify as incentive stock options under Section 422 of the Internal Revenue Code (the “Code”) and other options not specifically authorized or qualified for favorable income tax treatment by the Code. All eligible employees may receive more than one type of option. Any director or consultant who is not an employee of the Company shall be eligible to receive only nonqualified stock options under the Plans.
The Plans provide that in the event of a takeover or merger of the Company in which 100% of the equity of the Company is purchased or a sale of all or substantially all of the Company’s assets, 75% of all unvested employee options will vest immediately and the remaining 25% will vest over the following twelve month period. If an employee or holder of stock options is terminated as a result of or subsequent to the acquisition, 100% of that individual’s stock option will vest immediately upon employment termination.
We used the Black-Scholes model with the following assumptions to determine the total fair value of $34,000 and $59,000 for options to purchase 255,000 and 595,000 shares of our common stock issued during 2013 and 2012, respectively.
|
|
|
2013
|
|
2012
|
|
|
Risk free interest rate
|
|
0.7%
|
|
0.8%
|
|
|
Volatility
|
|
77%
|
|
74%
|
|
|
Expected term from vesting
|
|
4.6 Years
|
|
4.0 Years
|
|
Summary
Non-cash stock compensation cost for the year ended December 31, 2013, totaled $34,000. In the Statement of Operations for the year ended December 31, 2013, non-cash stock compensation expense of $33,000 was recorded as a general and administrative expense and $1,000 was recorded as a research and development expense.
Non-cash stock compensation cost for the year ended December 31, 2012, totaled $107,000. In the Statement of Operations for the year ended December 31, 2012, non-cash stock compensation expense of $98,000 was recorded as general and administrative expense and $9,000 was recorded as research and development expense.
No options were exercised in the years ended December 31, 2013 and 2012.
At December 31, 2013, the remaining unamortized non-cash stock compensation costs totaled approximately $2,000, which will be recognized ratably over the period ending December 31, 2014, with an estimated weighted average period of one year.
A summary of option activity under our stock option plans for the years ended December 31, 2013 and 2012 is as follows:
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2013
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2012
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Weighted
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Weighted
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average
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Weighted
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average
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remaining
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average
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Number of
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exercise
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contractual term
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Number of
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exercise
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Options
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price
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(years)
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Options
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price
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Options outstanding
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at the beginning of the year:
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3,218,264
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$
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1.71
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3,372,501
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$
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2.08
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Granted
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255,000
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$
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0.22
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595,000
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$
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0.17
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Exercised
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-
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$
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-
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-
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Expired / Forfeited
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(247,458
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$
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2.65
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(749,237
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)
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$
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2.16
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Outstanding at end of year
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3,225,806
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$
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1.52
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4.96
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3,218,264
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$
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1.71
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Options exercisable at year-end
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3,115,384
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$
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1.57
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4.77
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3,083,680
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$
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1.78
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Options vested and expected
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to vest at year end
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3,150,504
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$
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1.55
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4.83
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3,123,618
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$
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1.76
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On January 17, 2011, the Board of Directors of the Company granted John M. Holliman 50,000 shares of restricted common stock (fair value on the date of grant of $19,000), which vested January 17, 2012. On January 17, 2012, the Board of Directors was each granted 10,000 shares of unrestricted common stock (total fair value on the date of grant of $18,000). The Company had no unvested common stock share awards as of December 31, 2013 and no common stock awards were made in 2013.
It is the Company’s policy to issue options from stockholder approved incentive plans. However, if the options are issued as an inducement for an individual to join the Company, the Company may issue stock options outside of stockholder approved plans. The options granted to employees under stockholder approved incentive plans have a ten-year term and normally vest over a two to four-year period of service. All stock options are granted with an exercise price equal to the current market value on the date of grant and, accordingly, stock options have no intrinsic value on the date of grant. Based on the closing market price of the Company’s common stock at December 31, 2013 of $0.26, stock options exercisable or expected to vest at December 31, 2013, have intrinsic value of $6,000.
Warrants
At December 31, 2013, the Company has fully vested warrants outstanding to purchase 46,706 shares of the Company’s common stock with an exercise price of $6.39 per share which expire in February 2016, and fully vested warrants outstanding to purchase 117,423 shares of the Company’s common stock with an exercise price of $1.91 per share which expire in July 2016. No warrants were exercised during the years ended December 31, 2013 or 2012.
During 1998 through 2007, we were obligated under a non-cancelable operating lease agreement for a Tempe, Arizona office and research facility. Rent expense for the years ended December 31, 2013 and 2012, and for the period of August 5, 2004 through December 31, 2013 was $82,000, $263,000 and $5,177,000, respectively. We subleased portions of the Tempe facility to other tenants and approximately 45% of the Tempe facility was subleased through December 2007, which offset our lease expense. The Company recorded $2,299,000 of sublease income for the period of August 5, 2004 through December 31, 2007. The Company had no sublease income in the years subsequent to 2007.
On July 19, 2007, the Company entered into a lease, which became effective upon the expiration of its previous lease, for 17,000 square feet of space in the same Tempe, Arizona facility. This lease calls for monthly rental payments of $22,000, plus a proportionate share of building operating expenses and property taxes. The term of this lease is sixty months from March 1, 2008. In January of 2013, this lease was amended to extend the lease to February 28, 2015, with the rentable square feet of space reduced to 2,845 square feet and monthly rental payments of $4,000.
We adopted a 401(k) plan for our employees on July 1, 1993 and terminated the plan on November 30, 2012. There were no 401(k) Company contributions in 2013 or 2012.
8.
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AUTHORIZED PREFERRED STOCK
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We have 2,000,000 shares of authorized preferred stock, the terms of which may be fixed by our Board of Directors. We presently have no outstanding shares of preferred stock. While we have no present plans to issue any additional shares of preferred stock, our Board of Directors has the authority, without stockholder approval, to create and issue one or more series of such preferred stock and to determine the voting, dividend and other rights of holders of such preferred stock. The issuance of any of such series of preferred stock may have an adverse effect on the holders of common stock.
9.
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AUTHORIZATION OF COMPANY BUY-BACK OF COMMON STOCK
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On March 5, 2008, we announced that our Board of Directors approved a stock repurchase program for up to five percent of our then outstanding common shares. The shares could be repurchased from time to time in open market transactions or privately negotiated transactions at our discretion, subject to market conditions and other factors. There were approximately 41.8 million shares of common stock outstanding on March 5, 2008. On May 21, 2010, our Board of Directors canceled the stock repurchase program.
We did not purchase any shares in 2010 prior to cancellation of the program, and we did not purchase any shares in 2009.
During the year ended December 31, 2008, we repurchased and retired 1,131,622 shares of our common stock at a total cost of $1,041,000.
10.
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JOINT VENTURE FOR DEVELOPMENT OF APO E MIMETIC
PEPTIDE MOLECULE AEM-28 AND ANALOGS
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On August 3, 2012, we entered into a Contribution Agreement with LipimetiX LLC to form a joint venture, LipimetiX Development LLC (“JV”), to develop Apo E mimetic molecules, including AEM-28 and analogs. The Company contributed $6 million, which includes $1 million for 600,000 voting common ownership units representing 60% ownership in JV, and $5 million for 5,000,000 non-voting preferred ownership units, which have preferential distribution rights. The Contribution Agreement called for initial funding of approximately $3.3 million and funding of the remaining approximately $2.7 million (held in escrow) upon milestone achievement of IND allowance by the FDA or mutual agreement of both parties. By mutual agreement, on August 23, 2013, $800,000 was released from the escrow account and additional funds will be released in 2014.
LipimetiX LLC contributed to JV all intellectual property rights for Apo E mimetic molecules it owned and assigned its Exclusive License Agreement between the University of Alabama Birmingham Research Foundation (“UABRF”) and LipimetiX LLC, for the UABRF intellectual property related to Apo E mimetic molecules AEM-28 and analogs, in return for 400,000 voting common ownership units representing 40% ownership in JV, and $378,000 in cash (for certain initial patent related costs and legal expenses).
LipimetiX LLC was formed by the principals of Benu BioPharma, Inc. (“Benu”) and UABRF to commercialize UABRF’s intellectual property related to Apo E mimetic molecules, including AEM-28 and analogs. Benu is composed of Dennis I. Goldberg, Ph.D., Phillip M. Friden, Ph.D. and Eric M. Morrel, Ph.D. The Exclusive License Agreement calls for payment of patent filing, maintenance and other related patent fees, as well as a royalty of 3% on Net Sales of Licensed Products during the Term of the Agreement. The Agreement terminates upon the expiration of all Valid Patent Claims within the Licensed Patents, currently estimated to be approximately by 2028. The Agreement also calls for annual maintenance payments of $25,000, various milestone payments of $50,000 to $1,000,000 and minimum royalty payment of $1,000,000 to $5,000,000 per year commencing on January 1 of the first calendar year following the year in which the First Commercial Sale occurs. UABRF will also receive 15% of Non Royalty Income received after August 25, 2014 and a greater percentage if received before that date.
Concurrent with entering into the Contribution Agreement and the First Amendment and Consent to Assignment of Exclusive License Agreement between LipimetiX LLC, UABRF and the Company, the Company and LipimetiX LLC entered into a Limited Liability Company Agreement for JV which establishes a Joint Development Committee (“JDC”) to manage JV development activities. The JDC is composed of three members appointed by LipimetiX LLC and two members appointed by the Company. Non-development JV decisions, including the issuance of new equity, incurrence of debt, entry into strategic transactions, licenses or development agreements, sales of assets and liquidation, will be decided by a majority vote of the common ownership units.
The JV, on August 3, 2012, entered into a Management Agreement with Benu to manage JV development activities for a monthly fee of approximately $63,000 during the twenty-seven month development period, and an Accounting Services Agreement with the Company to manage JV accounting and administrative functions with a current monthly fee of $1,000. The Management Agreement provides for an additional performance measured incentive fee of up to $250,000.
The joint venture formation was as follows ($000’s):
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Patent license rights
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$
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1,045
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Noncontrolling interests
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$
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( 667
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Cash paid at formation
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$
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378
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Patent license rights were recorded at their estimated fair value and will be amortized on a straight-line basis over the key patent life of eighty months.
The financial position and results of operations of the joint venture are presented on a consolidated basis with the financial position and results of operations of the Company. Intercompany transactions have been eliminated. The joint venture agreement requires profits and losses to be allocated on the basis of common ownership equity interests (60% Company / 40% noncontrolling interests). However, for the Company’s consolidated financial statement, joint venture losses were recorded on the basis of common ownership equity interests (60% Company / 40% noncontrolling interests) until common ownership equity was reduced to $0. Subsequent joint venture losses are being allocated to the preferred ownership equity (100% Company). Subsequent to March 31, 2013, all joint venture losses are being allocated to the Company.
The joint venture incurred operating expenses, prior to the elimination of intercompany transactions of $2,664,000 in 2013, of which $2,471,000 is allocated to the Company, and $3,847,000 for the period from August 3, 2013 (inception) to December 31, 2012, of which $3,180,000 is allocated to the Company. The joint venture operating expenses are included in research and development expenses in the consolidated statements of operations.
Neither the Company nor the noncontrolling interests have an obligation to contribute additional funds to the joint venture or to assume any joint venture liabilities or to provide a guarantee of either joint venture performance or any joint venture liability. Losses allocated to the noncontrolling interests represent an additional potential loss for the Company as the noncontrolling interests are not obligated to contribute assets to the joint venture to the extent they have a negative capital account, and depending on the ultimate outcome of the joint venture, the Company could potentially absorb all losses associated with the joint venture. At December 31, 2013, losses totaling $667,000 have been allocated to the noncontrolling interests.
11.
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CONTINGENCY – LEGAL PROCEEDINGS
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In April 2009, we became aware of a
qui tam
complaint that was filed under seal by Jeffrey J. Bierman as Relator/Plaintiff on March 28, 2005 in the United States District Court for the District of Massachusetts against OrthoLogic and other companies that allegedly manufactured bone growth stimulation devices, including Orthofix International N.V., Orthofix, Inc., DJO Incorporated, Reable Therapeutics, Inc., the Blackstone Group, L.P., Biomet, Inc., EBI, L.P., EBI Holdings, Inc., EBI Medical Systems, Inc., Bioelectron, Inc., LBV Acquisition, Inc., and Smith & Nephew, Inc. By order entered on March 24, 2009, the court unsealed the amended complaint. The amended complaint alleges various causes of action under the federal False Claims Act and state and city false claims acts premised on the contention that the defendants improperly promoted the sale, as opposed to the rental, of bone growth stimulation devices. The amended complaint also includes claims against the defendants for, among other things, allegedly misleading physicians and purportedly causing them to file false claims and for allegedly violating the Anti-kickback Act by providing free products to physicians, waiving patients’ insurance co-payments, and providing inducements to independent sales agents to generate business. The Relator/Plaintiff is seeking civil penalties under various state and federal laws, as well as treble damages, which, in the aggregate could exceed the financial resources of the Company.
The United States Government declined to intervene or participate in the case. On September 4, 2009, the Relator/Plaintiff served the amended complaint on the Company. We sold our bone growth stimulation business in November 2003 and have had no further activity in the bone growth stimulation business since that date. We intend, in conjunction with the other defendants, to defend this matter vigorously and believe that at all times our billing practices in our bone growth stimulation business complied with applicable laws. On December 4, 2009, the Company, in conjunction with the other defendants, moved to dismiss the amended complaint with prejudice. In response to that motion, Relator/Plaintiff filed a second amended complaint. On August 17, 2010, the Company, in conjunction with the other defendants, moved to dismiss the second amended complaint with prejudice. That motion was denied by the court on December 8, 2010. On January 28, 2011, we, in conjunction with the other defendants, filed our answer to the second amended complaint. No trial date has been set. Discovery in the case is now open.
Based upon the currently available information, we believe that the ultimate resolution of this matter will not have a material effect on our financial position, liquidity or results of operations. However, because of many questions of law and facts that may arise, the outcome of this litigation is uncertain. If we are unable to successfully defer or otherwise dispose of this litigation, and the Relator/Plaintiff is awarded the damages sought, the litigation would have a material adverse effect on our financial position, liquidity and results of operations and we would not be able to continue our business as it is presently conducted.