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EX-32.1 - EX-32.1 - RADIENT PHARMACEUTICALS Corp | a56178exv32w1.htm |
EX-31.2 - EX-31.2 - RADIENT PHARMACEUTICALS Corp | a56178exv31w2.htm |
EX-32.2 - EX-32.2 - RADIENT PHARMACEUTICALS Corp | a56178exv32w2.htm |
EX-31.1 - EX-31.1 - RADIENT PHARMACEUTICALS Corp | a56178exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2010
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 |
Commission file number 001-16695
Radient Pharmaceuticals Corporation
(Exact name of registrant as specified in its charter)
Delaware | 33-0413161 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
2492 Walnut Avenue, Suite 100 | ||
Tustin, California | 92780-7039 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code: (714) 505-4460
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a larger accelerated filer, an accelerated
filer or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ | |||
(Do not check if 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 o No þ
As of May 15, 2010, there were 29,639,167 shares of the registrants common stock outstanding.
RADIENT PHARMACEUTICALS CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2010
INDEX
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2010
INDEX
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Table of Contents
PART 1 FINANCIAL INFORMATION
ITEM 1. | FINANCIAL STATEMENTS |
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
(Unaudited) | (Audited) | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 43,678 | $ | 12,145 | ||||
Accounts receivable, net |
1,550 | | ||||||
Inventories |
62,780 | 79,255 | ||||||
Prepaid expenses and other current assets |
38,717 | 57,778 | ||||||
Prepaid consulting |
364,667 | 358,667 | ||||||
Total current assets |
511,392 | 507,845 | ||||||
Property and equipment, net |
75,135 | 83,547 | ||||||
Intangible assets, net |
1,133,333 | 1,158,333 | ||||||
Receivable from JPI, net of allowance |
2,675,000 | 2,675,000 | ||||||
Investment in JPI |
20,500,000 | 20,500,000 | ||||||
Debt issuance costs |
1,382,002 | 1,288,910 | ||||||
Other assets |
92,040 | 105,451 | ||||||
Total assets |
$ | 26,368,902 | $ | 26,319,086 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable and accrued expenses |
$ | 1,829,430 | $ | 1,542,974 | ||||
Accrued salaries and wages |
1,043,774 | 738,331 | ||||||
Accrued interest expense |
632,969 | 432,337 | ||||||
Derivative liabilities |
703,139 | 354,758 | ||||||
Deferred revenue |
103,128 | 103,128 | ||||||
Convertible
notes, net of discount |
645,677 | 240,482 | ||||||
Current
portions of notes payable, net of debt discount |
2,101,109 | 1,316,667 | ||||||
Total current liabilities |
7,059,226 | 4,728,677 | ||||||
Other long-term liabilities |
32,164 | 295,830 | ||||||
Notes payable, net of current portion and debt discount |
| 601,819 | ||||||
Total liabilities |
7,091,390 | 5,626,326 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity: |
||||||||
Preferred stock, $0.001 par value; 25,000,000 shares
authorized; none issued and outstanding |
| | ||||||
Common stock, $0.001 par value; 100,000,000 shares
authorized; 25,439,261 and 22,682,116 shares issued at
March 31, 2010 and December 31, 2009, respectively;
25,297,583 and 22,265,441 shares outstanding at March
31, 2010 and December 31, 2009, respectively |
25,297 | 22,265 | ||||||
Additional paid-in capital |
74,288,010 | 73,109,048 | ||||||
Accumulated deficit |
(55,035,795 | ) | (52,438,553 | ) | ||||
Total stockholders equity |
19,277,512 | 20,692,760 | ||||||
Total liabilities and stockholders equity |
$ | 26,368,902 | $ | 26,319,086 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
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Table of Contents
Radient Pharmaceuticals Corporation
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(Unaudited)
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
Net revenues |
$ | 36,842 | $ | 2,711,737 | ||||
Cost of sales |
21,935 | 1,585,573 | ||||||
Gross profit |
14,907 | 1,126,164 | ||||||
Operating expenses: |
||||||||
Research and development |
51,036 | 92,684 | ||||||
Selling, general and administrative |
1,355,182 | 2,590,769 | ||||||
1,406,218 | 2,683,453 | |||||||
Loss from operations |
(1,391,311 | ) | (1,557,289 | ) | ||||
Other expense: |
||||||||
Interest expense |
(1,162,674 | ) | (234,217 | ) | ||||
Other expense, net |
(43,257 | ) | (36,109 | ) | ||||
Total other expense, net |
(1,205,931 | ) | (270,326 | ) | ||||
Loss before provision for income taxes and
discontinued operations |
(2,597,242 | ) | (1,827,615 | ) | ||||
Provision for income taxes |
| 110,502 | ||||||
Loss from continuing operations |
(2,597,242 | ) | (1,938,117 | ) | ||||
Income from discontinued operations, net |
| 247,026 | ||||||
Net loss |
(2,597,242 | ) | (1,691,091 | ) | ||||
Other comprehensive income: |
||||||||
Foreign currency translation gain |
| 42,431 | ||||||
Comprehensive loss |
(2,597,242 | ) | (1,648,660 | ) | ||||
Basic and diluted income (loss) per common share: |
||||||||
Loss from continuing operations |
$ | (0.11 | ) | $ | (0.12 | ) | ||
Income from discontinued operations |
$ | | $ | 0.01 | ||||
Net loss |
$ | (0.11 | ) | $ | (0.11 | ) | ||
Weighted average common shares outstanding
basic and diluted |
23,887,666 | 15,851,815 | ||||||
See accompanying notes to unaudited condensed consolidated financial statements.
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Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (2,597,242 | ) | $ | (1,691,091 | ) | ||
Less: income from discontinued operations |
| 247,026 | ||||||
(2,597,242 | ) | (1,938,117 | ) | |||||
Adjustments to reconcile net loss before discontinued operations to net cash
provided by (used in) operating activities: |
||||||||
Depreciation and amortization |
33,412 | 352,441 | ||||||
Amortization of debt discount and accretion of debt issuance costs |
870,077 | 69,965 | ||||||
Share-based
compensation related to options granted to employees and directors for services |
173,758 | 157,155 | ||||||
Share-based
compensation related to common stock, warrants and options expensed for services |
342,311 | 105,925 | ||||||
Fair value adjustment to warrants accounted for as liabilities |
| 35,558 | ||||||
Provision for bad debts |
| 202,817 | ||||||
Change in fair value of derivative |
42,994 | | ||||||
Penalties due to late payment of debt |
50,000 | | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(1,550 | ) | 3,307,879 | |||||
Inventories |
16,475 | (567,218 | ) | |||||
Prepaid expenses and other assets |
26,472 | (831,172 | ) | |||||
Accounts payable, accrued expenses and accrued salaries and wages |
531,826 | 269,767 | ||||||
Income taxes payable |
| (381,648 | ) | |||||
Deferred revenue |
| (43,817 | ) | |||||
Net cash provided by (used in) operating activities of continuing operations |
(511,467 | ) | 739,535 | |||||
Net cash provided by operating activities of discontinued operations |
| 101,457 | ||||||
Net cash provided by (used in) operating activities |
(511,467 | ) | 840,992 | |||||
Cash flows from investing activities: |
||||||||
Purchase of property and equipment |
| (407,156 | ) | |||||
Net cash used in investing activities of continuing operations |
| (407,156 | ) | |||||
Net cash used in investing activities |
| (407,156 | ) | |||||
Cash flows from financing activities: |
||||||||
Proceeds from issuance of Senior Notes, net of issuance costs of $113,400 |
| 566,600 | ||||||
Proceeds
from issuance of convertible debt, net of original issue discount of
$385,000 and issuance costs of $112,000 |
403,000 | | ||||||
Proceeds from the exercise of warrants |
140,000 | | ||||||
Net cash provided by financing activities |
543,000 | 566,600 | ||||||
Effect of exchange rates on cash and cash equivalents |
| 2,510 | ||||||
Net change in cash and cash equivalents |
31,533 | 1,002,946 | ||||||
Cash and cash equivalents, beginning of period |
12,145 | 2,287,283 | ||||||
Cash and cash equivalents, end of period |
$ | 43,678 | $ | 3,290,229 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
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Radient Pharmaceuticals Corporation
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Unaudited)
For the Three Months Ended March 31, 2010 and 2009
NOTE 1 MANAGEMENTS REPRESENTATION
The accompanying condensed consolidated financial statements of Radient Pharmaceuticals
Corporation (the Company, Radient, We, or Our), (formerly AMDL, Inc.), have been prepared
in accordance with accounting principles generally accepted in the United States, or GAAP. In
the opinion of the Companys management, the unaudited condensed consolidated financial statements
have been prepared on the same basis as the audited consolidated financial statements in the Annual
Report on Form 10-K/A for the year ended December 31, 2009 and include all adjustments necessary
for the fair presentation of the Companys statement of financial position as of March 31, 2010,
and its results of operations and cash flows for the three months ended March 31, 2010 and 2009.
The condensed consolidated balance sheet as of December 31, 2009 has been derived from the
December 31, 2009 audited financial statements. The interim financial information contained in this
quarterly report is not necessarily indicative of the results to be expected for any other interim
period or for the entire year.
It is suggested that these condensed consolidated financial statements be read in conjunction
with the audited consolidated financial statements and notes thereto for the year ended December
31, 2009 included in the Companys Annual Report on Form 10-K/A. The report of the Companys
independent registered public accounting firm on the consolidated financial statements included in
Form 10-K/A contains a qualification regarding the substantial doubt about the Companys ability to
continue as a going concern.
The Company has evaluated subsequent events through the filing date of this Form 10-Q, and
determined that no subsequent events have occurred that would require recognition in the condensed
consolidated financial statements or disclosure in the notes thereto, other than as disclosed in
the accompanying notes.
NOTE 2 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
On September 25, 2009, we changed our name
from AMDL, Inc. to Radient Pharmaceuticals Corporation. We believe Radient Pharmaceuticals as a brand name has considerable market
appeal and reflects our new corporate direction and branding statements.
Until recently, we were focused on the
production and distribution of pharmaceutical products through our subsidiaries located in the Peoples Republic of China. We have
recently refocused our business on the development, manufacture and marketing of advanced, pioneering medical diagnostic products,
including our Onko-Sure a proprietary In-Vitro Diagnostic (IVD) Cancer Test. During the third and fourth quarter of 2009, we
repositioned various business segments in order to monetize the value of these assets through either new partnerships, separate
IPOs or that could be positioned to be sold. These special assets include: (i) our 98% ownership in China-based pharmaceuticals business,
Jade Pharmaceuticals Inc. (JPI); (ii) our 100% Ownership of a proprietary cancer vaccine therapy technology: Combined Immunogene Therapy
(CIT); and (iii) 100% ownership of the Elleuxe brand of advanced skin care produces with proprietary formulations that include human
placenta extract ingredients sourced from our deconsolidated chinese
subsidiarys operations of JPI. We currently employ approximately 7 people, all located in
California at our corporate headquarters.
We are now actively engaged in the research,
development, manufacturing, sale and marketing of our Onko-Sure a proprietary IVD Cancer Test in the United States, Canada, China, Chile,
Europe, India, Korea, Taiwan, Vietnam and other markets throughout the world. We manufacture and distribute our proprietary ONKO-SURE
cancer test kits at our licensed manufacturing facility located at 2492 Walnut Avenue, Suite 100, in Tustin, California. We are a
United States Food and Drug Administration (USFDA), GMP approved manufacturing facility. We maintain a current Device Manufacturing
License issued by the State of California, Department of Health Services, Food and Drug Branch.
Deconsolidation
Prior to September 2009, the Company manufactured
and distributed generic and homeopathic pharmaceutical products and supplements as well as cosmetic products in China through a wholly
owned subsidiary, JPI and JPIs two wholly owned subsidiaries, Jiangxi Jiezhong Bio-Chemical
Pharmacy Company Limited (JJB) and Yangbian Yiqiao Bio-Chemical Pharmacy Company Limited (YYB).
Due to several factors, including deterioration
in its relationship with local management of JPI, the Company relinquished control over JPI. Effective September 29, 2009, the Company
agreed to exchange its shares of JPI for 28,000,000 non-voting shares of preferred stock, which represents 100% of the outstanding
preferred shares, relinquished all rights to past and future profits, surrendered its management positions and agreed to a non-authoritative
minority role on its board of directors. For accounting purposes, the Company converted its interest in JPI to that of an investment to
be accounted for under the cost method and deconsolidated JPI as of September 29, 2009. The Company recorded a loss on deconsolidation
of $1,953,516 in connection with the transaction.
As a result of the deconsolidation and
conversion of our interest in JPI to an investment, the Companys results of operations for the three months ended March 31, 2009
include the operations of JPI. The net revenues, gross profit, operating expenses and net income of JPI were approximately $2,688,677,
$1,111,169, $546,385 and $509,066, respectively. JPIs subsidiary YYB was sold by JPI on June 26, 2009. Accordingly, the results of YYB
are presented as discontinued operations in our results of operations for the three months ended March 31, 2009. The Companys results
of operations for the three months ended March 31, 2010 do not include any participation in the results of JPI.
The significant terms of the deconsolidation of the Companys operations in China are
described in the notes to the Companys Annual Report on Form 10-K/A for the year ended December
31, 2009.
Going Concern
The condensed consolidated financial 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. The Company incurred losses from continuing
operations of $2,597,242 and $1,938,117 for the three months ended March 31, 2010 and 2009,
respectively, and had an accumulated deficit of $55,035,795 at March 31, 2010. In addition, the
Company used cash from operating activities of continuing operations
of $511,467 and had a working capital deficit of approximately $10.2
million, based on the face amount of the current portion of debt.
These factors raise substantial doubt about the Companys
ability to continue as a going concern.
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The
Company raised net proceeds of approximately $403,000 in a convertible note and warrant
purchase agreement, during the three months ended March 31,
2010, and raised net proceeds of
approximately $6.0 million in a series of three similar convertible note and warrant purchase
agreements in April 2010, (see Note 13). Additionally, in 2010, the Company entered into a 5-year
collaboration agreement with a third party to commercialize the Companys CIT technology in India,
resulting in a potential revenue sharing arrangement. We are actively securing additional
distribution agreements that include potential revenue sharing arrangements in 2010.
The
Companys monthly cash requirement of $300,000 does not include any extraordinary items or
expenditures, including payments to the Mayo Clinic on clinical trials for the Companys
ONKO-SUREtm kit or expenditures related to further development of the CIT
technology, as no significant expenditures are anticipated other than recurring legal fees incurred
in furtherance of patent protection for the CIT technology.
Managements plans include seeking
financing, alliances or other partnership agreements with entities interested in the Companys
technologies, or other business transactions that would generate sufficient resources to assure
continuation of the Companys operations and research and development programs.
There are significant risks and uncertainties which could negatively affect the Company
operations. These are principally related to (i) the absence of substantive distribution network
for the Companys ONKO-SUREtm kits, (ii) the early stage of development of the
Companys CIT technology and the need to enter into additional strategic relationships with larger
companies capable of completing the development of any ultimate product line including the
subsequent marketing of such product, (iii) the absence of any commitments or firm orders from the
Companys distributors, (iv) possible defaults in existing indebtedness and (v) failure to meet
operational covenants in existing financing agreements which would trigger additional defaults or
penalties. The Companys limited sales to date for the ONKO-SUREtm kit and the
lack of any purchase requirements in the existing distribution agreements make it impossible to
identify any trends in the Companys business prospects. Moreover, if either AcuVector and/or the
University of Alberta is successful in their claims, we may be liable for substantial damages, the
Companys rights to the CIT technology will be adversely affected, and the Companys future
prospects for licensing the CIT technology will be significantly impaired.
Principles of Consolidation
As of September 29, 2009 the Company deconsolidated JPI, but for the three months ended March
31, 2009, the operations of JPI have been consolidated in the accompanying unaudited condensed
consolidated statements of operations and comprehensive loss and cash flows. Intercompany
transactions for the three months ended March 31, 2009 have been eliminated in consolidation. In
addition, the Company consolidated the operations of YYB through June 26, 2009 (the date of sale).
Reclassification
Certain
amounts in the 2009 financial statements have been reclassified to
conform with the current year presentation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make
certain estimates and assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates made by management are, realizability of inventories,
recoverability of long-lived assets, valuation and useful lives of intangible assets, valuation of
derivative liabilities, valuation of investment in JPI, loan to JPI and valuation of common stock, options,
warrants and deferred tax assets. Actual results could differ from those estimates.
Revenue Recognition
Revenues from the wholesale sales of over-the counter and prescription pharmaceuticals are
recognized when persuasive evidence of an arrangement exists, title and risk of loss have passed to
the buyer, the price is fixed or readily determinable and collection is reasonably assured, as
noted in the appropriate accounting guidance.
The Company has entered into several distribution agreements for various geographic locations
with third party distributors. Under the terms of the agreements, the Company sells product to the
distributor at a base price that is the greater of a fixed amount (as defined in each agreement) or
50% of the distributors invoiced Net Sales price (as defined) to its customers. The distributor is
required to provide the Company quarterly reconciliations of the distributors actual invoiced
prices at which time the price becomes fixed and determinable by the Company. Until the price is
fixed and determinable, the Company defers the recognition of revenues
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under these arrangements. As
of March 31, 2010, the Company had $103,128 of deferred revenue related to these arrangements
recorded in the accompanying consolidated balance sheet.
Any provision for sales promotion discounts and estimated returns are accounted for in the
period the related sales are recorded. Buyers generally have limited rights of return, and the
Company provides for estimated returns at the time of sale based on historical experience. Returns
from customers historically have not been material. Actual returns and claims in any future period
may differ from the Companys estimates.
Accounting for Shipping and Handling Revenue, Fees and Costs
The Company classifies amounts billed for shipping and handling as revenue in accordance with
FASB ASC 605-45-50-2, Shipping and Handling Fees and Costs. Shipping and
handling fees and costs are included in cost of sales.
Research and Development
Internal research and development costs are expensed as incurred. Non-refundable third party
research and development costs are expensed when the contracted work has been performed.
Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months
or less when purchased to be cash equivalents.
Inventories
Inventories are valued at the lower of cost or net realizable value. Cost is determined on an
average cost basis which approximates actual cost on a first-in, first-out basis and includes raw
materials, labor and manufacturing overhead. At each balance sheet date, the Company evaluates its
ending inventories for excess quantities and obsolescence. The Company considers historical demand
and forecasted in relation to the inventory on hand, market conditions and product life
cycles when determining obsolescence and net realizable value. Provisions are made to reduce excess
or obsolete inventories to their estimated net realizable values. Once established, write-downs are
considered permanent adjustments to the cost basis of the excess or obsolete inventories.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the straight-line
method over estimated useful lives as follows:
Machinery and equipment, including lab equipment |
5 to 15 years | |||
Office equipment |
3 to 5 years |
Maintenance and repairs are charged to expense as incurred. Renewals and improvements of a
major nature are capitalized. At the time of retirement or other disposition of property and
equipment, the cost and accumulated depreciation are removed from the accounts and any resulting
gains or losses are reflected in the consolidated statement of operations.
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Intangible Assets
The Company owns intellectual property rights and an assignment of a US patent application for
its CIT technology. The technology was purchased from Dr. Lung-Ji Chang, who developed it while at
the University of Alberta, Edmonton, Canada. The purchase price is being amortized over the
expected useful life of the technology, which the Company determined to be 20 years, based upon an
estimate of three years to perfect the patent plus 17 years of patent life.
Impairment of Long-Lived Assets
In accordance with FASB ASC 360-10-5, Accounting for the Impairment or Disposal of Long-Lived
Assets, the Company evaluates the carrying value of its long-lived assets for impairment whenever
events or changes in circumstances indicate that such carrying values may not be recoverable. The
Company uses its best judgment based on the current facts and circumstances relating to its
business when determining whether any significant impairment factors exist. The Company considers
the following factors or conditions, among others, that could indicate the need for an impairment
review:
| significant under performance relative to expected historical or projected future operating results; | ||
| market projections for cancer research technology; | ||
| its ability to obtain patents, including continuation patents, on technology; | ||
| significant changes in its strategic business objectives and utilization of the assets; | ||
| significant negative industry or economic trends, including legal factors; | ||
| potential for strategic partnerships for the development of its patented technology; | ||
| changing or implementation of rules regarding manufacture or sale of pharmaceuticals in China; and | ||
| ability to maintain Good Manufacturing Process (GMP) certifications. |
If the Company determines that the carrying values of long-lived assets may not be recoverable
based upon the existence of one or more of the above indicators of impairment, the Companys
management performs an undiscounted cash flow analysis to determine if impairment exists. If
impairment exists, the Company measures the impairment based on the difference between the assets
carrying amount and its fair value, and the impairment is charged to operations in the period in
which the long-lived asset impairment is determined by management. Based on its analysis, the
Company believes that no indicators of impairment of the carrying value of its long-lived assets
existed at March 31, 2010. There can be no assurance, however, that market conditions will not
change or demand for the Companys products will continue or allow the Company to realize the value
of its long-lived assets and prevent future impairment.
The carrying value of the Companys investment in JPI represents its ownership interest in
JPI, accounted for under the cost method. The ownership interest is not adjusted to fair value on
a recurring basis. Each reporting period we assess the fair value of our ownership interest in JPI
in accordance with FASB ASC 325-20-35 paragraphs 1A and 2. Each year we conduct an impairment
analysis in accordance with the provisions within FASB ASC 320-10-35 paragraphs 25 through 32.
Derivative Financial Instruments
The Company applies the provisions of FASB ASC 815-10, Derivatives and Hedging (ASC 815-10).
Derivatives within the scope of ASC 815-10 must be recorded on the balance sheet at fair value.
During the three months ended March 31, 2010, the Company issued convertible debt with warrants and
recorded derivative liabilities related to the beneficial conversion feature of the convertible
debt and a reset provision associated with the exercise price of the warrants. The fair value on
the grant date was $418,138 as computed using the Black-Scholes option pricing model.
During the three months ended March 31, 2010, a convertible debt holder converted $394,000
which represented principal and accrued interest. This resulted in a decrease of $48,309 in the
derivative liabilities related to the embedded conversion feature of the converted debt. In
addition, during the three months ended March 31, 2010, 500,000 warrants were exercised by a holder
of the Companys convertible debt. This resulted in a decrease
of $83,872, representing the fair value
of the warrants prior to exercise. The Company re-measured the fair values all of its derivative
liabilities as of March 31, 2010 and recorded an aggregate decrease of $42,994 in the fair value of
the derivative liabilities as other income during the three months ended March 31, 2010.
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Fair Value Measurements
The Company determines the fair value of its derivative instruments using a three-level
hierarchy for fair value measurements which these assets and liabilities must be grouped, based on
significant levels of observable or unobservable inputs. Observable inputs reflect market data
obtained from independent sources, while unobservable inputs reflect the Companys market
assumptions. This hierarchy requires the use of observable market data when available. These two
types of inputs have created the following fair-value hierarchy:
Level 1 Valuations based on unadjusted quoted market prices in active markets for identical
securities. Currently the Company does not have any items classified as Level 1.
Level 2 Valuations based on observable inputs (other than Level 1 prices), such as quoted prices
for similar assets at the measurement date; quoted prices in markets that are not active; or other
inputs that are observable, either directly or indirectly. Currently the Company does not have any
items classified as Level 2.
Level 3 Valuations based on inputs that are unobservable and significant to the overall fair
value measurement, and involve management judgment. The Company uses the Black-Scholes option
pricing model to determine the fair value of the instruments.
If the inputs used to measure fair value fall in different levels of the fair value hierarchy, a
financial securitys hierarchy level is based upon the lowest level of input that is significant to
the fair value measurement.
The following table presents the Companys warrants and embedded conversion features measured at
fair value on a recurring basis as of March 31, 2010 classified using the valuation hierarchy:
Level 3 | ||||
Carrying | ||||
Value | ||||
March 31, | ||||
2010 | ||||
Embedded conversion options |
$ | 540,750 | ||
Warrants |
162,389 | |||
$ | 703,139 | |||
Decrease in
fair value included in other expense, net |
$ | 42,994 | ||
The following table provides a reconciliation of the beginning and ending balances for the
Companys derivative liabilities measured at fair value using Level 3 inputs:
Balance at December 31, 2009 |
$ | 354,758 | ||
Derivative liabilities added conversion options |
205,941 | |||
Derivative liabilities added warrants |
231,627 | |||
Reclassification to equity in connection with conversion of underlying debt to equity |
(48,309 | ) | ||
Reclassification to equity in connection with exercise of underlying stock warrants |
(83,872 | ) | ||
Change in fair value |
42,994 | |||
Balance at March 31, 2010 |
$ | 703,139 | ||
Risks and Uncertainties
There are significant risks and uncertainties which could negatively affect the Companys
operations. These are principally related to (i) the absence of substantive distribution network
for the Companys ONKO-SUREtm kits, (ii) the early stage of development of the
Companys CIT technology and the need yet to be developed to enter into a strategic relationship
with a larger company capable of completing the development of any ultimate product line including
the subsequent marketing of such product and (iii) the absence of any commitments or firm orders
from the Companys distributors. The Companys limited sales to date for the
ONKO-SUREtm kit and the lack of any purchase requirements in the existing
distribution agreements make it impossible to identify any trends in the Companys business
prospects. Moreover, if either AcuVector and/or the University of Alberta is successful in their
claims, the Company may be liable for substantial damages, the Companys rights to the CIT
technology will be adversely affected,
and the Companys future prospects for licensing the CIT
technology will be significantly impaired.
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Share-Based Compensation
All issuances of the Companys common stock for non-cash consideration have been assigned a
per share amount equaling either the market value of the shares issued or the value of
consideration received, whichever is more readily determinable. The majority of non-cash
consideration received pertains to services rendered by consultants and others and has been valued
at the market value of the shares on the measurement date.
The Company accounts for equity instruments issued to consultants and vendors in exchange for
goods and services in accordance with the provisions of FASB ASC 505-50-30, Equity-Based Payments
to Non-Employees, (ASC 505-50-30). Under ASC 505-30-30, the measurement date for the fair value of the equity
instruments issued is determined at the earlier of (i) the date at which a commitment for
performance by the consultant or vendor is reached or (ii) the date at which the consultant or
vendors performance is complete. In the case of equity instruments issued to consultants, the fair
value of the equity instrument is recognized over the term of the consulting agreement.
Under the relevant accounting guidance, assets acquired in exchange for the issuance of fully
vested, non-forfeitable equity instruments are not presented or classified as an offset to
equity on the grantors balance sheet once the equity instrument is granted for accounting
purposes. Accordingly, the Company records the fair value of the fully vested, non-forfeitable
common stock issued for future consulting services as prepaid expense in its consolidated balance
sheet.
We have employee compensation plans under which various types of stock-based instruments are
granted. We account for our share-based payments in accordance with FASB ASC 718-10, Stock
Compensation (ASC 718-10). This statement requires all share-based payments to employees,
including grants of employee stock options, to be measured based upon their grant date fair value,
and be recognized in the statements of operations as compensation expense (based on their estimated
fair values) generally over the vesting period of the awards.
Basic and Diluted Income (Loss) Per Share
Basic net loss per common share from continuing operations is computed based on the
weighted-average number of shares outstanding for the period. Diluted net loss per share from
continuing operations is computed by dividing net loss by the weighted-average shares outstanding
assuming all dilutive potential common shares were issued. In periods of losses from continuing
operations, basic and diluted loss per share before discontinued operations are the same as the
effect of shares issuable upon the conversion of debt and issuable upon the exercise of stock
options and warrants is anti-dilutive. Basic and diluted income per share from discontinued
operations are also the same, as FASB ASC 260-10 requires the use of the denominator used in the
calculation of loss per share from continuing operations in all other calculations of earnings per
share presented, despite the dilutive effect of potential common shares.
Based on the conversion prices in effect and the interest accrued through the end of the
respective periods, the potentially dilutive effects of 18,585,269 and 9,465,380 options,
warrants and convertible debt were not considered in the calculation of earnings per
share as the effect would be anti-dilutive on March 31, 2010 and 2009, respectively.
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Supplemental Cash Flow Information
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
Supplemental disclosure of cash flow information: |
||||||||
Cash paid during the period for interest |
$ | | $ | 57,000 | ||||
Cash paid during the period for taxes |
$ | | $ | 492,000 | ||||
Supplemental disclosure of non-cash activities: |
||||||||
Fair value of warrants issued in connection with Senior Notes, included
in debt issuance costs and debt discount |
$ | | $ | 472,736 | ||||
Fair value of warrants issued in connection with Convertible Debt,
included in debt issuance costs and debt discount |
$ | 231,627 | $ | | ||||
Reclassification of amounts recorded to additional paid-in capital to warrant
liability, including $110,858 recorded to retained earnings, representing the
change in value of the warrants from date of issuance to January 1, 2009 |
$ | | $ | 209,166 | ||||
Reclassification of warrant liability to additional paid-in capital upon expiration of share adjustment terms |
$ | | $ | 133,866 | ||||
Voluntary conversion of convertible debt and accrued interest |
$ | 394,000 | $ | | ||||
Fair value of common stock recorded as prepaid consulting |
$ | 317,500 | $ | | ||||
Fair value of warrants issued for services, included in prepaid expense |
$ | | $ | 17,500 | ||||
Fair value of embedded conversion features |
$ | 205,941 | $ | | ||||
Reclassification
of derivative liabilities |
$ | 132,181 | $ | | ||||
Amount paid
directly from proceeds in connection with convertible debt unrelated
to the financing |
$ | 25,000 | $ | | ||||
Recent Accounting Pronouncements
In January 2010, the FASB issued authoritative guidance to amend the disclosure requirements
related to recurring and nonrecurring fair value measurements. The guidance requires new
disclosures on the transfers of assets and liabilities between Level 1 (quoted prices in active
market for identical assets or liabilities) and Level 2 (significant other observable inputs) of
the fair value measurement hierarchy, including the reasons and the timing of the
transfers. Additionally, the guidance requires a roll forward of activities on purchases, sales,
issuance, and settlements of the assets and liabilities measured using significant unobservable
inputs (Level 3 fair value measurements). The guidance became effective for us with the reporting
period beginning January 1, 2010, except for the disclosure on the roll forward activities for
Level 3 fair value measurements, which will become effective for us with the reporting period
beginning January 1, 2011. The adoption of this new guidance did not have a material impact on our
financial statements.
Other new pronouncements issued but not effective until after March 31, 2010, are not expected
to have a significant effect on the Companys consolidated financial position or results of
operations.
NOTE 3 INVENTORIES
Inventories consist of the following:
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
(Unaudited) | (Audited) | |||||||
Raw materials |
$ | 51,707 | $ | 48,852 | ||||
Work-in-process |
10,754 | 3,265 | ||||||
Finished goods |
319 | 27,138 | ||||||
$ | 62,780 | $ | 79,255 | |||||
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NOTE 4 INTANGIBLE ASSETS
Intangible assets consist of the following at March 31, 2010 (unaudited):
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
(Unaudited) | (Audited) | |||||||
Intellectual property |
$ | 2,000,000 | $ | 2,000,000 | ||||
Accumulated amortization |
(866,667 | ) | (841,667 | ) | ||||
1,133,333 | 1,158,333 | |||||||
In August 2001, the Company acquired intellectual property rights and an assignment of a US
patent application for combination immunogene therapy (CIT) technology for $2,000,000. The
technology was purchased from Dr. Lung-Ji Chang, who developed it while at the University of
Alberta, Edmonton, Canada. During 2003, two lawsuits were filed challenging the Companys ownership
of this intellectual property. The value of the intellectual property will be diminished if either
of the lawsuits is successful (see Note 9).
As part of the acquisition of the CIT technology, the Company agreed to pay Dr. Chang a 5%
royalty on net sales of combination gene therapy products. The Company has not paid any royalties
to Dr. Chang to date as there have been no sales of combination gene therapy products.
NOTE 5 INCOME TAXES
The Company accounts for income taxes under FASB ASC 740-10, Income Taxes (ASC 740-10).
Under ASC 740-10, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. A valuation allowance is
provided for significant deferred tax assets when it is more likely than not that such assets will
not be recovered.
When tax returns are filed, it is highly certain that some positions taken would be sustained
upon examination by the taxing authorities, while others are subject to uncertainty about the
merits of the position taken or the amount of the position that would be ultimately sustained. The
benefit of a tax position is recognized in the financial statements in the period during which,
based on all available evidence, management believes it is more likely than not that the position
will be sustained upon examination, including the resolution of appeals or litigation processes, if
any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet
the more-likely-than-not recognition threshold are measured at the largest amount of tax benefit
that is more than 50 percent likely of being realized upon settlement with the applicable taxing
authority. The portion of the benefits associated with tax positions taken that exceeds the amount
measured as described above is reflected as a liability for unrecognized tax benefits in the
accompanying consolidated balance sheet along with any associated interest and penalties that would
be payable to the taxing authorities upon examination.
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NOTE 6 DEBT
Debt consists of the following:
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
Convertible Debt | (Unaudited) | (Audited) | ||||||
Convertible Notes issued September 2008, net of unamortized discount,
of $1,340,752 and $1,607,111 at March 31, 2010
and December 31, 2009, respectively |
$ | 284,134 | $ | 17,775 | ||||
St. George Convertible Note, issued September 2009, net of unamortized
discount $95,158 and $393,681 at March 31, 2010 and
December 31, 2009, respectively |
206,217 | 222,707 | ||||||
ISP Holdings Note, issued March 22, 2010, net of
unamortized discount of $769,674 at March 31, 2010 |
155,326 | | ||||||
$ | 645,677 | $ | 240,482 | |||||
Senior Notes payable, net of unamortized discount of $1,534,990 and $1,701,398 at March 31, 2010 and December 31, 2009, respectively |
2,018,109 | 1,851,854 | ||||||
Bridge note |
83,000 | 66,632 | ||||||
$ | 2,746,786 | $ | 2,158,968 | |||||
Less: Current Portion of Senior Notes and Bridge note |
(2,101,109 | ) | (1,316,667 | ) | ||||
Less: Current Portion of Convertible Debt |
(645,677 | ) | (240,482 | ) | ||||
$ | | $ | 601,819 | |||||
The significant terms of the Companys debt issued during 2008, 2009 and 2010 are described in
the notes to the Companys Annual Report on Form 10-K/A for the year ended December 31, 2009. See
also Note 13 Subsequent Events for further information regarding certain debt obligations.
Defaults on Senior Notes and Proposed Debt Exchanges
The Company did not pay the interest due on the Series 1 Senior Notes or the Series 2 Senior Notes
(together the Notes) due on December 1, 2009 or March 1, 2010. The Company did not have
sufficient cash to satisfy these debts and carry on current operations. Consequently, under the
terms of the Notes, the interest rate increased from 12% to 18% per annum. The failure to pay
interest as scheduled represented an event of default under the terms of the Notes and all senior
debt was classified as current. However, none of the holders declared default, or declared the
outstanding Notes and other contractual obligations immediately due. In order to resolve the
defaults and to preserve as much cash as possible for operations, management put together various
exchange agreements (the Debt Exchanges) to enter into with a majority, and potentially all, of
the debt holders subject to shareholder approval (Shareholder Approval) of such share issuances,
pursuant to which the debt holders would exchange their outstanding Notes or other debt obligations
for shares of the Companys common stock. Although the exchange terms vary slightly between the
debt holders based upon the terms of each of the particular Notes, a few provisions are
consistent in all of the exchange agreements: First, all of the issuances pursuant to the proposed
Debt Exchanges are subject to Shareholder Approval. To that end, the Company filed a Preliminary
Proxy Statement on Schedule 14A on February 1, 2010 and is in the process of responding to SEC
comments regarding the same so that it can finalize the proxy and send it out to its shareholders.
The Company has the right to seek Shareholder Approval two times; if it does not receive
Shareholder Approval at the second meeting, the Company will fall back into default on all of the
Notes for which shareholders did not approve the issuance of shares pursuant to the related
exchange agreement. Once the Company obtains Shareholder Approval to issue the shares pursuant to a
particular Debt Exchange, upon such issuance, the debt related to such exchange agreement will be
converted to shares of common stock and the holders thereof shall waive all current and future
defaults under the debt. Second, the Company agreed to use its best efforts to register the shares
issuable pursuant to the exchange agreements in the next registration statement to be filed under the
Securities Act of 1933, as amended. A Form S-1 registration statement
to register the shares issuable pursuant to the note financings was
filed on May 3, 2010, but has not yet been declared effective. And third, the issuance of all of the shares of Common Stock to be issued under these Debt
Exchanges are subject to NYSE Amex listing approval. Therefore, although some debt holders have
signed an exchange agreement, they are not enforceable by us until we receive Shareholder Approval
and approval of the NYSE Amex to list the shares, which we cannot guarantee and therefore the
exchange may never occur.
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If and when we do receive Shareholder Approval, we shall disclose the final amount of debt
that shall be exchanged and the total number of shares issued in exchange thereof. Any shares of
common stock to be issued pursuant to the debt exchange will be issued pursuant to Section 4(2) of
the Securities Act for issuances not involving a public offering and Regulation D promulgated
thereunder.
In March 2010, the Company also entered into an Exchange Fee Agreement with Cantone Research
Inc., who was the placement agent for the original issuance of the Notes. Pursuant to the Exchange
Fee Agreement, Cantone Research agreed to negotiate the exchange with the Note Holders described
above and obtain the Note Holders agreement and signature to the exchange agreement. Under the
Exchange Fee Agreement, we agreed to pay Cantone Research a fee of 2% of the total principal and
interest that is due, up through March 1, 2010, which, as of
such date was $79,049 or 2% of
$3,952,403. The Company agreed to pay Cantone Research the number of shares of our Common Stock
that is equal to the quotient of $79,048 divided by $0.28, or 282,314 shares. The Company also
agreed to reduce the exercise price of the placement agent warrants issued to Cantone Research to
$0.28 per share upon completion of the Debt Exchange. The issuance of shares to Cantone Research
under the Exchange Fee Agreement is subject to NYSE Amex and Shareholder Approval. If Shareholder
Approval is not received, the Company will have to pay the exchange fee in cash. Further, if the
Company does not proceed with the Debt Exchanges, none of the other agreements with Cantone
Research Inc. will be consummated. Accordingly, the Company has not
accounted for the related contingent reduction of the exercise of the
warrant.
In March 2010, in an effort to further reduce its cash expenditures, the Company also amended
a consulting agreement with Cantone Asset Management, LLC (Cantone Asset). Under the original
consulting agreement, the Company was to pay Cantone Asset an aggregate cash consulting fee of
$144,000 and issued Cantone Asset warrants to purchase 200,000 shares of our common stock at $0.60 per
share. Pursuant to the amendment, (i) Cantone Asset shall instead be paid with an aggregate of
514,285 shares of our common stock, (ii) we will use our best efforts to register those shares in
the next registration statement we file; and, (iii) we will engage counsel to issue a blanket
opinion to our transfer agent regarding the amendment shares once the related registration
statement is declared effective. The Company filed a registration statement on Form S-1 on May 3,
2010 which included these shares. In consideration for Cantone Asset agreeing to the amendment, we agreed to adjust the
exercise price of their warrant to $0.28 per share. The issuance of shares pursuant to the
amendment is subject to our receipt of NYSE AMEX listing approval and Shareholder Approval. If we do not
receive Shareholder Approval, the exercise price of the warrants will remain at their pre-agreement
amounts and the Company will have to pay the consulting fee in cash. Accordingly, the Company has not
accounted for the related contingent reduction of the exercise of the
warrant.
St. George Convertible Note and Warrant Purchase Agreement Defaults and Waivers; Note Conversions
and Warrant Exercises After January 1, 2010
On September 15, 2009, the Company issued a 12% Convertible Promissory Note (the St. George
Note) to St. George Investments, LLC (St. George). On December 11, 2009 the Company entered
into a Waiver of Default with St. George pursuant to which the Company agreed to repay the entire
balance of the St. George Note and any adjustments thereto pursuant to the terms of the initial
Waiver by February 1, 2010. Since the Company failed to pay the entire balance of the note by
February 1, 2010, the Company was in default on the St. George Note. On February 16, 2010, the
Company entered into a Waiver of Default agreement (February 16 Waiver) with St. George pursuant
to which: (i) St. George waived all defaults through May 15, 2010 and agreed not to accelerate the
amounts due under the Note before May 15, 2010 and (ii) St. George shall exercise their Warrant to
purchase 140,000 shares of our common stock at $0.65 per share. In consideration for this waiver,
we agreed to pay St. George a default fee equal to $50,000, which was added to the balance of the
Note effective as of the February 16, 2010. During the three months ended March 31, 2010, St.
George converted notes and accrued interest of $365,015 and $28,985 respectively into 1,407,143
shares of the Companys common stock. The amount converted during 2010 represented
approximately 55% of the outstanding debt and accrued interest subject to conversion.
In connection with the conversions, the Company accelerated the amortization of debt discount of
$298,523. In addition the Company reclassified derivative liabilities of $48,309, representing the
embedded conversion features of the converted debt to equity. All of such note conversions were
at $0.28 per share. See Note 13 for information regarding the conversion of the remaining St.
George Note to shares of the Companys common stock.
Note and Warrant Purchase Agreements- March and April 2010
After the year ended December 31, 2009, the Company sought additional financing to fund
operations. On March 22, 2010, the Board of Directors authorized the Company to enter into a Note
and Warrant Purchase Agreement (Purchase Agreement) with one accredited investor (ISP Holdings
or Lender) pursuant to which the Company issued the Lender a Convertible Promissory Note in the
principal amount of $925,000 bearing interest at a rate of 12%, increasing to 18% upon the
occurrence of an event of certain triggering events. The Purchase Agreement includes a warrant to
purchase up to 1,100,000 shares of the Companys Common Stock at an exercise price of $0.28. The
Note carries a 20% original issue discount and matures on March 22, 2011. The Company
agreed to pay $385,000 to the Lender to cover their transaction costs incurred in connection with
this transaction; such amount was withheld from the loan at the closing of the transaction. As a
result, the total net proceeds the Company received were $403,000,
after payment made directly by lender to a vendor of the
Company, issuance costs and
finders fees paid in connection with the transaction. The Lender may convert the Note, in whole or
in part into shares of the Companys Common Stock. The Conversion Price is equal to 80% of the
volume-weighted average price for the 5
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trading days ending on the business day immediately preceding the applicable date the
conversion is sought but will be at least $0.28 per share, subject to adjustment upon the
occurrence of certain events.
The transaction with the Lender was the First Closing of a series of similar transactions.
See Subsequent Events Note 13 following for further information.
Activity in connection with the Companys convertible debt during the three months ended March 31,
2010, is as follows:
Convertible Debt | ||||||||||||||||
10% Notes | St. George Debt | ISP Holdings Debt | ||||||||||||||
Issued | Issued | Issued | ||||||||||||||
September 2008 | September 2009 | March 2010 | Total | |||||||||||||
Carrying Value Before Discount at December 31, 2009 |
$ | 1,624,886 | $ | 616,390 | $ | | $ | 2,241,276 | ||||||||
Penalties added to St George Note |
| 50,000 | | 50,000 | ||||||||||||
Portion of St. George Note converted to equity |
| (365,015 | ) | | (365,015 | ) | ||||||||||
Face value of Debt issued March 22, 2010 |
| | 925,000 | 925,000 | ||||||||||||
Carrying Value Before Discount at March 31, 2010 |
1,624,886 | 301,375 | 925,000 | 2,851,261 | ||||||||||||
Discount, net of accumulated amortization at December 31, 2009 |
(1,607,111 | ) | (393,681 | ) | | (2,000,792 | ) | |||||||||
Acceleration of amortization in connection with conversion of St. George note |
| 298,523 | | 298,523 | ||||||||||||
Discount attributable to ISP Holdings Note issued March 2010 |
| | (803,138 | ) | (803,138 | ) | ||||||||||
Amortization expense during the three months ended March 31, 2010 |
266,359 | | 33,464 | 299,823 | ||||||||||||
Discount, net of accumulated amortization at March 31, 2010 |
(1,340,752 | ) | (95,158 | ) | (769,674 | ) | (2,205,584 | ) | ||||||||
Net Carrying Value at March 31, 2010 |
$ | 284,134 | $ | 206,217 | $ | 155,326 | $ | 645,677 | ||||||||
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Activity in connection with the Companys Senior debt during the three months ended March 31,
2010, is as follows:
Senior Debt | ||||||||||||||||||||
Series 1 | Series 2 | |||||||||||||||||||
December 2008 | January 2009 | May 2009 | June 2009 | Total | ||||||||||||||||
Carrying Value Before Discount at March 31, 2010 |
$ | 1,077,500 | $ | 680,000 | $ | 1,327,249 | $ | 468,350 | $ | 3,553,099 | ||||||||||
Discount, net of accumulated amortization,
at December 31, 2009 |
(318,178 | ) | (327,809 | ) | (782,043 | ) | (273,366 | ) | (1,701,396 | ) | ||||||||||
Amortization
expense for the
three months ended
March 31, 2010 |
66,093 | 47,244 | 30,394 | 22,675 | 166,406 | |||||||||||||||
Discount, net of accumulated amortization,
at March 31, 2010 |
(252,085 | ) | (280,565 | ) | (751,649 | ) | (250,691 | ) | (1,534,990 | ) | ||||||||||
Net Carrying Value at March 31, 2010 |
$ | 825,415 | $ | 399,435 | $ | 575,600 | $ | 217,659 | $ | 2,018,109 | ||||||||||
Bridge Note
On September 10, 2009, the Company entered into a Bridge Loan Agreement (the Bridge Loan
Agreement) with Cantone Research, Inc. (the Lender) whereby the Lender agreed to provide a
Bridge Loan for $58,000 inclusive of penalties, (the Bridge Loan) and the Company agreed that the
proceeds of the Bridge Loan would be used exclusively to pay interest due on currently outstanding
12% Senior Notes. During the fourth quarter of 2009, the Company defaulted on the loan and
incurred an additional penalty of $25,000 that was added to the principal balance. As of March 31,
2010, the remaining outstanding balance of the loan is $83,000, which is due upon demand.
NOTE 7 EMPLOYMENT CONTRACT TERMINATION LIABILITY
In October 2008, the Companys former chief executive officer agreed to retire from his
employment with the Company. The Company negotiated a settlement of its employment contract with
the former chief executive officer under which he received $150,000 upon the effective date of the
agreement, including $25,000 for reimbursement of his legal expenses. In addition the Company
agreed to pay $540,000 in monthly installments of $18,000, commencing January 31, 2009, to continue
certain insurance coverages, and to extend the term of options previously granted which would have
expired shortly after termination of employment. Pursuant to FASB ASC 420-10, the Company recorded
a liability of approximately $517,000 for the present value of the monthly installments and
insurance coverages due under the settlement agreement. Approximately $294,000 and $225,000 are
included in accrued salaries and wages and $32,000 and $86,000 are included in other long-term
liabilities in the accompanying condensed consolidated balance sheets at March 31, 2010 and
December 31, 2009, respectively.
NOTE 8 COMMITMENTS AND CONTINGENCIES
Litigation
On February 22, 2002, AcuVector Group, Inc. (AcuVector) filed a statement of claim in the
Court of Queens Bench of Alberta, Judicial District of Edmonton relating to the Companys CIT
technology acquired from Dr. Chang in August 2001. The claim alleges damages of $CDN 20 million and
seeks injunctive relief against Dr. Chang for, among other things, breach of contract and breach of
fiduciary duty, and against the Company for interference with the alleged relationship between Dr.
Chang and AcuVector. The claim for injunctive relief seeks to establish that the AcuVector license
agreement with Dr. Chang is still in effect. The Company performed extensive due diligence to
determine that AcuVector had no interest in the technology when the Company acquired it. The
Company is confident that AcuVectors claims are without merit and that the Company will receive a
favorable result in the case. As the final outcome is not determinable, no accrual or loss relating
to this action is reflected in the accompanying condensed consolidated financial statements.
The Company is also defending a companion case filed in the same court by the Governors of the
University of Alberta filed against the Company and Dr. Chang in August 2003. The University of
Alberta claims, among other things, that Dr. Chang failed to remit the payment of the Universitys
portion of the monies paid by the Company to Dr. Chang for the CIT technology purchased by the
Company from Dr. Chang in 2001. In addition to other claims against Dr. Chang relating to other
technologies developed by him while at the University, the University also claims that the Company
conspired with Dr. Chang and interfered with the Universitys contractual relations under certain
agreements with Dr. Chang, thereby damaging the University in an amount which is unknown to
the University at this time. The University has not claimed that the Company is not the owner
of the CIT technology, just that the University has an equitable interest therein or the revenues
there from.
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If either AcuVector or the University is successful in their claims, the Company may be liable
for substantial damages, its rights to the technology will be adversely affected and its future
prospects for exploiting or licensing the CIT technology will be significantly impaired.
In the ordinary course of business, there are other potential claims and lawsuits brought by
or against the Company. In the opinion of management, the ultimate outcome of these matters will
not materially affect the Companys operations or financial position or are covered by insurance.
Licensing Agreements
The Company has agreed to pay a 5% royalty on net sales of products developed from the
Companys CIT technology. The Company has not paid any royalties to date as there have been no
sales of such products.
Indemnities and Guarantees
The Company has executed certain contractual indemnities and guarantees, under which it may be
required to make payments to a guaranteed or indemnified party. The Company has agreed to indemnify
its directors, officers, employees and agents to the maximum extent permitted under the laws of the
State of Delaware. In connection with a certain facility lease, the Company has indemnified its
lessor for certain claims arising from the use of the facilities. Pursuant to the Sale and Purchase
Agreement, the Company has indemnified the holders of registrable securities for any claims or
losses resulting from any untrue, allegedly untrue or misleading statement made in a registration
statement, prospectus or similar document. Additionally, the Company has agreed to indemnify the
former owners of JPI against losses up to a maximum of $2,500,000 for damages resulting from breach
of representations or warranties in connection with the JPI acquisition. The duration of the
guarantees and indemnities varies, and in many cases is indefinite. These guarantees and
indemnities do not provide for any limitation of the maximum potential future payments the Company
could be obligated to make. Historically, the Company has not been obligated to make any payments
for these obligations and no liabilities have been recorded for these indemnities and guarantees in
the accompanying consolidated balance sheets.
Tax Matters
The Company is required to file federal and state income tax returns in the United States and
various other income tax returns in foreign jurisdictions. The preparation of these income tax
returns requires the Company to interpret the applicable tax laws and regulations in effect in such
jurisdictions, which could affect the amount of tax paid by the Company. The Company, in
consultation with its tax advisors, bases its income tax returns on interpretations that are
believed to be reasonable under the circumstances. The income tax returns, however, are subject to
routine reviews by the various taxing authorities in the jurisdictions in which the Company files
its income tax returns. As part of these reviews, a taxing authority may disagree with respect to
the interpretations the Company used to calculate its tax liability and therefore require the
Company to pay additional taxes.
Change in Control Severance Plan
On November 15, 2001, the board of directors adopted an Executive Management Change in Control
Severance Pay Plan. The plan covered the persons who at any time during the 90-day period ending on
the date of a change in control (as defined in the plan), were employed by the Company as Chief
Executive Officer and/or president and provided for cash payments upon a change in control. The
Change in Control Severance Pay Plan was terminated in April 2009.
NOTE 9 SHARE-BASED COMPENSATION
The Company has six share-based compensation plans under which it may grant common stock or
incentive and non-qualified stock options to officers, employees, directors and independent
contractors. A detailed description of the Companys share-based compensation plans and option
grants outside the option plans is contained in the notes to the audited December 31, 2009
consolidated financial statements on form 10-K/A.
For the three months ended March 31, 2010 and 2009, the Company recorded share-based
compensation expense to employees and directors of $173,758 and $157,155, respectively.
Substantially all of such compensation expense is reflected in the accompanying condensed
consolidated statements of operations and comprehensive income (loss) within the selling, general
and administrative line item. Share-based compensation expense recognized in the periods presented
is based on awards that have vested or are ultimately expected to vest. Historically, options have
vested upon grant, thus it was not necessary for management to estimate forfeitures. Options
granted in 2008 vested ratably over 24 months. Based on historical turnover rates and the vesting
pattern of the options, the
Companys management has assumed that there will be no forfeitures of unvested options.
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Summary of Activity
As of March 31, 2010, all outstanding stock options are fully vested. There were 1,858,001
stock options outstanding, vested and exercisable with a weighted average exercise price of $1.90
at March 31, 2010 and December 31, 2009, respectively. The Company granted no stock options, and
no stock options were exercised during the entire year ended December 31, 2009 or during the three
months ended March 31, 2010. There were no forfeitures or expirations of stock options during the
three months ended March 31, 2010. The aggregate intrinsic value of options outstanding at March
31, 2010, considering only options with positive intrinsic values and based on the closing stock
price, was zero.
NOTE 10 FINANCING ACTIVITIES
Common Stock Issued for Services
On February 9, 2010, we issued 1,025,000 shares of our common stock, initially valued at $317,500
to two consultants under consulting services agreements. The Company records the appropriate
expense as the shares are earned over the terms of their underlying agreements. See also Note 13
for other issuances after March 31, 2010.
On January 22, 2009, the Company entered into an
agreement with B&D Consulting for investor relations services through July 7, 2010. The Company granted B&D
Consulting 400,000 shares of the Companys common stock in exchange for services. In accordance with FASB ASC
505-50, the shares issued are periodically valued, as earned, through the vesting period. Approximately 183,333
shares were earned during the year ended December 31, 2009 and 49,998 shares were earned during the three months
ended March 31, 2010. During the three months ended March 31, 2010 and 2009, the Company recorded general and
administrative expense of $13,310 and $29,632, respectively, related to the agreement.
On September 22, 2009, the Company Corporation
entered into an agreement with Lyon Consulting for investor relation services through September 2010. The
Company granted Lyons Consulting 200,000 restricted shares of the Companys common stock in exchange for services. In
accordance with FASB ASC 505-50, the shares issued will be periodically valued through the vesting period.
Approximately 100,000 shares were earned during the year ended December 31, 2009 and 50,000 shares were
earned during the three months ended March 31, 2010. During the three months ended March 31, 2010, the Company recorded
general and administrative expense of $11,500 related to the agreement.
Warrants
A summary of activity with respect to warrants outstanding follows:
Three months ended | ||||||||
March 31, 2010 | ||||||||
Weighted | ||||||||
Average | ||||||||
Exercise | ||||||||
Warrants | Price | |||||||
Outstanding and exercisable, January 1, 2010 |
10,393,287 | $ | 1.84 | |||||
Granted |
1,100,000 | 0.28 | ||||||
Exercised |
(500,000 | ) | 0.28 | |||||
Outstanding and exercisable, March 31, 2010 |
10,993,287 | $ | 1.74 | |||||
In connection with a note purchase agreement effective, March 22, 2010, (see Note 6 for
further information), the Company issued a warrant to purchase
up to 1,100,000 shares of the Companys common stock at an exercise price of $0.28.
During the three months ended March 31, 2010, St. George, a convertible debt holder,
exercised outstanding warrants to purchase an aggregate of 500,000 Shares of the Companys common stock. All warrants exercised
during the three months ended March 31, 2010 by St. George were at $0.28 per share, the adjusted
warrant exercise price pursuant to the terms of the warrants. The total net proceeds from the
exercise of warrants by St. George during such period were $140,000.
The aggregate intrinsic value of the warrants exercised was $19,000.
NOTE 11 SEGMENT REPORTING
Prior to the deconsolidation, the Company had two reportable segments: (i) China, which consists of
manufacturing and wholesale distribution of pharmaceutical and cosmetic products to distributors,
hospitals, clinics and similar institutional entities in China, and (ii) Corporate, which comprises
the development of in-vitro diagnostics and the Companys CIT technology, as well as the
development of the Companys HPE-based products for markets outside of China. The following is
information for the Companys reportable segments for the three months ended March 31, 2009:
China | Corporate | Total | ||||||||||
Net revenue |
$ | 2,688,667 | $ | 23,070 | $ | 2,711,737 | ||||||
Gross profit |
$ | 1,111,169 | $ | 14,995 | $ | 1,126,164 | ||||||
Depreciation |
$ | 206,387 | $ | 13,901 | $ | 220,288 | ||||||
Amortization |
$ | 107,153 | $ | 25,000 | $ | 132,153 | ||||||
Interest expense |
$ | 55,702 | $ | 178,515 | $ | 234,217 | ||||||
Income (loss) before discontinued operations |
$ | 398,564 | $ | (2,336,681 | ) | $ | (1,938,117 | ) | ||||
Capital expenditures |
$ | 300,719 | $ | 106,437 | $ | 407,156 |
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Virtually all of the Companys revenues for the three months ended March 31, 2009 were from
foreign customers.
NOTE 12 RELATED PARTY TRANSACTIONS
As part of the deconsolidation of JPI as of September 29, 2009, the Company recorded a note
receivable from JPI totaling $5,350,000 and an offsetting allowance of $2,675,000. These amounts
were previously classified as intercompany balances and eliminated in consolidation. The note bears
interest at 12% annually. The payment terms are expected to be finalized in fiscal 2010.
NOTE 13 SUBSEQUENT EVENTS
Conversion of St. George Note
At various times during the period April 1, 2010 through April 8, 2010, St. George converted
the remaining principal and interest due on the St. George Note of
$301,375 and $23,931,
respectively, into 1,161,808 shares of the Companys common stock. In connection with the
conversions, the Company accelerated the amortization of debt discount of $95,158. In addition the
Company reclassified all related derivative liabilities, representing the embedded conversion
features of the converted debt to equity. All of such note conversions were at $0.28 per share.
Note Financings
During April 2010, the Company sought additional financing to fund operations. In addition to the
Convertible Note to St. George issued on March 22, 2010, (see description of debt issued in Note 6), the Company
completed three additional closings of convertible note and warrant purchase agreements,
aggregating to approximately $10.1 million as follows:
Minimum | Maximum | Warrants | ||||||||||||||||||||||||||
Face Value of | Conversion | Shares | Minimum | |||||||||||||||||||||||||
Date of | Convertible | Price Per | Issuable upon | Exercise | ||||||||||||||||||||||||
Issuance | Notes | Discounts [1] | Proceeds | Share [2] | Conversion | Number | Price | |||||||||||||||||||||
4/8/2010 |
$ | 5,490,165 | $ | (2,285,165 | ) | $ | 3,205,000 | $ | 0.28 | 19,607,732 | 6,528,213 | $ | 0.38 | |||||||||||||||
4/13/2010 |
3,957,030 | (1,647,030 | ) | 2,310,000 | $ | 0.28 | 14,132,250 | 4,705,657 | $ | 0.38 | ||||||||||||||||||
4/26/2010 [3] |
599,525 | (249,525 | ) | 350,000 | $ | 0.28 | 2,141,161 | 712,949 | $ | 0.28 | ||||||||||||||||||
4/26/2010 [3] |
85,645 | (35,645 | ) | 50,000 | $ | 0.28 | 305,875 | 101,849 | $ | 0.89 | ||||||||||||||||||
$ | 10,132,365 | $ | (4,217,365 | ) | $ | 5,915,000 | $ | 36,187,018 | $ | 12,048,668 | ||||||||||||||||||
[1] | In addition to scheduled debt discounts, the Company incurred debt issuance costs of approximately 13% of the proceeds of these financings, which is not included herein. | |
[2] | The number of shares of common stock to be issued upon such conversion shall be determined by dividing (a) the amount sought to be converted by (b) the greater of (i) the Conversion Price (as defined below) at that time, or (ii) the Floor Price (as defined below). The Conversion Price is equal to 80% of the volume-weighted average price for the 5 trading days ending on the business day immediately preceding the applicable date the conversion is sought, as reported by Bloomberg, LP, or if such information is not then being reported by Bloomberg, then as reported by such other data information source as may be selected by the lender. The Floor Price is initially equal to $0.28 per share, subject to adjustment upon the occurrence of certain events, including recapitalization, stock splits, and similar corporate actions. | |
[3] | As part of the closing on April 26, 2010, certain investors in the 2009 Registered Direct Offering exercised their Right of Participation and purchased $599,525 of the Notes issued in that closing and the Company issued such participants warrants to purchase up to 712,949 shares of our common stock exercisable at $0.28 per share. The remainder of the participants received warrants exercisable at $0.89 per share. |
The convertible notes and warrants issued pursuant to the four closings
are virtually the same, but for an addendum the Company entered into at the second closing
regarding the number of shares the Company can issue before receiving Stockholder Approval to issue
more than 19.99% of our issued and outstanding common stock.
The private financing described herein was made pursuant to the exemption from the
registration provisions of the Securities Act of 1933, as amended, provided by Sections 3(a)(9) and
4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder. In addition to the
discounts and fees listed above, the Company paid an aggregate of approximately $469,000 in
finders fees for the note financings. The securities issued have not been registered under the
Securities Act and may not be offered or sold in the United States absent registration or an
applicable exemption from registration requirements. A Form S-1 Registration Statement to register the shares
issuable pursuant to the note financings was filed on May 3, 2010, but has not yet been declared effective.
Each of the convertible notes
issued in the four closings, (collectively Notes) matures one year from the date of issuance and carries an original issue
discount. The Lenders have the right, at their sole option, to convert the Notes, in whole or in
part into shares of our common stock.
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If, during the term of the Notes, the average closing bid price of the Companys the common stock for at
least 20 of the immediately preceding 30 trading days equals or exceeds $1.25, then on 20 days
irrevocable notice, and subject to certain conditions set forth in the Note, the Company can cause
the lenders to convert the outstanding balance of the Notes into shares of common stock. The number
of shares of common stock to be so delivered shall not exceed an amount equal to the product of the
average daily volume of common stock traded on the primary exchange for common stock during the 20
prior trading days as of the mandatory conversion determination date multiplied by twenty.
Interest on the unpaid principal balance of the Notes shall accrue at the rate of 12% per
annum, which shall increase to 18% upon the occurrence of an event of default of trigger event, as
those terms are defined in the Notes. Commencing on the 6 month anniversary of the Notes and each
90 days thereafter on which a payment of interest is due and continuing on the first day of every
third month thereafter until the one year anniversary of the Note, the Company shall pay the
lenders all interest, fees and penalties accrued but unpaid under the Notes as of such date.
Pursuant to the terms of the Notes, the Company shall also pay lenders six equal payments
representing one-twelfth of the principal amount of the Notes, commencing on the six month
anniversary of the Notes and continuing thereafter until the Maturity Date, when the Company shall
pay all remaining principal and interest, in cash. The Company maintain the right to make any and
all of the six payments, at our option, in cash or shares of common stock at the greater of the
Floor Price or 80% of the volume-weighted average price for the 5 trading days ending on the
business day immediately preceding the applicable payment date.
Notwithstanding any other terms to the contrary, pursuant to the terms of the Notes, the
Company must pay all amounts due under the Notes in cash unless all of the following conditions are
met: (i) a payment in common stock would not cause an individual lenders beneficial ownership of common
stock to exceed 9.99% of our then outstanding shares of common stock; (ii) the Company received
NYSE Amex listing approval for the common stock issuable under the Notes; (iii) not less than seven
calendar days prior to the applicable payment date, the Company shall have notified the Lenders
that the Company intend to make such payment in common stock; (iv) (a) the common stock to be
issued have been registered under the Securities Act of 1933, as amended, or (b) (A) Rule 144
promulgated thereunder is available for their sale, (B) the Company provided to the Lenders (prior
to the delivery of the common stock on the applicable payment date) an attorneys opinion, in a
form acceptable to the lenders, which provides that Rule 144 is available for the sale of the
common stock, (C) the Company is current on all of our Securities and Exchange Commission reporting
obligations, and (D) the Company is not subject to an extension for reporting our quarterly or
annual results; (v) the closing bid price for the common stock on the business day on which notice
is given is greater than the Floor Price divided by 80%; and (vi) neither an Event of Default nor a
Trigger Event shall have occurred.
Upon a Triggering Event, as defined in the Notes, the outstanding balance of the Notes shall
immediately increase to 125% of the then owing principal balance and interest shall accrue at the
rate of 1.5% per month. Upon an Event of Default, as defined in the Notes, the lender may declare
the unpaid principal balance together with all accrued and unpaid interest thereon immediately due
and payable. However, all outstanding obligations payable by us shall automatically become
immediately due and payable if the Company become the subject of a bankruptcy or related
proceeding.
The Warrants issued in connection with the Notes Warrants have a term of five years and are initially exercisable at the higher of: (i)
105% of the average VWAP for the five trading days immediately preceding the date the Company
issued the Warrants; and (ii) the Floor Price (the same as in the Notes) in effect on the date the
Warrants is exercised. The exercise price is subject to the occurrence of certain events,
including capital adjustments and reorganizations. The Lenders may exercise the Warrants via a
cashless exercise if a registration statement for the Warrant Shares is not the in
effect. Pursuant to the terms of the Warrants, the Company will not effect the exercise of any
warrants, and no person who is a holder of any warrant has the right to exercise his/her Warrants,
if after giving effect to such exercise, such person would beneficially own in excess of 9.99% of
the then outstanding shares of our common stock.
Since the Company is listed on the NYSE Amex, the Company is required to obtain stockholder
approval to issue more than 19.99% of our issued and outstanding common stock at a discount from
book or market value at the time of issuance (19.99% Cap), which as of the date of the first
closing equals 5,085,308 shares, as of the second and third closing equals 5,367,529 shares, and as
of the fourth closing equals 5,919,395 shares of our common stock. If the Notes and Warrants
issued pursuant to the first closing is fully converted and exercised(but no shares of our common
stock are issued in payment of interest on the Note), then the Company will issue 4,403,571 shares
of our common stock, which represents 17.3% of our issued and outstanding common stock. If the
Notes and Warrants issued in the second and third closings are fully converted and exercised (but
no shares of our common stock are issued in payment of interest on the Notes), then the Company may
possibly issue up to a total of 45,137,578 shares of our common stock, which exceeds 19.99% of our
issued and outstanding common stock. If the Notes and Warrants issued in the fourth closing are
fully converted, at the floor price, and exercised (but no shares of our common stock are issued in
payment of interest on the Notes), then the Company may possibly issue up to a total of
approximately 52,802,983 shares of our common stock, which exceeds 19.99% of our issued and
outstanding common stock. Accordingly, the Company is required under the terms of the Notes to
obtain Stockholder Approval, on or before July 15, 2010 for the first and second closing and on or
before August 31, 2010, for the third and fourth closing. However, the Company agreed to seek Stockholder
Approval at our next meeting of stockholders. If the Company fails to obtain such approval, an
Event of Default under the Notes shall occur. The Company is not required to issue any shares
above the 19.99% Cap, if such 19.99% Cap is applicable, until the Company receives the Stockholder
Approval of same.
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The Addendum the Company entered into in the Second Closing prohibits us from issuing more
than 594,528 shares to the lenders, unless the Company receive Stockholder Approval and NYSE Amex
approval to list and issue all shares issuable: (i) upon
exercise of all of the Warrants at $0.28
per share, (ii) all of the Notes are converted at that same price (which is the lowest price
possible, although the initial conversion price is to 80% of the five day volume weighted average
closing price of our common stock preceding the date of conversion) and (iii) no shares are issued
in payment of interest. Pursuant to an Addendum to the Note and Warrant purchase Agreement the
Company entered into in the Second Closing, in the event (i) any Lender in the second or third
closing attempts to convert the Notes or exercise the Warrant prior to our receipt of such
Stockholder Approval and NYSE Amex approval and (ii) such conversion or exercise would require us
to issue in excess of 19.99% of our outstanding common stock to any Lender in the second or third
closing at any time after the second closing date (after reserving 4,403,571 shares for issuance to
the lender of the first closing), then the Company shall not be obligated to issue any shares that
would be in excess of the 19.99% Cap until required approvals are obtained from the stockholders
and NYSE Amex, if required.
NYSE Amex approved the application for listing on April 19, 2010 for the shares issuable on
conversion of the Notes and Warrants in the First Closing and approved the application for listing
approval of the shares issuable on conversion of the Notes or issuable on exercise of the Warrants
in the Second Closing and the Third Closing on May 3, 2010. The Company has applied for
listing of the shares issuable on conversion of the Fourth Closing Notes and issuable on exercise of
the Warrants issued in the Fourth Closing or pursuant to their Rights of Participation, but has not yet
received listing approval therefor.
In accordance with its Registration Rights Agreement with the lenders, the Company filed a
registration statement on May 3, 2010, registering for resale all of the shares underlying the
Notes and the Warrants, as well as shares issuable under the Notes and Warrants pursuant to
potential adjustments that may occur pursuant thereto and shares of common stock issuable as
interest payments. Pursuant to the terms of the Registration Rights Agreement, our obligation to
register all such shares shall initially was satisfied by the registration of that number of shares
of common stock which is at least equal to the sum of (i) the principal amount of the note plus one
year of interest at the rate of 12% divided by the Floor Price of the Note, which is $0.28 and (ii)
the number of shares of common stock underlying the Lenders Warrants.
Shares Issued in Connection with Warrant Exercises and Financing Arrangements
At various times during April 2010 certain of the Companys debt holders exercised warrants to
purchase 748,000 shares of the Companys common stock. Proceeds from the exercise were
approximately $740,800. In addition, on April 20, 2010, the Company issued 2,200,000 shares of its
common stock to various service providers as compensation services to be provided to the Company.
On April 20, 2010 the Company issued 160,714 shares to settle a balance payable to a professional
services firm.
After April 30, 2010 the Company permitted certain former debt holders to reverse the earlier
conversion of their debt holdings to equity, receive additional interest and re-convert their debt
on a current basis. Under the program, the original debt balances are to be restored and the
previous issuances of the Companys common stock are to be cancelled. As of May 15, 2010, the
Company has issued 54,393 shares to the program participants in lieu of additional interest to the
re-converting note holders.
Approximately 16,666 additional shares of the Companys common stock were earned by B&D
Consulting under its investor relations agreement with the Company (See Note 10).
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report contains forward-looking statements. These statements relate to future events or
our future financial performance. In some cases, you can identify forward-looking statements by
terminology such as may, will, should, expect, plan, anticipate, believe, estimate,
predict, potential or continue, the negative of such terms or other comparable terminology.
These statements are only predictions. Actual events or results may differ materially.
Although we believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance or achievements.
Moreover, neither we, nor any other person, assume responsibility for the accuracy and completeness
of the forward-looking statements. We are under no obligation to update any of the forward-looking
statements after the filing of this Quarterly Report to conform such statements to actual results
or to changes in our expectations.
The following discussion of our financial condition and results of operations should be read
in conjunction with our consolidated financial statements and the related notes and other financial
information appearing elsewhere in this Quarterly Report. Readers are also urged to carefully
review and consider the various disclosures made by us which attempt to advise interested parties
of the factors which affect our business, including without limitation the disclosures made under
the caption Managements Discussion and Analysis of Financial Condition and Results of
Operations, and the audited consolidated financial statements and related notes included in our
Annual Report on Form 10-K/A for the year ended December 31, 2009, previously filed with the U.S.
Securities and Exchange Commission (SEC).
Overview
The Company
Until recently, we were focused on the production
and distribution of pharmaceutical products through our subsidiaries located in the Peoples Republic of China. We have recently refocused
our business on the development, manufacture and marketing of advanced, pioneering medical diagnostic products, including our Onko-Sure a
proprietary In-Vitro Diagnostic (IVD) Cancer Test. During the third and fourth quarter of 2009, we repositioned various business segments
in order to monetize the value of these assets through either new partnerships, separate IPOs or that could be positioned to be sold.
These special assets include: (i) our 98% ownership in China-based pharmaceuticals business, Jade Pharmaceuticals Inc. (JPI); (ii) our
100% ownership of a proprietary cancer vaccine therapy technology: Combined Immunogene Therapy (CIT); and (iii) 100% ownership of the
Elleuxe brand of advanced skin care produces with proprietary formulations that include human placenta extract ingredients sourced from
our deconsolidated chinese subsidiarys operation. We currently employ approximately 7 people, all located in California at our corporate headquarters.
Until September 2009, we operated in China
through our then wholly owned subsidiary, JPI. JPI engages in the manufacture and distribution of generic and homeopathic pharmaceutical
products and supplements, as well as cosmetic products. JPI manufactures and distributes its products through two wholly-owned Chinese
subsidiaries, Jiangxi Jiezhong Bio-Chemical Pharmacy Company Limited (JJB) and Yangbian Yiqiao Bio-Chemical Pharmacy Company Limited
(YYB). However, JPI sold its interest in YYB during June 2009 and during the quarter ended September 30, 2009, we deconsolidated JPI
due to the inability to exercise significant influence of its
operations (See below).
In connection with the deconsolidation, the Company has reclassified its China pharmaceutical manufacturing and distribution business
(conducted through JPI subsidiary) as a business investment, rather than a consolidated operating subsidiary of the Company.
Until
the sale of YYB and deconsolidation of JPI,
we were focused on the production and distribution of pharmaceutical products through our subsidiaries located in the Peoples Republic of
China. We recently refocused our core business strategy and market focus to the international commercialization of Onko-Sure and Elleuxe
products. On September 25, 2009, we changed our corporate name from AMDL, Inc. to Radient Pharmaceuticals Corporation, because we
believe Radient Pharmaceuticals as a brand name has considerable market appeal and reflects our new corporate direction and branding
statements.
We are now actively engaged in the research,
development, manufacturing, sale and marketing of our Onko-Sure a proprietary IVD Cancer Test in the United States, Canada, China, Chile,
Europe, India, Korea, Taiwan, Vietnam and other markets throughout the world.
We manufacture and distribute our proprietary
ONKO-SURE cancer test kits at our licensed manufacturing facility located at 2492 Walnut Avenue, Suite 100, in Tustin, California. We are
a United States Food and Drug Administration (USFDA), GMP approved manufacturing facility. We maintain a current Device Manufacturing
License issued by the State of California, Department of Health Services, Food and Drug Branch. For the three months ended March 31 2010,
we generated approximately $37,000 in the sales of the Companys ONKO-SURE IVD cancer diagnostic test kits, which is an increase of
approximately 60% in sales of this product over the same period for 2009. We believe, subject to receipt of adequate financing, revenues
from ONKO-SURE will significantly increase in 2010 due to the creation of distribution agreements which are anticipated to move the
IVD cancer diagnostic test kit in markets throughout
the world. However, the success of the Companys distribution strategy for these products in 2010 is dependent upon a number of factors.
Accordingly, we may not be able to implement our distribution strategy at the rate we anticipate which will have a material adverse effect
on anticipated 2010 revenues.
Deconsolidation
Due to several factors including deterioration in its relationship with local management of
JPI, we relinquished control over JPI. Effective September 29, 2009, we agreed to exchange its
shares of JPI for 28,000,000 non-voting shares of preferred stock, which represents 100% of the
outstanding preferred shares, relinquished all rights to past and future profits, surrendered its
management positions and agreed to non-authoritative minority role on its board of directors. For
accounting purposes, we converted its interest in JPI to that of an investment to be accounted for
under the cost method and deconsolidated JPI as of September 29, 2009. The Company recorded a
loss on deconsolidation of $1,953,516 in connection with the transaction during the nine months
ended September 30, 2009. In connection with the deconsolidation, we reclassified China
pharmaceutical manufacturing and distribution business (conducted through JPI subsidiary) as a
business investment, rather than a consolidated operating subsidiary of the Company.
The significant terms of the deconsolidation of our operations in China are described in the
notes to our Annual Report on Form 10-K/A for the year ended December 31, 2009.
Monetization of the Value of JPI
We and the management of JPI have recently
developed a new path to monetizing the value of JPI. This new monetization path focuses around JPI acquiring a well-managed China-based
pharmaceuticals manufacturing and marketing company, where in the acquired companys management would take over operations of the combined
companies. This combined broader-based pharmaceuticals business would then seek a financing and public listing in the U.S. Recently,
JPI has had active dialogue with various prospective companies that
have indicated an interest in being acquired by JPI. Although no
agreements have been reached at this time, JPIs management has indicted that they believe an acquisition of this type, as described
above,
could begin before the end of 2010.
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IV Diagnostics
IVD Cancer Diagnostics
ONKO-SURETM Kit
Our ONKO-SURETM product is manufactured at the Companys Tustin, California
based facilities and is sold to third party distributors, who then sell directly to CLIA certified
reference laboratories in the United States as well as clinical reference labs, hospital
laboratories and physician operated laboratories in the international market. Our test kits are
currently being sold to one diagnostic reference laboratory in the United States. During the three
months ended March 31, 2010, we entered into an exclusive five year distribution agreement with
Genway Biotech, Inc. for the marketing and sales of ONKO-SURETM in Greece. In April
2010, we entered into an exclusive five year collaboration agreement with Jaiva Technologies, Inc.
to conduct clinical trials for our CIT technology in India.
The majority of our sales were outside of the U.S. with, limited sales of test kits within the
U.S. We have developed the next generation version of the ONKO-SURE TM test
kit, and in 2009, we entered into a collaborative agreement with the Mayo Clinic to conduct a
clinical study to determine whether the new version of the kit can lead to improved accuracy in the
detection of early-stage cancer. In addition, we are involved with research conducted with CLIA
Laboratories to expand on the Clinical utility of ONKO-SURETM . The
Companys ONKO-SURE TM in- vitro diagnostic test enables physicians and their
patients to effectively monitor and/or detect solid tumor cancers by measuring the accumulation of
specific breakdown products in the blood called Fibrin and Fibrinogen Degradation Products (FDP).
ONKO-SURE TM is a simple, non-invasive blood test used for the detection
and/or monitoring of 14 different types of cancer including: lung, breast, stomach, liver, colon,
rectal, ovarian, esophageal, cervical, trophoblastic, thyroid, malignant lymphoma, and pancreatic.
ONKO-SURE TM can be a valuable diagnostic tool in the worldwide battle
against cancer, the second leading cause of death worldwide. ONKO-SURE TM
serves the IVD cancer/oncology market which, according to Bio-Medicine.org, is growing at an 11%
compounded annual growth rate.
ONKO-SURETM is sold as a blood test for cancer in Europe (CE Mark
certified), India, Taiwan, Korea, Vietnam, and in Chile (research use); approved in the U.S. for
the monitoring of colorectal cancer (CRC); approved in Canada (by Health Canada) for lung cancer
detection and lung cancer treatment monitoring; and in many key markets, has the significant
potential to be used as a general cancer screening test.
Because the ONKO-SURETM test kit is a non-invasive blood test,
there are no side effects of the administration of the test. As with other cancer diagnostic
products, false positive and false negative test results could pose a small risk to patient health
if the physician is not vigilant in following up on the ONKO-SURE TM test
kit results with other clinically relevant diagnostic modalities. While the ONKO-SURE
TM test kit is helpful in diagnosing whether a patient has cancer, the attending
physician needs to use other testing methods to determine and confirm the type and kind of cancer
involved.
On July 8, 2009, we changed the brand name of our in-vitro diagnostic cancer test from
DR-70 to the more consumer friendly, trademarked brand name ONKO-SURE TM ,
which we believe communicates it as a high quality, innovative consumer cancer test. The Company is
also installing a new tag line The Power of Knowing which communicates to cancer patients and
their physicians that the test is effective in assessing whether a patients cancer is progressing
during treatment or is in remission.
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IVD Cancer Research and Development
During the three months ended March 31, 2010, we spent $51,036 on research and
development related to the ONKO-SURE TM , as compared to $92,684 for the
same period in 2009. These expenditures were incurred as part of the Companys efforts to improve
the existing ONKO-SURE TM and develop the next generation ONKO-SURE
TM .
We expect expenditures for research and development to grow in 2010 due to additional
staff and consultants needed to support an agreement with Mayo Clinic to conduct a clinical study
for the validation of our next generation version of its United States Food and Drug
Administration(USFDA) approved ONKO-SURE TM test kit, additional costs
involved with research conducted with CLIA Laboratories to expand on the Clinical utility of
ONKO-SURETM and additional development costs associated with entry into new markets.
Through this validation study, we and Mayo Clinic will perform clinical diagnostic testing to
compare to the Companys ONKO-SURE TM test kit with a newly developed, next
generation test. The primary goal of the study is to determine whether the Companys next
generation ONKO-SURE TM test kit serves as a higher-performing test to its
existing predicate test and can lead to improved accuracy in the detection of early-stage cancers.
For USFDA regulatory approval on the new test, we intend to perform an additional study
to demonstrate the safety and effectiveness of the next generation test for monitoring colorectal
cancer. The validation study will run for three months and final results are expected in the third
or fourth quarter of 2010. In addition, additional expenses will be incurred for consultants and
laboratories for the reformulation of the HPE-based cosmetics as well as laboratories involved in
testing the safety and effectiveness of the product.
Cancer Therapeutics
In 2001, we acquired the CIT technology, which forms the basis for a proprietary cancer
vaccine. Our CIT technology is a U.S. patented technology (patent issued May 25, 2004). The Cancer
Therapeutics division is engaged in commercializing the CIT technology. In April 2010, we entered
into a five year collaboration agreement with Jaiva Technologies, Inc., (Jaiva) where Jaiva will
conduct clinical trials of the CIT technology that potentially could lead to gaining governmental
approval in India.
Critical Accounting Estimates
Our consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation of these
consolidated financial statements requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. We base our estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances, the results of which
form the basis of making judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources.
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Actual results may differ from these estimates under different assumptions or conditions and
the differences could be material.
We believe the following critical accounting policies, among others, affect our more
significant judgments and estimates used in the preparation of our consolidated financial
statements:
Revenue Recognition. Revenues from the wholesale sales of over-the counter and
perscription pharmaceuticals are recognized when persuasive evidence of an arrangement exists,
title and risk of loss have passed to the buyer, the price is fixed or readily determinable and
collection is reasonably assured.
We have entered into several distribution agreements for various geographic locations with
third party distributors. Under the terms of the agreements, we sell product to the distributor at
a base price that is the greater of a fixed amount (as defined in each agreement) or 50% of the
distributors invoiced Net Sales price (as defined) to its customers. The distributor is required
to provide quarterly reconciliations of the distributors actual invoiced prices at which time the
price becomes fixed and determinable by the Company. Until the price is fixed and determinable, we
defer the recognition of revenues under these arrangements. As of March 31, 2010, we had $103,128 of deferred revenue related to
these arrangements recorded in our accompanying consolidated balance sheet.
Any provision for sales promotion discounts and estimated returns are accounted for in
the period the related sales are recorded. Buyers generally have limited rights of return, and we
provides for estimated returns at the time of sale based on historical experience. Returns from
customers historically have not been material. Actual returns and claims in any future period may
differ from our estimates. In accordance with FASB ASC 605-45-50, Taxes Collected from Customers
and Remitted to Governmental Authorities , JPIs revenues are reported net of value added taxes
(VAT) collected.
Sales Allowances. A portion of our business is to sell products to distributors who resell
the products to end customers. In certain instances, these distributors obtain discounts based on
the contractual terms of these arrangements. Sales discounts are usually based upon the volume of
purchases or by reference to a specific price in the related distribution agreement. The Company
recognizes the amount of these discounts at the time the sale is recognized. Additionally, sales
returns allowances are estimated based on historical return data, and recorded at the time of sale.
If the quality or efficacy of our products deteriorates or market conditions otherwise change,
actual discounts and returns could be significantly higher than estimated, resulting in potentially
material differences in cash flows from operating activities.
Allowance for Doubtful Accounts. We maintain allowances for doubtful accounts for
estimated losses resulting from the inability of our customers to make required payments. The
allowance for doubtful accounts is based on specific identification of customer accounts and our
best estimate of the likelihood of potential loss, taking into account such factors as the
financial condition and payment history of major customers. We regularly evaluate the
collectibility of our receivables. If the financial condition of our customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional allowances may be
required. The differences could be material and could significantly impact cash flows from
operating activities.
Inventories. Major components of inventories are raw materials, packaging materials, direct
labor and production overhead. Our inventories consist primarily of raw materials and related
materials, and are stated at the lower of cost or market with cost determined on a first-in,
first-out (FIFO) basis. The Company regularly monitors inventories for excess or obsolete items
and makes any valuation corrections when such adjustments are needed. Once established,
write-downs are considered permanent adjustments to the cost basis of the obsolete or excess
inventories. The Company writes down inventories for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventories and the estimated market value
based upon assumptions about future demand, future pricing and market conditions. If actual future
demand, future pricing or market conditions are less favorable than those projected by management,
additional write-downs may be required and the differences could be material. Such differences
might significantly impact cash flows from operating activities.
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Impairment of Long-Lived Assets
In accordance with FASB ASC 360-10-5, Accounting for the Impairment or Disposal of Long-Lived
Assets, we evaluate the carrying value of our long-lived assets for impairment whenever events or
changes in circumstances indicate that such carrying values may not be recoverable. We uses its
best judgment based on the current facts and circumstances relating to its business when
determining whether any significant impairment factors exist. We consider the following factors or
conditions, among others, that could indicate the need for an impairment review:
| significant under performance relative to expected historical or projected future operating results; | ||
| market projections for cancer research technology; | ||
| its ability to obtain patents, including continuation patents, on technology; | ||
| significant changes in its strategic business objectives and utilization of the assets; | ||
| significant negative industry or economic trends, including legal factors; | ||
| potential for strategic partnerships for the development of its patented technology; | ||
| changing or implementation of rules regarding manufacture or sale of pharmaceuticals in China; and | ||
| ability to maintain Good Manufacturing Process (GMP) certifications. |
If we determine that the carrying values of long-lived assets may not be recoverable based
upon the existence of one or more of the above indicators of impairment, our management performs an
undiscounted cash flow analysis to determine if impairment exists. If impairment exists, we
measures the impairment based on the difference between the assets carrying amount and its fair
value, and the impairment is charged to operations in the period in which the long-lived asset
impairment is determined by management. Based on our analyses, we believe that no indicators of
impairment of the carrying value of its long-lived assets existed at March 31, 2010. There can be
no assurance, however, that market conditions will not change or demand for our products will
continue or allow we to realize the value of its long-lived assets and prevent future impairment.
The carrying value of our investment in JPI represents its ownership interest in JPI,
accounted for under the cost method. The ownership interest is not adjusted to fair value on a
recurring basis. Each reporting period we assess the fair value of our ownership interest in JPI
fair value in accordance with FASB ASC 325-20-35 paragraphs 1A and 2. Each year we conduct an
impairment analysis in accordance with the provisions within FASB ASC 320-10-35 paragraphs 25
through 32.
Deferred Taxes. We record a valuation allowance to reduce the deferred tax assets to the
amount that is more likely than not to be realized. We have considered estimated future taxable
income and ongoing tax planning strategies in assessing the amount needed for the valuation
allowance. Based on these estimates, all of our deferred tax assets have been reserved. If actual
results differ favorably from those estimates used, we may be able to realize all or part of our
net deferred tax assets. Such realization could positively impact our consolidated operating
results and cash flows from operating activities.
Litigation. We account for litigation losses in accordance with accounting principles
generally accepted in the United States, (GAAP), loss contingency provisions are recorded for
probable losses at managements best estimate of a loss, or when a best estimate cannot be made, a
minimum loss contingency amount is recorded. These estimates are often initially developed
substantially earlier than when the ultimate loss is known, and the estimates are refined each
accounting period, as additional information is known. Accordingly, we is often initially unable to
develop a best estimate of loss; therefore, the minimum amount, which could be zero, is recorded.
As information becomes known, either the minimum loss amount is increased or a best estimate can be
made, resulting in additional loss provisions. Occasionally, a best estimate amount is changed to a
lower amount when events result in an expectation of a more favorable outcome than previously
expected. Due to the nature of current litigation matters, the factors that could lead to changes
in loss reserves might change quickly and the range of actual losses could be significant, which
could materially impact our consolidated results of operations and comprehensive loss and cash
flows from operating activities.
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Stock-Based Compensation Expense. All issuances of our common stock for non-cash
consideration have been assigned a per share amount equaling either the market value of the shares
issued or the value of consideration received, whichever is more readily determinable. The majority
of non-cash consideration received pertains to services rendered by consultants and others and has
been valued at the market value of the shares on the measurement date.
We account for equity instruments issued to consultants and vendors in exchange for goods
and services in accordance with GAAP. The measurement date for the fair value of the equity
instruments issued is determined at the earlier of (i) the date at which a commitment for
performance by the consultant or vendor is reached or (ii) the date at which the consultant or
vendors performance is complete. In the case of equity instruments issued to consultants, the fair
value of the equity instrument is recognized over the term of the consulting agreement.
We account for equity awards issued to employees as follows. GAAP requires a public entity to
measure the cost of employee services received in exchange for an award of equity instruments,
including stock options, based on the grant-date fair value of the award and to recognize the
portion expected to vest as compensation expense over the period the employee is required to
provide service in exchange for the award, usually the vesting period.
Derivative Financial Instruments. We apply the provisions of FASB ASC 815-10,
Derivatives and Hedging (ASC 815-10). Derivatives within the scope of ASC 815-10 must be recorded
on the balance sheet at fair value. During the three months ended March 31, 2010, we issued
convertible debt with warrants and recorded derivative liabilities related to the beneficial
conversion feature of the convertible debt and a reset provision associated with the exercise price
of the warrants. The fair value on the grant date was $418,138 as computed using the Black-Scholes
option pricing model. During the three months ended March 31, 2010, a convertible debt holder of
prior financings converted the principal and accrued interest which resulted in a decrease of the
derivative liability of $43,094 which was recorded to additional paid in capital. In addition,
during the three months ended March 31, 2010, 500,000 warrants were exercised by a holder of the
Companys convertible debt. This resulted in a decrease of $83,872, representing the value of the
warrants exercised. We re-measured the fair values all of our derivative liabilities as of March
31, 2010 and recorded an aggregate decrease of $42,994 in the fair value of the derivative
liabilities as other income during the three months ended March 31, 2010.
Results of Operations
Three Months Ended March 31, 2010 Compared to Three Months Ended March 31, 2009
Introduction
As noted above, we deconsolidated our operations in China effective September 29, 2009. The table
below reflects the comparative results for the three months ended March 31, 2010 as compared to the
three months ended March 31, 2009, after the elimination of our China based operations:
Three months ended March 31, | Difference | |||||||||||||||
2010 | 2009 | $ | % | |||||||||||||
Net revenues |
$ | 36,842 | $ | 23,070 | $ | 13,772 | 60 | % | ||||||||
Cost of sales |
21,935 | 8,075 | 13,860 | 172 | % | |||||||||||
Gross profit |
14,907 | 14,995 | (88 | ) | (1 | )% | ||||||||||
Operating expenses: |
||||||||||||||||
Research and development |
51,036 | 92,684 | (41,648 | ) | (45 | )% | ||||||||||
Selling, general and administrative |
1,355,182 | 2,044,384 | (689,202 | ) | (34 | )% | ||||||||||
1,406,218 | 2,137,068 | (730,850 | ) | (34 | )% | |||||||||||
Loss from operations |
(1,391,311 | ) | (2,122,073 | ) | 730,762 | (34 | )% | |||||||||
Other expense: |
||||||||||||||||
Interest expense |
(1,162,674 | ) | (178,515 | ) | (984,159 | ) | 551 | % | ||||||||
Other expense, net |
(43,257 | ) | (36,093 | ) | (7,164 | ) | 20 | % | ||||||||
Total other expense, net |
(1,205,931 | ) | (214,608 | ) | (991,323 | ) | 462 | % | ||||||||
Net loss |
(2,597,242 | ) | (2,336,681 | ) | (260,561 | ) | 11 | % | ||||||||
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Net Revenues
Net revenues during the three months ended March 31, 2010, were primarily earned from the sale
of ONKO-SURE test kits. The increase in revenues during the three months ended March 31, 2010, as
compared to the same prior year results from our efforts to develop our distribution networks.
With USFDA approval of our ONKO-SUREtm product, our goal is to enter into
additional exclusive or non-exclusive distribution agreements for various regions, and due to the
Companys overall commercialization efforts, we expect that sales will continue to increase in
2010.
We presently have exclusive distribution agreements in place for ONKO-SURE test kits in the
U.S., Canada, Korea, India, Russia, Greece, and Israel along with an exclusive distribution partner
assigned in Vietnam. We have an agreement in negotiation which would grant exclusive rights to
distribute the ONKO-SUREtm test kits in South America and Latin America. It is
anticipated that this agreement will be in place by the end of the second quarter of 2010.
Our expectations concerning future sales represent forward-looking statements that are subject
to certain risks and uncertainties which could result in sales below those achieved in previous
periods. Sales of ONKO-SUREtm test kits in 2010 could be negatively impacted
by potential competing products, lack of adequate supply and overall market acceptance of the
Companys products.
We have a limited supply of one of the key components of the ONKO-SUREtm
test kit. The anti-fibrinogen-HRP is limited in supply and additional quantities cannot be
purchased. We currently have two lots remaining which are estimated to produce approximately 31,000
kits. Based on the Companys current and anticipated orders, this supply is adequate to fill all
orders. Although are working on replacing this component so that we are in a position to have an
unlimited supply of ONKO-SURETM in the future, the Company cannot assure that this
anti-fibrinogen-HRP replacement will be completed. An integral part of the Companys research and
development through 2010 is the testing and development of an improved version of the
ONKO-SUREtm test kit. The Company is reviewing various alternatives and
believes that a replacement anti-fibrinogen-HRP will be identified, tested and USFDA approved
before the current supply is exhausted.
Pilot studies show that the new version could be superior to the current version and it is
anticipated that this version will be submitted to the USFDA in the latter half of 2010.
Gross Profit
The major components of cost of sales include raw materials and production overhead.
Production overhead is comprised of depreciation, land use rights, and manufacturing equipment,
amortization of production rights, utilities and repairs and maintenance. The increase in cost of
revenues is primarily due to increase sales of ONKO-SUREtm test
kits. In addition, during the three months ended March 31, 2010, our gross margin decreased to
approximately 40% during the three months ended March 31, 2010 from approximately 65%, during the
same period of the prior year, due to increases in the costs of raw materials and inefficiencies in
the manufacturing process due to reductions and turnover in staff during 2010.
Research and Development.
The reduction in research and development expenses is consistent with managements general
effort to manage expenditures in response to the limited availability of cash. However, as
resources become available, we expect research and development expenditures to increase during the
remainder of 2010 due to:
| The need for research and development for an updated version of the ONKO-SUREtm test kit in the US, clinical trials for such tests and funds for ultimate USFDA approval; and | ||
| Additional expenditures for research and development incurred under agreements with CLIA laboratories. |
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of consulting (including financial
consulting) and legal expenses, director and commitment fees, regulatory compliance, professional
fees related to patent protection, payroll, payroll taxes, investor and public relations,
professional fees, and stock exchange and shareholder services. Included in selling, general and
administrative expenses were non-cash expenses incurred during the three months ended March 31,
2010 of $173,758 for options issued to employees and directors and $342,311 of common
stock, options and warrants issued to consultants for services. For the three months ended March
31, 2009, selling, general and administrative expenses included non-cash expenses of $157,155 for
options issued to employees and directors and approximately $105,925 for common stock, options and
warrants issued to consultants
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for services. The decrease in selling, general and administrative expense is primarily due to
managements general effort to reduce expenditures in response to the Companys limited available
cash.
The table below details the major components of selling, general and administrative expenses:
Three months ended March 31, | ||||||||
2010 | 2009 | |||||||
Investor relations (including value of warrants/options) |
$ | 461,337 | $ | 313,769 | ||||
Salary and wages (including value of options) |
407,486 | 647,944 | ||||||
Accounting and other professional fees |
87,540 | 326,428 | ||||||
Stock exchange fees |
85,393 | 206,224 | ||||||
Directors fees (including value of options) |
72,500 | | ||||||
Rent and office expenses |
31,462 | 96,377 | ||||||
Employee benefits |
31,312 | 26,625 | ||||||
Travel and entertainment |
30,092 | 49,307 | ||||||
Insurance |
25,406 | 27,116 | ||||||
Taxes and licenses |
22,576 | 49,262 | ||||||
Other |
100,078 | 301,332 | ||||||
$ | 1,355,182 | $ | 2,044,384 | |||||
Interest Expense
Interest expense increased due to the issuance of debt instruments and the amortization of the
related debt discounts, debt issuance costs, and derivative liabilities in 2009 and during the
three months ended March 31, 2010.
Other Expense
The increase in other expense is primarily due to losses of $42,994 resulting from the change
in the fair value of derivatives during three months ended March 31, 2010.
Liquidity and Capital Resources
Historically, our operations have not been a source of liquidity. At March 31, 2010, we had a significant amount
of relatively short term indebtedness that was in default or past due and we may be unable to satisfy our
obligations to pay interest and principal thereon. As of March 31, 2010, we had the
following approximate amounts of outstanding short term indebtedness:
(i) | Accounts payable and accrued expenses of approximately $1.8 million; | ||
(ii) | Accrued salaries of approximately $1.1 million; | ||
(iii) | Accrued interest of $633,000; | ||
(ii) | An $83,000 unsecured bridge loan bearing interest at 12% per annum which was due October 9, 2009 and obligations under a consulting agreement aggregating $144,000 due to Cantone Research, Inc. and Cantone Asset Management, LLC, respectively; | ||
(iv) | Approximately $1.6 million in unsecured convertible notes bearing interest at 10% per annum due September 15, 2010; | ||
(v) | Approximately $300,000 in unsecured convertible notes bearing interest at 12%, which were converted to equity in April 2010; | ||
(vi) | Approximately $925,000 in unsecured convertible notes bearing interest at 12% per annum due March 22, 2011; and | ||
(vii) | Approximately $3.6 million in senior unsecured promissory notes bearing interest at 18% interest, payable quarterly in cash, which are due between December 2010 and May 2011; |
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In addition, in April 2010 we conducted three additional closings of convertible note and
warrant purchase agreements, aggregating approximately $10.1 million as follows:
Minimum | Maximum | Warrants | ||||||||||||||||||||||||||
Face Value of | Conversion | Shares | Minimum | |||||||||||||||||||||||||
Date of | Convertible | Price Per | Issuable upon | Exercise | ||||||||||||||||||||||||
Issuance | Notes | Discounts [1] | Proceeds | Share [2] | Conversion | Number | Price | |||||||||||||||||||||
4/8/2010 |
$ | 5,490,165 | $ | (2,285,165 | ) | $ | 3,205,000 | $ | 0.28 | 19,607,732 | 6,528,213 | $ | 0.38 | |||||||||||||||
4/13/2010 |
3,957,030 | (1,647,030 | ) | 2,310,000 | $ | 0.28 | 14,132,250 | 4,705,657 | $ | 0.38 | ||||||||||||||||||
4/26/2010 [3] |
599,525 | (249,525 | ) | 350,000 | $ | 0.28 | 2,141,161 | 712,949 | $ | 0.28 | ||||||||||||||||||
4/26/2010 [3] |
85,645 | (35,645 | ) | 50,000 | $ | 0.28 | 305,875 | 101,849 | $ | 0.89 | ||||||||||||||||||
$ | 10,132,365 | $ | (4,217,365 | ) | $ | 5,915,000 | $ | 36,187,018 | $ | 12,048,668 | ||||||||||||||||||
[1] | In addition to scheduled debt discounts, the Company incurred debt issuance costs of approximately 13% of the proceeds of these financings. | |
[2] | The number of shares of common stock to be issued upon such conversion shall be determined by dividing (a) the amount sought to be converted by (b) the greater of (i) the Conversion Price (as defined below) at that time, or (ii) the Floor Price (as defined below). The Conversion Price is equal to 80% of the volume-weighted average price for the 5 trading days ending on the business day immediately preceding the applicable date the conversion is sought, as reported by Bloomberg, LP, or if such information is not then being reported by Bloomberg, then as reported by such other data information source as may be selected by the lender. The Floor Price is initially equal to $0.28 per share, subject to adjustment upon the occurrence of certain events, including recapitalization, stock splits, and similar corporate actions. | |
[3] | As part of the closing on April 26, 2010, certain investors in the 2009 Registered Direct Offering exercised their Right of Participation and purchased $599,525 of the Notes issued in that closing and the Company issued such participants warrants to purchase up to 712,949 shares of our common stock exercisable at $0.28 per share. The remainder of the participants received warrants exercisable at $0.89 per share. |
Each of the notes matures one year from the date of issue and is convertible at the option of
the holders. We are attempting to obtain stockholder approval to restructure and convert a
significant portion of the indebtedness referred to in (ii), and (vi) above; however, there can be
no assurance that such indebtedness will be restructured, converted into equity or that the
requisite approvals therefore can be obtained. Absent approval of our stockholders and the NYSE
Amex to restructure these obligations or the receipt of a new financing or series of financings,
our current operations do not generate sufficient cash to pay the interest and principal on these
obligations when they become due. Accordingly, there can be no assurance that we will be able to
pay these or other obligations which we may incur in the future.
Our cash balances at March 31, 2010 and December 31, 2009 were approximately $44,000 and
approximately $12,000, respectively.
Operating activities. Our cash used in and provided in operations was $511,000 and $841,000 for
the three months ended March 31, 2010 and 2009, respectively. The primary driver of cash used or
provided by operations during the three months ended March 31, 2010 and 2009 was our net losses of
approximately $2.6 million and approximately $1.7 million, respectively. The effect of the net
loss during the three months ended March 31, 2010 was partially offset by significant non-cash
activity such as (i) approximately $870,000 for the accretion of debt issuance costs and the
amortization of debt discounts, (ii) approximately $174,000 for the fair value of options granted
to employees and directors for service and (iii) approximately $342,000 representing the fair
market value of common stock, warrants and options expensed for services. The effect of the net
loss was further offset by an aggregate increase in accounts payable, accrued expenses and accrued
salaries and wages of approximately $531,000.
In addition to the effect of the approximately $1.7 million net loss during the three months ended
March 31, 2009, the company used cash of approximately $567,000 and approximately $831,000 in the
build up of inventories and prepaid expenses, respectively. However, the effect of these
activities was offset by the net collection of approximately $3.3 million in accounts receivable
and approximately $352,000 representing non-cash activities related to depreciation and
amortization.
Investing activities. We used zero and approximately $407,000 in investing activities in the three
months ended March 31, 2010 and 2009, respectively. During the three months ended March 31, 2009,
we made expenditures in an effort to regain our GMP certification for JJBs small injectible
manufacturing lines. In addition, we acquired lab and office equipment for our U.S. facility to
support our ONKO-SURE test kit initiatives.
Financing activities. Cash proceeds from the issue of debt, net of discounts and debt issue costs,
were approximately $403,000 and approximately $567,000 during the three months ended March 31, 2010
and 2009, respectively. In addition, we collected proceeds of approximately $140,000 from the
exercise of warrants during the three months ended March 31, 2010.
Future Capital Needs
Our operations require approximately $300,000 per month, including interest. To the extent
that funds are not available to meet our operating needs, our will have to restrict or discontinue
operations. The Company expects to incur additional capital expenditures at our U.S. facilities in
2010 in the form of upgrading our information technology systems, collaboration with the Mayo
Clinic, agreements with CLIA Laboratories and further development of the
ONKO-SUREtm product and upgrading manufacturing lines in Tustin. It is
anticipated that these projects will be funded primarily through the additional debt or equity
financing obtained in March and April 2010.
Off-Balance Sheet Arrangements
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We are not party to any off-balance sheet arrangements, however, we have executed certain
contractual indemnities and guarantees, under which we may be required to make payments to a
guaranteed or indemnified party. We have agreed to indemnify our directors, officers, employees and
agents to the maximum extent permitted under the laws of the State of Delaware. In connection with
a certain facility lease, we have indemnified our lessor for certain claims arising from the use of
the facilities. Pursuant to the Sale and Purchase Agreement, we have indemnified the holders of
registrable securities for any claims or losses resulting from any untrue, allegedly untrue or
misleading statement made in a registration statement, prospectus or similar document.
Additionally, we have agreed to indemnify the former owners of JPI against losses up to a maximum
of $2,500,000 for damages resulting from breach of representations or warranties in connection with
the JPI acquisition. The duration of the guarantees and indemnities varies, and in many cases is
indefinite. These guarantees and indemnities do not provide for any limitation of the maximum
potential future payments we could be obligated to make. Historically, we have not been obligated
to make any payments for these obligations and no liabilities have been recorded for these
indemnities and guarantees in the accompanying consolidated balance sheets.
Going Concern
The condensed consolidated financial 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. We incurred losses from continuing operations of
$2,597,242 and $1,938,117 for the three months ended March 31, 2010 and 2009, respectively, and had
an accumulated deficit of $55,035,795 at March 31, 2010. In addition, we used cash from operating
activities of continuing operations of $511,467 and had a working capital deficit of approximately $10.2M, based on the face amount of the current portion of debt. These factors raise substantial doubt about the Companys ability to continue as a going concern.
The monthly cash requirement of $300,000 does not include any extraordinary items or
expenditures, including payments to the Mayo Clinic on clinical trials for our
ONKO-SUREtm kit, research conducted through CLIA Laboratories or expenditures
related to further development of the CIT technology, as no significant expenditures are
anticipated other than recurring legal fees incurred in furtherance to of patent protection for the
CIT technology.
We raised gross proceeds of approximately $403,000 in a convertible note and warrant purchase
agreement, during the three months ended March 31, 2010, and raised gross proceeds of approximately
$6.0 million in a series of three similar convertible note and warrant purchase agreements in April
2010, (see note 13). Additionally, in 2010, we entered into a 5-year collaboration agreement with
a third party to commercialize our CIT technology in India, resulting in a potential revenue
sharing arrangement. We are actively securing additional distribution agreements that include
potential revenue sharing arrangements in 2010.
Managements plans include seeking
financing, alliances or other partnership agreements with entities interested in the Companys
technologies, or other business transactions that would generate sufficient resources to assure
continuation of the Companys operations and research and development programs.
There are significant risks and uncertainties which could negatively affect our operations.
These are principally related to (i) the absence of substantive distribution network for our
ONKO-SUREtm kits, (ii) the early stage of development of our CIT technology and
the need to enter into additional strategic relationships with larger companies capable of
completing the development of any ultimate product line including the subsequent marketing of such
product, (iii) the absence of any commitments or firm orders from our distributors, (iv) possible
defaults in existing indebtedness and (v) failure to meet operational covenants in existing
financing agreements which would trigger additional defaults or penalties. Our limited sales to
date for the ONKO-SUREtm kit and the lack of any purchase requirements in the
existing distribution agreements make it impossible to identify any trends in our business
prospects. Moreover, if either AcuVector and/or the University of Alberta is successful in their
claims, we may be liable for substantial damages, our rights to the CIT technology will be
adversely affected, and our future prospects for licensing the CIT technology will be significantly
impaired.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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ITEM 4. CONTROLS AND PROCEDURES
Disclosure of Controls and Procedures
The Company maintains disclosure controls and procedures designed to provide reasonable assurance
that material information required to be disclosed by us in the reports we file or submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms, and that the information is accumulated and
communicated to the Companys management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding required disclosure. The Company
performed an evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the companys disclosure controls and procedures as of the end of the
period covered by this report. Based on the existence of the material weaknesses discussed below
under the heading Material Weaknesses the Companys management, including the Chief Executive
Officer and Chief Financial Officer, concluded that the Companys disclosure controls and
procedures were not effective at the reasonable assurance level as of the end of the period covered
by this report.
The Company does not expect our disclosure controls and procedures will prevent all errors and all
instances of fraud. Disclosure controls and procedures, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls
and procedures are met. Further, the design of disclosure controls and procedures must reflect the
fact that there are resource constraints, and the benefits must be considered relative to their
costs. Because of the inherent limitations in all disclosure controls and procedures, no evaluation
of disclosure controls and procedures can provide absolute assurance that we have detected all the
Companys control deficiencies and instances of fraud, if any. The design of disclosure controls
and procedures also is based partly on certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its stated goals under all
potential future conditions.
Material Weaknesses
In our Managements Report on Internal Control Over Financial Reporting included in the Companys
Form 10-K/A for the period ended December 31, 2009, management concluded that the Companys
internal control over financial reporting was not effective due to the existence of the material
weaknesses as of December 31, 2009, discussed below. A material weakness is a control deficiency,
or a combination of control deficiencies, that results in more than a remote likelihood that a
material misstatement of the annual or interim financial statements will not be prevented or
detected.
During the three months ended March 31, 2010, we did not maintain effective controls to ensure
there is adequate analysis, documentation, reconciliation, and review of accounting records and
supporting data, especially as it relates to subsidiary accounting records. This control deficiency
contributed to the individual material weaknesses described below:
a) Shortage of qualified financial reporting personnel with sufficient depth, skills and
experience to apply accounting principles generally accepted in the United States of America
(GAAP).
b) We did not maintain effective controls to ensure there is adequate analysis,
documentation, reconciliation, and review of accounting records and supporting data.
c) We do not have adequate controls in place to identify and approve non-recurring
transactions such that the validity and proper accounting can be determined on a timely basis.
In summary, the control deficiencies and material weaknesses noted above could result in
a material misstatement of the aforementioned accounts or disclosures that would result in a
material misstatement to the Companys interim or annual consolidated financial statements that
would not be prevented or detected. Accordingly, management has determined that each of the control
deficiencies described above constitutes a material weakness.
Remediation Plan for Material Weaknesses
As of December 31, 2009 and March 31, 2010 there were control deficiencies which constitute as
a material weakness in our internal control over financial reporting. To the extent reasonably
possible in our current financial condition, we have:
1. authorized the addition of staff members and outside consultants with appropriate
levels of experience and accounting expertise to the finance department and information technology
department to ensure that there is sufficient depth and experience to implement and monitor the
appropriate level of control procedures;
2. issued policies and procedures regarding the delegation of authority and conducted
training sessions with appropriate individuals.
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Through these steps, we believe we are addressing the deficiencies that affected our
internal control over financial reporting as of December 31, 2009 and March 31, 2010. Because the
remedial actions require hiring of additional personnel, upgrading certain of our information
technology systems, and relying extensively on manual review and approval, the successful operation
of these controls for at least several quarters may be required before management may be able to
conclude that the material weakness has been remediated. We intend to continue to evaluate and
strengthen our ICFR systems. These efforts require significant time and resources.
Notwithstanding the material weaknesses discussed above, the Companys management has
concluded that the condensed consolidated financial statements included in this Quarterly Report on
Form 10-Q fairly present in all material respects the Companys financial condition, results of
operations, and cash flows for the period ended March 31, 2010 in conformity with accounting
principles generally accepted in the United States of America.
Changes in Internal Control Over Financial Reporting.
Except as set forth above, there have not been any changes in the Companys internal control over
financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) during the three months ended March 31, 2010 that have materially affected, or are reasonably
likely to materially affect, the Companys internal control over financial reporting.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On February 22, 2002, AcuVector Group, Inc. (AcuVector) filed a Statement of Claim in the
Court of Queens Bench of Alberta, Judicial District of Edmonton relating to the Companys CIT
technology acquired from Dr. Chang in August 2001. The claim alleges damages of $CDN 20 million and
seeks injunctive relief against Dr. Chang for, among other things, breach of contract and breach of
fiduciary duty, and against the Company for interference with the alleged relationship between Dr.
Chang and AcuVector. The claim for injunctive relief seeks to establish that the AcuVector license
agreement with Dr. Chang is still in effect. The Company has performed extensive due diligence to
determine that AcuVector had no interest in the technology when the Company acquired it. The
Company has recently initiated action to commence discovery in this case, and AcuVector has taken
no action to advance the proceedings since filing the complaint in 2002. The Company is confident
that AcuVectors claims are without merit and that the Company will receive a favorable judgment.
As the final outcome is not determinable, no accrual or loss relating to this action is reflected
in the accompanying consolidated financial statements.
We are also defending a companion case filed in the same court by the Governors of the
University of Alberta against us and Dr. Chang. The University of Alberta claims, among other
things, that Dr. Chang failed to remit the payment of the Universitys portion of the monies paid
by us to Dr. Chang for the CIT technology purchased by us from Dr. Chang in 2001. In addition to
other claims against Dr. Chang relating to other technologies developed by him while at the
University, the University also claims that the Company conspired with Dr. Chang and interfered
with the Universitys contractual relations under certain agreements with Dr. Chang, thereby
damaging the University in an amount which is unknown to the University at this time. The
University has not claimed that we are not the owner of the CIT technology, just that the
University has an equitable interest therein for the revenues there from. As the final outcome is
not determinable, no accrual or loss relating to this action is reflected in the accompanying
consolidated financial statements. No significant discovery has as yet been conducted in the case.
Accordingly, if either AcuVector and/or the University is successful in their claims, we
may be liable for substantial damages, our rights to the technology will be adversely affected, and
our future prospects for exploiting or licensing the CIT technology will be significantly impaired.
Other than the above mentioned litigation matters, neither we nor any of our direct or
indirect subsidiaries is a party to, nor is any of our property the subject of, any legal
proceedings other than ordinary routine litigation incidental to their respective businesses. There
are no proceedings pending in which any of our officers, directors or 5% shareholders are adverse
to us or any of our subsidiaries or in which they are taking a position or have a material interest
that is adverse to us or any of our subsidiaries.
Neither we nor any of our subsidiaries is a party to any administrative or judicial
proceeding arising under federal, state or local environmental laws or their Chinese counterparts.
From time to time, we may be involved in litigation relating to claims arising out of our
operations in the normal course of business.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) Information relating to sales of our securities that were not registered under the Securities
Act are disclosed in the Current Reports on Form 8-K that we filed on March 26, 2010, April 13,
2010, April 16, 2010 and April 28,2010.
(b) Not applicable
(c) Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company did not pay the interest due on the Series 1 Senior Notes or the Series 2 Senior
Notes (together the Notes) due on December 1, 2009 or March 1, 2010 the Company did not have
sufficient cash to satisfy these debts and carry on current operations. Consequently, under the
terms of the Notes, the interest rate increased from 12% to 18% per annum. The failure to pay
interest as scheduled represented an event of default under the terms of the Notes and all senior
debt was classified as current. However, none of the holders declared default, or declared the
outstanding notes and other contractual obligations immediately due. In order to resolve the
defaults and to preserve as much cash as possible for operations, management put together various
exchange agreements (the Debt Exchanges) to enter into with a majority, and potentially all, of
the debt holders subject to shareholder approval (Shareholder Approval) of such share issuances,
pursuant to which the debt holders would exchange their outstanding notes or other debt obligations
for shares of the Companys common stock. Although the exchange terms vary slightly between the
debt holders based upon the terms of each of the particular notes, a few provisions are
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consistent in all of the
exchange agreements: First, all of the issuances pursuant to the proposed Debt Exchanges are
subject to Shareholder Approval. To that end, the Company filed a Preliminary Proxy Statement on
Schedule 14A on February 1, 2010 and is in the process of responding to SEC comments regarding the
same so that we can finalize the proxy and send it out to our shareholders. The Company has the
right to seek Shareholder Approval two times; if it does not receive Shareholder Approval at the
second meeting, the Company will fall back into default on all of the notes for which shareholders
did not approve the issuance of shares pursuant to the related exchange agreement. Once the Company
obtains Shareholder Approval to issue the shares pursuant to a particular Debt Exchange, upon such
issuance, the debt related to such exchange agreement will be converted to shares of common stock
and the holders thereof shall waive all current and future defaults under the debt. Second, the
Company agreed to use its best efforts to register the shares issuable pursuant to the exchange
agreements in the next registration statement we file under the Securities Act of 1933, as amended.
The Company filed a registration statement on Form S-1 on May 3, 2010. And third, the issuance of
all of the shares of Common Stock to be issued under these Debt Exchanges are subject to NYSE Amex
listing approval. Therefore, although some debt holders have signed an exchange agreement, they are
not enforceable by us until we receive Shareholder Approval and approval of the NYSE Amex to list
the shares, which we cannot guarantee and therefore the exchange may never occur.
At this time, based on the recent rise in the price of our shares of Common Stock and the
closing of the March-April 2010 12% Convertible Note Financing discussed above, it is unclear
whether we will proceed with the proposed Debt Exchange. If and when we do receive Shareholder
Approval, we shall disclose the final amount of debt that shall be exchanged and the total number
of shares issued in exchange thereof. Any shares of common stock to be issued pursuant to the debt
exchange will be issued pursuant to Section 4(2) of the Securities Act for issuances not involving
a public offering and Regulation D promulgated thereunder.
In March 2010, the Company also entered into an Exchange Fee Agreement with Cantone Research
Inc., who was the placement agent for the original issuance of the Notes. Pursuant to the Exchange
Fee Agreement, Cantone Research agreed to negotiate the exchange with the Note Holders described
above and obtain the Note Holders agreement and signature to the exchange agreement. Under the
Exchange Fee Agreement, we agreed to pay Cantone Research a fee of 2% of the total principal and
interest that is due, up through March 1, 2010, which, as of such date is $79,049 or 2% of
$3,952,403. The Company agreed to pay Cantone Research the number of shares of our Common Stock
that is equal to the quotient of $79,048 divided by $0.28, or 282,314 shares. The Company also
agreed to reduce the exercise price of the placement agent warrants issued to Cantone Research to
$0.28 per share upon completion of the Debt Exchange. The issuance of shares to Cantone Research
under the Exchange Fee Agreement is subject to NYSE Amex listing approval and Shareholder Approval. If Shareholder
Approval is not received, the Company will have to pay the exchange fee in cash. Further, if the
Company does not proceed with the Debt Exchanges, none of the other agreements with Cantone
Research Inc. will be consummated.
In March 2010, in an effort to further reduce its cash expenditures, the Company also amended
a consulting agreement with Cantone Asset Management LLC (Cantone Asset). Under the original
consulting agreement, the Company was to pay Cantone Asset an aggregate cash consulting fee of
$144,000 and issued Cantone Asset warrants to purchase 200,000 shares of our common stock at $0.60 per
share. Pursuant to the amendment, (i) Cantone Asset shall instead be paid with an aggregate of
514,285 shares of our common stock, (ii) we will use our best efforts to register those shares in
the next registration statement we file; and, (iii) we will engage counsel to issue a blanket
opinion to our transfer agent regarding the amendment shares once the related registration
statement is declared effective. The Company filed a registration statement on Form S-1 on May 3,
2010 which includes these shares. In consideration for Cantone Asset agreeing to the amendment, we agreed to adjust the
exercise price of their warrant to $0.28 per share. The issuance of shares pursuant to the
amendment is subject to our receipt of NYSE AMEX approval and Shareholder Approval. If we do not
receive Shareholder Approval, the exercise price of the warrants will still be effective, but the
Company will have to pay the consulting fee in cash.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
On
May 23, 2010, one of our directors, Edward R. Arquilla, M.D., passed
away.
Accordingly, there is now one vacancy on the Board of Directors. We
will seek to replace Dr. Arquilla on the Board of Directors when a
qualified candidate is identified and is willing to serve on the
Board of Directors.
ITEM 6. EXHIBITS
(a) Exhibits: See Exhibit Index herein
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RADIENT PHARMACEUTICALS CORPORATION, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
RADIENT PHARMACEUTICALS CORPORATION (Registrant) |
||||
Date: May 24, 2010 | By: | /s/ Douglas C. MacLellan | ||
Douglas C. MacLellan, President and | ||||
Chief Executive Officer | ||||
Date: May 24, 2010 | By: | /s/ Akio Ariura | ||
Akio Ariura, Chief Financial Officer and | ||||
Secretary (Principal Financial Officer) |
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EXHIBIT INDEX
Exhibit | ||
Number | Description: | |
31.1
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith.) | |
31.2
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith.) | |
32.1
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith.) | |
32.2
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith.) |
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