Attached files
file | filename |
---|---|
EX-23.1 - EX-23.1 - RADIENT PHARMACEUTICALS Corp | a56395exv23w1.htm |
EX-32.2 - EX-32.2 - RADIENT PHARMACEUTICALS Corp | a56395exv32w2.htm |
EX-31.1 - EX-31.1 - RADIENT PHARMACEUTICALS Corp | a56395exv31w1.htm |
EX-31.2 - EX-31.2 - RADIENT PHARMACEUTICALS Corp | a56395exv31w2.htm |
EX-32.1 - EX-32.1 - RADIENT PHARMACEUTICALS Corp | a56395exv32w1.htm |
Table of Contents
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K/A
Amendment No. 2
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal year ended December 31, 2009
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 1-16695
RADIENT PHARMACEUTICALS CORPORATION
(Exact name of
registrant as specified in its charter)
Delaware | 33-0413161 | |
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
|
2492 Walnut Avenue, Suite 100 Tustin, California 92780-7039 (Address of principal executive offices) |
(714) 505-4460 (Registrants telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Each Exchange on Which Registered | |
Common Stock, $.001 par value | NYSE Amex |
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of class)
Common Stock, $.001 par value
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No þ
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 has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files)
. Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K/A or any amendment to this Form 10-K/A. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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 Exchange Act
Rule 12b-2). Yes o No þ
As
of September 20, 2010, 31,383,649 shares of common stock were outstanding. The aggregate market
value of the voting and non-voting common equity held by non-affiliates of the registrant as of the
last business day of the registrants most recently completed second fiscal quarter, based upon the
closing sale price of the registrants common stock on June 30, 2009 (the last trading day in the
second calendar quarter of 2009) as reported by the NYSE Amex) $11,232,377 (based upon the closing
price of the common stock on such date as reported. For purposes of this calculation, we have
excluded the market value of all common stock beneficially owned by all executive officers and
directors of the Company.
Documents Incorporated by Reference
None.
EXPLANTORY NOTE
On April 15, 2010,
the undersigned registrant filed its Annual Report on Form 10-K for the year ended December 31, 2009. The
registrant amended the original Annual Report on Form 10-K on May 3, 2010 (Amendment No. 1) to
provide more accurate information related to the operations of registrant, primarily to update the state of its
operations in China. The registrant hereby amended the Amendment No. 1 to conform this Form 10-K/A with its
other periodic reports and to amend certain disclosures previously made. The registrant hereby amends the Annual
Report on Form 10-K (Amendment No. 2) to disclose the comparable companies information
and include quantitative and qualitative factors considered in the valuation of its investment in Jade Pharmaceuticals
Inc. There have been no changes to the amounts reported in the consolidated financial statements, nor any
significant changes to any related disclosures beyond those included in our originally issued Annual Report and
Amendment No. 1.
Except as described
above, the Company has not modified or updated disclosures presented in the Original Report in this Amended
Report. Accordingly, this Amended Report does not reflect events occurring after the filing of our Original Report
or modify or update those disclosures, including the exhibits to the Original Report (except certifications filed as
Exhibits 31.1 and 31.2), affected by subsequent events. As such, our Original Report continues to speak as of April
15, 2010 (the date it was filed with the SEC). Accordingly, this
Amendment No. 2 Report should be read in
conjunction with the Original Report and our other reports filed with the SEC subsequent to the filing of our
Original Report, including any amendments to those filings.
In addition, as
required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended (the Exchange Act),
currently dated certifications by our principal executive officer and principal financial officer are filed as exhibits to
this Amendment under Item 15 of Part IV hereof.
TABLE OF CONTENTS
2
Table of Contents
Cautionary Statement under the Private Securities Litigation Reform Act of 1995:
This Annual Report on Form 10-K/A and the documents incorporated by reference herein contain
forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of
1934, which include information relating to future events, future financial performance,
strategies, expectations, competitive environment, regulation and availability of resources. From
time to time, we also provide forward-looking statements in other materials we release to the
public as well as verbal forward-looking statements. These forward-looking statements include,
without limitation, statements regarding: regulatory approval for our products; market demand for
our products and competition; our dependence on licensees, distributors and management; impact of
technological changes on our products; results of operations or liquidity; statements concerning
projections, predictions, expectations, estimates or forecasts as to our business, financial and
operational results and future economic performance; and statements of managements goals and
objectives and other similar expressions. Such statements give our current expectations or
forecasts of future events; they do not relate strictly to historical or current facts. Given these
uncertainties, readers are cautioned not to place undue reliance on such forward-looking
statements. Words such as may, will, should, could, would, predicts, potential,
continue, expects, anticipates, future, intends, plans, believes, estimates, and
similar expressions, as well as statements in future tense, identify forward-looking statements.
We cannot guarantee that any forward-looking statement will be realized, although we believe
we have been prudent in our plans and assumptions. Achievement of future results is subject to
risks, uncertainties and potentially inaccurate assumptions. Many events beyond our control may
determine whether results we anticipate will be achieved. Should known or unknown risks or
uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could
differ materially from past results and those anticipated, estimated or projected. You should bear
this in mind as you consider forward-looking statements.
We undertake no obligation to publicly update or revise forward-looking statements, whether as
a result of new information, future events or otherwise. You are advised, however, to consult any
further disclosures we make on related subjects in our Form 10-Q and 8-K reports to the SEC. Also
note that we provide the following cautionary discussion of risks, uncertainties and possibly
inaccurate assumptions relevant to our business. These factors individually or in the aggregate, we
think could cause our actual results to differ materially from expected and historical results. You
should understand that it is not possible to predict or identify all such factors. Our actual
results may differ materially from those currently anticipated and expressed in such
forward-looking statements as a result of a number of factors, including those we discuss under
Risk Factors and elsewhere in this Annual Report on Form 10-K/A.
3
Table of Contents
PART I
Item 1. | Business |
We recently refocused our business on the development, manufacture and marketing of advanced,
pioneering medical diagnostic products, including our ONKO-SUREtm, a proprietary In-Vitro
Diagnostic (IVD) Cancer Test. During the third and fourth quarter of 2009, we repositioned
various business segments that we believe will enable us to monetize the value of some of our
assets through either new partnerships, separate potential IPOs or possible sales. These special
assets include: (i) our 98% ownership in a 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 the China operations of JPI.
Until September 2009, we operated in China through our 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 originally manufactured and distributed 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 on June 26, 2009 and on September 29, 2009, we deconsolidated JPI due
to the inability to exercise significant influence of its operations (See Discontinued Operations
and Deconsolidation below). In connection with the deconsolidation, we reclassified our China
pharmaceutical manufacturing and distribution business (conducted through our JPI subsidiary) as a
business investment, rather than a consolidated operating subsidiary.
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 tm, a proprietary IVD Cancer Test in the United States, Canada, Chile,
Europe, India, Korea, Taiwan, Vietnam and other markets throughout the world. Virtually all of our
sales are to distributors.
We manufacture and distribute our proprietary ONKO-SUREtm 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.
Discontinued Operations and Dispositions
On January 22, 2009, our board of directors authorized management to sell the operations of
YYB and it was sold on June 26, 2009. Proceeds from the sale of YYB consisted of a note receivable
in the amount of 16 million Yuan Renminbi (RMB) (approximately U.S. $2,337,541), which is to
be paid directly to a bank that JPI owed approximately 18,250,000 RMB (approximately
U.S. $2,668,000) at the date of sale. In connection with the sale, JPI transferred rights to
certain land and land use rights upon sale. JPI remains liable on the debt obligation to the bank
for any amounts not paid by the buyer of YYB, as such obligation did not pass directly to the
buyer.
Deconsolidation
During the third quarter of 2009, it became apparent to our management that our working
relationship with management of our operations in China was becoming increasingly strained.
Accordingly, we deemed it appropriate to seek alternative means of monetizing our investment. There
were several issues that caused us to conclude accordingly, including, but not limited to:
| Lack of timely responses from the management in China to our requests for financial information; | ||
| Lack of responsiveness by management in China to our requests to transfer our funds to bank accounts under corporate control; |
4
Table of Contents
| Lack of timely communication with their corporate management concerning significant decisions made by management in China concerning the disposal of the YYB subsidiary; and | ||
| Lack of timely communication with corporate officers concerning operations in China. |
Effective September 29, 2009, based on unanimous consent of our board of directors and an
executed binding agreement (the Agreement) between us and certain individual stockholders in
China, we deconsolidated all activity of JPI.
Based on the Agreement and in accordance with current accounting guidelines, we deconsolidated
JPI as of the date we ceased to have a controlling financial interest, which was effective
September 29, 2009. In accordance with the Agreement, we agreed to exchange our shares of JPI for
28,000,000 non-voting shares of preferred stock, which represents all outstanding shares of
preferred stock, relinquished all rights to past and future profits, surrendered our management
positions and agreed to a non-authoritative minority role on the board of directors.
Despite the deconsolidation of JPI on September 29, 2009, we still believe JPI has a promising
future. We hope that we will be able to sell off a portion or all of our ownership in JPI during
the next 24 months. Alternatively, we will seek an exit from our investment at or after any public
listing in China. We may also retain all or a portion of our remaining equity stake in JPI, if
ownership continues to look promising.
Elleuxe Brand of Premium Anti-Aging Skin Care Products
We now intend to license
or sell off our Elleuxe brand of cosmetic products that were originally developed
by Jade Pharmaceuticals Inc in 2008, based upon their HPE anti-aging therapeutic products. We have
reformulated these products for international markets under the brand name Elleuxe. The Elleuxe family of
products is a therapeutic, high-end skin care product line based on the active ingredient Elleuxe
Protein our proprietary active ingredient that offers cell renewing properties designed to minimize the
appearance of aging.
The initial Elleuxe product line includes:
| Hydrating Firming Cream | ||
| Renergie Hydrating Cleanser | ||
| Intense Hydrating Cleanser | ||
| Visable Renewing Hydrating Softener | ||
| Smoothing Renewing Eye Moisturizer |
The Elleuxe brand was based on cosmetic products originally developed by JPI. However, we
commissioned a laboratory in the United States to assist in the reformulation of the product to enhance the
product for use in both China and other Asian markets. As such, the products and formula noted in the
above disclosure is owned by Radient Pharmaceuticals.
IVD DIAGNOSTICS DIVISION
IVD Industry and Market
The
receipt of USFDA approval for marketing our proprietary
ONKO-SUREtm cancer test kit in July 2008, has given us significant visibility in the in-vitro diagnostics (IVD) industry.
The growth of the IVD marketplace has been driven by an increase in the incidence of cancer, other
chronic and infectious diseases, emerging technologies and increasing patient awareness. The world
market for IVD tests for cancer is expected to grow at nearly 11% annually and could reach nearly
$8 billion by the end of 2012. (Kalorama Research Group: 2008)
5
Table of Contents
ONKO-SUREtm
We are the developer and worldwide marketer of ONKO-SUREtm , non-invasive cancer
blood test kit. On July 8, 2009, we changed the brand name of our in-vitro diagnostic cancer test
from DR-70tm to the more consumer friendly, trademarked brand name ONKO-SUREtm ,
which we believe communicates it as a high quality, innovative consumer cancer test. We also
installed 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. In clinical trials, the ONKO-SUREtm test kit has
demonstrated its ability to detect the presence of certain cancers in humans 84 percent of the time
overall. ONKO-SUREtm 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-SUREtm can be a valuable diagnostic tool in the worldwide battle against cancer, the
second leading cause of death worldwide. ONKO-SUREtm serves the IVD cancer/oncology market
which, according to Bio-Medicine.org, is growing at an 11% compounded annual growth rate.
The ONKO-SUREtm test kit is a tumor-marker, which is a biochemical substance
indicative of neoplasia, potentially specific, sensitive, and proportional to tumor load, used to
screen, diagnose, assess prognosis, follow response to treatment, and monitor for recurrence. As
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 their physician is not vigilant
in following up on the ONKO-SUREtm test kit results with other clinically relevant
diagnostic modalities. While the ONKO-SUREtm 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.
The ONKO-SUREtm test kit can be added easily and inexpensively to the pre-existing
line of ELISA-based diagnostics performed routinely by clinical laboratories throughout the world.
Furthermore, the ONKO-SUREtm test kit can be used in place of more costly and time
consuming diagnostic tests. In clinical trialsin China, Germany, Taiwan and Turkey,
ONKO-SUREtm has been used as a screen for multiple cancers while only needing a single
blood sample. A positive ONKO-SUREtm value is then followed with other diagnostic tests to
determine the specific type of cancer.
We developed the next generation version of the ONKO-SUREtm 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.
The Companys ONKO-SUREtm cancer test kits are currently sold in the form of a
96 well test plate, which, after standards are applied, 43 individual tests can be run in
duplicate. These tests are typically run in a reference laboratory with test results determined by
using a micro-titer reading analyzer. Results are sent to the attending physician who then relays
those results to the patient. Typically, a patient can receive results within 3-5 days from the
blood draw date.
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-SUREtm test kit results with other clinically
relevant diagnostic modalities. While the ONKO-SUREtm test kit can be 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.
ONKO-SUREtm Test Kit Sales and Licensing Strategy
We are seeking to engage additional distributors who will sell to reference and clinical
laboratories in the U.S. and other countries to make the ONKO-SUREtm test kit available to
physicians and patients. Our objectives regarding the development, marketing and distribution of
our ONKO-SUREtm test kit are to:
| obtain international approvals; | ||
| develop new distribution channels in new markets; | ||
| distribute greater quantities of kits in approved markets; |
6
Table of Contents
| fully utilize our GMP manufacturing facilities in the U.S. to foster worldwide sales; | ||
| automate the ONKO-SUREtm test kit; and | ||
| eventually create a rapid test format of ONKO-SUREtm test kit to extend sales into rural areas and POL (physician owned labs). |
We adopted a licensing strategy for the commercialization of ONKO-SUREtm test kit.
Our licensing strategy is common in the diagnostics industry as it maximizes market penetration on
the installed base of instruments of one or more partners and facilitates quick market uptake and
higher peak sales due to potential joint marketing efforts.
During 2009, we entered into the following distribution agreements:
| Exclusive five-year distribution agreement with Grifols USA, LLC. This distribution agreement allows Grifols USA, LLC to market and sell ONKO-SUREtm for the monitoring of colorectal cancer to hospitals, clinical laboratories, clinics and other health care organizations. | ||
| Exclusive two-year distribution agreement with Tarom Applied Technologies Ltd for the marketing and sales of ONKO-SUREtm in Israel. | ||
| Two distinct exclusive five year distribution agreement with GenWay Biotech, Inc. This distribution agreement allows Genway Biotech, Inc, to market and sell ONKO-SUREtm for uses other than colorectal cancer to CLIA-certified laboratories in the US and as a lung cancer screen to laboratories in Canada. |
Our five year distribution agreement with Grifols is for the United States for the indicated use as
identified and registered with the United States Food and Drug Administration. The agreement requires
Grifols to purchase a minimum amount of DR-70 Kits during each quarter of the agreement; starting with
50 kits in September 2009 and at least 280 for the quarter ending May 31, 2014 for a total of at least 2,640
kits during the term. Pursuant to the Agreement, we are to meet with Grifols 30 days before the end of the
5 year term to establish the minimum purchase requirements for the next 5 years; if we cannot agree, the
agreement shall automatically terminate. In addition, pursuant to the agreement, we and Grifols may terminate the Agreement without cause and at any time after September 20, 2011 upon serving one (1) calendar years prior written notice to the other party.
Pursuant to our two year distribution agreement with Tarom, Tarom has exclusive rights to market
ONKO-SURETM (formerly known as DR-70), in Israel. As this is a new market, minimum purchase requirements
have not yet been determined.
The Company is not reliant on the above distribution agreements as the monetary value of the minimum
purchase requirement is currently immaterial to the Company. One of our objectives in entering into these
respective agreements is to utilize the marketing and sales resources of the respective distributor to gain
market penetration and brand recognition within the specified region.
In addition, ONKO-SUREtm test kits are currently being sold to one diagnostic
reference laboratory in the U.S. Foreign distributors have the potential for transferring the tests
onto their respective diagnostics platform(s), develop test kits that can be shipped to diagnostics
laboratories to perform the test, run any additional clinical trials and seek additional regulatory
approval for the new combination of the test kits and the instrument. At this time, through our
distributors we have had only limited sales of these test kits outside the United States.
There may be factors that prevent us from further developing and marketing the
ONKO-SUREtm test kit. We cannot guarantee that the ONKO-SUREtm test kit will be
commercially successful in either the U.S. or internationally. Clinical trials results are
frequently susceptible to varying interpretations by scientists, medical personnel, regulatory
personnel, statisticians and others, which may delay, limit or prevent further clinical development
or regulatory approvals of a product candidate. Also, the length of time that it would take for us
to complete clinical trials and obtain regulatory approval for product marketing may vary by
product and by the intended use of a product. We cannot predict the length of time it would take to
complete necessary clinical trials and obtain regulatory approval in any other country.
ONKO-SUREtm Test Kit Competition
We have only had limited sales of ONKO-SUREtm test kit to our distributors outside
the United States. We are dependent on our distributors financial ability to advertise and market
the ONKO-SUREtm test kit in those countries where we have distributors. A number of
domestic and international companies are in indirect competition with us in all of these markets.
Most of these companies are larger, more firmly established, have significant marketing and
development budgets and have greater capital resources than us or our distributors. Therefore,
there can be no assurance that we will be able to achieve and maintain a competitive position in
the diagnostic test industry.
Many major medical device manufacturers, including Abbott Diagnostics, Baxter Healthcare
Corp., Beckman Diagnostics, Boehringer Mannheim, Centocor, Diagnostic Products Corporation, Bio-Rad
Laboratories, Roche Diagnostic Systems, Sigma Diagnostics and others, are manufacturers or
marketers of other diagnostic products. We are not aware of any efforts currently being devoted to
development of products such as ONKO-SUREtm test kit; however, there can be no assurance
that such efforts are not being undertaken without our knowledge. We believe that most of the
diagnostic products currently manufactured by other companies are complementary to
ONKO-SUREtm test kit. Moreover, such companies could develop products similar to our
products and they may be more successful than we may be in marketing and manufacturing their
products. In addition, there are a number of new technologies in various stages of development at
the National Institute of Health, university research centers and at other companies for the
detection of various types of cancers, e.g., identification of proteomic patterns in blood serum
that distinguishes benign from cancerous conditions, which may compete with our product.
7
Table of Contents
U.S. based ONKO-SUREtm Test Kit Manufacturing
We manufacture our ONKO-SUREtm test kit at our licensed manufacturing facility
located at 2492 Walnut Avenue, Suite 100, in Tustin, California.
In December 2003, our facilities in Tustin, California became CE compliant. Our
ONKO-SUREtm test kit conforms to the essential requirements of the CE Mark, which is
required to sell our product in the European Union (EU). The CE Mark is recognized around the
world as an indication of quality practices and is referred to as the Trade Passport to Europe
for non-EU products. As of January 2004 we became EN ISO 1345 compliant, which is important for
sales internationally.
In July 2008, the USFDA inspected our facilities and found no deficiencies. We were found to
be compliant with USFDA Regulations. All of our OEM products are Class I (GMP not required) or
Class II (GMP required, as defined by the USFDA guidelines) devices and our facilities meet the GMP
requirements for each of our OEM products. We are also licensed to manufacture our proprietary
products and to repackage our OEM products at our Tustin location.
Regulatory Approval and Clinical Trials of the ONKO-SUREtm Test Kit
The ONKO-SUREtm test kit is subject to specific USFDA rules applicable to IVD
products. Prior to marketing ONKO-SUREtm test kit in the U.S., we were required to make a
pre-market application to prove the safety and efficacy of the products and to comply with
specified labeling requirements for IVD products for human use. We received a determination letter
on July 3, 2008 from the USFDA approving our application to market ONKO-SUREtm test kit as
an immunology and microbiology device to monitor colorectal cancer under the category Tumor
Associated Antigens Immunological Test System as a Class II IVD device. USFDA clearance to market
was based upon data showing that the ONKO-SUREtm test kit has the ability to monitor the
progression of colorectal cancer post-surgery in patients who are biopsy confirmed with this
disease. This announcement marks the first clearance to market a colorectal monitoring product that
the USFDA has granted since January 14, 1982 when Carcinoembryonic Antigen (CEA) was approved.
Until now, the CEA test has been the only accepted method cleared in the U.S. Thus,
ONKO-SUREtm test kit offers a new test that can monitor colorectal tumors post-surgery.
We must abide by the listing rules of the USFDA. We have established our Quality System
Regulation in accordance with applicable regulations and were most recently inspected in July 2008.
Our Quality System Regulation program contains applicable complaint provisions that we believe meet
the USFDAs requirements for Medical Device Reporting, and we have experienced no incidents or
complaints to date. We also have implemented procedures for preventive and corrective action and
changed our packing and shipping method once in 2002 to improve protection of our product.
Although we received USFDA approval to market ONKO-SUREtm test kit in the U.S., we
have a limited supply of the horseradish peroxidase (HRP)-conjugated anti-fibrin and fibrinogen
degradation (FDP) antibody component currently used for the approved ONKO-SUREtm test
kit. Because of the limited supply of the current antibody, we have determined it is in our best
interest to change to a HRP-conjugated anti-FDP antibody. We are currently screening six
commercially available conjugated antibodies to substitute into the current
ONKO-SUREtm test kit and one that we have produced and conjugated ourselves. The anti-FDP
antibody that we produced ourselves has performed well in pilot studies and will likely be used in
our next generation ONKO-SUREtm test kit. In addition, our next generation
ONKO-SUREtm
test kit will be automated using the Dynex DS2 open platform ELISA system for
ease of commercialization. If the antibody substitution significantly improves
ONKO-SUREtm test kit performance, we will be required to change the reported sensitivity
and specificity of the
ONKO-SUREtm
test kit. Because of these changes and modifications,
we will likely have to submit a new 510(k) premarket notification application, but can continue to
sell the existing kit until our current antibody supply is exhausted. If the new antibody does not
significantly affect the clinical performance of the test, we can likely substitute it into the
currently approved kit without filing a new 510k.
8
Table of Contents
In addition to the USFDA regulation and approval process, each foreign jurisdiction may have
separate and different approval requirements and processes. We previously applied for approval of
the ONKO-SUREtm test kit in China, however, in June 2007, the Chinese approval process
fundamentally changed. Under the new guidelines, the SFDA is unlikely to approve the marketing of
the ONKO-SUREtm test kit without the following: approval by the USFDA (obtained July
2008) and sufficient clinical trial data in China. We engaged Jyton & Emergo Medical Technology,
Inc. (Beijing, China), an international regulatory affairs and clinical research consulting group,
to assist with the ONKO-SUREtm test kit clinical trials in China and with filing the SFDA
application for the ONKO-SUREtm test kit. Along with Jyton & Emergo, we completed a
Chinese-language application to support the ONKO-SUREtm test kit, and we met with the
Director of Medical Device Evaluation for the SFDA to define our clinical trial requirements. In
order to obtain SFDA approval, we would need to perform clinical testing of the
ONKO-SUREtm test kit test for 1,000 patients in China at SFDA approved hospitals. We have
terminated the services of a local Chinese company that was engaged to facilitate SFDA approval and
we do not intend to undertake any clinical trials in China in 2010. Therefore, we cannot accurately
predict when clinical trials will be completed or when SFDA approval might be obtained.
Our distribution agreements require our distributors to obtain the requisite approval and
clearance in each jurisdiction in which they sell products. In our experience, once a foreign
approval is obtained, it is generally renewed on a periodic basis, annually or otherwise. In
certain territories, distributors can sell under limited circumstances prior to approval and in
other territories no formal approval is required. On December 20, 2000, the Medical Devices Agency
of United Kingdom Department of Health issued a letter of no objection to the exportation of our
ONKO-SUREtm test kit from the U.S. to the United Kingdom, allowing ONKO-SUREtm
test kit to be sold in the United Kingdom. In late 2006, Mercy Bio Technology Co., Ltd., our
distributor in Taiwan, received Department of Health approval to market the ONKO-SUREtm
test kit in Taiwan. We have also received regulatory approval to market the ONKO-SUREtm
test kit in South Korea and import and market the ONKO-SUREtm test kit in Australia. In
Canada, ONKO-SUREtm test kit is approved as a screening device for lung cancer only.
ONKO-SUREtm test kit also has the CE mark from the European Union for sale in Europe as a
general cancer screen.
Obtaining regulatory approval in the U.S. for our ONKO-SUREtm test kit was costly,
and it remains costly to maintain. The USFDA and foreign regulatory agencies have substantial
discretion to terminate clinical trials, require additional testing, delay or withhold registration
and marketing approval and mandate product withdrawals. In addition, later discovery of unknown
problems with our products or manufacturing processes could result in restrictions on such products
and manufacturing processes, including potential withdrawal of the products from the market. If
regulatory authorities determine that we have violated regulations or if they restrict, suspend or
revoke our prior approvals, they could prohibit us from manufacturing or selling our products until
we comply, or indefinitely.
Collaboration with Mayo Clinic
We entered into a Collaboration Agreement on December 12, 2008 with the Mayo Clinic to conduct
a clinical study for the validation of our next generation version of its USFDA-approved
ONKO-SUREtm test kit. Through the validation study, the Mayo Clinic in conjunction with us
will perform clinical diagnostic testing to compare our USFDA-approved ONKO-SUREtm test
kit with a newly developed, next generation test. The Mayo Clinic is providing the bio-specimens to
perform the study of approximately 1,000 subjects. The primary goal of the study to be undertaken
in collaboration with Mayo Clinic is to determine whether our next generation ONKO-SUREtm
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. The total costs of the study and related project
fees are $312,072 under the contract. Before any trials can be undertaken, the next generation
test kit must be designed, validated and tested by us. The next generation version of ONKO-SURE is
currently under product development in collaboration with the Mayo Clinic. The Mayo Clinic has
provided clinical samples for a research project to address the effectiveness of the next
generation ONKO-SURE test relative to the current ONKO-SURE test at early-stage colorectal cancer
detection. We anticipate completion of this trial within a year after the trial is designed and
validated. The results of this study would contribute to, but are not solely sufficient for a new
510k filing for USFDA clearance of the next generation test. We need to obtain and test serial,
monitoring samples from colorectal cancer patients in order to file a 510k as a colorectal cancer
monitoring test.
The Mayo Clinic upon completion of specific milestones as set forth under the
Agreement, shall be compensated approximately $312,000. As of April 2010, milestones
have been met and payments made. Although the prestige that comes along with the
Mayo Clinic completing this study would enhance our reputation, alternative service
providers exist with which we can conduct the same studies and accomplish the same
product development. Therefore, our business and operations are not dependent upon our
agreement with the Mayo Clinic.
Pursuant to the Agreement, we may terminate the agreement upon thirty days written notice to the
Mayo Clinic, although we will have to pay any fees owed to Mayo up the effective date of
termination. Additionally, the Mayo Clinic may terminate the Agreement for reasonable cause
upon thirty days written notice to us.
9
Table of Contents
ONKO-SUREtm Test Kit Research and Development
During the years ended December 31, 2009 and 2008, we incurred expenses of $563,690 and
$194,693, respectively, in research and development costs related to the USFDA and SFDA
applications for approval of our ONKO-SUREtm test kit.
Reimbursability of Our IVD Products
We recognize that health care cost reimbursement under private and government medical
insurance programs is critical to gaining market share in any of the markets where we intend to
sell our IVD products. Thus, we are currently seeking approval for reimbursement in the U.S., Korea
and Taiwan for our ONKO-SUREtm test kit. In the future, we plan to also seek reimbursement
approval in other countries for our ONKO-SUREtm test kit and any other products we may
acquire or develop in the future.
CHINA-BASED INTEGRATED PHARMACEUTICALS
Through JPI, we formally manufactured and distributed generic and homeopathic pharmaceutical
products and supplements as well as cosmetic products. JPI acquired the businesses currently
conducted by JJB and YYB in 2005 along with certain assets and liabilities of a predecessor to JJB
(Jiangxi Shangrao KangDa Biochemical Pharmacy Co. Ltd).
We sold YYB on June 26, 2009. The decision was based on a variety of factors, including the
expiration of YYBs GMP certification in March 2009, our estimates of the capital investment
required to obtain recertification of the facility, our desire to redeploy amounts invested in the
YYB facility into higher growth and/or potentially more profitable opportunities, and our desire to
consolidate JPIs manufacturing in Jiangxi province, China.
JJB is wholly-foreign owned enterprise (WFOE). WFOEs are limited liability companies
established under Chinese Company Law that are exclusively owned by foreign investors. WFOEs are
used to, among other things: enable local China based entities to carry on business in China,
rather than operate in a representative capacity; acquire land use certificates to own and operate
facilities in China; employ persons in China; hold intellectual property rights; protect
intellectual property and proprietary technology; and issue invoices to their customers in RMB and
record revenues in RMB, but convert the profits into U.S. dollars for distribution to their parent
company outside China. There are also potential disadvantages of operating as a WFOE, including,
but not limited to, unlimited liability claims arising from the operations in China and potentially
less favorable treatment from governmental agencies than would be afforded to those entities
operating with a Chinese partner.
Effective September 29, 2009 (the Effective Date), based on unanimous consent of the Companys
board of directors and an executed binding agreement (the Agreement) between the Company and
Henry Jia, Frank Zheng and Yuan Da Xia (collectively, the JPI Shareholders), the Company
deconsolidated all activity of JPI.
Based on the Agreement and in accordance with current accounting guidelines, the Company
deconsolidated JPI as of the date the Company ceased to have a controlling financial interest,
which was effective September 29, 2009. In accordance with the Agreement, the Company relinquished
all rights to past and future profits, surrendered its management positions and agreed to
non-authoritative minority role on its board of directors. Accordingly, it was determined that we
did not maintain significant influence over the investee and, accordingly, have recorded such
investment in accordance with the cost method. Although, we maintain significant economic
ownership in JPI, based on our evaluation of our lack of ability to influence, lack of a role in
policy and decision making, no significant planned intercompany activity, among other things, we
concluded that it would not be appropriate to account for such investment in consolidation or under
the equity method of accounting.
Overview of JPIs Business
Historically, JJB has primarily been a manufacturer and distributor of large and small volume
injectible fluids as well as other products for external use. YYB, on the other hand, used to
manufacture tablets, capsules and other over-the-counter pharmaceutical products, but is no longer
manufacturing any of these products.
During 2008, we conducted a significant marketing campaign for our Goodnak/Nalefen Skin Care
Human Placental Extract (HPE) products. HPE Solution was our largest selling product in 2008. We
are now preparing to market HPE-based cosmetics in various formulations under the product name
ELLEUXE. We hired a US-based cosmetics laboratory to adapt the Chinese cosmetic formulations for
the US-market. Safety and effectiveness testing will be performed by a US-based laboratory with GMP
and Good Laboratory Practice approvals, such that all required regulatory approvals can be
obtained. We believe these products offer a significant opportunity both in China and the United
States, as well as other markets. We now anticipate licensing or selling off the Elleuxe brand of
skin care products.
10
Table of Contents
JPIs Product Lines
JJB currently manufactures ten unique therapeutic and cosmetic HPE-based anti-aging products
in China including:
| HPE Solutions | ||
| Domperidone Tablets | ||
| Compound Benzoic Acid and Camphor Solution | ||
| Diavitamin, Calcium and Lysine Tablets | ||
| Levofloxacin Lactate Injection | ||
| Guyanling Tablets | ||
| GS Solution | ||
| GNS Solution | ||
| NaCL Solution |
JPIs China Business Strategy
General
JPI is attempting to establish distribution agreements with large pharmaceutical distributors
in the larger cities and provinces in China. JPI is also developing new products for distribution
in China. JPI sells Goodnak and other anti-aging and skin care products through JJBs existing
distribution channels in China.
JPI sells in approximately 36 markets, utilizing approximately 50 third-party distributors. In
those 36 markets, each had approximately 1.5 distributors per market on average. In those markets,
distributors have preferred and/or exclusive distribution relationships for select products that
JPI provides.
Currently, distributors are distributed geographically as follows:
Geographic | ||||
Location China | ||||
Southeastern |
38 | % | ||
Northeastern |
31 | % | ||
Central |
14 | % | ||
Southwestern |
13 | % | ||
North |
4 | % |
Marketing and Sales of JPIs Products
JJB and YYB together had established a marketing program consisting of approximately forty
sales managers and a network of distributors who market JJBs and YYBs products.
JPIs subsidiary, JJB, sells directly to hospitals and retail stores and indirectly to other
customers through distributors.
Most of JPIs revenues were derived from JJBs products. For the period January 1, 2009
through September 29, 2009 and the year ended December 31, 2008, sales to one customer comprised
approximately 20% of JJBs net revenues, respectively.
11
Table of Contents
Manufacturing of JPI Products
JPI utilizes the services of more than 200 small suppliers. No raw materials are imported for
their pharmaceutical manufacturing operations and no finished products are currently exported out
of China. All raw materials are stored at the facilities and JPI has not experienced any difficulty
in obtaining raw materials for their manufacturing operations. The average cost to manufacture
JPIs products in 2009 was approximately 48%, but the gross margins vary slightly from product to
product.
JPIs Competition
JPI competes with different companies in different therapeutic categories. For example, with
regard to large and small volume injection fluids, JJB primarily competes with Jiangxi Zhuhu
Pharmaceutical Company and Jiangxi Pharmaceutical Company, which are both located in the Jiangxi
Province. They manufacture large and small volume injection fluids, tablets and tinctures and
related product include generics, over-the-counter and supplement pharmacy products. There are at
least 70 companies in China approved by the SFDA to manufacture large and small volume injection
fluids. JJB competes with numerous companies with respect to its tablet products, as these are
common over the counter pharmaceuticals. Most of these companies are larger, more established and
have significant marketing and development budgets and have greater capital resources than JJB.
Therefore, there can be no assurance that JJB will be able to achieve and maintain a competitive
position in this market.
JPIs Research and Development
In the past, JJB and YYB entered into joint research and development agreements with outside
research institutes, but all of the prior joint research agreements have expired. Also, JJB and YYB
generally required the licensor of new products provide all of the research and development for new
products that they licensed.
JJB has historically introduced new products by acquiring generic drug production technical
information to be used in JJBs SFDA generic drug applications to manufacture the new products.
This information is acquired from third party specialty pharmaceutical product development
companies, such as Jiangxi YiBo Medicine Technology Development, Ltd. (YiBo). In the past, JJB
has purchased technical specifications from YiBo for approximately 10 new products through
installment purchase transfer contracts (New Medicine Transfer Contracts or MTCs). In exchange
for specified payments, these MTCs typically provide for one or more of the following: (a) transfer
of any technical information related to the production of a new product, (b) product formulations,
(c) a products manufacturing process, and (d) clinical data collection. In the event that JJB is
unable to obtain SFDA approval to manufacture the product, YiBo will provide an alternate product
formulation such that JJB can again apply for manufacturing rights with the SFDA.
JJB records payments made on MTCs as Deposits until a permit is issued by the SFDA to
manufacture the new product. Once the permit to manufacture is issued, the amounts paid are then
reclassified as intangible assets with defined lives subject to amortization. For intangible assets
with definite lives, tests for impairment are performed if conditions exist that indicate the
carrying value may not be recoverable or if no production of the product has taken place after a
reasonable period of time.
JJB believes that it had no significant impairments of the amounts included in intangible
assets for new products, individually or in the aggregate. However, it is possible that JJB may
experience impairments of some of its intangible assets in the future, which would require JJB to
recognize impairment charges and ultimately impair our investment in JPI.
JPIs Product Development
JPI currently has applied with the SFDA for manufacturing rights to produce a number of
generic drug products. JPI continues to search for new products to ensure a pipeline of products
for future growth.
| Pidotimod Tablets (an anti-aging product) |
12
Table of Contents
| Epinastine Tablets (allergy product) | ||
| Paclitaxel (a cancer medication) | ||
| Creatine Phosphate Sodium Injections (a heart medicine) | ||
| Drotaverrine Hydrochloric (a chemotherapy therapeutic product) | ||
| Diammonium Glycyrrhizinate (a chemotherapy therapeutic product) |
Additionally, YiBo is developing an HPE Capsule (anti-aging product) on JJBs behalf. JJB has
not yet applied to the SFDA or other regulatory agencies for required approvals or licenses to
manufacture this product.
Chinese Pharmaceutical Regulations
Pursuant to Article 9 of the Law of China on Pharmaceutical Administration (China Law),
pharmaceutical manufacturing enterprises must organize production according to the statutory
administrative criteria on quality of pharmaceuticals formulated by the supervisory and
administrative departments in charge of pharmaceuticals of the State Council. The SFDA requires
that all facilities engaged in the manufacture of pharmaceutical products obtain the Good
Manufacturing Practice (GMP) certification that meet the requirements of the China Law. JJBs
facility was renovated in 2009 and was issued GMP certificates necessary to conduct current
operations.
In addition, under Article 31 of China Law, each entity manufacturing pharmaceuticals must
receive the approval of the supervisory and administrative departments in charge of pharmaceuticals
of the State Council and receive a serial approval number to manufacture a specific pharmaceutical.
JJB has product licenses to manufacture all of the products they currently manufacture. JJB is also
subject to the Food Sanitation Law providing standards in sanitation for the consumption or
injection of foods.
JJB operates in two locations, which together total approximately 200,000 square feet of
manufacturing facilities in Shangrao, Jiangxi Province, China.
JJB was notified by the Chinese Military Department of its intent to annex one of JJBs plants
that is located near a military installation. The proposed area to be annexed contains the
facilities that are used to manufacture large and small volume parenteral solutions. Discussions
regarding annexation are proceeding and we expect that JJB will be compensated fairly for the
facility upon annexation. JJB intends to find a new single center site in Jiangxi Province, China
to relocate its operations and combine them with any operations related to any product lines
retained from YYBs manufacturing, sales and distribution operations after the sale of YYB. We may
have to spend significant time and resources finding, building and equipping the new location and
restarting those operations. In addition, such new facilities will need to obtain GMP certification
for all manufacturing operations.
CANCER THERAPEUTICS
Combination Immunogene Therapy
In August 2001, we acquired a combination immunogene therapy technology (CIT) that may be
effective in building a cancer patients immune system and could eventually lead to a vaccine to
protect patients known to be at risk because of a family history for certain types of cancer. CIT
is intended to build the bodys immune system and destroy cancer cells. This technology involves
injecting the cancer patients tumor with a vector carrying both a granulocyte-macrophage colony
stimulating factor and a t-cell co-stimulating factor, thereby activating an immune response
against the cancer cells. We are actively seeking additional pharmaceutical or biotechnology
strategic partners with whom to form a joint venture or otherwise license our CIT technology.
13
Table of Contents
Preliminary tests in Canada conducted on mice injected with human skin and brain cancers
indicated that the CIT technology can be effective. Additionally, Phase 1 clinical trials have been
completed in Canada. We funded a study conducted by Dr. Lung-Ji Chang at the University of Florida
to target breast cancer with a goal of ultimately developing a vaccine using the CIT technology. We
believe the technology may have potential for fighting several types of cancer by enhancing ones
immune system, thereby increasing the number of cells that naturally destroy cancer. We also
acquired from Dr. Chang other technology relating to a humanized mouse model for the evaluation of
anti-human tumor immunity and the identification of immuno-modulating genes. We are not currently
conducting any trials using our CIT technology. No assurances can be given that any of these
activities will lead to the development of any commercial products or vaccines or that USFDA
approval will be obtained for any use of CIT technology.
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, Canada relating to our CIT
technology acquired from Dr. Chang in August 2001. AcuVector, a former licensee of Dr. Chang,
claims that the terminated license agreement is still in effect. AcuVector is seeking substantial
damages and injunctive relief against Dr. Chang and CDN$20,000,000 in damages against us for
alleged interference with the 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. We performed sufficient due diligence at the time we acquired the technology to permit
us to conclude that AcuVector had no interest in the technology when we acquired it. Although the
case is still in the early stages of discovery, we believe that AcuVectors claims are without
merit and that we will receive a favorable judgment.
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 we
paid to Dr. Chang for the CIT technology we purchased 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 we 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
or the revenues there from.
Accordingly, if either AcuVector 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.
In February 2009, we submitted a Response to Final Office Action in support of USPTO
Application number 10/785,577 entitled Combination Immunogene Therapy that was filed February 23,
2004. We have not received any further indication, or comments, from the USPTO as to the outcome of
our application, but remain optimistic about the likelihood of patent approval.
On April 1, 2010 we entered into an exclusive 5-year collaboration agreement with Jaiva
Technologies, Inc. (JTI). Under the terms of the agreement, JTI will collaborate with clinical
laboratories, hospitals and physicians in India to conduct clinical trials for RPCs CIT
technology. Additionally, JTI will support RPC in securing Indian government approval for the use
of the CIT technology as a cancer therapy and vaccine throughout the country. JTI is a US-based
multinational biotechnology company focused on the research and development, distribution,
marketing and sales of promising third-party healthcare technology products, including RPCs CIT
cancer therapy and vaccine. JTI has agreed to underwrite any and all costs associated with its
undertakings in India to commercialize our CIT technology. These cost could well exceed US$1.4
million. Both parties understand that JTI may raise additional capital from third parties to
underwrite a portion or all of these costs. Although JTI anticipates being able to underwrite any
and all costs directly or by raising capital from various third parties, no guarantee to this
provision is provided by JTI. Both parties agree that any net profits derived by JTI or any of its
partners or affiliates, as a result of any commercialization of our CIT technology, will be equally
split between the parties.
OUR ONKO-SUREtm AND CIT PATENTS
Success in our business divisions depends, in part, on our ability to obtain U.S. and foreign
patent protection for our products, preserve our trade secrets, and operate without infringing upon
the proprietary rights of third parties.
14
Table of Contents
The U.S. Patent and Trademark Office has issued to us two patents which describe methods for
measuring ring-shaped particles in extra-cellular fluid as a means for detecting cancer. Our patent
for a method of detecting the tumors using ring shaped particles as a tumor marker was issued on
October 17, 1995 and expires on October 17, 2012. Our patent for a method for detecting the
presence of ring shaped particles as tumor markers was issued on June 3, 1997 and expires on June
3, 2014. We have three additional patent applications pending in the U.S. with respect to our
methodology for the ONKO-SUREtm tumor-markers as reliable indicators of the presence of
cancer. In addition, we have one patent based on our methodology for the ONKO-SUREtm tumor
marker pending in Europe.
In August 2001, we acquired intellectual property rights and an assignment of a U.S. patent
application covering 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. A U.S. patent was
issued on May 4, 2004, expires on April 9, 2017, and claims a vector composition comprising a gene
encoding the B7-2 protein in combination with an additional modulating protein, GMCSF. In 2004, we
also filed a continuation patent application on the CIT methodology. In February 2009, we submitted
a Response to Final Office Action in support of USPTO application number 10/785,577 entitled
Combination Immunogene Therapy that was filed February 23, 2004. We abandoned this continuation
patent application in early 2009.
On November 21, 2001, Singapore granted our patent containing claims to the CIT technology.
Singapore is a registration only jurisdiction, which means that patent applications are not
substantively reviewed prior to grant. However, the patent is enforceable in Singapore, but the
validity of such patents is determined by their courts. In November 2006, we were issued a patent
in Australia on our CIT technology claims covering the gene therapy method for treating cancer
using an expression vector comprising a gene encoding the B7-2 protein in combination with an
additional modulating protein.
In early 2003, Australia granted us a patent for our humanized mouse model technology acquired
from Dr. Chang. This technology is a research tool suitable for the evaluation of anti-human tumor
immunity and the identification of immuno-modulating genes. In March 2007, Israel granted us a
patent for our humanized mouse model. Patents that are based on the humanized mouse model are
pending in the following countries: Canada, Europe, Japan, and Singapore.
On June 19, 2001, a U.S. patent was issued on a technology for evaluation of vaccines in
animals which was also acquired from Dr. Chang. This patent expires on December 25, 2017.
There can be no assurance however, that any additional patents will be issued to us, or that,
if issued, the breadth or degree of protection of these patents will be adequate to protect our
interests. In addition, there can be no assurance that others will not independently develop
substantially equivalent proprietary information or obtain access to our know-how. Further, there
can be no assurance that others will not be issued patents which may prevent the sale of our test
kits or require licensing and the payment of significant fees or royalties by us in order for us to
be able to carry on our business. Finally, there can be no guarantee that any patents issued to or
licensed by us will not be infringed by the products of others. Defense and prosecution of patent
claims can be expensive and time consuming, even in those instances in which the outcome is
favorable to us. If the outcome is adverse, it could subject us to significant liabilities to third
parties, require us to obtain licenses from third parties or require us to cease research and
development activities or sales.
EMPLOYEES
As of April 10, 2009, we had 7 full-time employees in the U.S. We supplement our permanent
staff with temporary personnel. Our employees are neither represented by a union nor subject to a
collective bargaining agreement, and we consider our relations with our employees to be favorable.
We have entered into certain agreements with our employees regarding their services. We utilize the
services of consultants for safety testing, regulatory and legal compliance, and other services.
15
Table of Contents
EXECUTIVE OFFICES
Our executive offices are located at 2492 Walnut Avenue, Suite 100, Tustin, California 92780,
telephone number (714) 505-4460. In September 2001, we registered our common stock under the
Securities Exchange Act of 1934 and listed on the NYSE Amex exchange under the symbol RPC. You may
review any of our public reports or information on file with the SEC at the SECs Public Reference
Room at 100 F Street N.E., Room 1580, Washington, D.C., 20549. You may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330 or review our reports
at http://www.sec.gov. Information located on, or accessible through, our website is not
incorporated into this filing unless this filing specifically indicates otherwise.
Item 1A. Risk Factors
Our business involves significant risks which are described below.
Limited product development activities; our product development efforts may not result in
commercial products.
We intend to continue to pursue SFDA approval of the ONKO-SUREtm test kit and
licensing of our CIT technology. We are limited in the number of additional products we can develop
at this time. Successful cancer detection and treatment product development is highly uncertain,
and very few research and development projects produce a commercial product. Product candidates
like the ONKO-SUREtm test kit or the CIT technology that appear promising in the early
phases of development, such as in early animal or human clinical trials, may fail to reach the
market for a number of reasons, such as:
| the product candidate did not demonstrate acceptable clinical trial results even though it demonstrated positive preclinical trial results; | ||
| the product candidate was not effective in treating a specified condition or illness; | ||
| the product candidate had harmful side effects on humans; | ||
| the necessary regulatory bodies, such as the SFDA, did not approve our product candidate for an intended use; | ||
| the product candidate was not economical for us to manufacture and commercialize; and | ||
| the product candidate is not cost effective in light of existing therapeutics. |
Of course, there may be other factors that prevent us from marketing a product such as the
availability of sufficient cash to develop and market the product. We cannot guarantee we will be
able to produce commercially successful products. Further, clinical trial results are frequently
susceptible to varying interpretations by scientists, medical personnel, regulatory personnel,
statisticians and others, which may delay, limit or prevent further clinical development or
regulatory approvals of a product candidate. Also, the length of time that it takes for us to
complete clinical trials and obtain regulatory approval in multiple jurisdictions for a product
varies by jurisdiction and by product. We cannot predict the length of time to complete necessary
clinical trials and obtain regulatory approval.
JPIs operations in China involve significant risk.
JPIs operations in China are conducted as WFOEs in China. Risks associated with operating as
a WFOE include unlimited liability for claims arising from operations in China and potentially less
favorable treatment from governmental agencies in China than if operated through a joint venture
with a Chinese partner.
16
Table of Contents
JPIs Chinese operations are subject to the Pharmaceutical Administrative Law, which governs
the licensing, manufacture, marketing and distribution of pharmaceutical products in China and sets
penalty provisions for violations of provisions of the Pharmaceutical Administrative Law.
Compliance with changes in law may require JPI to incur additional expenditures or could impose
additional regulation on the prices charged for its pharmaceutical products, which could have a
material impact on JPIs financial position, results of operations and cash flows and ultimately
impair our investment in JPI.
The Chinese government has the right to annex or take facilities it deems necessary.
Currently, a portion of JJBs facility that produces large and small volume parenteral solutions
has been identified for annexation by the Chinese Military Department. The outcome of this event
cannot be predicted at this time, but if the Chinese government takes this facility, although JPI
expects that JJB will be compensated fairly for the facility, JJB will have to spend significant
time and resources finding another location and restarting those operations in another area. JPI
intends to consolidate JJB and any operations related to product lines retained after the sale of
YYB in a single facility in a new location. This may in turn negatively affect the ability to
monetize our investment in JPI. Any such new location will need to obtain GMP certification. Such
annexation, or the threat of such annexation, may also negatively impact our ability to monetize
our investment in JPI, affect the timing of any public listing in China, and negatively impact
JPIs results of operation and financial condition, and ultimately impair our investment in JPI.
The value of the RMB fluctuates and is subject to changes in Chinas political and economic
conditions. Historically, the Chinese government has benchmarked the RMB exchange ratio against the
U.S. dollar, thereby mitigating the associated foreign currency exchange rate fluctuation risk;
however, no assurances can be given that the risks related to currency deviations of the RMB will
not increase in the future. Additionally, the RMB is not freely convertible into foreign currency
and all foreign exchange transactions must take place through authorized institutions.
Our business is capital intensive and we may need additional operating capital.
Our business and operations are substantially dependent on the availability of enough cash to:
(i) finance the costs of sales and marketing of our ONKO-SUREtm cancer test kits; and (ii)
fund ongoing selling, general and administrative expenses of our business. Our existing cash
resources may be insufficient to meet our long term needs.
17
Table of Contents
At April 14, 2010, we had cash on hand in the U.S. of approximately $6.4 million. We require
approximately $300,000 per month to fund the costs associated with our financing activities; SEC
and NYSE reporting; legal and accounting expenses of being a public company; other general
administrative expenses; research and development, regulatory compliance, and distribution
activities related to ONKO-SUREtm test kit; the operation of a USFDA approved
pharmaceutical manufacturing facility; the development of international distribution of the
Companys planned HPE-based cosmetics product line; and compensation of executive management.
Accordingly, in the future we may require additional operating capital to meet these needs. No
assurances can be given that we will be able to obtain additional financing in the future, if
needed for our operations.
Our independent registered public accounting firm has included a going concern paragraph in their
report on our financial statements.
While our independent registered public accounting firm expressed an unqualified opinion on
our consolidated financial statements, our independent registered public accounting firm did
include an explanatory paragraph indicating that there is substantial doubt about our ability to
continue as a going concern due to our significant operating loss in 2009, our negative cash flows
from operations through December 31, 2009 and our accumulated deficit at December 31, 2009. Our
ability to continue as an operating entity currently depends, in large measure, upon our ability to
generate additional capital resources. In light of this situation, it is not likely that we will be
able to raise equity. While we seek ways to continue to operate by securing additional financing
resources or alliances or other partnership agreements, other than the exercise of outstanding
warrants, we do not at this time have any other commitments or agreements which provide for
additional capital resources. Our financial condition and the going concern emphasis paragraph may
also make it more difficult for us to maintain existing customer relationships and to initiate and
secure new customer relationships.
Our current products cannot be sold in certain countries if we do not obtain and maintain
regulatory approval.
We manufacture, distribute and market our products for their approved indications. These
activities are subject to extensive regulation by numerous state and federal governmental
authorities in the U.S., such as the USFDA and the Centers for Medicare and Medicaid Services
(formerly Health Care Financing Administration) and the SFDA in China as well as by certain foreign
countries, including some in the European Union. Currently, we (or our distributors) are required
in the U.S. and in foreign countries to obtain approval from those countries regulatory
authorities before we can market and sell our products in those countries. Obtaining regulatory
approval is costly and may take many years, and after it is obtained, it remains costly to
maintain. The USFDA and foreign regulatory agencies have substantial discretion to terminate any
clinical trials, require additional testing, delay or withhold registration and marketing approval
and mandate product withdrawals. In addition, later discovery of unknown problems with our products
or manufacturing processes could result in restrictions on such products and manufacturing
processes, including potential withdrawal of the products from the market. If regulatory
authorities determine that we have violated regulations or if they restrict, suspend or revoke our
prior approvals, they could prohibit us from manufacturing or selling our products until we comply,
or indefinitely.
Our future prospects will be negatively impacted if we are unsuccessful in pending litigation over
the CIT technology.
As noted above, we are engaged in litigation with AcuVector and with the Governors of the
University of Alberta over our CIT technology. We believe they both actions are without merit. We
believe that we will be able to settle this case during the second quarter of 2010. Yet, if either
AcuVector 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.
The value of intangible assets may not be equal to their carrying values.
Our intangible asset is the CIT technology, which we acquired from Dr. Chang in August 2001.
Whenever events or changes in circumstances indicate that the carrying amount may not be
recoverable, we are required to evaluate the carrying value of this asset, including the related
amortization periods. Whenever events or changes in circumstances indicate that the carrying value
of an intangible asset may not be recoverable, we determine whether there has been an impairment by
comparing the anticipated undiscounted cash flows from the operation and eventual disposition of
the product line with its carrying value. If the undiscounted cash flows are less than the carrying
value, the amount of the impairment, if any, will be determined by comparing the carrying value of
this intangible asset with its fair value. Fair value is generally based on either a discounted
cash flows analysis or market analysis. Future operating income is based on various assumptions,
including regulatory approvals, patents being granted, and the type and nature of competing
products.
18
Table of Contents
Patent approval for eight original claims related to the CIT technology was obtained in May
2004 and a continuation patent application was filed in 2004 for a number of additional claims. No
regulatory approval has been requested for our CIT technology and we may not have the funds to
conduct the clinical trials which would be required to obtain regulatory approval for our CIT
technology. Accordingly, we entered into a five year collaboration agreement to create one or more
clinical trials that would lead to gaining governmental approval in the country of India. If our
CIT technology is unable to pass the clinical trials required to obtain regulatory approval, or if
regulatory approvals or patents are not obtained or are substantially delayed, or other competing
technologies are developed and obtain general market acceptance, or market conditions otherwise
change, our CIT technology and other intangible technology may have a substantially reduced value,
which could be material. As intangible assets represent a substantial portion of assets in our
consolidated balance sheet, any substantial deterioration of value would significantly impact our
reported consolidated financial position and our reported consolidated operating results.
If our intellectual property positions are challenged, invalidated or circumvented, or if we fail
to prevail in future intellectual property litigation, our business could be adversely affected.
The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and
often involve complex legal, scientific and factual questions. To date, there has emerged no
consistent policy regarding breadth of claims allowed in such companies patents. Third parties may
challenge, invalidate or circumvent our patents and patent applications relating to our products,
product candidates and technologies. In addition, our patent positions might not protect us against
competitors with similar products or technologies because competing products or technologies may
not infringe our patents.
We face substantial competition, and others may discover, develop, acquire or commercialize
products before or more successfully than we do.
We operate in a highly competitive environment. Our products compete with other products or
treatments for diseases for which our products may be indicated. Additionally, some of our
competitors market products or are actively engaged in research and development in areas where we
are developing product candidates. Large pharmaceutical corporations have greater clinical,
research, regulatory and marketing resources than we do. In addition, some of our competitors may
have technical or competitive advantages over us for the development of technologies and processes.
These resources may make it difficult for us to compete with them to successfully discover, develop
and market new products.
We have limited sales of the ONKO-SUREtm test kit and are reliant on our distributors for
sales of our products.
Virtually all of our operating revenues in the U.S, came from the sale of ONKO-Sure to
distributor research users in foreign markets or from sales to a few domestic customers of certain
OEM products. Historically, we have not received any substantial orders from any of our customers
or distributors of ONKO-SUREtm test kits. For the year ended December 31, 2009, virtually
all of our U.S. revenues were derived from sales of ONKO-SUREtm test kits to our
distributors. However, in 2009 our U.S. sales substantially increased in comparison to prior
years. To maintain exclusive rights in assigned territories, distribution partners must provide
product marketing, sales management, logistics support and meet contractual product minimums.
Failing that, it is the Companys prerogative to downgrade distribution partners to non-exclusive
status or terminate agreements. Although our distributor network is increasing, any projection of
future orders or sales of ONKO-SUREtm test kits is unreliable. In addition, the amount of
ONKO-SUREtm test kits purchased by our distributors can be adversely affected by a number
of factors, including market challenges of commercializing a recently approved biotech product,
budget cycles and the amount of resources available for marketing programs, demand creation
activities, and outreach to appropriate healthcare professionals and targeted markets.
19
Table of Contents
We have a significant amount of relatively short term indebtedness that is in default and we may
be unable to satisfy our obligations to pay interest and principal thereon when due.
As of April 14, 2010, we have the following approximate amounts of outstanding short term
indebtedness:
(i) Accounts payable of approximately $2 million;
(ii) An $85,000 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 under a consulting agreement.
(iii) Approximately $2.5 million in unsecured convertible notes bearing interest at 10% per
annum due September 15, 2010;
(iv) Approximately $3.6 million senior unsecured promissory notes bearing interest at 18%
per annum, payable quarterly in cash, portions of which principal are due in December 2010 and
the balance of the principal is due at varying dates through 2012;
(v) Approximately $11 million represented by a series of 12% Convertible Notes which are
due at various dates in March and April 2012;
We are attempting to obtain stockholder approval to restructure and convert a significant
portion of the indebtedness referred to in (ii), (iii) and (iv) above; however, there can be no
assurance that such indebtedness will be restructured, converted into equity or that the requisite
approvals therefor 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.
We are subject to risks associated with our foreign distributors.
Our business strategy includes the continued dependence on foreign distributors for our
ONKO-SUREtm test kits. To date, we have not been successful in generating a significant
increase in sales for ONKO-SUREtm test kits through distribution channels in existing
markets or in developing distribution channels in new markets. We are also subject to the risks
associated with our distributors operations, including: (i) fluctuations in currency exchange
rates; (ii) compliance with local laws and other regulatory requirements; (iii) restrictions on the
repatriation of funds; (iv) inflationary conditions; (v) political and economic instability; (vi)
war or other hostilities; (vii) overlap of tax structures; and (viii) expropriation or
nationalization of assets. The inability to manage these and other risks effectively could
adversely affect our business.
We do not intend to pay dividends on our common stock in the foreseeable future.
We currently intend to retain any earnings to support our growth strategy and do not
anticipate paying dividends in the foreseeable future.
If we fail to comply with the rules under the Sarbanes-Oxley Act related to accounting controls
and procedures or if the material weaknesses or other deficiencies in our internal accounting
procedures are not remediated, our stock price could decline significantly.
Section 404 of the Sarbanes-Oxley Act required annual management assessments of the
effectiveness of our internal controls over financial reporting commencing December 31, 2007.
20
Table of Contents
Our management has concluded that the consolidated financial statements included in our Annual
Report on Form 10-K as of December 31, 2009 and 2008 and for the two years ended December 31, 2009,
fairly present in all material respects our consolidated financial condition, results of operations
and cash flows in conformity with accounting principles generally accepted in the U.S.
Our management has evaluated the effectiveness of our internal control over financial
reporting as of December 31, 2009 and 2008 based on the control criteria established in a report
entitled Internal Control Integrated Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this evaluation, our management has concluded
that our internal control over financial reporting was not effective as of December 31, 2009 and
2008. During its evaluation, as of December 31, 2009 our management identified material weaknesses
in our internal control over financial reporting and other deficiencies as described in Item 9A. As
a result, our investors could lose confidence in us, which could result in a decline in our stock
price.
We are taking steps to remediate our material weaknesses, as described in Item 9A. If we fail
to achieve and maintain the adequacy of our internal controls, we may not be able to ensure that we
can conclude in the future that we have effective internal controls over financial reporting in
accordance with Section 404 of the Sarbanes-Oxley Act. Moreover, effective internal controls,
particularly those related to revenue recognition, are necessary for us to produce reliable
financial reports and are important to helping prevent financial fraud. If we cannot provide
reliable financial reports or prevent fraud, our business and operating results could be harmed,
investors could lose confidence in our reported financial information, and the trading price of our
stock could decline significantly. In addition, we cannot be certain that additional material
weaknesses or other significant deficiencies in our internal controls will not be discovered in the
future.
Our stock price is volatile, which could adversely affect your investment.
Our stock price, like that of other international bio-pharma and/or cancer diagnostic and
treatment companies, is highly volatile. Our stock price may be affected by such factors as:
| clinical trial results; | ||
| product development announcements by us or our competitors; | ||
| regulatory matters; | ||
| announcements in the scientific and research community; | ||
| intellectual property and legal matters; | ||
| broader industry and market trends unrelated to our performance; | ||
| economic markets in Asia; and | ||
| competition in local Chinese markets where JPI sells its product. |
In addition, if our revenues or operating results in any period fail to meet the investment
communitys expectations, there could be an immediate adverse impact on our stock price.
Our stock price and financing may be adversely affected by outstanding warrants and convertible
securities.
We have a significant number of warrants outstanding and a large amount of convertible notes
which over hang the market for the Companys common stock. As of April 29, 2010, we had warrants
outstanding that are currently exercisable for up to an aggregate of approximately 22,268,929
shares of common stock at a weighted average exercise price of $1.03 per share; approximately
46,016,626 shares of common stock potentially issuable on conversion of our 10% convertible notes
at $1.20 per share and our various issues of 12% convertible notes exercisable and varying fixed
prices and formula prices. The existence of, and/or potential exercise of all or a portion of these
securities, create a negative and potentially depressive effect on our stock price because
investors recognize that they over hang the market at this time.
21
Table of Contents
We have limited product liability insurance.
We currently produce products for clinical studies and for investigational purposes. We are
producing our products in commercial sale quantities, which will increase as we receive various
regulatory approvals in the future. There can be no assurance, however, that users will not claim
that effects other than those intended may result from our products, including, but not limited to
claims alleged to be related to incorrect diagnoses leading to improper or lack of treatment in
reliance on test results. In the event that liability claims arise out of allegations of defects in
the design or manufacture of our products, one or more claims for damages may require the
expenditure of funds in defense of such claims or one or more substantial awards of damages against
us, and may have a material adverse effect on us by reason of our inability to defend against or
pay such claims. We carry product liability insurance for any such claims, but only in an amount
equal to $2,000,000 per occurrence, and $2,000,000 aggregate liability, which may be insufficient
to cover all claims that may be made against us.
Item 1B. Unresolved Staff Comments
Although we are a smaller reporting company, we are voluntarily disclosing that we received
SEC comments regarding the preliminary proxy statement we filed on February 1, 2010. Although we
are compiling our responses thereto, we cannot file and clear the definitive proxy statement until
we file this Form 10-K and the SEC confirms that they will not submit any comments to us regarding
this Form 10-K; we anticipate filing our response as soon as possible thereafter.
Item 2. Properties
Our office in the U.S. consists of research laboratory and manufacturing facilities which
occupy 4,395 square feet and are located at 2492 Walnut Avenue, Suite 100, Tustin, California. We
are renting these facilities at a monthly rate of $6,900 per month, including property taxes,
insurance and maintenance through December 1, 2010. Relations with the landlord are good and we do
not expect to have to relocate our executive offices.
Item 3. 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.
22
Table of Contents
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.
23
Table of Contents
Item 4. (Removed and Reserved)
PART II
Item 5.
Market for Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is listed on the NYSE Amex under the symbol RPC
Our stock price, like that of some other cancer diagnostic and pharmaceutical companies, is
highly volatile. Our stock price may be affected by such factors as:
| clinical trial results; | ||
| product development announcements by us or our competitors; | ||
| regulatory matters; | ||
| announcements in the scientific and research community; | ||
| intellectual property and legal matters; | ||
| broader industry and market trends unrelated to our performance; and | ||
| economic markets in Asia. |
In addition, if our revenues or earnings in any period fail to meet the investment communitys
expectations, there could be an immediate adverse impact on our stock price.
Market Information Our common shares are currently listed on the NYSE Amex under the symbol
RPC. On April 29, 2010, the closing price of our common shares on NYSE Amex was $1.30.
Set forth in the following table are the high and low closing prices for the years ended
December 31, 2008 and 2009 and for the quarter ended March 31, 2010 for our common stock
Quarter Ended | High | Low | ||||||
March 31, 2008 |
$ | 4.18 | $ | 2.93 | ||||
June 30, 2008 |
$ | 3.89 | $ | 2.78 | ||||
September 30, 2008 |
$ | 3.05 | $ | 1.26 | ||||
December 31, 2008 |
$ | 2.00 | $ | 0.69 |
Quarter Ended | High | Low | ||||||
March 31, 2009 |
$ | 1.38 | $ | 0.70 | ||||
June 30, 2009 |
$ | 1.35 | $ | 0.75 | ||||
September 30, 2009 |
$ | 1.01 | $ | 0.55 | ||||
December 31, 2009 |
$ | 0.60 | $ | 0.22 | ||||
March 31, 2010 |
$ | 0.38 | $ | 0.22 |
Record Holders. As of April 29, 2010, there were approximately 843 record holders of our
common stock.
Dividend Policy. We have not paid any cash dividends since our inception and do not
contemplate paying dividends in the foreseeable future. We anticipate that earnings, if any, will
be retained for the operation of our business.
24
Table of Contents
Securities Authorized for Issuance Under Equity Compensation Plans. This information is
included under Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
Purchases of Securities by the Company
None.
Recent Sales of Unregistered Securities
During the past three years, we effected the following transactions in reliance upon
exemptions from registration under the Securities Act as amended. Unless stated otherwise; (i) that
each of the persons who received these unregistered securities had knowledge and experience in
financial and business matters which allowed them to evaluate the merits and risk of the receipt of
these securities, and that they were knowledgeable about our operations and financial condition;
(ii) no underwriter participated in, nor did we pay any commissions or fees to any underwriter in
connection with the transactions; (iii) the transactions did not involve a public offerings; and
(iv) each certificate issued for these unregistered securities contained a legend stating that the
securities have not been registered under the Act and setting forth the restrictions on the
transferability and the sale of the securities.
The Company has funded its operations primarily through a series of Regulation S and
Regulation D companion offerings (the Offerings), as described below. The Offerings have
consisted of units of one share of common stock and warrants to purchase a number of shares of
common stock equal to one-half the number of shares of common stock included in the units (Units)
and units of one share of common stock and a warrant to purchase one share of common stock (Full
Units). The Units and Full Units are priced at a discount of 25% from the average closing prices
of the Companys common stock for the five consecutive trading days prior to the close of the
offering, as quoted on the NYSE Amex exchange, and the exercise price of the warrants is set at
115% of the average closing price. Unless otherwise noted below, the warrants issued in the
Offerings are exercisable at the date of issuance and expire three years from issuance.
For all of the Offerings, the Company utilized the placement agent services of Galileo Asset
Management, S.A. (Galileo), a Swiss corporation for sales to non-U.S. persons. In the United
States, the Company has utilized the placement agent services of FINRA (formerly NASD) member
broker-dealers Havkit Corporation (Havkit), Securities Network, LLC (Network) and Spencer
Clarke, LLC (Spencer Clarke), and licensed sub agents working under Spencer Clarke. In addition
to commissions and expenses paid to the Companys placement agents for each of the Offerings, as
described below, the Company has agreed to pay cash commission of 6% upon exercise of the warrants
by the purchasers.
April 2007 Offering
In April through June of 2007, the Company conducted two closings of a private placement (the
April 2007 Offering) of Units. The Company received $5,330,378 in aggregate gross proceeds from
the sale of 2,030,620 Units in the April 2007 Offering. The Units were sold at $2.625 per Unit and
the warrants are exercisable at $3.68 per share. Each warrant became exercisable on October 31,
2007 and remains exercisable until October 31, 2010.
In connection with the April 2007 Offering, the Company utilized the services of Galileo and
Network. For their services, Galileo and Network received commissions in an aggregate of $553,539
and warrants to purchase an aggregate of 203,062 shares of the Companys stock. The Company also
paid Galileo a non-accountable expense allowance of $160,000. In addition, the Company incurred
legal and other costs totaling $44,333 in connection with the April 2007 Offering. Total costs
associated with the April 2007 Offering were $757,872, which costs have been netted against the
proceeds received.
After the closing of the April 2007 Offering, the Company filed a registration statement with
the Securities and Exchange Commission to register the shares of the Companys common stock, shares
issuable upon exercise of the related investor warrants, and shares issuable upon exercise of the
warrants issued to the placement agents. The registration statement was declared effective on June
29, 2007.
25
Table of Contents
December 2007 Offering
In December, 2007, the Company conducted the closing of a private placement (December 2007
Offering) of Units. The Company received approximately $6,203,200 in aggregate gross proceeds from
the sale of 2,007,508 Units in the December 2007 Offering. The Units were sold at $3.09 per Unit.
The exercise price of the four-year warrants issued as part of the December 2007 Offering was $4.74
per share.
In connection with the December 2007 Offering, we utilized the placement services of Galileo
and Spencer Clarke. For their services, Galileo and Spencer Clarke received commissions and due
diligence fees of an aggregate of $619,158 and warrants to purchase 200,751 shares of our common
stock. The Company also paid the placement agents a non-accountable expense allowance of $150,000
and incurred $16,750 in other costs in connection with the December 2007 Offering. Total costs
associated with the December 2007 Offering were $785,908, which costs have been netted against the
proceeds received.
On March 5, 2008 the Company conducted the second closing of the December 2007 Offering. In
the second closing the Company received $1,000,000 in aggregate gross proceeds from the sale of a
total of 323,813 Units at $3.09 per Unit and issued warrants to purchase 161,813 shares at an
exercise price of $4.74 per share. The Company did not utilize the services of a placement agent,
however, in connection with the second closing of the December 2007 Offering, the Company paid a
finders fee of $100,000, and incurred $39,584 in other costs. Total costs associated with the
second closing of the December 2007 Offering were $139,584, which costs have been netted against
the proceeds received.
After the closing of the December 2007 Offering, the Company filed a registration statement
with the Securities and Exchange Commission to register the shares of the Companys common stock,
shares issuable upon exercise of the related investor warrants, and shares issuable upon exercise
of the warrants issued to the placement agents. The registration statement was declared effective
on April 22, 2008.
10% Convertible Note Financing
On September 15, 2008, we conducted the closing of a combined private offering of 10%
Convertible Notes (the 10% Convertible Note Offering) under Regulation D and Regulation S of
$2,510,000 of 10% Convertible Promissory Notes (the 10% Convertible Notes), maturing at the
earlier of (i) upon the closing of a Qualified Public Offering of our common stock (as defined
below), if not mandatorily converted at the closing, or (ii) September 15, 2010 (the Maturity
Date). For purposes thereof, Qualified Public Offering shall mean an equity offering of not less
than $25 million in gross proceeds. The 10% Convertible Notes bear interest at the annual rate of
ten percent (10%) which shall accrue and be payable on the Maturity Date. If all of the principal
amount of a 10% Convertible Note has not been voluntarily converted by the holder or a Qualified
Public Offering causing a mandatory conversion shall not have occurred prior to the Maturity Date,
the note holder shall receive additional interest (Bonus Interest) equal to fifty percent (50%)
of the remaining principal amount of the 10% Convertible Note on the Maturity Date. Any unpaid
Bonus Interest shall accrue interest thereafter at the rate of ten percent (10%) per annum thereon
until paid.
The holders of the 10% Convertible Notes have the right to convert the entire principal and
accrued interest of the 10% Convertible Notes into the common stock of the company at any time
prior to the Maturity Date at $1.20 per share. Upon conversion of the 10% Convertible Notes into
common stock of the Company, the Company shall issue warrants to purchase common stock (Investor
Warrants) to the converting investors in the amount equal to fifty percent (50%) of the number of
shares of common stock into which the 10% Convertible Notes were converted. The Investor Warrants
have a term of five (5) years from the date of issuance and shall be exercisable at a price equal
to 120% of the Companys stock price on the date of conversion; however, in no case will the
exercise price be less than $2.80.
The shares of common stock issuable upon a voluntary conversion of the 10% Convertible Notes
carry so-called piggy-back registration rights should the Company file a registration statement
in the future. In the event of a forced conversion into common shares in the event of a Public
Offering, holders of the 10% Convertible Notes will be subject to a lock-up on any remaining shares
not sold in the offering for ninety (90) days after the Public Offering.
26
Table of Contents
In connection with the offer and sale of the Notes in the 10% Convertible Note Offering, we
relied on the exemption under Section 4(2) of the Securities Act of 1933, as amended (the
Securities Act), Regulation S and Regulation D, Rule 506 promulgated thereunder. We believe that
all of the purchasers of Convertible Notes are accredited investors, as such term is defined in
Rule 501(a) under the Securities Act.
In connection with the sale of 10% Convertible Notes, we utilized the services of Jesup &
Lamont Securities Corporation and Dawson James Securities, Inc., FINRA (NASD) member broker-dealers
(the Placement Agents). For their services, the Placement Agents received commissions of 10% of
the amount of the notes sold and the Placement Agents received an aggregate of $313,750 (2.5%) as
due diligence and non-accountable expenses. We incurred an additional $111,849 in legal and other
expenses related to the issuance of the Convertible Notes. The Placement Agents and their assigns
also received five year warrants (Placement Agent Warrants) to purchase up to 209,166 shares of
the Companys common stock exercisable at $2.69, representing 115% of the five day volume-weighted
average price of the Companys common stock up through and including September 12, 2008. The terms
of these warrants require that we issue additional warrants in the case of certain dilutive
issuances of our common stock through the first quarter of 2009. The number of additional warrants
to be issued is based on the percentage decrease in share price of the dilutive issuance compared
to the exercise price of the warrants.
12% Convertible Note Financing March and April 2010
On March 22, 2010, we entered into a Note and Warrant Purchase Agreement with one accredited
investor. Pursuant to the Agreement, we issued the Lender a 12% Convertible Promissory Note
(Note) in the principal amount of $925,000 and a five year warrant (Warrant) to purchase up to
1,100,000 shares of our Common Stock. The Warrant is initially exercisable at the higher of: (i)
105% of the average VWAP for the five trading days immediately preceding the date we issued the
Warrant; and (ii) the Floor Price (the same as in the Note) in effect on the date the Warrant is
exercised. The Note carries a 20% original issue discount. In addition, we agreed to pay $200,000
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 we received were $540,000. We relied on the exemption from registration provided by
Section 4(2) of the Securities Act of 1933, as amended (the Securities Act), and Rule 506
promulgated thereunder. We believe that all of the purchasers are accredited investors, as such
term is defined in Rule 501(a) promulgated under the Securities Act. The Conversion Price of the
Convertible Promissory Note 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
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 in
April 2010, which together are hereinafter referred to as March-April 2010 12% Convertible Note
Financing. On April 8, 2010, the Board of Directors authorized the Company to enter into
additional Purchase Agreements to issue up to an additional $7,500,000 of 12% Convertible notes and
to issue warrants to issue up to an additional 15,000,000 shares of the Companys Common Stock
pursuant to the March-April 2010 12% Convertible Note Financing.
On April 8, 2010, we entered into Note and Warrant Purchase Agreements (the Agreements) with
24 accredited investors (Lenders) in the Second Closing of the sale of 12% Convertible Notes
(Second Closing Notes) and Warrants. Pursuant to the Agreements, we issued to the Lenders
Convertible Promissory Notes in the aggregate principal amount of $5,490,165 and warrants to
purchase up to 6,528,843 shares of our Common Stock (Warrants). The Second Closing Notes mature
on April 7, 2011 (Maturity Date). The Second Closing Notes contain original issue discounts and
fees payable by us aggregating $2,285,165. As a result, the total net proceeds we received were
$3,225,000. The Agreements, Notes and Warrants, as well as the terms of this transaction, are
substantially the same as those we issued to the investor in the First Closing on March 22, 2010,
as disclosed in the Current Report on Form 8-K that we filed with the Securities and Exchange
Commission on March 26, 2010.
27
Table of Contents
As of the Second Closing, we had 26,851,069 shares of common stock issued and outstanding. The
Agreements include an addendum that prohibits us from issuing more than 594,528 shares to the
Lenders, unless we receive stockholder approval and NYSE Amex approval to list and issue all shares
issuable: (i) upon exercise of all of the Warrants at $0.38 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 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. We are required
under the terms of the Notes to obtain stockholder approval, on or before July 15, 2010, of the
issuance of all shares of our common stock issuable pursuant to the Notes and Warrants. If we fail
to obtain such approval, an Event of Default under the Notes shall occur. We are also obligated to
receive listing approval from NYSE Amex for the shares of Common Stock issuable upon conversion of
the Note and exercise of the Warrant as soon as practicable after closing, but in no event later
than May 1, 2010.
On April 13, 2010, we entered into Additional Note and Warrant Purchase Agreements
(Additional Agreements) with eleven accredited investors (Lenders) in a Third Closing of the
March-April 2010 Convertible Note Financing. Pursuant to the Additional Agreements, we issued to
the Lenders additional Convertible Promissory Notes in the aggregate principal amount of $3,957,030
(Third Closing Notes) and warrants to purchase up to 4,705,657 shares of our Common Stock
(Warrants). The Third Closing Notes mature on April 12, 2011 (Maturity Date). The conversion
price of the Third Closing Notes is the higher of (i) 80% of the five day volume weighted average
closing price of our common stock preceding the date of conversion, or (ii) $0.28 per share. We
agreed to pay to the Lenders one-sixth of the principal amount of the Notes each month commencing
on the six month anniversary of the Notes and the balance of the unpaid principal of the Notes on
the one year anniversary date of the Notes. The Notes contain original issue discounts and fees
payable by us aggregating $1,646,980. As a result, the total net proceeds we received in the Third
Closing were $2,310,000. The exercise price of the Warrants issued in the third closing is $0.69
per share.
The Agreements, Notes and Warrants, as well as the terms of this transaction (other than the
exercise price of the warrants) in the Second Closing and Third Closing are substantially the same
as those we issued to the investor in the First Closing pursuant to the Note and Warrant Purchase
Agreements we entered into on March 22, 2010.
We are required under the terms of the Notes to obtain stockholder approval, on or before
August 31, 2010, of the issuance of all shares of our common stock issuable pursuant to the Notes
and Warrants in this financing. If we fail to obtain such approval, an Event of Default under the
Notes shall occur. We are also obligated to receive listing approval from NYSE Amex for the shares
of Common Stock issuable upon conversion of the Note and exercise of the Warrant as soon as
practicable after Closing, but in no event later than May 1, 2010. A listing application will be
prepared and filed with the NYSE AMEX.
Any shares of Common Stock issuable in any of the Closings in excess of NYSE Amex Rule 713
so-called 19.99% Cap will require stockholder approval. No stockholder approval has been
solicited or obtained as of the date hereof. The Company intends to file an additional listing
application with the NYSE Amex to list all of the shares of the Companys Common Stock issuable on
conversion of the 12% Convertible Notes and on exercise of the warrants issued in the Second
Closing and the Third Closing. The Company also intends to seek stockholder approval for a waiver
of the 19.99% Cap on such shares.
28
Table of Contents
Non-Cash Financing Activities
On March 2, 2007, the Board of Directors authorized the issuance of 190,000 shares of common
stock to Boston Financial Partners, Inc. pursuant to an amendment to the consulting agreement dated
September 16, 2003, as consideration for financial advisory services to be provided from March 1,
2007 through September 1, 2007. The shares were valued at $558,600 based on the trading price of
the common stock on the measurement date. During the year ended December 31, 2007, the Company
recorded selling, general and administrative expense of $558,600 related to the agreement.
Also on March 2, 2007, the Board of Directors authorized the issuance of 150,000 shares of
common stock to First International pursuant to an amendment to the consulting agreement dated July
22, 2005, as consideration for financial advisory services to be provided from March 22, 2007
through September 22, 2007. The shares were valued at $517,500 based on the trading price of the
common stock on the measurement date. During the year ended December, 2007, the Company recorded
selling, general and administrative expense of $517,500.
On April 24, 2007, the Board of Directors authorized the issuance of warrants to purchase
25,000 shares of common stock to Brook street Securities Corporation, a consultant, as
consideration for financial advisory services. The common shares issuable on exercise of the
warrants are exercisable at $3.68 per share. The warrants were valued at $35,000 using the
Black-Scholes option pricing model with the following assumptions: (i) no dividend yield, (ii)
weighted-average volatility of 123% (iii) weighted-average risk-free interest rate of 4.88%, and
(iv) weighted-average expected life of 1 year. The amount was charged to general and administrative
expense in the year ended December 31, 2007.
On September 14, 2007, the Board of Directors authorized the issuance of 250,000 shares of
common stock to First International pursuant to an amendment to the consulting agreement dated July
22, 2005, for financial advisory services to be provided from September 22, 2007 through September
22, 2008. The shares were valued at $817,500 based on the trading price of the common stock on the
measurement date. The Shares were issued pursuant to an exemption under Section 4(2) of the
Securities Act. No underwriter was involved in this issuance. During the years ended December 31,
2008 and 2007, the Company recorded selling, general and administrative expense of $592,687 and
$224,813, respectively, related to the agreement.
The Company issued 10,000 options to a consultant and an investor during the year ended
December 31, 2007 which resulted in compensation expense of $35,300 which is included in selling,
general and administrative expense. In pricing these options, the Company used the Black-Scholes
pricing model with the following weighted-average assumptions: expected volatility of 353%;
risk-free interest rate of 4.92%; expected term of five years; and dividend yield of 0%.
On November 27, 2007, the Board of Directors authorized the issuance of 75,000 shares of
common stock to Boston Financial Partners Inc. pursuant to an amendment to the consulting agreement
dated September 16, 2003, for financial advisory services to be provided from November 1, 2007
through October 31, 2008. The shares were valued at $336,000 based on the trading price of the
common stock on the measurement date. During the years ended December 31, 2008 and 2007, the
Company recorded selling, general and administrative expense of $280,000 and $56,000, respectively,
related to the agreement.
On November 27, 2007, the Board of Directors authorized the issuance of up to 300,000 shares
of common stock, to be earned at the rate of 25,000 shares per month to Madden Consulting, Inc. for
financial advisory services to be provided from December 26, 2007 through December 26, 2008. The
first 25,000 shares were valued at $104,250 based on the trading price of the common stock on the
measurement date. During the year ended December 31, 2007, the Company recorded selling, general
and administrative expense of $104,250 related to the agreement and the issuance of the first
25,000 shares. A second 25,000 shares was earned in 2008, resulting in expense of $104,250, and the
agreement terminated on January 28, 2008.
On February 5, 2008, the Board of Directors authorized the issuance of 300,000 shares of
common stock to LWP1 pursuant to a consulting agreement dated February 3, 2008 for financial
advisory services to be provided from February 3, 2008 through May 3, 2009. The shares are
issuable in two increments of 150,000. The shares vest over a fifteen month period and are being
valued monthly as the shares are earned based on the trading price of the common stock on the
monthly anniversary date. In accordance with FASB ASC 505-50-30, Equity-Based Payments to
Non-Employees, (ASC 505-50-30), the shares issued will be periodically valued through the vesting
period. During the year ended December 31, 2008, the Company recorded general and administrative
expense of $527,801 related to the agreement.
29
Table of Contents
On April 30, 2008, the Company extended the term of warrants to purchase 18,750 shares of
common stock at $3.68 per share to October 31, 2009. The warrants were held by an investor/service
provider. The Company recorded $18,375 in compensation expense related to the term extension,
calculated using the Black-Scholes option valuation model with the following assumptions: expected
volatility of 79%; risk-free interest rate of 2.37%; expected term of 1.5 years; and dividend yield
of 0%.
On May 16, 2008, the Company settled litigation related to the termination of an agreement
regarding a proposed private placement. In connection with the settlement, the Company paid $12,500
in cash, and issued 25,000 shares of unregistered common stock with a deemed value of $75,000,
based on the ten-day volume weighted-average price of the Companys common stock through May 8,
2008. The value of the cash and shares issued in the settlement is included in general and
administrative expense in the consolidated statement of operations for the year ended December 31,
2008.
On June 17, 2008, the Company entered into an agreement for financial consulting services. In
connection with the agreement, the Company granted warrants to purchase 150,000 shares of common
stock at an exercise price of $3.50. The warrants, which were approved by the Companys board of
directors, were granted in partial consideration for financial consulting services, vest over a
twelve month period, and expire in five years. The warrants were initially valued at $315,000,
based on the application of the Black Scholes option valuation model with the following
assumptions: expected volatility of 95%; average risk-free interest rate of 3.66%; expected term of
5 years; and dividend yield of 0%. In accordance with ASC 505-50-30, the warrants will be
periodically revalued through the vesting period. The value of the warrants is being expensed over
the 36 month term of the consulting contract. The Company recognized $19,478 of expense in the year
ended December 31, 2008 with respect to the warrants. Additionally, $68,773 related to vested
warrants which have not been expensed based on the 36 month term of the consulting agreement is
included in prepaid consulting at December 31, 2008.
On January 22, 2009, we entered into an agreement with B&D Consulting for investor relations
services through July 7, 2010. We granted B&D Consulting 400,000 shares of our common stock in
exchange for services, subject to the approval for listing of the shares by the NYSE Alternate US.
NYSE Amex approval was received on March 26, 2009 and the shares were issued on March 31, 2009. The
value of the shares will be expensed during the periods in which services are provided in exchange
for the share-based compensation.
On February 2, 2009, our Board of Directors authorized the issuance of 12,500 shares of our
common stock to an investor relations consultant for services under a consulting agreement, subject
to the approval for listing of the shares by the NYSE Amex. NYSE Amex approval was received on
March 26, 2009 and the shares were issued on March 31, 2009. The value of the shares will be
expensed during the periods in which services are provided in exchange for the share-based
compensation.
On September 10, 2009, we entered into a Consulting Agreement with Cantone Asset Management,
LLC whereby the Consultant shall provide guidance and advice related to negotiating the terms of
the Companys outstanding Series 1 and Series 2 Senior Notes and continue services to assist the
Company to coordinate with the holders of the Series 1 and Series 2 Senior Notes. In consideration
of the Consultants service, we agreed to pay monthly consulting fees of $12,000 per month for a
period of twelve (12) months and issue to the Consultant a five-year warrant to purchase 200,000
shares of the Companys common stock at an exercise price of $0.60 per share. The warrants were
initially valued at $88,000, based on the application of the Black Scholes option valuation model
with the following assumptions: expected volatility of 97.27%; average risk-free interest rate of
238%; expected term of 5 years; and dividend yield of 0. In accordance with ASC 505-50-30, the
warrants will be periodically revalued through the vesting period. The value of the warrants is
being expensed over the term of the consulting contract. The Company recognized $25,666 of expense
in the year ended December 31, 2009 with respect to the warrants. Additionally, $62,334 related to
vested warrants which have not been expensed based on the 12 month term of the consulting agreement
is included in prepaid consulting at December 31, 2009.
30
Table of Contents
On February 9, 2010 we issued 1,100,000 shares of our common stock to two consultants under
consulting services agreements. The value of these issuances will be recorded in first quarter 2010
at fair market value based upon the then current fair market value of the stock.
Item 6. Selected Financial Data
Not applicable.
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
The Company
Radient Pharmaceuticals Corporation is a vertically integrated pharmaceutical company with the
following distinct business divisions or units:
| Manufacturer and Distributor of ONKO-SUREtm a Proprietary In-Vitro Diagnostic (IVD) Cancer Test; | ||
| Distribution of Elleuxe brand of Anti-Aging Skin Care Products; | ||
| A Cancer Therapeutics Technology. |
The Companys Revised Strategic Focus
Until recently, the Company was focused on the production and distribution of pharmaceutical
products through the Companys subsidiaries located in the Peoples Republic of China. The Company
has recently refocused the Companys core business strategy and market focus to the international
commercialization of ONKO-SUREtm and Elleuxe products. On September 25, 2009, the Company
changed the name from AMDL, Inc. to Radient Pharmaceuticals Corporation. The Company believe
Radient Pharmaceuticals as a brand name has considerable market appeal and reflects the Companys
new corporate direction and branding statements.
The Company is now actively engaged in the research, development, manufacturing, sale and
marketing of in IVD and high-end skin care products. The Company has focused the business strategy
on the international commercialization and next generation product development for both of these
products. All of these business units focus on the development, manufacturing, distribution and
sales of high-quality medical diagnostic products, generic pharmaceuticals, nutritional
supplements, and cosmetics in the United States, Canada, China, Chile, Europe, India, Korea,
Taiwan, Vietnam and other markets throughout the world.
For 2009, the Company generated approximately $158,000 in the sales of the Companys
ONKO-SUREtm IVD cancer diagnostic test kits, which is an increase of approximately 98% in
sales of this product over the same period for 2008. Depending on receiving additional funding, it
is also anticipated that we will begin commercialized sales of the Companys Elleuxe brand of skin
care products by the end of the fourth quarter of 2010. These two business segments are anticipated
to be the Companys largest revenue producing products in the near future. The Company believes
that revenues from these products will significantly increase in 2010 due to the creation of
distribution agreements that are anticipated to move the IVD cancer diagnostic test kits and the
Elleuxe brand of skin care products into broad commercial channels in markets throughout the world.
In connection with the deconsolidation, the Company has reclassified China pharmaceutical
manufacturing and distribution business (conducted through JPI subsidiary) as a business
investment, rather than a consolidated operating subsidiary of the Company.
31
Table of Contents
IV Diagnostics
IVD Cancer Diagnostics
ONKO-SUREtm Kit
The product is manufactured at the Companys Tustin, California based facilities and is sold
to third party distributors, who then sell directly to Clinical Laboratory Improvement Amendments
certified reference laboratories in the United States as well as clinical reference labs, hospital
laboratories and physician operated laboratories in the international market. The Companys test
kits are currently being sold to one diagnostic reference laboratory in the United States. During
the 2009, the Company entered into the following distribution agreements:
| Exclusive five year distribution agreement with Grifols USA, LLC. This distribution agreement allows Grifols USA, LLC to market and sell ONKO-SUREtm for the monitoring of colorectal cancer to hospitals, clinical laboratories, clinics and other health care organizations. | ||
| Exclusive two year distribution agreement with Tarom Applied Technologies Ltd for the marketing and sales of ONKO-SUREtm in Israel. | ||
| Two distinct exclusive five year distribution agreement with GenWay Biotech, Inc. This distribution agreement allows Genway Biotech, Inc, to market and see ONKO-SUREtm for uses other than colorectal cancer to CLIA-certified laboratories in the US and as a lung cancer screen to laboratories in Canada |
The majority of sales were outside of the U.S. with, limited sales of test kits within the
U.S. The Company has developed the next generation version of theONKO-SUREtm test kit, and
in 2009, the Company 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 The CompanysONKO-SUREtm 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-SUREtm 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-SUREtm can be a valuable diagnostic tool in the worldwide battle
against cancer, the second leading cause of death worldwide. ONKO-SUREtm 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-SUREtm test kit results with other clinically
relevant diagnostic modalities. While the ONKO-SUREtm 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, the Company changed the brand name of their in-vitro diagnostic cancer test
from DR-70 to the more consumer friendly, trademarked brand name ONKO-SUREtm, 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.
32
Table of Contents
Elleuxe Brand of Premium Anti-Aging Skin Care Products
The Company intends to produce and market a variety of cosmetic products that were originally
developed by JPI in 2008, based upon their HPE anti-aging therapeutic products. We have
reformulated these products for international markets under the brand name Elleuxe. The Company
currently anticipates the launch of sales of these U.S. manufactured skin care products during late
2010. Elleuxe, a therapeutic, high-end skin care product line based on the active ingredient
Elleuxe Protein the Companys proprietary active ingredient that offers cell renewing
properties designed to minimize the appearance of aging. The initial Elleuxe product line includes:
| Hydrating Firming Cream | ||
| Renergie Hydrating Cleanser | ||
| Intense Hydrating Cleanser | ||
| Visable Renewing Hydrating Softener | ||
| Smoothing Renewing Eye Moisturizer |
The Company now expects to launch this product in late 2010. The Company also expect to offer
a vegetable-based product line and a mens product line by the end of 2010. In total there will be
eight separate product formulations. Elleuxe is anticipated to be sold directly to high-end retail
stores, high-end beauty spas and medical day spas. The Company anticipates that we will sell the
product sets (grouped based on skin types) at prices ranging from $500 to $650 per set and the
individual products in the set at $100-$350 per ounce in eight separate product formulations.
According to Euromonitor, the global luxury skin care market is expected to reach $22.1 billion by
2013.
33
Table of Contents
IVD Cancer Research and Development
During the year ended December 31, 2009, we incurred expenses of $563,690 in research and
development related to the ONKO-SUREtm, as compared to $194,693 for the same period in
2008. These expenditures were incurred as part of the Companys efforts to improve the existing
ONKO-SURE tm and develop the next generation ONKO-SUREtm.
The Company expects expenditures for research and development to grow in the 2010 due to
additional staff and consultants needed to support an agreement with Mayo Clinic to conduct a
clinical study for the validation of the Companys next generation version of its United States
Food and Drug Administration(USFDA) approved ONKO-SUREtm test kit and additional
development costs associated with entry into new markets. Through this validation study, the
Company and Mayo Clinic will perform clinical diagnostic testing to compare to the Companys
ONKO-SUREtm test kit with a newly developed, next generation test. The primary goal of
the study is to determine whether the Companys next generation ONKO-SUREtm 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.
In collaboration with the Mayo Clinic, the Company is designing and intends to perform an
additional study to demonstrate the safety and effectiveness of the next generation test for
monitoring colorectal cancer. 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.
New Corporate Name
On August 22, 2009, the Company, received shareholder approval in order to change its name to
Radient Pharmaceuticals Corporation (Radient Pharma). the Companys name was changed on September
25, 2009 and shortly thereafter the Company posted a new corporate website under the new name at
www.radient-pharma.com
China-based Integrated Pharmaceuticals
China Pharmaceutical Manufacturing and Distribution; Discontinued Operations and Dispositions
The Companys previously operated China-based pharmaceutical manufacturing and distribution
business is engaged in the manufacture and distribution of generic and homeopathic pharmaceutical
products and supplements, as well as cosmetic products. RPC operated this business division through
its wholly-owned subsidiary, JPI, which in turn, operates through a wholly-owned Chinese
subsidiary, Jiangxi Jiezhong Bio-Chemical Pharmacy Company Limited (JJB). On January 22, 2009,
the Companys board of directors authorized management to sell the operations of Yangbian Yiqiao
Bio-Chemical Pharmacy Company Limited (YYB). The Company classified the assets, liabilities,
operations and cash flows of YYB as discontinued operations for all periods presented in the
consolidated financial statements.
The sale of YYB was completed on June 26, 2009. Shares in YYB, along with rights to certain
land and land use rights, were transferred to the buyer (an individual) in consideration of:
| The forgiveness of amounts owed to YYB from JJB;and | ||
| The buyer of YYB has contractually agreed to pay off the balance of the 16 million RMB (or $2,337.541 U.S. Dollars) obligation secured by a mortgage on certain land owned by JJB. |
YYB has been accounted for as discontinued operations and in connection with the sale of YYB,
JPI transferred certain of JJBs land use rights to the buyer of YYB, in which the bank has a
secured interest. JPI originally acquired YYB and JJB in 2005 along with certain assets and
liabilities of a predecessor to JJB (JiangXi Shangrao KangDa Biochemical Pharmacy Co. Ltd). YYB was
sold to a Chinese national for 16 million RMB (or $2,337,541 U.S. Dollars) in the form of an
agreement whereby the buyer of YYB will pay this amount to Chinese International Bank of Commerce
in order to partially satisfy outstanding bank loans at JJB.
34
Table of Contents
During the second quarter of 2009, the Companys management became aware of internal
management disputes in China that resulted in a deterioration of both operational and financial
controls by JPIs management over the operating entity JJB. The management of both JPI and JJB have
indicated that they believe the most prudent path to raising additional capital for the Companys
Chinese operating division is for JJB to complete one or more private placements of equity. They
also indicated that they believe the best path for the Company to monetize the Companys
investments in JPI and JJB would be for JJB to seek a public listing on the Growth Enterprise
Market (GEM) located in Hong Kong or a similar Asia based market by the third quarter of 2012.
The Companys executive management and board of directors are in agreement with JPI and JJBs
management on this strategy.
During the third quarter of 2009, it became apparent to the Companys management that the
working relationship with management of its operations in China was becoming increasingly strained.
Accordingly, the Company deemed it appropriate to seek alternative means of monetizing its
investment. There were several issues that caused the Company to conclude accordingly, including,
but not limited to:
| Lack of timely responses from the management in China to requests by Company management for financial information; | ||
| Lack of responsiveness by management in China to requests for transfer of Company funds to bank accounts under corporate control; | ||
| Lack of timely communication with Corporate management concerning significant decisions made by management in China concerning the disposal of the YYB subsidiary; and | ||
| Lack of timely communication with corporate officers concerning operations in China. |
Effective September 29, 2009, based on unanimous consent of the Companys board of directors
and an executed binding agreement (the Agreement) between the Company and Henry Jia, Frank Zheng
and Yuan Da Xia (collectively, the JPI Shareholders), the Company deconsolidated all activity of
JPI.
Based on the Agreement and in accordance with current accounting guidelines, the Company
deconsolidated JPI as of the date the Company ceased to have a controlling financial interest,
which was effective September 29, 2009. In accordance with the Agreement, the Company agreed to
exchange its shares of JPI for 28,000,000 non-voting shares of preferred stock, which represents
all outstanding shares of preferred stock, relinquished all rights to past and future profits,
surrendered its management positions and agreed to non-authoritative minority role on its board of
directors.
Based on the Companys evaluation of current accounting guidance, it was determined that the
Company did not maintain significant influence over the investee and, accordingly, has recorded
such investment in accordance with the cost method. Although, the Company maintains significant
economic ownership in JPI, based on its evaluation of its lack of ability to influence, lack of a
role in policy and decision making, no significant planned intercompany activity, among other
things, the Company concluded that it would not be appropriate to account for such investment in
consolidation or under the equity method of accounting.
The deconsolidation process of JPI and JJB materially and adversely affected the Companys
2009 earnings and sales. There can be no assurance that we will ever realize any significant value
from the Companys equity interest in JPI and JJB.
On September 29, 2009, the Company entered into an agreement which outlines the Companys
limited role in JPIs future operations. As such, the Company has classified JPI on the
consolidated balance sheet as Investment in JPI and included results from JPI and JJBs
operations for the period ended September 29, 2009 on the consolidated statements of operations and
comprehensive income (loss).
Upon deconsolidation, the Company conducted a valuation of its investment. In determining the valuation of the Companys interest in JPI
at September 29, 2010, the most significant assumptions, include the following:
| Sales growth based on managements expectations and historical analysis | ||
| Cost of sales/Gross Margin Based on historical analysis and management expectations | ||
| Selling, General and Administrative Expenses Based on historical analysis and management expectations | ||
| Comparable Public Companies Based on same or similar line of business as the Company and those that possessed similar to those of the Company. | ||
| Discounts The Company evaluated discounts related to the following: |
| Lack of control | ||
| Lack of marketability |
In addition to the above, the Company noted that JPI had a recent history of significant
revenues and gross operating profits which the Company deemed particularly relevant. Furthermore,
JPI realized an operating profit in the twelve month period ended September 30, 2009. The Company
considered this performance indicative of future performance. The
Company used a combination of the Income and Market Approaches to
the Valuation. The Company utilized data obtained from comparable publicly traded companies operating
in the same or similar line of business as a function of revenue
and earnings before interest, taxes, depreciation and amortization
(EBITDA). This was considered
appropriate since the value of an asset is reasonably reflected by what an arms-length buyer is
willing to pay for an asset possessing similar characteristics. Based
on the combination of the Income and Market Approaches, the Company determined that a 100% controlling equity
interest in JPI was valued at approximately $35,000,000. Accordingly, the Companys 97.6% non-voting equity
interest after application of a reasonable discount related to lack of control and lack of
marketability was $20,500,000.
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.
Despite the deconsolidation of JPI and its wholly-owned subsidiary, JJB, the Company still
believes JPI and JJB have a promising future. The Company anticipates that they may be able to sell
off a portion or all of their ownership in JPI and JJB within the next 24 months, although no
buyers have as yet been identified. Alternatively, the Company would seek an exit from their
investment at or after any public listing. The Company also could retain all or a portion of the
Companys remaining equity stake in JPI and JJB, if ownership continues to look promising. The goal
is to gain the best valuation possible for this strategic asset. Additionally, the Company also
believes that JPI/JJBs business and brand recognition make it a potential buyout target.
35
Table of Contents
Operations of JJB
JJB manufactures and markets numerous diagnostic, pharmaceutical, nutritional supplement and
cosmetic products. JJB is acquiring production rights for other pharmaceutical products which will
require the approval of the SFDA. Historically, the top selling products in China are HPE-based
Solutions (anti-aging cosmecutical), Domperidone (anti-emetic), Levofloxacin Lactate Injections (IV
antibiotics) and Glucose solutions (pharmaceutical).
Facilities
The SFDA requires that all facilities engaged in the manufacture of pharmaceutical products
obtain GMP certification. In February 2008, JJBs GMP certification expired for the small volume
parenteral solutions injection plant lines that were engaged in manufacturing the Companys HPE
injectible product, Goodnak, and all other small volume parenteral solutions. JJB ceased small
volume parenteral solutions operations at this facility while undertaking $1.5 million in
modifications necessary to bring the facility and its operations into compliance. The renovations
were completed and recertification was obtained in 2009.
The Company was notified by the Chinese Military Department of its intent to annex one of
JJBs plants that is located near a military installation. The proposed area to be annexed contains
the facilities that are used to manufacture large and small volume parenteral solutions.
Discussions regarding annexation are proceeding and we expect that JJB will be compensated fairly
for the transfer of the facility upon annexation. JJB intends to find a new single center site in
Jiangxi Province, China to relocate its operations.
For purposes of reporting the results of discontinued operations, the Company have assumed
that all products previously manufactured and sold by YYB were sold with the business. The Company
may have to spend significant time and resources finding, building and equipping the new location
and restarting the relocated operations. In addition, such new facilities will need to obtain GMP
certification for all manufacturing operations.
Marketing and Distribution
JJB has established a marketing program consisting of approximately forty sales managers and a
network of distributors who market JJBs products.
JJB sells directly to hospitals and retail stores and indirectly to other customers through
distributors. One primary distributor has 29 retail outlets throughout China. JJB is developing
educational programs for hospitals, doctors, clinics and distributors with respect to JJBs product
lines. These educational programs are intended to improve sales and promotion of JJBs products.
New Beauty Formulations of the HPE-Based Anti-Aging Product
During 2008, JJB finalized the formulations of the following HPE-based cosmetic products.
These new products consist of capsules and an easy-to-apply lotion version and are marketed under
the trade name Nalefen Skin Care. These new products complement JJBs existing high quality
injectible and extract formulations. Additionally, JJB has contracted with YiBo to develop a
capsule version of the Goodnak product. JJB plans to sell both products through both new and
existing distribution channels within the Henan, Sichuan, Guizhou, Shanxi, Xinjiang, Gansu, Hunan,
Zhejiang, Fujian, Liaoning and Heilongjiang Provinces of China. Together these regions have a
combined population of more than 376 million people.
36
Table of Contents
Distribution Channels for Beauty Product Lines
Distribution contracts which were in place during 2008 for the sale of HPE products have
expired and JJB has not renewed the agreements. As a result, revenue in 2009 was adversely
impacted. At this time, JJB does not anticipate the new lotion formulations will also be sold
through these same distributors. JPIs management has indicated that they have developed various
new distribution relationships with more reliable distributors that will be selling their HPE
solutions in the future.
JJB also believes that some of the beauty products will be good candidates for export to the
North American and South American markets. JJB has completed the reformulation of the China based
formula and will submit to a US laboratory to be tested for safety and effectiveness. In
conjunction with the testing, RPC is collaborating with an industry specialist to develop a unique
packaging scheme for the market. It is estimated that this process will be completed in 2010.
The Current Chinese Economic and Market Environment
The Company operates in a challenging economic and regulatory environment that has undergone
significant changes in technology and in patterns of global trade. The current economic and market
environment in China is uncertain. In addition, Chinas health care spending is projected to
increase by nearly 40% to $17.3 billion, with a government proposal to bring universal healthcare
to 90% of its 1.3 billion citizens by 2011, as reported by the American Free Press. While this data
appears promising, the proposal, however, could result in additional controls over the pricing of
certain drugs which could, in turn, negatively impact JJBs business prospects in China and the
carrying amount of production rights acquired from YiBo.
Cancer Therapeutics
In 2001, the Company acquired the CIT technology, which forms the basis for a proprietary
cancer vaccine. The Companys CIT technology is a U.S. patented technology (patent issued May 25,
2004). The Cancer Therapeutics division is engaged in commercializing the CIT technology.
Critical Accounting Policies
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. 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:
Inventories. Major components of inventories are raw materials, packaging materials, direct
labor and production overhead. The Companys 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.
37
Table of Contents
Sales Allowances. A portion of the Companys 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 the Companys 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 evaluate the collectibility of our receivables at least
quarterly. 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.
Valuation of Intangible 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; and | ||
| changing or implementation of rules regarding sale of pharmaceuticals in China. |
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 December 31, 2009. 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 technologies and prevent future long-lived asset impairment.
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.
During the third and fourth quarters of 2009, the Company entered into several distribution
agreements for various geographic locations with a third party. 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
under these arrangements.
38
Table of Contents
In conjunction with the launch of the Companys Nalefen Skin Care HPE products, distributors
of the products were offered limited-time discounts to allow for promotional expenses incurred in
the distribution channel. Distributors are not required to submit proof of the promotional expenses
incurred. These promotional discounts are netted against revenues in the condensed consolidated
statements of operations and comprehensive income (loss). Accounts receivable presented in the
accompanying condensed consolidated balance have been reduced by the promotional discounts, as
customers are permitted by the terms of the distribution contracts to net the discounts against
payments on the related invoices.
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.
Deferred Taxes. The Company records a valuation allowance to reduce the deferred tax assets
to the amount that is more likely than not to be realized. The Company has 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 the Companys deferred tax assets have been
reserved. If actual results differ favorably from those estimates used, the Company may be able to
realize all or part of the Companys net deferred tax assets. Such realization could positively
impact the Companys consolidated operating results and cash flows from operating activities.
Litigation. The Company accounts for litigation losses in accordance with 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, the
Company 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 the Companys
consolidated results of operations and comprehensive loss and cash flows from operating activities.
Stock-Based Compensation Expense. 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 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.
The Company accounts 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. Derivatives are recorded on the balance sheet at fair
value. The Company issued convertible debt in September 2008, and recorded a derivative asset
related to the limitation on bonus interest rights held by convertible debt holders in the event of
a change in control or bankruptcy.
39
Table of Contents
During the year ended December 31, 2009, we issued convertible debt and recorded derivative
liabilities related to the conversion feature of debt and reset provision of the exercise price of
the warrants. During the year ended December 31, 2009, the Company granted warrants in connection
with the issuance of common stock and recorded a derivative liability related to the reset
provision of the exercise price of the warrants.
Wholesale Sales. 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.
In conjunction with the launch of the Companys Goodnak/Nalefen cosmetic line, distributors of
the products were offered limited-time discounts to allow for promotional expenses incurred in the
distribution channel. Distributors are not required to submit proof of the promotional expenses
incurred. The Company accounts for the promotional expenses in accordance with ASC 605-50-25
Vendors Accounting for Consideration Given to a Customer. Accordingly, the promotional discounts
have been netted against revenue in the accompanying consolidated statements of operations.
Accounts receivable have also been reduced by the promotional discounts, as customers are permitted
by the terms of the distribution contracts to net the discounts against payments on the related
invoices.
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. 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.
Results of Operations
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
Net Revenues. During the year ended December 31, 2009, the Companys aggregate net revenues
from product sales decreased 63% to $8,627,669 from $23,774,900 for the same period in 2008.
Corporate
Net revenues for the year ended December 31, 2009 for the Company was $158,017 compared to
$80,222 for the same period in 2008. This increase is due to increased orders for the
ONKO-SUREtm test kits.
With USFDA approval of ONKO-SUREtm test kit, the Companys 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 sales to increase in 2010.
The Company presently has in place exclusive distribution agreements for the ONKO-SURE test
kits in the USA, Canada, Korea, India, Russia, Greece, and Israel along with an exclusive
distribution partner assigned inVietnam. The Company has 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.
The statement concerning future sales is a forward-looking statement that involves certain
risks and uncertainties which could result in sales below those achieved for the year ended
December 31, 2009. 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.
40
Table of Contents
The Company has 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.
The Company currently has 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 the Company is working on replacing this component so that they are in a position
to have an unlimited supply of ONKO-SURE 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. It is
anticipated that this version will be submitted to the USFDA in the latter half of 2010.
China-Wholesale
China net revenues were $8,469,652 for the period January 1, 2009 through September 29, 2009
as compared to $23,694,678 for the year ended December 31, 2008. This decrease was primarily due
to:
| Management conflicts between JPI and its subsidiary JJB; | ||
| The sale of YYB; and | ||
| The lack of sales of HPE solutions due to the mandatory 5-year GMP recertification by the SFDA of JJBs small injectible line and the expiration of contracts with beauty distributors that sell topical HPE solution. |
Gross Profit. The Companys gross profit for the year ended December 31, 2009 was $3,267,456
as compared to $12,244,509 for the year ended December 31, 2008.
Corporate
Gross profit increased approximately 102% to $120,345 for the year ended December 31, 2009
from $59,605 for the year ended December 31, 2008 due to increased sales volume of the
ONKO-SUREtm test kit.
China
China gross profit was $3,147,110 for the period January 1, 2009 through September 29, 2009, a
74% decrease over the year ended December 31, 2008 where gross profit was $12,184,904. Gross profit
as compared to sales decreased from 52% for the year ended December 31, 2008 to 37% for the period
January 1, 2009 through September 29, 2009. This decrease can be attributed to a change in the
product mix as products shifted away from products reliant on the small injectible manufacturing
line to other less profitable products as well as an increase in the cost of raw materials and an
increase in manufacturing overhead.
The major components of cost of sales include raw materials, wages and salary and production
overhead. Production overhead is comprised of depreciation of building, land use rights, and
manufacturing equipment, amortization of production rights, utilities and repairs and maintenance.
Research and Development. In the past, JJB and YYB entered into joint research and
development agreements with outside research institutes, but all of the prior joint research
agreements have expired.
All research and development costs incurred during the year ended December 31, 2009 were
incurred by Radient in the U.S. These costs comprised of funding the necessary research and
development of the ONKO-SUREtm test kit for the USFDA, and preparing for submission of
ONKO-SUREtm test kit to the SFDA. During the year ended December 31, 2009, we incurred
$563,690 in research and development expenses related to the ONKO-SUREtm test kit,
compared to $194,693 for the same period in 2008.
41
Table of Contents
We expect research and development expenditures to increase during of 2010 due to:
| Additional expenditures for research and development is needed in China for SFDA approval of ONKO-SUREtm test kit and the need for clinical trials in China for SFDA approval of ONKO-SUREtm test kit; | ||
| 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 | ||
| Research and development for the HPE-based cosmetic product. |
Selling, General and Administrative Expenses. Selling, general and administrative expenses
for the Company were $10,936,789 for the year ended December 31, 2009 as compared to $10,962,058
for the year ended December 31, 2008.
Corporate
We incurred selling, general and administrative expenses of $7,311,242 in 2009 as compared to
$9,674,934 in 2008. Corporate 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
expenses. Also included in selling, general and administrative expenses were non-cash expenses
incurred during the year ended December 31, 2009 of approximately $520,000 for common stock,
options and warrants issued to consultants for services and approximately $822,000 for options
issued to employees and directors and approximately $1,900,000 in bad debt expense. The decrease in
selling, general and administrative expense incurred is primarily a result of a reduction in
professional fees and payroll related costs of approximately $1,300,000 and $1,100,000,
respectively.
The table below details the major components of selling, general and administrative expenses
incurred at Corporate:
Year Ended December 31, | ||||||||
2009 | 2008 | |||||||
Investor relations (including value of warrants/options) |
$ | 864,905 | $ | 1,851,033 | ||||
Salary and wages (including value of options) |
$ | 2,701,530 | $ | 3,859,506 | ||||
Directors fees (including value of options) |
$ | 378,521 | $ | 721,874 | ||||
Consulting fees |
$ | 192,692 | $ | 104,040 | ||||
Accounting and other professional fees |
$ | 735,618 | $ | 972,141 | ||||
Legal |
$ | 825,727 | $ | 630,939 |
China-Wholesale
China-Wholesale incurred selling, general and administrative expenses of $3,625,547 for the
period January 1, 2009 through September 29, 2009 as compared to $1,287,124 for the year ended
December 31, 2008. Major components were advertising, amortization, payroll and related taxes,
transportation charges, meals and entertainment and insurance. Selling, general and administrative
expenses increased 182% in 2009 when compared to 2008 expenses. The increase is primarily due to
expenses for advertising of approximately $1,098,000 incurred during the third quarter of 2009.
Advertising expense are for the promotion and advertising of the HPE based products which were in
prior periods assumed by the distributors.
Additionally, JPIs executive salaries were paid by Corporate in 2008.
Interest Expense. Interest expense for the years ended December 31, 2009 and 2008 was
$2,596,606 and $468,531, respectively.
42
Table of Contents
Corporate
Interest expense increased to $2,568,155 for the year ended December 31, 2009 from $100,561
for the year ended December 31, 2008 as a result of the issuance of debt instruments and the
amortization of the related debt discounts, debt issuance costs, and derivative liabilities in 2008
and 2009.
China-Wholesale
JPI incurred interest expense of $28,451 and $367,970 for the period January 1, 2009 through
September 29, 2009 and the year ended December 31, 2008, respectively. These expenses represent
interest paid to financial institutions in connection with debt obligations.
Results of Discontinued Operations
Summarized operating results of discontinued operations for the period January 1, 2009 through
June 26, 2009 (date of sale) and the year ended December 31, 2008 are as follows:
ows:
Periods Ended | ||||||||
December 31 | ||||||||
2009 | 2008 | |||||||
Revenue |
$ | 594,839 | $ | 3,967,643 | ||||
Income (loss) before income taxes |
$ | 277,743 | $ | 1,081,021 |
Included in income (loss) from discontinued operations, net are income tax expenses of
$30,717 and $5,213 for the period January 1, 2009 through June 26, 2009 (date of sale) and the year
ended December 31, 2008, respectively. YYBs tax rate is 15% through 2010 in accordance with the
Western Region Development Concession Policy of the PRC government.
Income (loss) before discontinued operations. As a result of the factors described above, for
the year ended December 31, 2009 the Companys loss before discontinued operations was $12,482,018
or ($0.75) per share compared to the year ended December 31, 2008 when the Companys loss before
discontinued operations was $712,948, or ($0.05) per share.
Liquidity and Capital Resources
For the year ended December 31, 2009, the Companys cash and cash equivalents decreased by
$2,275,138, compared to a net decrease in cash and cash equivalents of $3,870,210 for the same
period in 2008. We lost approximately $900,000 of cash due to the disposition of YYB and
deconsolidation of JPI. In addition, we continue to attempt to raise additional debt or equity
financing as the Companys operations historically have not produced sufficient cash to offset the
cash drain of growth in the Companys pharmaceutical business and general operating and
administrative expenses. The Companys operations require approximately $300,000 per month,
including interest. To the extent that funds are not available to meet the Companys operating
needs, the Companys will have to restrict or discontinue operations.
Operating activities. The Company used $3,204,985 from continuing operating activities in the
year ended December 31, 2009, compared with cash used in continuing operating activities of
$6,230,880 for the same period in 2008. This decrease was due in part to the collection of accounts
receivable offset by an increase in prepaid advertising, consulting and other expenses.
The Company generated $101,457 in cash from discontinued operating activities from changes in
operating assets and liabilities in the year ended December 31, 2009, as compared to generating
$1,559,721 for the same period in 2008.
Investing activities. We used $1,797,723 in investing activities in the year ended
December 31, 2009 compared with $1,310,280 for the same period in 2008. The primary reason for the
change was that the Company purchased more equipment in 2009 compared to 2008. For the years ended
December 31, 2009 and 2008, JJB made capital improvements to their facilities and purchased
equipment in an effort to regain JJBs GMP certification for JJBs small injectible manufacturing
lines. Renovations necessary for GMP recertification of the facility at JJB were completed and
recertification was received in the second quarter of 2009. In 2009, we also acquired lab and
office equipment for the Companys U.S. facility to support the Companys ONKO-SUREtm test
kit initiatives.
43
Table of Contents
Net cash provided by financing activities was $3,464,468 for the year ended December 31, 2009,
primarily consisting of the net proceeds of $520,556 from the issuance of convertible debt, net
proceeds of $2,088,592 from the issuance of senior debt, and net proceeds of $812,320 from the
issuance of common stock. Net cash provided by financing activities of continuing operations was
$2,162,272 for the year ended December 31, 2008 represented net proceeds of $2,084,401, $856,714,
$857,271 and $559,530 from the issuance of convertible debt, senior debt, common stock and exercise
of warrants and options, respectively, which were partially offset by payments of $2,195,644 on
notes payable.
Our cash position was significantly improved by the March-April 2010 12% Convertible Note
Financing. As of April 14, 2010 we had $6.4 million of cash on hand.
Future Capital Needs
The Company expects to incur additional capital expenditures at the Companys U.S. facilities
in 2010 in the form of upgrading the Companys information technology systems, collaboration with
the Mayo Clinic, 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.
China Credit Facilities
When JPI acquired JJB and YYB, KangDa Pharmaceutical Company, a predecessor of JJB,
had a credit facility and bank loan from Industrial and Commercial Bank of China (ICBC) of
approximately 38 million RMB, or $4.7 million, (the KangDa Credit Facility), which was assumed by
JPI through agreement with KangDa. The assumption of the loan was not formalized with the bank,
however, the bank made a verbal agreement to allow the JPI to continue under the original terms of
the credit agreement. The loan from ICBC is secured by a pledge of the real property on which the
JJBs Chinese manufacturing facilities are located. Currently, approximately $3.1 million is due
and payable on the KangDa Credit Facility. JPI is currently in default, but the bank is cooperating
with JPIs management to resolve this issue. Approximately $2.3 million from the sale of YYB is to
be remitted by the buyer of YYB to pay down principal and interest on this loan.
Issuance of Securities for Services
Due to our limited cash resources, we have in the past and recently issues securities for
services in lieu of cash to consultants and other providers.
On January 22, 2009, we entered into an agreement with B&D Consulting for investor relations
services through July 7, 2010. We granted B&D Consulting 400,000 shares of our common stock in
exchange for services, subject to the approval for listing of the shares by the NYSE Alternate US.
NYSE Alternext US approval was received on March 26, 2009 and the shares were issued on March 31,
2009. The value of the shares will be expensed during the periods in which services are provided in
exchange for the share-based compensation.
On February 2, 2009, our Board of Directors authorized the issuance of 12,500 shares of our
common stock to an investor relations consultant for services under a consulting agreement, subject
to the approval for listing of the shares by the NYSE Alternext US. NYSE Alternext US approval was
received on March 26, 2009 and the shares were issued on March 31, 2009. The value of the shares
will be expensed during the periods in which services are provided in exchange for the share-based
compensation.
On July 31, 2009, the Company issued 37,500 shares of common stock to Strategic Growth
International, Inc. as settlement for the 150,000 warrants owned them. The stock was valued at
$0.63 per share. As the common stock value is below the original warrant value, the Company did not
recognize incremental costs associated with the settlement.
44
Table of Contents
On September 22, 2009, we entered into an agreement with Lyons Capital, LLC for investor
relations services for a twelve month period. We granted 200,000 shares, in exchange for services.
The value of the shares will be expensed during the periods in which service are provided in
exchange for the share-based compensation.
On September 29, 2009 the Company issued 67,800 shares of common stock to a vendor as
settlement for the amount owed them. The shares were valued at $0.29 per share and as a result of
the settlement the Company recorded the gain of $26,442.
On November 24, 2009, we entered into an agreement with First International Capital Group,
Ltd, for investor relations services for a six month period. We granted 900,000 shares, which will
be expensed during the periods in which service are provided in exchange for the share-based
compensation.
On February 9, 2010, we issued 1,100,000 shares of our common stock to two consultants under
consulting services agreements. The value of these issuances will be recorded in first quarter
2010 at fair market value based upon the then current fair market value of the stock.
Off-Balance Sheet Arrangements
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 consolidated financial statements have been prepared assuming we 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 before discontinued operations of $12,482,018 and
$712,948 for the years ended December 31, 2009 and 2008, respectively, and had an accumulated
deficit of $52,438,553 at December 31, 2009. In addition, we used cash from operating activities of
continuing operations of $3,204,985 for the year ended December 31, 2009.
During the second quarter 2009 the Companys corporate management became aware of certain
internal disputes in China between the management of JJB and JPI. These disputes have effectively
resulted in difficulties in managing the operations of JJB and also receiving financial information
from them. As a result of this loss of control, the Company deconsolidated JJB effective
September 29, 2009.
On April 14, 2010, the Company had cash on hand of approximately $6.4 million. The Companys
U.S. operations currently require approximately $300,000 per month exclusive of interest payments
on outstanding note obligations to fund the cost associated with the Companys general
U.S. corporate operations, and the expenses related to the further development of the
ONKO-SUREtm kit.
45
Table of Contents
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 the Companys
ONKO-SUREtm kit or expenditures related to further development of the Companys CIT
technology, as no significant expenditures are anticipated other than recurring legal fees incurred
in furtherance of patent protection for the CIT technology.
The Companys near and long-term operating strategies focus on (i) obtaining SFDA approval for
the ONKO-SUREtm kit, (ii) further developing and marketing of ONKO-SUREtm,
(iii) seeking a large pharmaceutical partner for the Companys CIT technology, (iv) selling
different formulations of HPE-based products in the U.S. and internationally and (v) introduction
of new products. Management recognizes that ability to achieve any of these objectives is dependent
upon obtaining significant additional financing to sustain operations to enable it to continue as a
going concern. 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 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 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, (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.
The Companys only sources of additional funds to meet continuing operating expenses, fund
additional research and development and fund additional working capital are through the sale of
securities, and/or debt instruments. The Company is actively seeking additional debt or equity
financing, but no assurances can be given that such financing will be obtained or what the terms
thereof will be. The Company may need to discontinue a portion or all of its operations if we are
unsuccessful in generating positive cash flow or financing for the Companys operations through the
issuance of securities.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Exchange Risk
Prior to the deconsolidation of JPI on September 29, 2009, our primary customers were located
in the Peoples Republic of China. As such, all of our transactions with our customers and vendors
were denominated in RMB. Since July 2005, the Chinese central bank has benchmarked the RMB against
a basket of currencies.
In the past, the value of the RMB fluctuates and is subject to changes in Chinas political
and economic conditions. Historically, the Chinese government benchmarked the RMB exchange ratio
against the United States dollar, thereby mitigating the associated foreign currency exchange rate
fluctuation risk.
46
Table of Contents
Item 8. Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Radient Pharmaceuticals Corporation
Radient Pharmaceuticals Corporation
We have audited the accompanying consolidated balance sheets of Radient Pharmaceuticals
Corporation and subsidiaries (the Company) as of December 31, 2009 and 2008, and the related
consolidated statements of operations and comprehensive income (loss), stockholders equity, and
cash flows for the years then ended. These consolidated financial statements are the responsibility
of the Companys management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial statements are free of
material misstatement. The Company was not required to have, nor were we engaged to perform, an
audit of its internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Companys internal control over financial reporting. Accordingly, we express
no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the consolidated financial statements, assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Radient Pharmaceuticals Corporation and
subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash
flows for the years then ended in conformity with accounting principles generally accepted in the
United States of America.
The accompanying consolidated financial statements have been prepared assuming the Company
will continue as a going concern. As more fully described in Note 1 to the consolidated financial
statements, the Company has incurred a significant operating loss in 2009 and negative cash flows
from operations in 2009 and has a working capital deficit of approximately $4.2 million at
December 31, 2009. These items, raise substantial doubt about the Companys ability to continue as
a going concern. Managements plans in regard to these matters are also described in Note 1. The
consolidated financial statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of liabilities that might
result should the Company be unable to continue as a going concern.
/s/ KMJ Corbin & Company LLP | ||||
KMJ Corbin & Company LLP | ||||
Costa Mesa, California
April 15, 2010
April 15, 2010
47
Table of Contents
RADIENT PHARMACEUTICALS CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, | ||||||||
2009 | 2008 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 12,145 | $ | 2,287,283 | ||||
Accounts receivable, net |
| 13,575,534 | ||||||
Inventories |
79,255 | 1,563,991 | ||||||
Prepaid expenses and other current assets |
57,778 | 1,006,960 | ||||||
Prepaid consulting |
358,667 | 1,435,021 | ||||||
Total current assets |
507,845 | 19,868,789 | ||||||
Property and equipment, net |
83,547 | 11,709,508 | ||||||
Intangible assets, net |
1,158,333 | 5,311,568 | ||||||
Receivable from JPI, net |
2,675,000 | | ||||||
Investment in JPI |
20,500,000 | | ||||||
Other assets |
1,394,361 | 4,072,432 | ||||||
Noncurrent assets of discontinued operations |
| 1,789,934 | ||||||
Total assets |
$ | 26,319,086 | $ | 42,752,231 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable and accrued expenses |
$ | 1,975,311 | $ | 1,675,539 | ||||
Accrued salaries and wages |
738,331 | 822,201 | ||||||
Derivative liabilities |
354,758 | | ||||||
Income taxes payable |
| 472,860 | ||||||
Deferred revenue |
103,128 | 87,538 | ||||||
Convertible note, net of discount of $2,000,649 |
240,482 | | ||||||
Current portion of notes payable |
1,316,667 | 2,662,610 | ||||||
Current liabilities of discontinued operations |
| 1,151,515 | ||||||
Total current liabilities |
4,728,677 | 6,872,263 | ||||||
Other long-term liabilities |
295,830 | 353,811 | ||||||
Notes payable, net of current portion and debt discount of $1,701,402 |
601,819 | 581,305 | ||||||
Total liabilities |
5,626,326 | 7,807,379 | ||||||
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; 22,682,116 and 16,006,074
shares issued at December 31, 2009 and 2008, respectively; 22,265,441 and 15,826,074 shares
outstanding at December 31, 2009 and 2008, respectively |
22,265 | 15,826 | ||||||
Additional paid-in capital |
73,109,048 | 68,192,411 | ||||||
Accumulated other comprehensive income |
| 2,443,452 | ||||||
Accumulated deficit |
(52,438,553 | ) | (35,706,837 | ) | ||||
Total stockholders equity |
20,692,760 | 34,944,852 | ||||||
Total liabilities and stockholders equity |
$ | 26,319,086 | $ | 42,752,231 | ||||
See accompanying notes to consolidated financial statements.
48
Table of Contents
RADIENT PHARMACEUTICALS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
Year Ended December 31, | ||||||||
2009 | 2008 | |||||||
Net revenues |
$ | 8,627,669 | $ | 23,774,900 | ||||
Cost of sales |
5,360,213 | 11,530,391 | ||||||
Gross profit |
3,267,456 | 12,244,509 | ||||||
Operating expenses: |
||||||||
Research and development |
563,690 | 194,693 | ||||||
Selling, general and administrative |
10,936,789 | 10,962,058 | ||||||
11,500,479 | 11,156,751 | |||||||
Income (loss) from continuing operations |
(8,233,023 | ) | 1,087,758 | |||||
Other income (expense): |
||||||||
Interest and other income (expense), net |
(328,071 | ) | (24,210 | ) | ||||
Change in fair value of derivative liabilities |
648,313 | | ||||||
Loss on deconsolidation |
(1,953,516 | ) | | |||||
Interest expense |
(2,596,606 | ) | (468,531 | ) | ||||
Total other expense, net |
(4,229,880 | ) | (492,741 | ) | ||||
Income (loss) from continuing operations before provision for income taxes |
(12,462,903 ) | 595,017 | ||||||
Provision for income taxes |
19,115 | 1,307,965 | ||||||
Loss from continuing operations |
(12,482,018 | ) | (712,948 | ) | ||||
Income (loss) from discontinued operations, net |
(4,139,037 | ) | 1,893,008 | |||||
Net income (loss) |
(16,621,055 | ) | 1,180,060 | |||||
Other comprehensive gain: |
||||||||
Foreign currency translation gain |
| 1,375,023 | ||||||
Comprehensive income (loss) |
$ | (16,621,055 | ) | $ | 2,555,083 | |||
Basic income (loss) per common share |
||||||||
Loss from continuing operations |
$ | (0.75 | ) | $ | (0.05 | ) | ||
Income (loss) from discontinued operations |
$ | (0.25 | ) | $ | 0.12 | |||
Net income (loss) |
$ | (1.00 | ) | $ | 0.08 | |||
Diluted income (loss) per common share |
||||||||
Loss from continuing operations |
$ | (0.75 | ) | $ | (0.04 | ) | ||
Income (loss) from discontinued operations |
$ | (0.25 | ) | $ | 0.10 | |||
Net income (loss) |
$ | (1.00 | ) | $ | 0.07 | |||
Weighted average common shares outstanding basic |
16,680,946 | 15,608,697 | ||||||
Weighted average common shares outstanding diluted |
16,680,946 | 18,337,162 | ||||||
See accompanying notes to consolidated financial statements.
49
Table of Contents
RADIENT PHARMACEUTICALS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
For The Years Ended December 31, 2009 and 2008
Accumulated | ||||||||||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||||||||||
Common Stock | Preferred Stock | Paid-in | Comprehensive | Accumulated | Stockholders | |||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Income (Loss) | Deficit | Equity | |||||||||||||||||||||||||
Balance, January 1, 2008 |
14,979,528 | $ | 14,980 | | $ | | $ | 61,525,001 | $ | 1,068,429 | $ | (36,886,897 | ) | $ | 25,721,513 | |||||||||||||||||
Beneficial conversion
feature related to
Convertible Debt |
| | | | 2,635,000 | | | 2,635,000 | ||||||||||||||||||||||||
Common stock issued for
cash, net of issuance
costs of $142,410 |
323,626 | 323 | | | 856,948 | | | 857,271 | ||||||||||||||||||||||||
Exercise of warrants |
252,733 | 253 | | | 559,277 | | | 559,530 | ||||||||||||||||||||||||
Common stock issued for
consulting services |
270,187 | 270 | | | 706,780 | | | 707,050 | ||||||||||||||||||||||||
Stock-based employee
and director
compensation |
| | | | 1,034,175 | | | 1,034,175 | ||||||||||||||||||||||||
Estimated fair value of
warrants issued to
brokers for debt
issuances |
| | | | 768,604 | | | 768,604 | ||||||||||||||||||||||||
Estimated fair value of
warrants and options
issued to third parties
for services |
| | | | 106,626 | | | 106,626 | ||||||||||||||||||||||||
Translation gain |
| | | | | 1,375,023 | | 1,375,023 | ||||||||||||||||||||||||
Net income |
| | | | | | 1,180,060 | 1,180,060 | ||||||||||||||||||||||||
Balance, December 31,
2008 |
15,826,074 | 15,826 | | | 68,192,411 | 2,443,452 | (35,706,837 | ) | 34,944,852 | |||||||||||||||||||||||
Common stock issued for
consulting services |
1,437,126 | 1,438 | | | 650,390 | | | 651,828 | ||||||||||||||||||||||||
Stock-based employee
and director
compensation |
| | | | 666,623 | | | 666,623 | ||||||||||||||||||||||||
Estimated fair value of
warrants issued to
brokers for debt
issuances |
| | | | 1,975,920 | | | 1,975,920 | ||||||||||||||||||||||||
Estimated fair value of
warrants and options
issued to third parties
for services |
| | | | 35,625 | | | 35,625 | ||||||||||||||||||||||||
Common stock granted as
compensation to members
of the Companys Board
of Directors |
120,000 | 120 | | | 71,880 | | | 72,000 | ||||||||||||||||||||||||
Stock option
modification |
| | | | 129,360 | | | 129,360 | ||||||||||||||||||||||||
Voluntary conversion of
debt |
1,342,956 | 1,342 | | | 1,090,447 | | | 1,091,789 | ||||||||||||||||||||||||
Common stock sold for
cash |
3,289,285 | 3,289 | | | 809,031 | | | 812,320 | ||||||||||||||||||||||||
Derivative liability in
connection with stock
offering |
| | | | (509,839 | ) | | | (509,839 | ) | ||||||||||||||||||||||
Common stock issued to
note holder due to
default |
250,000 | 250 | | | 72,500 | | | 72,750 | ||||||||||||||||||||||||
Adoption of change in
accounting principal
related to derivatives |
| | | | (209,166 | ) | | (110,661 | ) | (319,827 | ) | |||||||||||||||||||||
Reclassification of
derivative liability
upon expiration of
share adjustment terms |
| | | | 133,866 | | 133,866 | |||||||||||||||||||||||||
Reclassification
adjustment of
accumulated translation
gains in connection
with deconsolidation
and sale of YYB |
| | | | | (2,443,452 | ) | | (2,443,452 | ) | ||||||||||||||||||||||
Net loss |
| | | | | | (16,621,055 | ) | (16,621,055 | ) | ||||||||||||||||||||||
Balance, December 31,
2009 |
22,265,441 | $ | 22,265 | | $ | | $ | 73,109,048 | $ | | $ | (52,438,553 | ) | $ | 20,692,760 | |||||||||||||||||
See accompanying notes to consolidated financial statements.
50
Table of Contents
RADIENT PHARMACEUTICALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, | ||||||||
2009 | 2008 | |||||||
Cash flows from operating activities: |
||||||||
Net income (loss) |
$ | (16,621,055 | ) | $ | 1,180,060 | |||
Less: (loss) income from discontinued operations |
(4,139,037 | ) | 1,893,008 | |||||
(12,482,018 | ) | (712,948 | ) | |||||
Adjustments to reconcile net income (loss) to net cash used in operating activities |
||||||||
Depreciation and amortization |
1,095,771 | 1,343,677 | ||||||
Amortization of debt issuance costs |
1,770,377 | 12,386 | ||||||
Fair market value of common stock options granted to employees and directors for services |
795,983 | 1,034,175 | ||||||
Fair market value of common stock, warrants and options granted for services |
593,279 | 1,617,592 | ||||||
Fair market value of warrants accounted for as derivative liabilities |
35,558 | | ||||||
Change in fair value of derivative liabilities |
(648,313 | ) | | |||||
Penalties on Cantone Debt |
192,131 | | ||||||
Provision for bad debts |
1,890,762 | | ||||||
Loss on deconsolidation |
1,953,516 | | ||||||
Gain on the settlement of accounts payable |
(47,251 | ) | | |||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
4,489,789 | (11,656,294 | ) | |||||
Related party account with Jade Capital |
| 880,927 | ||||||
Inventories |
122,670 | (1,313,331 | ) | |||||
Prepaid consulting, expenses and other assets |
(3,890,720 | ) | 261,059 | |||||
Accounts payable, accrued expenses, accrued salaries and wages and other long-term
liabilities |
1,228,486 | 1,679,871 | ||||||
Income taxes payable |
(320,398 | ) | 794,411 | |||||
Deferred revenue |
15,393 | (172,405 | ) | |||||
Net cash used in operating activities of continuing operations |
(3,204,985 | ) | (6,230,880 | ) | ||||
Net cash provided by operating activities of discontinued operations |
101,457 | 1,559,721 | ||||||
Net cash used in operating activities |
(3,103,528 | ) | (4,671,159 | ) | ||||
Cash flows from investing activities: |
||||||||
Purchase of property and equipment |
(1,744,065 | ) | (1,490,224 | ) | ||||
Cash balance divested from deconsolidation of subsidiary |
(53,658 | ) | | |||||
Funds advanced to KangDa |
| (635,386 | ) | |||||
Repayment of funds from KangDa |
| 655,471 | ||||||
Payments received from notes receivable |
| 159,859 | ||||||
Net cash used in investing activities |
(1,797,723 | ) | (1,310,280 | ) | ||||
Net cash used in investing activities of discontinued operations |
(852,955 | ) | (17,252 | ) | ||||
Net cash used in investing activities |
(2,650,678 | ) | (1,327,532 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from issuance of bridgenote, net of issuance costs |
43,000 | | ||||||
Payments on notes payable |
| (2,195,644 | ) | |||||
Proceeds from issuance of convertible debt, net of cash offering costs |
520,556 | 2,084,401 | ||||||
Proceeds from issuance of senior notes, net of cash offering costs |
2,088,592 | 856,714 | ||||||
Proceeds from issuance of common stock, net of cash offering costs |
812,320 | 857,271 | ||||||
Proceeds from the exercise of warrants and options, net of commission and expenses |
| 559,530 | ||||||
Net cash provided by financing activities of continuing operations |
3,464,468 | 2,162,272 | ||||||
Net cash used in financing activities of discontinued operations |
| (86,758 | ) | |||||
Net cash provided by financing activities |
3,464,468 | 2,075,514 | ||||||
Effect of exchange rates on cash and cash equivalents |
14,600 | 52,967 | ||||||
Net change in cash and cash equivalents |
(2,275,138 | ) | (3,870,210 | ) | ||||
Cash and cash equivalents, beginning of year |
2,287,283 | 6,157,493 | ||||||
Cash and cash equivalents, end of year |
$ | 12,145 | $ | 2,287,283 | ||||
See Note 1 to consolidated financial statements for supplemental cash flow information and
non-cash investing and financing activities.
See accompanying notes to consolidated financial statements.
51
Table of Contents
NOTE 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Since inception, Radient Pharmaceuticals Corporation (the Company, or Radient, We, or
Our) has been engaged in:
| commercial development of, and obtaining various governmental regulatory approvals for its proprietary diagnostic tumor-marker test kit, ONKO-SUREtm (formally ONKO-SUREtm®), which detects the presence of multiple types of cancer, and |
| the international commercialization of its Elleuxetm branded Skin Care products. |
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 Jade Pharmaceutical Inc., (JPI) and JPIs two wholly owned subsidiaries, Jiangxi
Jiezhong Bio-Chemical Pharmacy Company Limited (JJB) and Yangbian Yiqiao Bio-Chemical Pharmacy
Company Limited (YYB). YYB was sold by JPI on June 26, 2009.
Due to several factors including deterioration in its relationship with local management of
JPI, the Company relinquished control over JPI and converted its interest in JPI to that of an
investment to be accounted for under the cost method, effective September 29, 2009. Accordingly,
since September 29, 2009, the accounts and transactions of JPI have been deconsolidated from the
financial statements of Radient.
Deconsolidation
During the third quarter of 2009, it became apparent to the Companys management that the
working relationship with management of its operations in China was becoming increasingly strained.
Accordingly, the Company deemed it appropriate to seek alternative means of monetizing its
investment. There were several issues that caused the Company to conclude accordingly, including,
but not limited to:
| Lack of timely responses by the management in China to requests by Company management for financial information; |
| Lack of responsiveness by management in China to requests for transfer of Company funds to bank accounts under corporate control; |
| Lack of timely communication with Corporate management concerning significant decisions made by management in China concerning the disposal of the YYB subsidiary; and |
| Lack of timely communication with corporate officers concerning operations in China. |
Effective September 29, 2009 (the Effective Date), based on unanimous consent of the
Companys board of directors and an executed binding agreement (the Agreement) between the
Company and Henry Jia, Frank Zheng and Yuan Da Xia (collectively, the JPI Shareholders), the
Company deconsolidated all activity of JPI.
Based on the Agreement and in accordance with current accounting guidelines, the Company
deconsolidated JPI as of the date the Company ceased to have a controlling financial interest,
which was effective September 29, 2009. In accordance with the Agreement, 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 our management positions and agreed to non-authoritative minority role on its board of
directors.
52
Table of Contents
Based on the Companys evaluation of current accounting guidance, it was determined that the
Company did not maintain significant influence over the investee and, accordingly, has recorded
such investment in accordance with the cost method. Although, the Company maintains significant
economic ownership in JPI, based on its evaluation of its lack of ability to influence, lack of a
role in policy and decision making, no significant planned intercompany activity, among other
things, the Company concluded that it would not be appropriate to account for such investment in
consolidation or under the equity method of accounting.
In accordance with current accounting guidance, the Company has recorded the investment in JPI
at its fair value as of the date of deconsolidation and recorded a loss in the statement of
operations based on the difference between the fair value of the consideration received, the fair
value of the retained noncontrolling interest and the carrying amount of JPIs assets and
liabilities at such date (as detailed below):
Consideration Received |
$ | 3,405,946 | (1) | |
Fair value of non-controlling interest |
20,500,000 | (2) | ||
23,905,946 | ||||
Net assets of JPI |
(25,859,462 | )(3) | ||
Loss on deconsolidation |
$ | (1,953,516 | ) | |
(1) | Consideration consisted of the following: |
a. | As part of the Agreement, the Company agreed to exchange loans and advances to JPI totalling $5,350,000 for a 6% convertible promissory note from JPI. These amounts were previously classified as inter company balances and eliminated in consolidation. The exchange, including final payment terms of the convertible promissory note, are expected to be finalized in fiscal 2010. Due to the Companys evaluation of the collectibility of these amounts. The Company has recorded a reverse of $2,675,000 against the amount due from JPI. | ||
b. | $730,946 of salaries and related interest which were accrued by the Company and will be exchanged for 730,946 shares of JPI common stock. |
(2) | Upon deconsolidation, the Company conducted a valuation of its investment. In determining the valuation of the Companys interest in JPI at September 29, 2010, the most significant assumptions, include the following: |
| Sales growth based on managements expectations and historical analysis, which included 2010 sales of approximately $25M and growth at a rate of 12.5% for 2011 and 2012 and 10% for 2013 and 2014. The estimated sales volumes were based on JPIs currently manufactured products and also its human placenta extract (HPE) products with an early 2011 launch date. The timeline for the launch of our HPE products was determined by our internal personnel and consultants hired specifically to assist with the development at such products | ||
| Cost of sales/Gross Margin Based on historical analysis and management expectations | ||
| Selling, General and Administrative Expenses Based on historical analysis and management expectations | ||
| Comparable Public Companies Based on the same or similar line of business and various other quantitative and qualitative characteristics, as discussed herein. | ||
| Risk adjusted weighted average cost of capital (WACC) A WACC of 17.7% was utilized. | ||
| Long term growth rate: we assumed a long term growth rate of 6% | ||
| Terminal value: Determined to be $57M which was based on a forecasted EBITDA in 2014 multiplied by a market based valuation multiple. | ||
| Product revenue: The analysis included JPIs currently manufactured products and also human placenta extract products with an early 2011 launch date. | ||
| Cost of Debt An examination of the industrys cost of debt as reflected by an examination of similar sized companies indicated that an appropriate rate on long-term debt was best provided for by examining the Moodys Ba1 (speculative grade) rate as of the Valuation Date, which was found to be an after tax cost of debt of 5.82%. | ||
| Cost of Equity The cost of equity was determined to be 22.58% and included the following variables: |
| Risk free rate: 4.02% | |||
| Equity risk premium: 6.47% | |||
| Small stock risk premium: 5.82% | |||
| Beta: 1.66x (which was based on an analysis utilized an industry beta derived from a selection of comparable companies as well as by sector) | |||
| Subject Company Risk Premium: 2% |
| Discounts The Company evaluated discounts related to the following: |
| Lack of control | |||
| Lack of marketability |
Since JPI has historically had relatively stable,
positive cash flows and there was good comparable company data, equal weight to both the income and market approaches to
determine the fair value of JPIs equity were used. The income approach included a multi-period discounted cash
flow (DCF) model that utilized a five year forecast (2010 through 2014) based on JPIs expected
organizational structure beyond September 30, 2009 and derived net cash flows from that forecast, and then applied a
risk-adjusted discount rate based on the weighted average cost of capital to arrive at an indication of fair value. The
market approach included an examination of comparable public companies from which market-based valuation multiples were
derived and then applied to the JPIs 2009 latest twelve months (ended September 30, 2009) revenue, gross
profit, and earnings before interest, taxes, depreciation and amortization to arrive at an indication of fair value.
First, we identified publicly traded companies that operated in the same or similar line of business as JPI. Specifically,
those comparable publicly traded companies within SIC Code 2834 (Pharmaceutical Preparations). In addition to those
companies with the appropriate primary SIC Code; the Company compared
the description of business, growth rates, liquidity, and profitability.
Based on the history of operating cash flow, we elected to apply an average
EBITDA multiple of the comparable companies, as we considered this measure to be the most reliable indicator of what an
arms-length buyer would be willing to pay for the business. The EBITDA multiple was then applied to the normalized
latest twelve month EBITDA of JPI to generate an indication of value.
The total valuation discount applied to the
minority interest consists of the combined effects of lack of control and lack of marketability. It was determined that
the aggregate discount for lack of control and lack of marketability for the Companys interest in JPI was 40.0%.
The discount for lack of control reflects the difference in benefits of control ascribed to a closely held controlling
interest versus a closely held minority interest. The discount for lack of marketability reflects the lack of liquidity
or ready marketplace in which to sell the interest.
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.
(3) | The net assets of JPI consisted of the following: |
Cash |
$ | 53,658 | ||
Other current assets |
18,920,177 | |||
Property and equipment |
9,381,118 | |||
Other long term assets |
3,464,715 | |||
Total assets |
$ | 31,819,668 | ||
Current portion of notes payable |
$ | (2,673,154 | ) | |
Other current liabilities |
(1,122,936 | ) | ||
Other comprehensive income |
(2,164,116 | ) | ||
Total liabilities |
$ | (5,960,206 | ) | |
Net Assets |
$ | 25,859,462 | ||
The following unaudited pro forma condensed consolidated statement of operations for the year
ended December 31, 2009 has been presented as if the deconsolidation had occurred on January 1,
2009:
Year Ended | Pro Forma | Pro forma | ||||||||||
December 31, 2009 [1] | Adjustments [2] | Results[3] | ||||||||||
Net revenues |
$ | 8,627,669 | $ | (8,469,652 | ) | $ | 158,017 | |||||
Cost of sales |
5,360,213 | (5,322,542 | ) | 37,671 | ||||||||
Gross profit |
3,267,456 | (3,147,110 | ) | 120,346 | ||||||||
Operating expenses: |
||||||||||||
Research and development |
563,690 | 563,690 | ||||||||||
Selling, general and administrative |
10,936,789 | (4,371,596 | ) | 6,565,193 | ||||||||
11,500,479 | (4,371,596 | ) | 7,128,883 | |||||||||
Income (loss) from operations |
(8,233,023 | ) | 1,224,486 | (7,008,537 | ) | |||||||
Other income (expense): |
||||||||||||
Interest and other income (expense), net |
(328,071 | ) | (310 | ) | (328,381 | ) | ||||||
Change in fair value of derivative liabilities |
648,313 | 648,313 | ||||||||||
Loss on
deconsolidation (4) |
(1,953,516 | ) | (1,953,516 | ) | ||||||||
Interest expense |
(2,596,606 | ) | 173,335 | (2,423,271 | ) | |||||||
Total other income (expense), net |
(4,229,880 | ) | 173,025 | (4,056,855 | ) | |||||||
Income
(loss) from continuing operations before provision for income taxes |
(12,462,903 | ) | 1,397,511 | (11,065,392 | ) | |||||||
Provision for income taxes |
19,115 | 19,115 | ||||||||||
Income
(loss) from continuing operations |
$ | (12,482,018 | ) | $ | 1,397,511 | $ | (11,084,507 | ) | ||||
[1] | Represents the Companys actual (as reported) consolidated results of operations for the year ended December 31, 2009. | |
[2] | Pro Forma Adjustments represents JPIs results of operations for the period January 1, 2009 through September 29, 2009. See Note 13 for additional information related to JPIs operations. This information is presented to show the effect of the elimination of JPIs operations from the Companys business. In accordance with the deconsolidation agreement, the Company agreed to exchange its shares of JPI for non-voting shares of preferred stock in the deconsolidated entity. Accordingly, there are no adjustments related to revised debt structures and there were no significant expenses incurred on JPIs behalf. | |
[3] | Pro forma results are equal to the historical condensed results of operations of the surviving Company for the year ended December 31, 2009. The pro forma results do not necessarily represent the actual results that would have been achieved had the companies been deconsolidated at the beginning of the year, nor may they be indicative of future operations. | |
[4] | As noted above, this table assumes an effective date of January 1, 2009. Accordingly, while the activity for the year ended December 31, 2009 would be eliminated, the recording of the deconsolidation would result in a loss on January 1, 2009 and result in a loss being recorded for the year ended December 31, 2009. |
53
Table of Contents
Discontinued Operations and Dispositions
On January 22, 2009, the Companys board of directors authorized management to sell the
operations of YYB. The Company has classified the assets, liabilities, operations and cash flows of
YYB as discontinued operations for all periods presented prior to the sale. The Company sold YYB in
June 2009.
Proceeds from the sale of YYB consist of a note receivable in the amount of 16 million RMB
(approximately U.S. $2,337,541), which is to be paid directly to a bank. JPI owed this bank
approximately 18,250,000 RMB (approximately U.S. $2,668,000) at the date of sale. In connection
with that sale, JPI transferred rights to certain land and land use rights upon sale. JPI remains
liable under the debt obligation with the bank, as such obligation did not pass to the buyer JPI is
unaware of any default in obligation to the bank being paid by the buyer. Accordingly, JPI recorded
a note receivable of $2,337.541 on its books, which is due through 2010. The loss on the sale of
YYB is summarized as follows (in U.S. dollars):
Sales price |
$ | 2,337,541 | ||
Carrying value of net assets |
6,723,605 | |||
Loss on sale |
$ | (4,386,064 | ) | |
Summarized operating results of discontinued operations through June 26, 2009 (the date of
sale) and for the year ended December 31, 2008 are as follows:
Year Ended December 31, | ||||||||
2009 | 2008 | |||||||
Revenue |
$ | 594,839 | $ | 3,967,643 | ||||
Income before income taxes |
$ | 277,743 | $ | 1,081,021 |
54
Table of Contents
Included in income (loss) from discontinued operations, net are income tax expenses of $30,717
and $5,213 for the years ended December 31, 2009 and 2008, respectively. YYBs tax rate is 15%
through 2010 in accordance with the Western Region Development Concession Policy of the PRC
government. The following table summarizes the carrying amounts at June 26, 2009 (the date of sale)
and December 31, 2008 of the major classes of assets and liabilities of the Companys business
classified as discontinued operations:
As of | ||||||||
June 26, 2009 | As of December 31, | |||||||
(Date of Sale) | 2008 | |||||||
Current assets: |
||||||||
Cash |
$ | 1,044,550 | $ | | ||||
Accounts receivable, net |
1,094,399 | 930,769 | ||||||
Inventories |
584,886 | 423,842 | ||||||
Other current assets |
3,975 | 80,410 | ||||||
$ | 2,727,810 | $ | 1,435,021 | |||||
Long-lived assets: |
||||||||
Property and equipment |
2,097,076 | $ | 1,742,739 | |||||
Other |
3,040,406 | 47,195 | ||||||
$ | 5,137,482 | $ | 1,789,934 | |||||
Current liabilities: |
||||||||
Accounts payable and accrued liabilities |
569,188 | 685,360 | ||||||
Debt |
572,500 | 466,155 | ||||||
$ | 1,141,688 | $ | 1,151,515 | |||||
55
Table of Contents
Going Concern
The 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 before discontinued operations of
$12,482,018 and $712,948 for the years ended December 31, 2009 and 2008, respectively, and had an
accumulated deficit of $52,438,553 at December 31, 2009. In addition, the Company used cash from
operating activities of continuing operations of $3,204,985.
During the second quarter 2009 the Companys corporate management became aware of certain
internal disputes in China between the management of JJB and JPI. These disputes have effectively
resulted in difficulties in managing the operations of JJB and also receiving financial information
from them. As a result of this loss of control, the Company entered into the Agreement to
deconsolidate JPI (see above).
On April 14, 2010 the Company had cash on hand of approximately $6.4 million. The Companys
operations currently require approximately $300,000 per month exclusive of interest payments.
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 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
to of patent protection for the CIT technology.
From January 1, 2010 through April 13, 2010, the Company raised gross proceeds of
approximately $6,000,000 from the issuance of additional 12% convertible promissory notes
payable and $512,000 from the exercise of warrants to purchase 400,000 shares. 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. The
Company is actively securing additional distribution agreements that include potential revenue
sharing arrangements in 2010.
The Companys near and long-term operating strategies focus on (i) obtaining SFDA approval for
the ONKO-SUREtm kit, (ii) further developing and marketing of ONKO-SUREtm,
(iii) seeking a large pharmaceutical partner for the Companys CIT technology in other locations,
(iv) selling different formulations of HPE-based products in the U.S. and internationally and
(v) introduction of new products. Management recognizes that ability to achieve any of these
objectives is dependent upon obtaining significant additional financing to sustain operations to
enable it to continue as a going concern. 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.
56
Table of Contents
The Companys only sources of additional funds to meet continuing operating expenses, fund
additional research and development and fund additional working capital are through the sale of
securities, and/or debt instruments. We are actively seeking additional debt or equity financing,
but no assurances can be given that such financing will be obtained or what the terms thereof will
be. We may need to discontinue a portion or all of its operations if the Company is unsuccessful in
generating positive cash flow or financing for the Companys operations through the issuance of
securities.
Principles of Consolidation
As of September 29, 2009, the Company deconsolidated JPI, but for the period of January 1,
2009 through September 29, 2009 the operations of JPI have been consolidated in the statements of
operations and comprehensive income (loss) and statement of cash flows. Intercompany transactions
for the period ended September 29, 2009 have been eliminated in consolidation. In addition, the
Company consolidated the operations of YYB through June 26, 2009 (the date of sale), which have
been classified as discontinued operations at December 31, 2008 and for the years ended December
31, 2009.
Reclassifications
Reclassifications have been made to prior year consolidated financial statements in order to
conform the presentation to the statements as of and for the year ended December 31, 2009.
Revenue Recognition
In China, in 2009, through the date of the deconsolidation on September 29, 2009, the Company
generated revenues of approximately $8,469,000 primarily from wholesale sales of over-the-counter
and prescription pharmaceuticals and cosmetic products. The Companys revenues outside of China
total approximately $158,000 for the year ended December 31, 2009. See Note 13 for segment
reporting.
Wholesale Sales
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.
During the third and fourth quarters of 2009, the Company entered into several distribution
agreements for various geographic locations with a third party. 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
under these arrangements. As of December 31, 2009, the Company had $103,128 of deferred revenue
related to these arrangements recorded in the accompanying consolidated balance sheet.
In conjunction with the launch of the Companys Goodnak facial creams, distributors of the
products were offered limited-time discounts to allow for promotional expenses incurred in the
distribution channel. Distributors are not required to submit proof of the promotional expenses
incurred. The Company accounts for the promotional expenses in accordance with FASB ASC 815-30-35
Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendors
Products), (ASC 815-30-35). Accordingly, the promotional discounts have been netted against
revenue in the accompanying consolidated statements of operations and comprehensive income (loss).
Accounts receivable have also been reduced by the promotional discounts, as customers are permitted
by the terms of the distribution contracts to net the discounts against payments on the related
invoices.
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.
57
Table of Contents
In accordance with FASB ASC 605-45-50-3, Taxes Collected from Customers and Remitted to
Governmental Authorities, (ASC 605-45-50-3), JPIs revenues are reported net of value added taxes
(VAT) collected.
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 (ASC 605-45-50-2). Shipping and
handling fees and costs are included in cost of sales.
Other Comprehensive Income and Foreign Currency Translation
FASB ASC 220-10-05, Comprehensive Income, establishes standards for the reporting and display
of comprehensive income and its components in a full set of general-purpose financial statements.
Comprehensive income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners.
The accompanying consolidated financial statements are presented in United States dollars. The
functional currency of JPI is the Yuan Renminbi (RMB). For 2008, the balance sheet accounts of
JPI were translated into United States dollars from RMB at year end exchange rates and for the year
ended December 31, 2008 and the period ended September 29, 2009, all revenues and expenses are
translated into United States dollars at average exchange rates prevailing during the periods in
which these items arise. For 2008, capital accounts were translated at their historical exchange
rates when the capital transactions occurred. Translation gain of $1,375,023 for 2008 was recorded
as accumulated other comprehensive income (loss), a component of stockholders equity.
The RMB is not freely convertible into foreign currency and all foreign exchange transactions
must take place through authorized institutions. No representation is made that the RMB amounts
could have been, or could be, converted into United States dollars at the rates used in
translation.
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
JPI recorded inventories at the lower of weighted-average cost (which approximates cost on a
first-in, first-out basis) or net realizable value. Major components of inventories were raw
materials, packaging materials, direct labor and production overhead. Radients inventories consist
primarily of raw materials and related materials, 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.
From time to time, provisions are made to reduce excess or obsolete inventories to their estimated
net realizable value. Once established, write-downs are considered permanent adjustments to the
cost basis of the obsolete or excess inventories.
58
Table of Contents
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.
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. During the quarter ended
September 30, 2009, the Company recorded an entry of $161,057 to remove capitalized accounting
software associated with the deconsolidation of JPI on September 29, 2009. Based on its analysis,
the Company believes that no further indicators of impairment of the carrying value of its
long-lived assets existed at December 31, 2009. 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.
59
Table of Contents
Risks and Uncertainties
The Companys proprietary test kit is deemed a medical device or biologic, and as such is
governed by the Federal Food and Drug and Cosmetics Act and by the regulations of state agencies
and various foreign government agencies. Prior to July 3, 2008, the Company was not permitted to
sell the ONKO-SUREtm test kit in the U.S. except on a research use only basis, as
regulated by the U.S. Food and Drug Administration (USFDA). The Company has received regulatory
approval from various foreign governments to sell its products and is in the process of obtaining
regulatory approval in other foreign markets. There can be no assurance that the Company will
maintain the regulatory approvals required to market its ONKO-SUREtm test kit or that they
will not be withdrawn.
Prior to May 2002, the Companys focus was on obtaining foreign distributors for its
ONKO-SUREtm test kit. In May 2002, the Company decided to begin the USFDA process under
Section 510(k) of the Food, Drug and Cosmetic Act for approval of its intent to market the
ONKO-SUREtm test kit as an aid in monitoring patients with colorectal cancer. On July 3,
2008, the Company received a letter of determination from the USFDA that the ONKO-SUREtm
test kit was substantially equivalent to the existing predicate device being marketed. The letter
grants the Company the right to market the ONKO-SUREtm test kit as a device to monitor
patients who have been previously diagnosed with colorectal cancer.
Although the Company had obtained approval from the USFDA to market the then current
formulation of the ONKO-SUREtm test kit, it had been determined that one of the key
components of the ONKO-SUREtm test kit, the anti-fibrinogen-HRP was limited in supply and
additional quantities could not be purchased. Subsequently, the Company has identified and tested a
substitute antibody that performs as well as the previously limiting antibody which we are
currently evaluating. The Company now anticipates that it will complete the validation of the
substitute anti-fibrinogen-HRP by the end of 2010, which creates a significant supply of the
current version (300 to 500 times more than previous levels) of the ONKO-SUREtm test kit.
Based on current and anticipated orders, this supply is adequate to fill all orders.
Part of the Companys research and development efforts through 2010 will include the testing
and development of an enhanced and improved version of the ONKO-SUREtm test kit. Pilot
studies show that the new version could be superior to the current version. The Company is
currently working with a third party to take the lead on necessary clinical studies. It is
anticipated that this version will be submitted to the USFDA in the latter half of 2010.
In June 2007, the Chinese approval process fundamentally changed. Under the new SFDA
guidelines, the SFDA is unlikely to approve the marketing of the ONKO-SUREtm test kit
without one of the following: approval by the USFDA, sufficient clinical trials in China, or
product approval from a country where the ONKO-SUREtm test kit is registered and approved
for marketing and export. We are not currently pursuing SFDA approval for ONKO-SUREtm in
China.
The Company is subject to the risk of failure in maintaining its existing regulatory
approvals, in obtaining other regulatory approval, as well as the delays until receipt of such
approval, if obtained. Therefore, the Company is subject to substantial business risks and
uncertainties inherent in such an entity, including the potential of business failure.
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.
60
Table of Contents
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) 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 should not be 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.
61
Table of Contents
Basic and Diluted Income (Loss) Per Share
The following table sets for the calculation of basic and diluted earnings per share for the
years ended December 31, 2009 and 2008:
2009 | 2008 | |||||||
Numerator: |
||||||||
Net income (loss) |
$ | (16,621,055 | ) | $ | 1,180,060 | |||
Numerator for basic per share amounts income available (loss
attributable) to common stockholders |
$ | (16,621,055 | ) | $ | 1,180,060 | |||
Interest on convertible debt |
| 73,581 | ||||||
Numerator for diluted per share amounts |
$ | (16,621,055 | ) | $ | 1,253,641 | |||
Denominator: |
||||||||
Denominator for basic per share amounts weighted-average shares |
16,608,946 | 15,608,697 | ||||||
Effect of dilutive securities: |
||||||||
Options and warrants dilutive potential common shares
calculated using the treasury stock method |
| 573,593 | ||||||
Incremental shares from assumed conversion convertible debt |
| 2,154,872 | ||||||
Denominator for diluted per share amounts |
16,680,946 | 18,337,162 | ||||||
Basic income (loss) per common share |
$ | (1.00 | ) | $ | 0.08 | |||
Diluted income (loss) per common share |
$ | (1.00 | ) | $ | 0.07 | |||
Basic income (loss) per common share is computed based on the weighted-average number
of shares outstanding for the period. Diluted income (loss) per share includes the effect of
potential shares outstanding, including dilutive stock options and warrants, using the treasury
stock method, and shares issuable upon conversion of debt. In periods of losses, basic and diluted
loss per share are the same as the effect of stock options, warrants and shares issuable upon
conversion of debt on loss per share is anti-dilutive. However, the impact under the treasury stock
method of dilutive stock options and warrants would have increased diluted weighted average
shares by 246,190 shares for the year ended December 31, 2009. The conversion price of the
Companys debt assumed in the calculation of diluted earnings per share for the years ended
December 31, 2009 and 2008 is $1.20 per share, based on the conversion price that would have been
in effect and the interest accrued through the year then ended. The potentially dilutive effect of
201,103 options and warrants issuable upon conversion of the debt was not considered in the
calculation of earnings per share as the effect would be anti-dilutive on December 31, 2009.
Diluted income per share for the year ended December 31, 2008 excludes the impact of 7,436,107
options and warrants because the exercise price per share for those options and warrants exceeds
the average market price of the Companys common stock during the year ended December 31, 2008. The
potentially dilutive effect of 1,077,436 options and warrants issuable upon conversion of the debt
is considered in the calculation of earnings per share using the treasury stock method, based on
the exercise price that would have been in effect had the warrants been issued on December 31,
2008. All such warrants have been excluded from the calculation because the minimum exercise price
of such warrants exceeds the average market price of the Companys common stock during the years
ended December 31, 2008.
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 as 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.
62
Table of Contents
At December 31, 2009 and 2008, the Company has accrued zero for the payment of tax related interest
and there was no tax interest or penalties recognized in the consolidated statements of operations.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the U.S. 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, among others, realizability of inventories, recoverability of long-lived assets,
valuation and useful lives of intangible assets, note receivable from JPI, valuation of derivative
liabilities, valuation of investment in JPI, and valuation of common stock options, warrants and
deferred tax assets. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The carrying amounts of the Companys cash and cash equivalents, accounts payable and accrued
expenses approximate their estimated fair values due to the short-term maturities of those
financial instruments. The Company believes the carrying amount of its notes payable approximates
its fair value based on rates and other terms currently available to the Company for similar debt
instruments.
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. The
Company issued convertible debt in September 2008, and recorded a derivative asset related to the
limitation on bonus interest rights held by convertible debt holders in the event of a change in
control or bankruptcy. The fair value of the derivative asset was $125,000 at December 31, 2008.
During 2009, certain convertible debt holders converted the principal and accrued interest which
resulted in a decrease of the derivative asset to $80,913 at December 31, 2009.
In connection with the convertible debt issued in September 2008, the Company was
required to issue additional warrants as a result of the reset provision of the exercise price. The
convertible debt warrant agreements provided for additional warrants to be issued within six months
after the final close date of the convertible debt or March 15, 2009, if the Company issued or sold
any shares of common stock (other than exercise of outstanding options or warrants) for
consideration less than the exercise price of the warrants issued to the convertible debt holders.
In 2008, the initial warrant value of $209,166 was originally recorded to additional paid in
capital. Upon the adoption of ASC 815-10 at January 1, 2009, the Company removed from additional
paid in capital $209,166 and recorded the derivative liability at its then fair value of $98,308
with the offset of $110,858 to retained earnings. The derivative liability was increased to
$133,866 at March 15, 2009 (its then fair value), resulting in a charge to other expense of $35,558
and then the derivative liability was reclassified back to additional paid in capital as the six
months term had expired.
During 2009, 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
$510,417 as computed using the Black-Scholes option pricing model. In accordance with the
accounting guidance associated with derivative instruments, the Company re-measured their values as
of the end of the quarter. During 2009, the Company recorded a decrease of $450,956 to the
derivative liabilities related to the decrease in fair value during the period ended December 31,
2009.
On November 30, 2009, the Company entered into a securities purchase agreement with Alpha
Capital Group and Whalehaven Capital funds. The Company issued 1,860,714 and 1,428,571 shares of
the Companys common stock to Alpha Capital Group and Whalehaven Capital Funds, respectively. The
stock price of the common shares issued was valued at $0.28 per share with aggregate proceeds of
$812,320, which is net of direct offering costs of $108,680. In connection with the securities
purchase agreement, the Company also issued 6.5 year warrants, which represents 50% of the common
stock issuances. As a result, the Company issued warrants to purchase 930,357 and 714,286 of the
Companys common stock, $0.001 par value per share, at an exercise price of $1.25 per share to
Alpha Capital Group and Whalehaven Capital Funds, respectively, subject to certain anti-dilution
adjustments. The terms associated with the reset of the exercise price of the warrants resulted in
classifying these warrants as derivative liabilities. On the date of issuance, the Company recorded
a derivative liability of $509,839. The derivative was revalued at December 31, 2009, which
resulted in a change in fair value of the derivative liability. In connection with the revaluation,
the Company recorded a gain of $197,357 in the change in fair value of derivative liabilities of
the accompanying statement of operations and comprehensive income (loss).
63
Table of Contents
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 Valuation based on unadjusted quoted market prices in active markets for
identical securities. Currently, the Company does not have any items 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 used a 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 December 31, 2009 classified using the valuation
hierarchy:
Level 3 | ||||
Carrying | ||||
Value | ||||
December 31, 2009 | ||||
Embedded conversion options |
$ | 269,758 | ||
Warrants |
85,000 | |||
$ | 354,758 | |||
Decrease in fair value included in other income (expense) |
$ | 648,313 | ||
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 January 1, 2009 |
$ | | ||
Derivative liabilities added warrants |
250,000 | |||
Derivative liabilities added conversion options |
770,256 | |||
Amount converted to additional paid-in capital for the conversion of debt |
(17,185 | ) | ||
Change in fair value |
(648,313 | ) | ||
Balance at December 31, 2009 |
$ | 354,758 | ||
64
Table of Contents
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs were approximately $14,000 and
$27,900 for the years ended December 31, 2009 and 2008, respectively.
Concentrations of Credit Risk
Cash
From time to time, the Company maintains cash balances at certain institutions in excess of
the FDIC limit. As of December 31, 2009, the Company had no cash balances in excess of this limit.
Customers
In the United States, the Companys ability to collect receivables is affected by economic
fluctuations in the geographic areas and the industry served by the Company. A reserve for
uncollectible amounts and estimated sales returns is provided based on historical experience and a
specific analysis of the accounts which management believes is sufficient. Accounts receivable is
net of a reserve for doubtful accounts and sales returns of $73,446 at December 31, 2008. There are
no accounts receivable balances as of December 31, 2009.
As of December 31, 2008, amounts due from six customers, each with receivables in excess of
10% of accounts receivable, comprised 19%, 14%, 13%, 13%, 12% and 12% of outstanding accounts
receivable. For the year ended December 31, 2009, one customer comprised 11% of net revenues. For
the year ended December 31, 2008, one customer comprised more than 17% of net revenues. All of the
related concentrations were in the Companys JPI subsidiary, which was deconsolidated in September
2009 (see above).
Supplemental Cash Flow Information
2009 | 2008 | |||||||
Supplemental disclosure of cash flow information: |
||||||||
Cash paid during the period for interest |
$ | 323,201 | $ | 332,233 | ||||
Cash paid during the period for taxes |
$ | 695,322 | $ | 2,562,485 | ||||
Supplemental disclosure of non-cash activities: |
||||||||
Warrants issued to brokers, included in prepaid consulting |
$ | 88,000 | $ | | ||||
Warrants issued in connection with senior notes and bridge loan included in debt discount |
$ | 1,887,920 | $ | | ||||
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 derivative liability related to warrants to additional paid-in
capital upon expiration of share adjustment terms |
$ | 133,866 | $ | | ||||
Conversion of warrants to common stock |
$ | 38 | $ | | ||||
Voluntary conversion of convertible debt and accrued interest |
$ | 1,074,605 | $ | | ||||
Conversion of accounts payable to stock |
$ | 75,751 | $ | | ||||
Broker warrants issued in connection with convertible debt |
$ | | $ | 209,166 | ||||
Broker warrants issued in connection with senior debt |
$ | | $ | 559,438 | ||||
Receipt of machines as partial settlement of note receivable |
$ | | $ | 472,451 | ||||
Derivative asset recorded in issuance of convertible debt |
$ | | $ | 125,000 | ||||
Fair value of common stock recorded as prepaid consulting |
$ | | $ | 527,801 | ||||
Fair value of warrants issued for services, included in prepaid expense |
$ | 283,951 | $ | 83,875 | ||||
Carrying value of net assets of JPI before deconsolidation |
$ | 25,698,405 | $ | | ||||
Fair value of derivative liabilities |
$ | 1,020,256 | $ | | ||||
Conversion of accrued salaries to ownership of JPI |
$ | 730,496 | $ | | ||||
65
Table of Contents
Recent Accounting Pronouncements
In August 2009, the FASB issued ASU No. 2009-05, Measuring Liabilities at Fair Value, which
provides additional guidance on how companies should measure liabilities at fair value under
ASC 820. The ASU clarifies that the quoted price for an identical liability should be used.
However, if such information is not available, an entity may use, the quoted price of an identical
liability when traded as an asset, quoted prices for similar liabilities or similar liabilities
traded as assets, or another valuation technique (such as the market or income approach). The ASU
also indicates that the fair value of a liability is not adjusted to reflect the impact of
contractual restrictions that prevent its transfer and indicates circumstances in which quoted
prices for an identical liability or quoted price for an identical liability traded as an asset may
be considered level 1 fair value measurements. This ASU is effective October 1, 2009. During 2009,
the Company adopted this standard, but it did not have a material impact on the consolidated
financial statements.
In October 2009, the FASB issued ASU No. 2009-15, Accounting for Own-Share Lending
Arrangements in Contemplation of Convertible Debt Issuance, to provide guidance on share-lending
arrangements entered into on an entities own shares. The Company does not expect it to have a
material impact on the consolidated financial statements.
Other new pronouncements issued but not effective until after December 31, 2009, are not
expected to have a significant effect on our consolidated financial statements.
We have evaluated subsequent events through the filing date of this Form 10-K/A, and
determined that no subsequent events have occurred that would require recognition in the
consolidated financial statements or disclosure in the notes thereto other than as disclosed in the
accompanying notes.
NOTE 2 INVENTORIES
Inventories consist of the following:
December 31, | ||||||||
2009 | 2008 | |||||||
Raw materials |
48,852 | $ | 719,389 | |||||
Work-in-process |
3,265 | 11,808 | ||||||
Finished goods |
27,138 | 832,794 | ||||||
$ | 79,255 | $ | 1,563,991 | |||||
NOTE 3 PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 31, | ||||||||
2009 | 2008 | |||||||
Building and improvements |
$ | | $ | 7,774,591 | ||||
Machinery and equipment |
| 4,233,129 | ||||||
Office equipment |
120,019 | 431,049 | ||||||
Lab equipment |
71,755 | 12,372 | ||||||
Construction in progress |
| 1,229,319 | ||||||
191,774 | 13,680,460 | |||||||
Less accumulated depreciation |
(108,227 | ) | (1,970,872 | ) | ||||
$ | 83,547 | $ | 11,709,588 | |||||
Depreciation expense was $686,197 and $962,075 for the years ended December 31, 2009 and 2008,
respectively.
66
Table of Contents
NOTE 4 INTANGIBLE ASSETS
Intangible assets consist of the following at December 31, 2009:
Gross | Accumulated | Amortization | ||||||||||||||
Value | Amortization | Net | (in years) | |||||||||||||
Assets subject to amortization: |
||||||||||||||||
Intellectual property |
$ | 2,000,000 | $ | (841,667 | ) | $ | 1,158,333 | 20 |
Intangible assets consist of the following at December 31, 2008:
Effect of | ||||||||||||||||||||
Foreign | ||||||||||||||||||||
Gross | Accumulated | Currency | Amortization | |||||||||||||||||
Value | Amortization | Translation | Net | (in years) | ||||||||||||||||
Assets subject to amortization: |
||||||||||||||||||||
Intellectual property |
$ | 2,000,000 | $ | (741,667 | ) | | $ | 1,258,333 | 20 | |||||||||||
Production rights |
1,916,622 | (318,986 | ) | 154,007 | 1,751,643 | 10 | ||||||||||||||
Land use rights |
1,354,765 | (99,094 | ) | 209,839 | 1,465,510 | 33 | ||||||||||||||
Non-compete agreements |
324,415 | (163,652 | ) | 32,483 | 193,246 | 5 | ||||||||||||||
Customer relationships |
214,328 | (77,904 | ) | 26,569 | 162,993 | 7 | ||||||||||||||
Trade name and logo |
530,829 | (129,041 | ) | 78,055 | 479,843 | 10 | ||||||||||||||
$ | 6,340,959 | $ | (1,530,344 | ) | $ | 500,953 | $ | 5,311,568 | ||||||||||||
During the year ended December 31, 2009, gross intangible assets of approximately $4,330,000
and related accumulated amortization related to JPI and subsidiary were removed from the Companys
books as a result of the deconsolidation of JPI.
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.
During the years ended December 31, 2009 and 2008, amortization expense totaled $409,574 and
$528,340 respectively. Assuming (1) no future impairment to the Companys intellectual property and
(2) no future acquisitions of intangible assets, amortization expense is expected to be $100,000
per year or the next five years.
NOTE 5 PREPAID EXPENSES, OTHER CURRENT ASSETS, AND OTHER ASSETS
Prepaid expenses and other current assets consist of the following:
December 31, | ||||||||
2009 | 2008 | |||||||
Material deposits |
$ | | $ | 627,390 | ||||
Due from officers and directors |
| 9,693 | ||||||
Current deferred tax asset |
| 92,798 | ||||||
Prepaid Insurance |
52,703 | 143,566 | ||||||
Other |
5,075 | 133,513 | ||||||
$ | 57,778 | $ | 1,006,960 | |||||
67
Table of Contents
Other assets consist of the following:
December 31, | ||||||||
2009 | 2008 | |||||||
Deposits, primarily product licenses |
$ | | $ | 3,000,354 | ||||
Debt issuance costs (Note 7) |
1,288,910 | 906,408 | ||||||
Convertible Debt derivative (Note 7) |
80,913 | 125,000 | ||||||
Refundable deposits |
24,538 | 40,670 | ||||||
$ | 1,394,361 | $ | 4,072,432 | |||||
Related to the $3,000,354 deposit for product licenses noted above in 2008 for JPI, revenues
had not yet been generated from the product licenses included in other assets. At the time
commercial sales of the product were to begin, the product licenses were to be reclassified to
intangible assets and amortized to cost of goods sold using the straight-line method over the
estimated useful life of the related product.
NOTE 6 INCOME TAXES
Radient Pharmaceuticals Corporation and subsidiaries are included in a consolidated Federal
income tax return. The Companys international subsidiaries file various income tax returns in
their tax jurisdictions. The provision for income taxes is as follows:
2009 | 2008 | |||||||
Current: |
||||||||
Federal |
$ | (2,000 | ) | $ | | |||
State |
1,000 | 1,000 | ||||||
Foreign |
| 1,815,000 | ||||||
Total current |
(1,000 | ) | 1,816,000 | |||||
Deferred: |
||||||||
Foreign |
| (92,000 | ) | |||||
Provision for income taxes |
$ | (1,000 | ) | $ | 1,724,000 | |||
The Companys income (loss) before income tax provision was subject to taxes in the following
jurisdictions for the following periods:
2009 | 2008 | |||||||
United States |
$ | (11,748,766 | ) | $ | (9,794,491 | ) | ||
Foreign |
(5,225,636 | ) | 12,698,064 | |||||
$ | (16,974,202 | ) | $ | 2,903,573 | ||||
The income tax expense for 2008 relates to payments made to foreign tax jurisdictions and
state minimum fees. The Companys Chinese operations were deconsolidated in the third quarter of
the year. See Note 1 for details.
68
Table of Contents
The provision (benefit) for income taxes differs from the amount computed by applying the
U.S. Federal income tax rate of 34% to loss before income taxes as a result of the following for
the years ended December 31:
2009 | 2008 | |||||||
Computed tax benefit at federal statutory rate |
$ | (5,772,000 | ) | $ | 987,000 | |||
State income tax benefit, net of federal benefit |
1,000 | 1,000 | ||||||
Nondeductible Interest Expense |
731,000 | | ||||||
Deferred Gain on JPI |
5,518,000 | | ||||||
Foreign earnings taxed at different rates |
1,776,000 | (2,609,000 | ) | |||||
Stock issuances |
481,000 | 640,000 | ||||||
Expired Net Operating Losses |
546,000 | | ||||||
Valuation allowance on federal tax benefit |
(3,285,000 | ) | 2,685,000 | |||||
Other |
3,000 | 20,000 | ||||||
$ | (1,000 | ) | $ | 1,724,000 | ||||
The components of the Companys deferred tax assets and liabilities are as follows:
December 31, | ||||||||
2009 | 2008 | |||||||
Deferred tax asset: |
||||||||
Net operating loss carryforwards |
$ | 15,529,000 | $ | 13,288,000 | ||||
Expenses recognized for granting of options and warrants |
1,727,000 | 2,036,000 | ||||||
Tax credit carryforwards |
245,000 | 216,000 | ||||||
Depreciation |
3,000 | | ||||||
Other temporary differences |
309,000 | 408,000 | ||||||
Total gross deferred tax asset |
17,813,000 | 15,948,000 | ||||||
Valuation allowance |
(11,698,000 | ) | (15,663,000 | ) | ||||
Net deferred tax asset |
6,115,000 | 285,000 | ||||||
Deferred tax liabilities: |
||||||||
Deferred Gain on JPI |
(6,115,000 | ) | | |||||
Depreciation |
| (193,000 | ) | |||||
Total deferred tax liabilities |
(6,115,000 | ) | (193,000 | ) | ||||
Net deferred tax asset |
$ | | $ | 92,000 | ||||
The Company records a valuation allowance to reduce the carrying value of the net deferred tax
assets to an amount that is more likely than not to be realized. The valuation allowance decreased
by approximately $2,027,000 during the year ended December 31, 2009.
At December 31, 2008, the Company had net operating loss carryforwards of approximately
$38.1 million and $29.1 million available to reduce federal and state taxable income,
respectively. Approximately $1.6 million of federal net operating losses expired during the year.
The federal and state net operating loss carryforward expire on various dates through 2023, unless
previously utilized. The Company does not have any net operating losses that are attributable to
excess stock option deductions which would be recorded as an increase in additional paid
in-capital. The Company has research and development tax credit carryforwards of approximately
$113,000 and $132,000 to reduce federal and state income tax, respectively. The federal research
and development tax credits will begin to expire in 2022, unless previously utilized. The Companys
California research and development tax credit carryforwards do not expire and will carryforward
indefinitely until utilized. Any net operating loss or credit carryforwards that will expire prior
to utilization will be removed from deferred tax assets with a corresponding reduction of the
valuation allowance.
69
Table of Contents
Utilization of the net operating loss and research and development credit carryforwards may be
subject to a substantial annual limitation due to ownership change limitations that have occurred
previously or that could occur in the future as provided by Sections 382 and 383 of the Internal
Revenue Code of 1986, as well as similar state and foreign provisions. These ownership changes may
limit the amount of net operating loss and research and development credit carryforwards than can
be utilized annually to offset future taxable income and tax, respectively. In general, an
ownership change, as defined by Section 382, results from transactions increasing the ownership of
certain shareholders or public groups in the stock of a corporation by more than 50 percentage
points over a three-year period. Since the Companys formation, the Company has raised capital
through the issuance of capital stock on several occasions which, combined with dispositions of
shares, may have resulted in a change of control, or could result in a change of control when
combined with future transactions. The Company has not currently completed a study to assess
whether a change or changes in control have occurred due to the significant complexity and cost
associated with such a study. Any limitation may result in expiration of a portion of the net
operating loss or research and development credit carryforwards before utilization.
On January 1, 2007 the Company adopted the provisions of FIN 48. As a result of applying the
provisions of FIN 48, the Company increased its liability for unrecognized tax benefits by
approximately $123,000, offsetting the valuation allowance on net deferred tax assets. Interest or
penalties have not been accrued at December 31, 2009 or 2008. If tax benefits are ultimately
recognized, there will be no impact to the Companys effective tax rate as a result of the
Companys valuation allowance. The Company does not anticipate any significant increases or
decreases to its liability for unrecognized tax benefits within the next 12 month period.
A reconciliation of the beginning and ending amount of unrecognized tax benefits (which are
not recorded as a liability because they are offset by net operating loss carryforwards) follows:
2009 | 2008 | |||||||
Unrecognized Tax Benefits: |
||||||||
Balance at beginning of year |
$ | 52,000 | $ | 123,000 | ||||
Increase/(Decrease) for tax positions taken during the current period |
| 10,000 | ||||||
Increase/(Decrease) for tax positions taken in prior years, net |
1,000 | (81,000 | ) | |||||
Balance at end of year |
$ | 53,000 | $ | 52,000 | ||||
The Company is no longer subject to U.S. federal and state income tax examinations for years
before 2005 and 2004, respectively. However, to the extent allowed by law, the tax authorities may
have the right to examine prior periods where net operating losses or tax credits were generated
and carried forward, and make adjustments up to the amount of the net operating loss or credit
carryforward amount. The Company is not currently under Internal Revenue Service or state tax
examinations.
NOTE 7 NOTES PAYABLE
Notes payable consists of the following:
December 31, | ||||||||
2009 | 2008 | |||||||
Convertible Debt, net of unamortized discount, inclusive of
bonus interest, of $2,000,649 and $3,765,000 at December 31,
2009 and 2008, respectively |
$ | 240,482 | $ | | ||||
Senior Notes payable, net of unamortized discount of
$1,701,398 and $496,195 at December 31, 2009 and 2008,
respectively |
1,918,486 | 581,305 | ||||||
Bank debt |
| 3,128,765 | ||||||
2,158,968 | 3,710,070 | |||||||
Less: Bank debt associated with discontinued operations of YYB |
| (466,155 | ) | |||||
Less: Current portion of long-term debt |
(1,316,667 | ) | (2,662,610 | ) | ||||
Less: Current portion of convertible note |
(240,482 | ) | | |||||
$ | 601,819 | $ | 581,305 | |||||
Convertible Debt
In September 2008, the Company issued $2,510,000 of Convertible Debt securities (the
Convertible Debt). The Convertible Debt bears interest at a coupon rate of 10%, and is due in
September 2010 or upon a change in control of the Company or certain other events of default, as
defined. However, if the Convertible Debt has not been converted to common stock at the maturity
date, the holder will be entitled to receive bonus interest equal to 50% of the face value of the
note, in addition to the coupon rate of interest. In the event of a change of control or
bankruptcy, interest due is limited to the 10% coupon rate. Interest is payable at maturity. The
Convertible Debt is unsecured and is junior in priority to the Senior Notes.
70
Table of Contents
The terms of conversion allow that if the Company completes a registered public offering of at
least $25 million (a Qualified Financing), all principal and accrued interest will automatically
be converted into the Companys common stock at a conversion price of $1.20, provided that the
conversion shares to which the Convertible Debt holders shall be entitled to receive shall either
have been registered for sale or salable under provisions of the Securities Act. If the Convertible
Debt is not mandatorily converted upon a Qualified Financing, the maturity date of the notes will
be accelerated to the closing date of the Qualified Financing. In the event of a forced conversion
into common shares resulting from a Qualified Financing, holders of the Convertible Debt will be
subject to a lock-up on any remaining shares not sold in the offering for ninety (90) days after
the public offering. Upon conversion, the holders will be entitled to receive five year warrants to
purchase a number of common shares equal to 50% of the shares issued upon conversion, with an
exercise price of 120% of Companys common share price on the conversion date, however, in no case
will the exercise price be less than $2.80. Holders of Convertible Debt may voluntarily convert any
or all of the principal and interest due under the same terms noted above, with the exception that
the shares may have resale restrictions. The shares of common stock issuable upon a voluntary
conversion of the Convertible Debt carry so-called piggy-back registration rights should the
Company file a registration statement in the future.
The Company has the right to call the Convertible Debt if the market value of the Companys
common stock exceeds $6.18 for five consecutive days, provided that the note holders have the right
to convert the debt to common shares within a stated period after notice of the Companys intent to
repay the debt has been delivered.
In accordance with FASB ASC 815-10, the Company established a debt premium and derivative
asset relative to the limitations on bonus interest that will occur upon a change in control or
bankruptcy. The initial fair value of the derivative asset of $125,000 was based on a probability
assessment of the payment alternatives. During 2009 approximately 35% of the principal balance was
converted to equity (see below). Related to that transaction, the Company reduced its derivative
asset by 35%, leaving a balance of $80,913 as of December 31, 2009. The derivative asset is
included in other assets in the consolidated balance sheets at December 31, 2009 and 2008.
In accordance with FASB ASC 320-10, Investments-Debt and Equity Securities (ASC 320-10) and
ASC 470-20, Debt with Conversion and Other Options, the Company also established a debt discount
and a related credit to additional paid-in capital in the amount of $2,635,000, representing the
value of the beneficial conversion feature inherent in the Convertible Debt, as limited to the face
amount of the debt and the premium related to the derivative asset. Accordingly, the carrying value
of the Convertible Debt, after allocation of the beneficial conversion feature to additional paid
in capital, was $0. The net debt discount is being accreted over the life of the debt using the
effective-interest method, such that the carrying value of the debt at maturity will include bonus
interest payable. The accretion was immaterial for the year ended December 31, 2008. For the year
ended December 31, 2009, the Company recorded accretion of the debt discount of approximately
$17,000.
The Company also incurred debt issuance costs of $634,765 in association with the Convertible
Debt, including $209,167 related to the issuance of 209,167 warrants issued to brokers. These
warrants were valued using the Black-Scholes option pricing model, using the following assumptions:
(i) no dividend yield, (ii) weighted-average volatility of 95% (iii) weighted-average risk-free
interest rate of 2.59%, and (iv) weighted-average expected life of 5 years. Those costs are
included in other assets in the consolidated balance sheet at December 31, 2009 and 2008, and are
being amortized over the life of the debt using the effective interest method.
In September 2009 approximately 35% of the principal balance of this Convertible Debt was
converted to equity at the option of the holders. The total amount converted was $924,605, which
included $885,259 of principal and $39,346 of accrued interest. These amounts were converted to
807,243 shares of common stock and additionally the Company issued 403,621 warrants, due to the 50%
warrant coverage feature, with an exercise price of $0.66 per share. Due to this conversion of
debt in August 2009, the Company removed approximately $83,000 of accrued bonus interest and debt
discount with no impact to the consolidated statement of operations for the year ended December 31,
2009. Post conversion, the remaining principal amount and bonus interest amount was approximately
$2,437,000, which will be amortized to interest expense over the remaining term of the Convertible
Debt using the effective interest rate method. As of December 31, 2009 and if there are no further
conversions prior to the maturity date of September 15, 2010, the Company anticipates recording
approximately $2,423,000 of amortization expense in 2010 related to the debt discount.
71
Table of Contents
Additionally due to the conversion of debt in August 2009, the Company reduced the carrying amount
of debt issuance costs by approximately $224,000 by recording a charge to interest expense. As of
December 31, 2009, the balance of the debt issuance costs related to this Convertible Debt is
approximately $410,000 which will be amortized to interest expense in 2010.
The Convertible Note and Warrant Purchase Agreement
On September 15, 2009, the Company entered into a Note and Warrant Purchase Agreement with St.
George Investments, LLC, (the Investor; collectively with registered assigns, the Holder) (the
Purchase Agreement). The Company issued and sold to the Investor (1) a 12% promissory note in the
principal amount of five hundred fifty-five thousand five hundred fifty-five and 56/100 dollars
($555,556) (the Note) which is convertible into the Companys common stock at 80% of the five day
volume weighted average of the closing price of the Companys common stock, subject to a floor
price of no less than $0.64 and on the terms and the conditions specified in the Note; and (2) a
warrant to purchase 500,000 shares of the Companys common stock, $0.001 par value per share, at a
exercise price of $0.65 per share , subject to certain anti-dilution adjustments. The note matures
on September 15, 2010. The terms associated with the conversion feature and the reset of the
exercise price of the warrants resulted in classifying these instruments as derivative liabilities
(see Note 1). The Company also entered into a Registration Rights Agreement with the Investor
pursuant to which the Company filed a registration statement for the sale of the common stock
issuable to the Investor under the Note and the Warrant on October 5, 2009 which was declared
effective on October 6, 2009.
In connection with the issuance of this note, the Company incurred approximately $35,000 in
debt issuance costs, including a $25,000 commission to a third party. These costs were recorded as
debt issuance costs are being amortized over the term of the debt on a straight-line basis (which
approximates the effective interest rate method) During the year ended December 31, 2009, the
Company amortized an immaterial amount to interest expense related to debt issuance costs.
During 2009, the Company failed to perform under the agreement which resulted in the
occurrence of triggering events (as defined) and default. Under the provision of the agreement,
the Company was required to increase the principal amount of the note by a total of 35% and some
additional amounts (totaling $210,834), accelerate the due date of the note, and increase the
interest rate from 12% to 18%. In December 2009, the Company obtained a waiver from the note
holder stating that the note holder will not accelerate the due date of the note, but rather will
keep the maturity date as of September 15, 2010. The Company recorded this increase in principal
as additional interest expense during the year ended December 31, 2009.
In December 2009, the holder of this note converted $150,000 of principal to 535,714
shares of common stock.
The Bridge Loan Agreement
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 (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.
Interest under the Bridge Loan was set at 12% per annum. However, because the Company did not repay
the Bridge Loan as scheduled on or before October 9, 2009, the interest rate was increased to 18%
per annum, retroactive to September 10, 2009. The additional amounts due under this arrangement,
including accrued interest (the the Cantone Penalty) were $86,032 as of December 31, 2009.
Pursuant to the Bridge Loan Agreement, against receipt of the Bridge Loan, the Company issued to
the Lender a two-year warrant to purchase 116,000 shares of the Companys common stock exercisable
at $0.60 per share (the Two-Year Warrant). This warrant was valued at $34,800 using the
Black-Scholes model with a discount rate of 0.93% and a volatility of 0.9308% on the date of the
Bridge Loan Agreement. Under the appropriate accounting guidance, the Company recorded the value of
the warrant at its relative fair value and recorded the relative fair value of the warrants as a
debt discount which was amortized to interest expense over the term of the bridge loan. The Company
paid cash fees associated with this debt of $15,000, which was recorded as debt issuance costs. For
the year ended December 31, 2009 the Company recorded interest expense of approximately $49,800
related to the debt discount and debt issuance costs.
72
Table of Contents
Consulting Agreement
On September 10, 2009, the Company entered into a Consulting Agreement (the Consulting
Agreement) with Cantone Asset Management, LLC (the Consultant) whereby the Consultant shall
provide guidance and advice related to negotiating the terms of the Companys outstanding Series 1
and Series 2 Senior Notes and continued services to assist the Company to coordinate with the
holders of the Series 1 and Series 2 Senior Notes. In consideration of the Consultants service,
the Company agreed to pay monthly consulting fees of $12,000 per month for a period of twelve
(12) months and issue to the Consultant a five-year warrant to purchase 200,000 shares of the
Companys common stock at an exercise price of $0.60 per share (the Five-Year Warrant). This
warrant was valued at $88,000 using the black-scholes model with a discount rate of 2.38% and a
volatility of 0.9727% and recorded as a prepaid asset. During the year ended December 31, 2009 the
Company recorded amortization expense of $29,333 related to this agreement, which has been included
in selling, general and administrative expenses in the accompanying consolidated statements of
operations and comprehensive income (loss). At December 31, 2009 the unamortized balance of $58,667
is included in prepaid consulting.
See also Note 15 Subsequent Events for further information regarding settlement of certain
obligations under consulting arrangements.
Senior Notes Payable
In December 2008, in the first closing of the 12% Senior Note offering, the Company issued
units consisting of $1,077,500 principal amount of 12% Senior Promissory Notes (Senior Notes) and
five year warrants to purchase a total of 862,000 shares of the Companys common stock at $1.00 per
share. The Senior Notes bear interest at a rate of 12% per annum, payable semi-annually on
June 1st and December 1st of each year after issuance. The Senior Notes mature on the earlier of
December 8, 2010 or upon the completion of the closing of a credit facility or loans by the Company
or its subsidiaries with a financial institution or bank of not less than $8 million in a
transaction or series of transactions. Certain events accelerate the maturity of the Senior Notes,
including a change in control, bankruptcy or legal judgment. The Senior Notes are unsecured, and
are senior to the Convertible Debt. The Company is not permitted to issue additional notes or
evidence of indebtedness that are senior in priority to the Senior Notes, however, the Company was
permitted to issue notes up to an aggregate principal amount of $2,500,000 which are of equal
priority with the Senior Notes.
The Company incurred debt issuance costs of $271,644 and debt discounts of $508,580 in
association with the Senior Notes, including $50,858 and $508,580, respectively, related to the
issuance of 948,200 warrants for the purchase of the Companys common stock at $1 per share, issued
to Senior Note holders and to brokers. These warrants were valued using the Black-Scholes option
pricing model, using the following assumptions: (i) no dividend yield, (ii) weighted-average
volatility of 97% (iii) weighted-average risk-free interest rate of 2.10%, and
(iv) weighted-average expected life of 5 years. Those debt issuance costs are included in other
assets in the consolidated balance sheet at December 31, 2008. Debt issuance costs and debt
discount are being amortized over the life of the debt using the effective interest method.
Amortization of debt discount was $178,015 and $12,385 for the years ended December 31, 2009 and
2008, respectively. Amortization of debt issuance costs was $101,698 and $0 for the years ended
December 31, 2009 and 2008, respectively.
On January 30, 2009, the Company conducted the second and final closing (the Final Closing)
of the 12% Series 1 Senior Note offering whereby the Company sold an additional $680,000 principal
amount of 12% Senior Notes and five year warrants to purchase a total of 544,000 shares of common
stock at $1.13 per share. Accordingly, a total of $1,757,500 in 12% Senior Notes and Warrants to
purchase 1,406,000 shares of common stock in the 12% Senior Note Offering were sold in 2008 and
2009. The Senior Notes issued in January 2009 mature on the earlier of the second anniversary of
the closing date or upon the completion of the closing of a credit facility or loans by the Company
or its subsidiaries with a financial institution or bank of not less than $8 million in a
transaction or series of transactions.
73
Table of Contents
In connection with the 12% Series 1 Senior Note offering, the Company agreed to file a
registration statement with the SEC on Form S-3 by July 31, 2009 (which was filed on July 2, 2009),
covering the secondary offering and resale of the Warrant Shares sold in the 12% Senior Note
offering.
The Company incurred debt issuance costs of $156,376 and debt discounts of $429,760 in
association with the Final Closing of the Series 1 Senior Note including $42,976 and $429,760,
respectively, related to the issuance of 54,400 and 544,000 warrants for the purchase of the
Companys common stock at $1.13 per share, issued to brokers and Series 1 Senior Note holders,
respectively. These warrants were valued using the Black-Scholes option pricing model, using the
following assumptions: (i) no dividend yield, (ii) weighted-average volatility of 120% (iii)
weighted-average risk-free interest rate of 1.85%, and (iv) weighted-average expected life of 5
years. The debt issuance costs are included in other assets in the consolidated balance sheet at
December 31, 2009. Debt issuance costs and debt discount are being amortized over the life of the
debt using the effective interest method. For the year ended December 31, 2009 the Company recorded
interest expense of $101,951 and $37,097 related to the debt discount and debt issuance costs,
respectively.
On May 4, 2009, the Company conducted a first closing (First Closing) of a private offering
under Regulation D for the sale to accredited investors of units consisting of $1,327,250 principal
amount of 12% Series 2 Senior Notes and five-year warrants to purchase a total of 2,123,600 shares
of the Companys common stock at $0.98 per share (the Warrant Shares). Under the terms of the
offering, the exercise price of the Warrant Shares was 115% of the five (5) day volume weighted
average closing price of the Companys common stock on NYSE Amex US for the five (5) trading days
prior to the date of the First Closing.
In connection with the offer and sale of securities to the purchasers in the First Closing of
the offering, the Companys exclusive placement agent and all participating brokers received
aggregate cash sales commissions of $132,725 and $39,817 in non-accountable expenses for services
in connection with the First Closing. In addition, in the First Closing the Company issued
placement agent warrants to the Companys exclusive placement agent to purchase a total of 212,360
shares, of which, 54,472 shares and warrants to purchase 6,000 shares were assigned to other
individuals.
The Company incurred debt issuance costs of $373,564 and debt discounts of $838,826 in
association with the First Closing in May 2009, including $172,012 and $838,826, respectively,
related to the issuance of 212,360 and 2,123,600 warrants for the purchase of the Companys common
stock at $0.98 per share, issued to brokers and Senior Note holders, respectively. These warrants
were valued using the Black-Scholes option pricing model, using the following assumptions: (i) no
dividend yield, (ii) weighted-average volatility of 120% (iii) weighted-average risk-free interest
rate of 2.03%, and (iv) weighted-average expected life of 5 years. Those debt issuance costs are
included in other assets in the consolidated balance sheet at December 31, 2009. Debt issuance
costs and debt discount are being amortized over the life of the debt using the effective interest
method. For the year ended December 31, 2009 the Company recorded interest expense of $56,782 and
$25,288 related to the amortization of the debt discount and debt issuance costs, respectively.
On June 12, 2009, the Company conducted the second closing (the Second Closing) of a private
offering under Regulation D for the sale to accredited investors of units consisting of $468,500
principal amount of 12% Series 2 Senior Notes (Notes) and five year warrants to purchase a total
of 749,600 shares of the Companys common stock at $1.11 per share (the Warrant Shares). Under
the terms of the offering, the exercise price of the Warrant Shares was to be greater of 115% of
the five day weighted average closing prices of the Companys common stock as reported by NYSE Amex
US for the five trading days ended on June 11, 2009.
In connection with the offer and sale of securities to the purchasers in the offering, the
Companys exclusive placement agent received sales commissions of $46,850 and $14,055 of
non-accountable expenses for services in connection with the Second Closing. In addition, in the
Second Closing, the Company issued to the placement agent, warrants to purchase a total of 74,960
shares, of which the Companys exclusive placement agent received placement agent warrants to
purchase 58,360 shares, and two other brokers received warrants to purchase 14,992 shares and 1,600
shares, respectively.
The Company incurred debt issuance costs of $141,168 and debt discounts of $300,583 in
association with the Second Closing in June 2009, including $68,963 and $300,583, respectively,
related to the issuance of 74,960 and 749,600 warrants for the purchase of the Companys common
stock at $1.11 per share, issued to brokers and Senior Note holders, respectively . These warrants
were valued using the Black-Scholes option pricing model, using the following assumptions: (i) no
dividend yield, (ii) weighted-average volatility of 120% (iii) weighted-average risk-free interest
rate of 2.03%, and (iv) weighted-average expected life of 5 years. Those debt issuance costs are
included in other assets in the consolidated balance sheet at December 31, 2009. Debt issuance
costs and debt discount are being amortized over the life of the debt using the effective interest
method. For the period ended December 31, 2009 the Company recorded interest expense of $27,215 and
$12,782 related to the amortization of the debt discount and debt issuance costs, respectively.
74
Table of Contents
The Company did not pay the interest due on the Series 1 Senior Notes or the Series 2 Senior Notes
due on December 1, 2009 or March 1, 2010. As a result, the interest rate on the Series 1 Senior
Notes and Series 2 Senior Notes is now accruing at 18% per annum. As of April 14, 2010 none of the
noteholders has declared any of the Series 1 Senior Notes or the Series 2 Senior Notes in default
and no Notices of Default have been received. The Company intends to seek stockholder approval to
exchange the Series 1 and Series 2 Senior Notes for shares of common stock at the next annual
meeting of stockholders.
Debt Repayment Obligations
The following table sets forth the contractual repayment obligations under the Companys notes
payable. The table assumes that Convertible Debt will be repaid at maturity, and excludes interest
payments, except for bonus interest payable under the terms of the Convertible Debt instruments.
2010 |
$ | 3,557,798 | ||
2011 |
888,224 | |||
2012 |
1,414,997 | |||
$ | 5,861,019 | |||
See also Note 15 Subsequent Events for further information regarding certain debt
obligations.
NOTE 8 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 $229,000 and $237,000 are
included in accrued salaries and wages and $86,000 and $280,000 are included in other long-term
liabilities in the accompanying consolidated balance sheets at December 31, 2009 and 2008,
respectively. The Company has not made the monthly $18,000 payments due, nor paid the premiums on a
life insurance policy on the former officer since October 2009 and as of December 31, 2009 was in
default under this obligation. As of April 14, 2010, the former officer has taken no action against
the Company to enforce this obligation.
NOTE 9 COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases its laboratory and manufacturing space under a non-cancelable two year
operating lease agreement that expires on December 1, 2010. The lease requires monthly lease
payments of $6,944. As of December 31, 2009, the Company is required to make future minimum rental
payments required under non-cancelable operating leases of approximately $83,000 in 2010.
75
Table of Contents
Rent expense under non-cancelable leases was approximately $83,000 and $80,000 for the years
ended December 31, 2009 and 2008, respectively.
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 us 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 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 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 the Company is not the owner of the CIT technology,
just that the University has an equitable interest therein or the revenues there from.
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.
Contingent Issuance of Shares Acquisition of JPI
In 2006, pursuant to the Stock Purchase and Sale Agreement (the Purchase Agreement), the
Company acquired 100% of the outstanding shares of JPI from Jade Capital Group Limited (Jade).
The terms of the Purchase Agreement provided that additional purchase consideration of 100,000
shares of the Companys common stock (the Escrow Shares) was deposited in an escrow account held
by a third party escrow agent and administered pursuant to an Escrow Agreement. The Escrow
Agreement provided that if, within one year from and after the closing of the Purchase Agreement,
Jade or its shareholders demonstrated that the SFDA had issued a permit or the equivalent
regulatory approval for the Company to sell and distribute the ONKO-SUREtm test kit in the
PRC without qualification, in form and substance satisfactory to the Company, then the escrow agent
would promptly disburse the Escrow Shares to Jade or its shareholders.
As part of the Agreement (see Note 1), shares held in escrow will be cancelled and returned to
the Company.
76
Table of Contents
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 10 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. The exercise price per share under the incentive stock option plan shall not be less
than 100% of the fair market value per share on the date of grant. The exercise price per share
under the non-qualified stock option plan shall not be less than 85% 100% of the fair market
value per share on the date of grant. All options granted under the plans through December 31, 2009
have an exercise price equal to the fair market value at the date of grant. The expiration date of
options granted under any of the plans may not exceed 10 years from the date of grant.
77
Table of Contents
Effective June 30, 1999, the Company adopted the 1999 Stock Option Plan (the 1999 Plan). The
Company can grant options for the purchase of up to 400,000 shares of the Companys common stock
under the 1999 Plan. The 1999 Plan terminated on June 30, 2009, after which grants cannot be made
from the 1999 Plan. All options vest upon grant and expire five years from the date of grant. As of
December 31, 2009, 60,001 options at a weighted average exercise price of $2.85 per share were
outstanding under the 1999 Plan.
On January 25, 2002, the board of directors adopted the 2002 Stock Option Plan (the 2002
Plan). The Company can grant options for the purchase of up to 200,000 shares of the Companys
common stock under the 2002 Plan. All options granted vest upon grant and expire five years from
the date of grant. As of December 31, 2009, there were no options outstanding under the 2002 Plan.
The Company had 39,237 options available for grant under the 2002 Plan at December 31, 2009.
On February 23, 2004, the board of directors adopted the 2004 Stock Option Plan (the 2004
Plan). The Company can grant options for the purchase of up to 480,000 shares of the Companys
common stock under the 2004 Plan. Under the terms of the 2004 Plan, 50,260 options were granted
under incentive stock option agreements to employees, and 228,740 options were granted under
non-qualified stock option agreements to employees, directors and a consultant; these options
vested immediately and expire in five years. As of December 31, 2009, 106,000 options at a weighted
average exercise price of $2.85 per share were outstanding under the 2004 Plan. The Company had
359,000 options available for grant under the 2004 Plan at December 31, 2009.
On March 14, 2006, the Board of Directors adopted the 2006 Equity Incentive Plan (the 2006
Plan). The Company can grant options for the purchase of up to 1,000,000 shares of the Companys
common stock under the 2006 Plan. Vesting of grants under the 2006 Plan is determined at the
discretion of the Compensation Committee of the Board of Directors. Options granted under the 2006
Plan have generally vested upon grant. As of December 31, 2009, 857,000 options at a weighted
average exercise price of $3.87 per share were outstanding under the 2006 Plan. The Company had
143,000 options available for grant under the 2006 Plan at December 31, 2009.
On September 7, 2006, the Companys shareholders approved the 2007 Equity Incentive Plan (the
2007 Plan). The Company can grant options for the purchase of up to 1,500,000 shares of the
Companys common stock under the 2007 Plan. Vesting of grants under the 2007 Plan is determined at
the discretion of the Compensation Committee of the Board of Directors. Options granted under the
2007 Plan generally vest ratably over 24 months. As of December 31, 2009, 835,000 options at a
weighted average exercise price of $3.45 per share were outstanding under the 2007 Plan. The
Company had 665,000 options available for grant under the 2007 Plan at December 31, 2009.
On January 7, 2009, the Company adopted the 2008-2009 Performance and Equity Incentive Plan
(Performance Plan) whereby up to 1,000,000 shares of the Companys common stock may be issued
under the Performance Plan. The Board of Directors approved the grant of 870,000 shares of the
Companys common stock under the Performance Plan, subject to stockholder approval of the
Performance Plan. Subsequently, this plan was not approved by the shareholders and all shares
issued under or options granted under the Performance Plan were cancelled.
78
Table of Contents
Summary of Assumptions and Activity
The fair value of option awards to employees and directors is calculated using the
Black-Scholes option pricing model, even though the model was developed to estimate the fair value
of freely tradable, fully transferable options without vesting restrictions, which differ
significantly from the Companys stock options. The Black-Scholes model also requires subjective
assumptions, including future stock price volatility and expected time to exercise, which greatly
affect the calculated values. The expected volatility is based on the historical volatility of the
Companys stock price. The expected term of options granted is derived from historical data on
employee exercises and post-vesting employment termination behavior. The risk-free rate selected to
value any particular grant is based on the U.S. Treasury rate that corresponds to the pricing term
of the grant effective as of the date of the grant. The Company does not expect to pay dividends in
the foreseeable future, thus the dividend yield is zero. These factors could change in the future,
affecting the determination of stock-based compensation expense in future periods. No options were
granted during the year ended December 31, 2009. The Company used the following weighted-average
assumptions in determining fair value of its employee and director stock options:
Expected volatility |
111 | % | ||
Expected term |
5 years | |||
Risk-free interest rate |
2.48 | % | ||
Dividend yield |
| % |
The weighted-average grant date fair value of employee and director stock options granted
during the year ended December 31, 2008 was $2.35.
Stock-based compensation expense recognized during the period is based on the value of the
portion of share-based payment awards that is ultimately expected to vest during the period. ASC
718-10 requires estimates of forfeitures of unvested options at the time of grant. Estimated
forfeitures are revised in subsequent periods if actual forfeitures differ form those estimates.
The estimated average forfeiture rate for 2009 and 2008 was 0%, as options generally vest upon
grant.
Upon the retirement of the Companys former chief executive officer in October 2008, the
Company agreed to extend the expiration date of the 982,000 options previously granted. Without
such a modification, the options would have expired within 90 days of the termination of services.
As a result of the modification, the options retained the expiration dates that would have been in
effect, had the former chief executive officer remained in the Companys employment. The
modification effectively accelerated the vesting of 200,000 options granted in 2008, as the chief
executive officer was not required to provide further services in order to earn the unvested
options at the date of retirement. The Company recorded $265,420 in stock option expense in
connection with the modifications. The expense was calculated using the Black-Scholes option
pricing model, using weighted-average volatility, term and risk-free interest rate of 93%, 2.9
years, and 1.88%, respectively.
Employee and director stock-based compensation expense for the years ended December 31, 2009
and 2008, including expense related to the modification of options upon the retirement of our
former Chief Executive Officer, as described above, was $795,983 and $1,034,175, respectively.
Stock-based compensation related to employee and director stock options under ASC 718-10 was
primarily included in selling, general and administrative expense; with the exception that
approximately $15,000 was charged to research and development in 2008. Unrecognized compensation
expense at December 31, 2009 related to employee and director stock options amounted to
approximately $107,641. The expense is expected to be recognized over a period of 0.17 years.
Substantially all of such compensation expense is reflected in the accompanying 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 vest 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.
During September 2009, the Company modified the various employee stock options to change the
exercise price to $0.75. For the fully vested options, this modification resulted in $129,360 of
expense recorded in September 2009. For those modified options that were not fully vesting on the
modification date a total of $368,916 will be expensed in the remaining requisite service period.
79
Table of Contents
The following is a status of all stock options outstanding at December 31, 2009 and 2008 and
the changes during the years then ended:
2009 | 2008 | |||||||||||||||
Weighted | Weighted | |||||||||||||||
Average | Average | |||||||||||||||
Exercise | Exercise | |||||||||||||||
Options | Price | Options | Price | |||||||||||||
Outstanding and exercisable, beginning of year |
2,757,001 | $ | 2.56 | 2,093,239 | $ | 3.97 | ||||||||||
Granted |
| | 850,000 | 3.45 | ||||||||||||
Expired/forfeited |
(899,000 | ) | 3.88 | (186,238 | ) | 4.81 | ||||||||||
Outstanding and expected to vest, end of year (1) |
1,858,001 | $ | 1.90 | 2,757,001 | $ | 3.75 | ||||||||||
Vested and exercisable, end of year |
1,753,626 | $ | 1.91 | 2,444,918 | $ | 3.79 | ||||||||||
(1) | Includes the repricing of 1,129,000 options from exercise prices ranging from $2.85 - $4.65 to a modified exercise price of $0.75. |
There were no options exercised in 2009 or 2008. The aggregate intrinsic value of options
outstanding at December 31, 2009, considering only options with positive intrinsic values and based
on the closing stock price, was $0. The weighted-average remaining contractual term of outstanding
and exercisable options at December 31, 2009 was 2.49 and 2.45 years, respectively.
NOTE 11 STOCK WARRANTS
From time to time, the Company issues warrants pursuant to various consulting agreements and
other compensatory arrangements.
On February 5, 2008, the Board of Directors authorized the issuance of 300,000 shares of
common stock to LWP1 pursuant to a consulting agreement dated February 3, 2008 for financial
advisory services to be provided from February 3, 2008 through June 4, 2009. The shares are
issuable in two increments of 150,000 and were valued at $1,011,000 based on the trading price of
the common stock on the date that the shares were issued. The shares vest over a fifteen month
period. In accordance with ASC 505-50-30, the shares issued will be periodically revalued through
the vesting period, and amount recorded as prepaid consulting will be expensed based on the value
of the shares earned at each measurement date. During the year ended December 31, 2008, the Company
recorded general and administrative expense of $527,801 related to the agreement and the balance of
$483,200 is included in prepaid consulting at December 31, 2008. The difference between the amount
recorded to additional paid-in capital upon issuance of the shares and the amounts ultimately
expensed at the measurement dates pursuant to ASC 505-50-30 will be recorded as an adjustment to
additional paid-in capital after all shares granted under the agreement have been earned.
In March 2008, the Company issued warrants to purchase a total of 161,813 shares of the
Companys common stock at an exercise price of $4.74 in connection with the second closing of the
December 2007 private placement offering (see Note 12).
On April 30, 2008, the Company extended the term of warrants to purchase 18,750 shares of
common stock at $3.68 per share to October 31, 2009. The warrants were held by an investor/service
provider. The Company recorded $18,375 in compensation expense related to the term extension,
calculated using the Black-Scholes option valuation model with the following assumptions: expected
volatility of 79%; risk-free interest rate of 2.37%; expected term of 1.5 years; and dividend yield
of 0%.
On June 17, 2008, the Company entered into an agreement for financial consulting services. In
connection with the agreement, the Company granted warrants to purchase 150,000 shares of common
stock at an exercise price of $3.50. The warrants, which were approved by the Companys board of
directors, were granted in partial consideration for financial consulting services, vests over a
twelve month period, and expire in five years. The warrants were initially valued at $315,000,
based on the application of the Black Scholes option valuation model with the following
assumptions: expected volatility of 95%; average risk-free interest rate of 3.66%; expected term of
5 years; and dividend yield of 0%. In accordance with FASB ASC 505-50, the warrants will be
periodically revalued through the vesting period. As of December 31, 2009, the estimated cumulative
value of the vested and unvested warrants, based on the periodic revaluation, is $116,000. The
value of the vested portion of the warrants is recorded to additional paid in capital and prepaid
expense in the month that vesting occurs. The Company recorded general and administrative expense
of $35,625 for the year ended December 31, 2009.
80
Table of Contents
In September 2008, the Company issued warrants to purchase a total of 209,167 shares of the
Companys common stock at an exercise price of $2.69 per share in connection with the Convertible
Debt financing. These warrants became exercisable on March 15, 2009 (see Note 7). The terms of
these warrants require that the Company issue additional warrants in the case of certain dilutive
issuances of the Companys common stock through the first quarter of 2009. The number of additional
warrants to be issued is based on the percentage decrease in share price of the dilutive issuance
compared to the exercise price of the warrants.
In December 2008, the Company issued warrants to purchase a total of 948,200 shares of the
Companys common stock at an exercise price of $1.00 per share in connection with the Senior Note
financing (see Note 7).
During the year ended December 31, 2008, 252,733 warrants were exercised at a weighted average
exercise price of $2.34, resulting in aggregate net proceeds of approximately $560,000, after
expenses and commissions of approximately $31,000.
In January 2009, the Company issued 598,400 warrants, exercisable at $1.13 per share, in
connection with the second closing of the Senior Note financing (see Note 7).
On May 4, 2009, the Company issued five-year warrants to purchase 2,123,600 shares of the
Companys common stock at $0.98 per share in connection with the First Closing of a private
offering of the Companys common stock. Warrants to purchase an additional the 212,360 shares of
the Companys stock were issued to the private placement agent (see Note 7).
On June 12, 2009, the Company issued five-year warrants to purchase 749,600 shares of the
Companys common stock at $1.11 per share in connection with the Second Closing of a private
offering of the Companys common stock. Warrants to purchase an additional the 74,960 shares of the
Companys stock were issued to the private placement agent (see Note 7).
On August 24, 2009, the Company issued five year warrants to purchase 403,621 shares of the
Companys common stock at $0.66 per share in connection with the issue of convertible debt which
were valued and accounted for upon the issuance of the related convertible debt in 2008 (see Note
7).
On September 10, 2009, the Company issued a two-year warrant to purchase 116,000 shares of the
Companys common stock, exercisable at $0.60 per share, pursuant to the Bridge Loan Agreement,
against receipt of the Bridge Loan, to the Lender (see Note 7).
On September 15, 2009, the Company issued a warrant to purchase 500,000 shares of the
Companys common stock, $0.001 par value per share, at a exercise price of $0.65 per share, subject
to certain anti-dilution adjustments, in connection with a promissory note (see Note 7). The
warrants expire five years from the date of grant.
On November 30, 2009, in connection with the closing of the 2009 Registered Direct Offering of
shares of common stock and warrants, the Company issued warrants to purchase 1,644,736 shares of
its common stock to the purchasers in that offering at an initial exercise price of $1.25 per
share, subject to adjustment as provided in the warrant. See also Notes 12 and 15 for additional
information.
81
Table of Contents
The following represents a summary of the warrants outstanding at December 31, 2009 and 2008
and changes during the years then ended:
2009 | 2008 | |||||||||||||||
Weighted | Weighted | |||||||||||||||
Average | Average | |||||||||||||||
Exercise | Exercise | |||||||||||||||
Warrants | Price | Warrants | Price | |||||||||||||
Outstanding and exercisable, beginning of year |
5,252,699 | $ | 3.38 | 4,528,668 | $ | 3.98 | ||||||||||
Granted |
6,688,970 | 1.02 | 1,469,180 | 1.91 | ||||||||||||
Expired/forfeited |
(1,548,382 | ) | 2.85 | (492,416 | ) | 5.00 | ||||||||||
Exercised |
| | (252,733 | ) | 2.34 | |||||||||||
Outstanding and exercisable, end of year |
10,393,287 | $ | 1.84 | 5,252,699 | $ | 3.38 | ||||||||||
The following table summarizes information about warrants outstanding at December 31, 2009:
Weighted | ||||||||
Average | ||||||||
Number of | Remaining | |||||||
Warrant | Contractual | |||||||
Exercise Price | Shares | Life (Years) | ||||||
$3.68 |
1,180,632 | 0.83 | ||||||
$4.74 |
1,366,319 | 2.00 | ||||||
$0.60 |
116,000 | 1.69 | ||||||
$2.69 |
209,166 | 3.71 | ||||||
$1.00 |
948,200 | 3.94 | ||||||
$1.13 |
598,400 | 4.08 | ||||||
$0.98 |
2,335,960 | 4.34 | ||||||
$1.11 |
824,560 | 4.44 | ||||||
$0.66 |
403,621 | 4.65 | ||||||
$0.60 |
200,000 | 4.69 | ||||||
$0.65 |
500,000 | 4.71 | ||||||
$1.25 |
1,710,429 | 0.42 | ||||||
10,393,287 | ||||||||
The outstanding warrants at December 31, 2009 are held by consultants and other service
providers, stockholders, and current and former note-holders and are immediately exercisable.
NOTE 12 STOCKHOLDERS EQUITY
Preferred Stock
The Companys Certificate of Incorporation authorizes the Company to issue up to 25,000,000
shares of $0.001 par value preferred stock. Shares of preferred stock may be issued in one or more
classes or series at such time and in such quantities as the board of directors may determine.
During the periods presented, the Company had no shares of preferred stock outstanding.
Common Stock
The Companys Certificate of Incorporation authorizes the Company to issue up to 100,000,000
shares of common stock, $0.001 par value.
82
Table of Contents
The Company has funded its operations primarily through a series of Regulation S and
Regulation D companion offerings (the Offerings), described below. The Offerings have consisted
of units of one share of common stock and warrants to purchase a number of shares of common stock
equal to one-half the number of shares of common stock included in the units (Units) and units of
one share of common stock and a warrant to purchase one share of common stock (Full Units). The
Units and Full Units are priced at a discount of 25% from the average closing prices of the
Companys common stock for the five consecutive trading days prior to the close of the offering, as
quoted on the American Stock Exchange, and the exercise price of the warrants is set at 115% of the
average closing price. Unless otherwise noted below, the warrants issued in the Offerings are
exercisable at the date of issuance and expire three years from issuance.
For all of the Offerings, the Company utilized the placement agent services of Galileo Asset
Management, S.A. (Galileo), a Swiss corporation for sales to non-U.S. persons. In United States,
the Company has utilized the placement agent services of FINRA (formerly NASD) member
broker-dealers Havkit Corporation (Havkit), Securities Network, LLC (Network) and Spencer
Clarke, LLC (Spencer Clarke), and licensed sub agents working under Spencer Clarke. In addition
to commissions and expenses paid to the Companys placement agents for each of the Offerings, as
described below, the Company has agreed to pay cash commissions of 6% of the gross amount received
upon exercise of the warrants by the purchasers.
December 2007 Offering
In December, 2007, the Company conducted the closing of a private placement (December 2007
Offering) of Units. On March 5, 2008 the Company conducted the second closing of the December 2007
Offering. In the second closing the Company received $1,000,000 in aggregate gross proceeds from
the sale of a total of 323,626 units at $3.09 per unit and issued warrants to purchase 161,813
shares at an exercise price of $4.74 per share. In connection with the second closing of the
December 2007 Offering, the Company paid a finders fee of $100,000 and other expenses and fees of
$42,729, including $18,854 that were paid subsequent to the first quarter of 2008.
After the closing of the December 2007 Offering, the Company filed a registration statement
with the Securities and Exchange Commission to register the shares of the Companys common stock,
shares issuable upon exercise of the related investor warrants, and shares issuable upon exercise
of the warrants issued to the placement agents. The registration statement was declared effective
on April 22, 2008.
November 2007 Offering
On May 16, 2008, the Company settled litigation related to the termination of an agreement
regarding a proposed private placement. In connection with the settlement, the Company paid $12,500
in cash, and issued 25,000 shares of unregistered common stock with a deemed value of $75,000,
based on the ten-day volume weighted-average price of the Companys common stock through May 8,
2008. The value of the cash and shares issued in the settlement is included in general and
administrative expense in the consolidated statement of operations for the year ended December 31,
2008.
Common Stock Issued for Services
On September 14, 2007, the Board of Directors authorized the issuance of 250,000 shares of
common stock to First International pursuant to an amendment to the consulting agreement dated July
22, 2005, for financial advisory services to be provided from September 22, 2007 through September
22, 2008. The shares were valued at $817,500 based on the trading price of the common stock on the
measurement date. The Shares were issued pursuant to an exemption under Section 4(2) of the
Securities Act. No underwriter was involved in this issuance. During 2008, the Company recorded
selling, general and administrative expense of $592,687 related to the agreement.
On November 27, 2007, the Board of Directors authorized the issuance of 75,000 shares of
common stock to Boston Financial Partners Inc. pursuant to an amendment to the consulting agreement
dated September 16, 2003, for financial advisory services to be provided from November 1, 2007
through October 31, 2008. The shares were valued at $336,000 based on the trading price of the
common stock on the measurement date. During 2008, the Company recorded general and administrative
expense of $280,000 related to the agreement.
83
Table of Contents
On November 27, 2007, the Board of Directors authorized the issuance of up to 300,000 shares
of common stock, to be earned at the rate of 25,000 shares per month to Madden Consulting, Inc. for
financial advisory services to be provided from December 26, 2007 through December 26, 2008. The
Company issued 25,000 shares in the January 2008 that were valued at $104,250 based on the trading
price of the common stock on the measurement date. During the nine months ended September 30, 2008,
the Company recorded general and administrative expense of $104,250 related to 25,000 shares. This
agreement was terminated on January 29, 2008 and the remaining obligation to issue 250,000 shares
was cancelled.
On February 5, 2008, the Board of Directors authorized the issuance of 300,000 shares of
common stock to LWP1 pursuant to a consulting agreement dated February 3, 2008 for financial
advisory services to be provided from February 3, 2008 through June 4, 2009. The shares are
issuable in two increments of 150,000. The shares vest over a fifteen month period and are being
valued monthly as the shares are earned based on the trading price of the common stock on the
monthly anniversary date. In accordance with FASB ASC 505-50 , the shares issued will be
periodically valued through the vesting period. Shares vested under the agreement were 80,000 and
220,000 during the years ended December 31, 2009 and 2008, respectively. The Company recorded
general and administrative expense of $71,600 and $527,801 related to the agreement during the same
years then ended.
On January 7, 2009, the Company granted 120,000 shares of common stock to the Companys
independent directors, subject to stockholder approval. The grant of the 120,000 shares is based on
performance through 2008. During the quarter ended September 30, 2009 the Companys stockholders
approved this grant of common stock to the Companys independent directors and approximately
$72,000 in expense has been recorded based on the stock price at August 21, 2009 (date in which
approval was obtained) in the accompanying consolidated statements of operations and comprehensive
income (loss) for the year ended December 31, 2009.
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 which 183,326 shares were earned during the
year ended December 31, 2009. In accordance with FASB ASC 505-50, the shares issued will be
periodically valued, as earned, through the vesting period. During the year ended December 31,
2009, the Company recorded general and administrative expense of $128,162 related to the agreement.
On March 31, 2009, the Company issued 12,500 shares of the Companys common stock to a
consultant for investor relations services. The Company recorded $10,125 of expense during the year
ended December 31, 2009 with respect to the shares issued, based on the value of the stock at the
date the shares were earned.
On May 28, 2009, the Company entered into a Settlement Agreement and Release with Strategic
Growth International Inc. (SGI), a consultant who provided investor relations services. Under the
SGI Settlement Agreement and Release, the Company agreed to issue 56,000 shares of the Companys
common stock to SGI, which shares are subject to listing approval by the NYSE Amex US. These shares
were approved on August 27, 2009. In lieu of cash payment for amount due of $56,089 for services
rendered, the Company issued these shares based on the approval date valued at $35,280 and recorded
a gain in the amount of $20,809 in the accompanying consolidated statements of operations and
comprehensive income (loss) as of December 31, 2009.
On June 23, 2009, the Company entered into a Settlement Agreement dated May 29, 2009 with
Strategic Growth International. Strategic Growth International agreed to accept 37,500 shares of
the Companys common stock in exchange for warrants originally issued in accordance with the
Financial Consulting Agreement. These shares were approved and issued on August 27, 2009. No
additional cost was recognized as the original warrant value was greater than the value of the
shares on the date the approval was obtained.
In September 2009 some holders of the convertible debt issued in September 2008 elected to
convert debt under the terms of the agreement into stock and warrants. This conversion resulted in
the issuance of 807,243 shares and 403,621 warrants with an exercise price of $0.66 (see Note 7.)
On September 22, 2009, the Company 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. The shares were approved
by the NYSE AMEX US on December 10, 2009. The Company recorded $27,000 related to the vested shares
during the year ended December 31, 2009.
84
Table of Contents
On September 29, 2009, the Company entered into an agreement regarding the Cancellation of
Indebtedness with SOX Solutions. The Company agreed to issue 67,800 shares of the Companys common
stock to SOX Solutions, which shares are subject to listing approval by the NYSE Amex US. The
shares were issued on December 10, 2009 and valued at $0.29 per share. As a result of the reclass,
the Company recorded a gain on settlement of $26,442 which is included in interest and income
(expense), net in the accompanying consolidated statements of operations and comprehensive income
(loss) for the year ended December 31, 2009.
On October 23, 2009, the Company entered into a Trigger Event Agreement with St. George
Investments, LLC. Under the Trigger Event Agreement, the Company agreed to issue 250,000 shares of
common stock to St. George Investments, LLC. The shares are subject to listing approval by the NYSE
Amex US. The shares were issued on December 12, 2009 and valued at $0.29 per share. The Company
recorded the issuance as interest expense in the accompanying consolidated statements of operations
and comprehensive income (loss) for the year ended December 31, 2009.
On November 11, 2009, the Company entered into an agreement with First International Capital
Group, Ltd., to provide investor relations services. In connection with the agreement, the Company
issued a total of 900,000 shares of the Companys common stock, par value $0.001. The service term
is six months (commencing November 24, 2009 and ending May 25, 2010). The value of the common
shares using the stock price on date of commencement is $0.24 per share. The total value of
$360,000 was recorded as prepaid consulting expense and will be amortized over the service period
of six months. As of December 31, 2009, the Company amortized $60,000 as general administrative
expenses in the accompanying statement of operations and comprehensive income (loss).
On November 30, 2009, the Company entered into a securities purchase agreement with Alpha
Capital Group and Whalehaven Capital Funds. The Company issued 1,860,714 and 1,428,571 shares of
the Companys common stock to Alpha Capital Group and Whalehaven Capital Funds, respectively. The
stock price of the common shares issued was valued at $0.28 per share with aggregate proceeds of
$812,320, which is net of direct offering costs of $108,680. In connection with the securities
purchase agreement, the Company also issued 6.5 year warrants, which represents 50% of the common
stock issuances. As a result, the Company issued warrants to purchase 930,357 and 714,286 of the
Companys common stock, $0.001 par value per share, at an exercise price of $1.25 per share to
Alpha Capital Group and Whalehaven Capital Funds, respectively, subject to certain anti-dilution
adjustments. The terms associated with the conversion feature and the reset of the exercise price
of the warrants resulted in classifying these instruments as derivative liabilities (see Note 1).
On the date of issuance, the Company recorded a derivative liability of $509,839. The derivative
was revalued at December 31, 2009, which resulted in a change in fair value of the derivative
liability. In connection with the revaluation, the Company recorded a gain of $197,357 in the
interest income (expense), net of the accompanying statement of operations and comprehensive income
(loss).
NOTE 13 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 2008
segment information has been restated to reclassifly the operating activities of YYB to
discontinued operations. The results previously reported for China-Direct have been combined with
China.
The following is information for the Companys reportable segments for the year ended December
31, 2009:
China | Corporate | Total | ||||||||||
Net revenue |
$ | 8,469,652 | $ | 158,017 | $ | 8,627,669 | ||||||
Gross profit |
$ | 3,147,110 | $ | 120,346 | $ | 3,267,456 | ||||||
Depreciation and amortization |
$ | 888,589 | $ | 207,182 | $ | 1,095,771 | ||||||
Interest expense |
$ | 81,834 | $ | 2,423,271 | $ | 2,596,606 | ||||||
Loss before discontinued operations |
$ | (1,397,511 | ) | $ | (11,084,507 | ) | $ | (12,482,018 | ) | |||
Capital expenditures |
$ | 1,447,356 | $ | 296,709 | $ | 1,744,065 |
85
Table of Contents
The following is information for the Companys reportable segments for the year ended December
31, 2008 after removing the discontinued operations of YYB:
China | Corporate | Total | ||||||||||
Net revenue |
$ | 23,694,678 | $ | 80,222 | $ | 23,774,900 | ||||||
Gross profit |
$ | 12,184,904 | $ | 59,605 | $ | 12,244,509 | ||||||
Depreciation and amortization |
$ | 1,219,487 | $ | 124,190 | $ | 1,343,677 | ||||||
Interest expense |
$ | 367,970 | $ | 100,561 | $ | 468,531 | ||||||
Income (loss) before discontinued operations |
$ | 10,508,239 | $ | (9,795,291 | ) | $ | 712,948 | |||||
Capital expenditures |
$ | 1,302,038 | $ | 205,438 | $ | 1,507,476 |
NOTE 14 RELATED PARTY TRANSACTIONS
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 $229,000 and $237,000 are
included in accrued salaries and wages and $86,000 and $280,000 are included in other long-term
liabilities in the accompanying consolidated balance sheets at December 31, 2009 and 2008,
respectively. The Company has not made the monthly $18,000 payments due, nor paid the premiums on a
life insurance policy on the former officer since October 2009 and as of December 31, 2009 was in
default under this obligation.
As part of the deconsolidation of JPI as of September 29, 2009, the Company
agreed to exchange loans and advances to JPI totaling $5,350,000 for
a 6% convertible promissory note from JPI. These amounts
were previously classified as intercompany balances and eliminated in
consolidation. The note will bear
interest at 6% annually. The exchange, including final payment, terms
of the convertible note are expected to be finalized in fiscal 2010.
During the year ended December 31, 2009, the Company received services from Tripoint Capital
Advisors, LLC, which was co-founded by the Companys audit committee chairman. During the year
ended December 31, 2009, the Company incurred $27,000 related to services from this related party
and this amount is included in accounts payable as of December 31, 2009.
NOTE 15 SUBSEQUENT EVENTS
On February 9, 2010, we issued 1,100,000 shares of our common stock to two consultants under
consulting services agreements. The value of these issuances will be recorded in first quarter
2010 at fair market value based upon the then current fair market value of the stock.
NYSE Amex Listing
On December 23, 2009, the Company received a letter from NYSE Amex (the Exchange),
indicating that the Company was below certain of the Exchanges continued listing standards.
Specifically, the Company was not in compliance with Section 1003(a)(iv) of the Exchanges Company
Guide (the Company Guide) in that the Company had sustained losses which were so substantial in
relation to our overall operations or our existing financial resources, or our financial condition
had become so impaired that it appeared questionable, in the opinion of the Exchange, as to whether
the Company could continue operations and/or meet our obligations as they matured. The letter from
the Exchange also indicated that, due to its low selling price, the Companys Common stock may not
be suitable for auction market trading. The Exchange afforded us an opportunity to submit a plan of
compliance to the Exchange by January 22, 2010, demonstrating our ability to regain compliance with
the Exchanges continued listing standards. Management submitted such a plan to the Exchange by the
deadline, and, in a letter dated January 6, 2010, and supplemented it thereafter. The Exchange
notified us on March 24, 2010 that it accepted our plan of compliance and granted us an extension
until June 15, 2010 to regain compliance with the continued listing standards. Failure to regain
compliance within the given timeframe may result in the Exchange initiating delisting proceedings
against us. As of the date hereof , the Company have not received any updates from the Exchange
regarding compliance with the continued listing standards.
86
Table of Contents
Defaults on Prior Note Financings: Proposed Debt Exchanges
In December 2008 and January 2009, the Company completed two closings with note holders of 12%
Senior Notes (the Series 1 Note Holders), pursuant to which we issued an aggregate of $1,757,500
in 12% Series 1 Senior Notes (Series 1 Notes); in consideration thereof, we issued the Series 1
Note holders warrants to purchase up to 1,492,000 shares of common stock of which 948,200 are
exercisable at $1.00 per share and the remaining 544,000 are exercisable at $1.13 per share. In May
and June 2009, we completed two closings with note holders of the 12% Series 2 Senior Promissory
Notes (the Series 2 Note Holders, together with the Series 1 Note Holders, the Note Holders),
pursuant to which we issued an aggregate of approximately $1,796,000 in 12% Series 2 Senior Notes
(Series 2 Notes, together with the Series 1 Notes, the Notes); in consideration thereof, we
issued the Series 2 Note Holders warrants to purchase up to 2,335,960 shares of common stock of
which 2,123,600 are exercisable at $0.98 per share and the remaining 749,600 are exercisable at
$1.11 per share. The terms of the Series 2 Notes provided that if the stockholders of the Company
do not approve of the Series 2 Note Offering by September 1, 2009 and the Company did not redeem
the 12% Series 2 Notes by November 30, 2009, then the holders of such 12% Series 2 Notes shall be
entitled to declare such notes in default and declare the entire principal and unpaid accrued
interest thereon immediately due and payable. The Company did not pay the interest due on the
Series 1 Senior Notes or the Series 2 Senior Notes due on December 1, 2009 or March 1, 2010. As a
result, the interest rate on the Series 1 Senior Notes and Series 2 Senior Notes is now accruing at
18% per annum. As of April 14, 2010, none of the noteholders has declared any of the Series 1
Senior Notes or the Series 2 Senior Notes in default and no Notices of Default have been received.
The Company intends to seek stockholder approval to exchange the Series 1 and Series 2 Senior Notes
for shares of common stock at the next annual meeting of stockholders.
The Company failed to pay the interest due on the Series 1 and Series 2 Notes due on December
1, 2009 and March 1, 2010; however none of the holders have declared default, or is due on
outstanding notes and other contractual obligations which are past due or soon to be due.
Management is concerned that we may not have sufficient cash to satisfy these debts and carry on
our current operations. Therefore, Management believes it is prudent to reserve as much cash as
possible for our operations.
To that end, in March 2010, Management put together various exchange agreements (the Debt
Exchanges) to enter into with a majority, and potentially all, of our 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 our 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, we filed a Preliminary Proxy Statement on Schedule 14A on February 1, 2010
and are 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. We have the right to seek Shareholder Approval two
times; if we do not receive Shareholder Approval at the second meeting, we shall 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 we obtain Shareholder Approval to issue the shares pursuant
to a particular Debt Exchange, upon such issuance, the debt related to such exchange agreement will
be exchanged for shares of common stock and the holders thereof shall waive all current and future
defaults under the debt. Second, we agreed to use our 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. 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 below, 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 therefor. 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.
87
Table of Contents
In March 2010, we 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. We
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. We 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 we do not receive Shareholder Approval, we
will have to pay the exchange fee in cash. Further, if we do not proceed with the Debt Exchanges,
none of the other agreements with Cantone Research Inc. will be consummated.
Also in March 2010, in an effort to further reduce our cash expenditures, we also amended a
consulting agreement with one of our corporate consultants Cantone Asset Management LLC
(Cantone Asset). Under the original consulting agreement, we were to pay Cantone Asset an
aggregate cash consulting fee of $144,000 and issued them 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. 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 we will have to pay the consulting fee in cash.
St. George Convertible Note and Warrant Purchase Agreement Defaults and Waivers; Note Conversions
and Warrant Exercises After January 1, 2010
On September 15, 2009, we issued a 12% Convertible Promissory Note (the St. George Note). to
St. George Investments, LLC (St. George). On December 11, 2009 we entered into a Waiver of
Default with St. George pursuant to which we 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 we failed to pay the entire balance of the note by February 1, 2010, we were in default on
the St. George Note. On February 16, 2010, we 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 shall be added to the balance of the Note effective as of the February 16, 2010. The February
16 Waiver included a provision that would reinstate the default if the company failed to comply
with the terms of the February 16 Waiver.
At various times during the period January 1, 2010 through April 8, 2010, St. George converted
portions of the remaining principal and interest due on the St. George Note and in consideration
thereof, the Company issued to St. George an aggregate of 2,568,951 shares of our Common Stock. In
addition during the same period, St. George exercised warrants to purchase an aggregate of 400,000
Shares of our Common Stock. All of such note conversions and warrant exercises during 2010 were at
$0.28 per share, the adjusted warrant exercise price pursuant to the terms of the warrant. The
total net proceeds from the exercise of warrants by St. George during such period was $112,000.
There were no net proceeds from the various note conversions.
Note and Warrant Purchase Agreements- March and April 2010
After the year ended December 31, 2009, the Company sought additional financing for its
continuing 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
(Lender) pursuant 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. In addition, the Company
agreed to pay $200,000 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 $540,000, exclusive of 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 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.
88
Table of Contents
The transaction with the Lender was the First Closing of a series of similar transactions,
which together are hereinafter referred to as March-April 2010 12% Convertible Note Financing. On
April 8, 2010, the Board of Directors authorized the Company to enter into additional Purchase
Agreements to issue up to an additional $7,500,000 of 12% Convertible notes and to issue warrants
to issue up to an additional 15,000,000 shares of the Companys Common Stock pursuant to the
March-April 2010 12% Convertible Note Financing.
On April 8, 2010, in the Second Closing, the Lender and other accredited investors purchased
an aggregate of $5,490,165 principal amount of additional 12% Convertible Notes and the Company
issued additional warrants to purchase 6,528,843 shares of the Companys Common Stock at an
exercise price of $0.38 per share on terms substantially the same as described above in the First
Closing with the Lender. The net proceeds from the Second Closing were $3,205,000, exclusive of any
finders fees paid in the Second Closing.
On April 13, 2010, in the Third Closing of the March-April 2010 12% Convertible Note
Financing, Lender and other accredited investors, purchased an aggregate of $3,957,030 principal
amount of additional 12% Convertible Notes and the Company issued additional warrants to purchase
4,705,657 shares of the Companys Common Stock exercisable at $0.69 per share on terms
substantially the same as described above in the First Closing and Second Closing.. The net
proceeds from the Third Closing were $2,310,000, exclusive of any finders fees paid in the Second
Closing.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
Our management, with the participation of our Principal Executive Officer and Principal
Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as
such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the Exchange Act) as of December 31, 2009. Based on this evaluation, our Principal
Executive Officer and our Principal Financial Officer concluded that our disclosure controls and
procedures, subject to the limitations as noted below, were effective during the period and as of
the end of the period covered by this annual report to ensure that information required to be
disclosed by us in reports that we file or submit under the 1934 act is recorded, processed,
summarized and reported within the time periods specified in the SEC rules and forms and that such
information is accumulated and communicated to our management as appropriate to allow timely
decisions regarding required disclosures.
Because of inherent limitations, our disclosure controls and procedures may not prevent or
detect misstatements. A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the controls system are met. Because of
the inherent limitations in all controls systems, no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, have been detected.
Managements Report on Internal Control Over Financial Reporting
Our internal controls over financial reporting are designed by, or under the supervision of
our Principal Executive Officer and Principal Financial Officer or persons performing similar
functions, and effected by our board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. Our internal control over financial reporting includes those policies and procedures
that:
| Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; | ||
| Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and |
89
Table of Contents
| Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition or disposition of our assets that could have a material effect on the financial statements. |
Our management has evaluated the effectiveness of our internal control over financial
reporting (ICFR) as of December 31, 2009 based on the control criteria established in a report
entitled Internal Control Integrated Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this evaluation, our management concluded that
our internal control over financial reporting was not effective as of December 31, 2009. Based on
its evaluation, our management concluded that our internal control over financial reporting has the
following deficiencies as of December 31, 2009:
1. 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 and complex transactions. These control
deficiencies 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.
d) We do not have adequate procedures in place to detect related party transactions which
give rise to potential conflicts of interest.
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 of Material Weakness
As of December 31, 2009, 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.
Through these steps, we believe we are addressing the deficiencies that affected our internal
control over financial reporting as of December 31, 2009. 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.
90
Table of Contents
Inherent Limitations Over Internal Controls
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect all errors or misstatements and all fraud. Therefore, even those systems determined to be
effective can provide only reasonable, not absolute, assurance that the objectives of the policies
and procedures are met. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
Our Audit Committee, Board of Directors and management and KMJ Corbin and Company LLP
discussed these weaknesses and we have assigned the highest priority to their correction. In 2010,
we plan to continue to add financial resources and expertise, both through internal hiring and
using outside consultants that will provide hands-on oversight of the monthly financial closing,
data analysis, and account reconciliation.
This annual report does not include an attestation report of our independent registered public
accounting independent firm regarding internal control over financial reporting. Managements
report was not subject to attestation by our independent registered public accounting firm pursuant
to temporary rules of the SEC that permit us to provide only managements report in this annual
report.
Changes in Internal Control Over Financial Reporting
There have not been any changes in our 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 fourth quarter of
2009 that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
Item 9B. Other Information
There is no information that was required to be disclosed, but was not disclosed in a report
on a Form 8-K during the fourth quarter of our fiscal year ending December 31, 2009.
91
Table of Contents
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The following table and text set forth the names and ages of all directors and executive
officers as of April 20, 2010. The size of our board is currently set at five and is divided into
three classes. The terms of two directors will expire at this years Annual Meeting; the term of
one director shall expire at the Annual Meeting of Stockholders to be held in 2011 (Class II); and
the terms of the two remaining directors shall expire at the Annual Meeting of Stockholders to be
held in 2012 (Class I). Currently, Douglas MacLellan and Minghui Jia serve as the Class I
directors, Michael Boswell serves as the Class II director, and William Thompson and Edward
Arquilla serve as the Class III directors. Commencing with this years Annual Meeting, one class of
directors will be elected for a three-year term at each Annual Meeting of Stockholders. There are
no family relationships among our directors and executive officers. Also provided herein are brief
descriptions of the business experience of each director, executive officer and advisor during the
past five years and an indication of directorships held by each director in other companies subject
to the reporting requirements under the Federal securities laws. None of our officers or directors
is a party adverse to us or has a material interest adverse to us.
Year First | ||||||||||
Name | Age | Elected | Position(s) | |||||||
Douglas C. MacLellan
|
54 | 1991 | Executive Chairman and Chief Executive Officer | |||||||
Akio Ariura
|
52 | 2006 | Chief Financial Officer and Secretary | |||||||
Michael Boswell
|
40 | 2008 | Director | |||||||
William M. Thompson
III, M.D.
|
82 | 1989 | Director | |||||||
Edward R. Arquilla,
M.D., Ph.D.
|
87 | 1997 | Director | |||||||
Minghui Jia
|
49 | 2006 | Director |
Mr. MacLellan transitioned into his new role after nearly 17 years on Radients Board. He was
appointed to the Board in 1992 and became Chairman of the Audit and Governance committees in 2001.
In 2008 he assumed the role of non-executive Chairman serving as an advisor and lead Company
spokesperson for Radient. Mr. MacLellan has been a member of our Board since 1992 and is Chairman
of the Boards Audit and Governance Committees. Mr. MacLellan is currently President and CEO of
MacLellan Group, Inc., a privately held business incubator and financial advisory firm since May
1992. From August 2005 to the present, Mr. MacLellan has been a member of the Board of Directors of
Edgewater Foods, International, Inc. Mr. MacLellan was, until September 2005, formally
vice-chairman of the Board of Directors of AXM Pharma, Inc. (AXMP.PK) and its predecessors. AXM is
a China based bio-pharmaceutical company. From January 1996 through August 1996, Mr. MacLellan was
also the Vice-Chairman of Asia American Telecommunications (now Metromedia China Corporation), a
majority owned subsidiary of Metromedia International Group, Inc. From November 1996 until March
1998, Mr. MacLellan was co-Chairman and investment committee member of the Strategic East European
Fund. From November 1995 until March 1998, Mr. MacLellan was President, Chief Executive Officer and
a director of PortaCom Wireless, Inc., a company engaged as a developer and operator of cellular
and wireless telecommunications ventures in selected developing world markets. Mr. MacLellan is a
former member of the Board of Directors and co-founder of FirstCom Corporation, an international
telecommunications company that operates a competitive access fiber and satellite network in Latin
America, which became AT&T Latin America, Inc. in August 2000. From 1993 to 1995, Mr. MacLellan was
a principal and co-founder of Maroon Bells Capital Partners, Inc., a U.S. based merchant bank,
which specializes in providing corporate finance services to companies in the international and
domestic telecommunications and media industries. His 18 years of experience with us, coupled with his pharmaceutical industry and international experience, led us to the conclusion that he should serve as one of our directors.
Mr. MacLellan was educated at the University of
Southern California in economics and finance, with advanced training in classical economic theory.
Mr. Ariura was appointed as our Chief Financial Officer as of August 21, 2006. Mr. Ariura is a
Certified Public Accountant. From September 2004 until joining the Company, Mr. Ariura was employed
by Resources Global Professionals, providing both public and private companies with consulting
services on Sarbanes-Oxley compliance, SEC filings and special project financial and management
services in connection with preparation of financial statements, tax reporting and mergers and
acquisitions. From January 2001 to December 2003, Mr. Ariura was Vice President of Sunvest
Industries, LLC in charge of preparation of financial statements, budgets and other financial
reports.
In light of Mr. Ariuras financial and regulatory experience, we determined that he should serve as the companys Chief Financial Officer.
Mr. Ariura received a B.S. in Business Administration from University of Southern
California in 1980. Mr. Ariura has had no prior affiliation or relationship with the Company.
Mr. Boswell
was elected to the Board in 2008. He is co-founder of the TriPoint family of companies and co-founder and member in TriPoint Capital Advisors, LLC a boutique merchant bank focused on
small and mid-sized growth companies. He has been active in the Chinese market since 2000
providing high-level financial guidance and services to start-up, small and mid-sized companies.
Mr. Boswell also holds executive and CFO positions with client companies that include Acting
CFO and Director of Edgewater Foods International Inc. (OTCBB: EDWT), and Financial
Advisor and Consultant to Tianyin Pharmaceutical Co, Inc. (NYSE AMEX: TPI) and JPAK
Group Inc. (OTCBB: JPAK). With TriPoint, Mr. Boswell has assisted numerous companies,
providing high-level advice related corporate finance,
92
Table of Contents
corporate structure, corporate governance,
and mergers and acquisitions. Prior to the founding of TriPoint, he held senior-level executive
positions focused on business development and management consulting. Mr. Boswell holds the
Series 24, 82 and 63 licenses and is COO of TriPoint Global Equities, a FINRA member firm. He
also spent eight years as a senior analyst and engineer in various branches of the United States
Government. His experience with small and mid-size growth companies and his financial
expertise led us to the conclusion that he should serve as one of our directors. Mr. Boswell earned
his MBA from John Hopkins University and a BS degree in Mechanical Engineering from
University of Maryland.
93
Table of Contents
Dr. Thompson has served as one of our directors since June 1989 and stepped down as our
Chairman in 2008, and was our CEO during the years 1992-1994. He is currently Medical Director of
PPO Next and a member of the clinical surgical faculty of U. C. Irvine School of Medicine. Dr.
Thompson has practiced medicine for over 40 years in general practice, general surgery and trauma
surgery. Previously, he practiced patent law and worked in the pharmaceutical industry in the areas
of research, law and senior management for 13 years. During his medical career, he was founding
Medical Director of Beach Street and August Healthcare Companies during a 25-year association with
the managed care PPO industry. Dr. Thompson has also served on the OSCAP Board of SCPIE, a
malpractice carrier, for 20 years and chaired its Claims Committee. His 21 years of experience with us, coupled with his pharmaceutical expertise, led us to the conclusion that he should serve as one of our directors. He has been heavily involved
with organized medicine and hospital staff management for many years and was a principal architect
of the paramedic and emergency systems of Orange County, CA.
Dr. Arquilla has been one of our directors since February 1997. Dr. Arquilla received his M.D.
and PhD from Case Western University in 1955 and 1957, respectively. He was board certified in
anatomic pathology in 1963. In 1959, he was appointed assistant professor of pathology at the
University of Southern California. In 1961, he was appointed assistant professor of pathology at
UCLA and promoted to full professor of pathology in 1967. He was appointed as the founding chair of
Pathology at UCI in 1968. He continued in this capacity until July 1, 1994. He is presently an
active professor emeritus of pathology at UCI. He has more that 80 peer reviewed published
articles. His current interests are focused on immuno-pathological testing of biologically
important materials.
Mr. Minghui Jia was elected to our Board in 2006 and is currently the Managing Director of
Jade Pharmaceutical, Inc. Mr. Jia has over 10 years experience in investment banking, venture
capital, marketing institutional trading and senior corporate management experience. Mr. Jia is
familiar with all procedures for manufacturing and marketing with respect to the Asian
Pharmaceutical market and has an in-depth understanding of the industry. Prior to founding Jade
Capital Group, Ltd. and Jade Pharmaceutical Inc., Mr. Jia served as marketing director for China
Real Estate Corporation, one of the largest Chinese property corporations between 1999 and 2003.
Between 1989 and 1998, Mr. Jia served as General Manager of several branches of China Resources Co.
Ltd., the largest China export corporation. From 1987 to 1989, Mr. Jia worked for the China
National Machinery import and export corporation where he served as Manager of the Import
Department for Medical Instruments. His experience with financial matters, as well as his experience in the Chinese business
community, led us to the conclusion that he should serve as one of our directors. Mr. Jia received his bachelors degree from the University of International Business and Economics in Beijing.
Communications with Directors
Stockholders may communicate with the Chairman of the Board, the directors as a group, the
non-employee directors or an individual director directly by submitting a letter in a sealed
envelope labeled accordingly and with instruction to forward the communication to the appropriate
party. Such letter should be placed in a larger envelope and mailed to the attention of our
Secretary at Radient Pharmaceuticals Corporation, 2492 Walnut Avenue, Suite 100, Tustin, California
92780. Shareholders and other persons may also send communications to members of our Board who
serve on the Audit Committee by utilizing the webpage on our website,
http://www.radient-pharma.com, designated for that purpose. Communications received through the
webpage are reviewed by a member of our internal audit staff and the chairperson of the Audit
Committee. Communications that relate to functions of our Board or its committees, or that either
of them believes requires the attention of members of our Board, are provided to the entire Audit
Committee and reported to our Board by a member of the Audit Committee. Directors may review a log
of these communications, and request copies of any of the communications.
Board of Directors Meetings
During the fiscal year ended December 31, 2009, there were six meetings of the Board as well
as numerous actions taken with the unanimous written consent of the directors.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our officers and directors and those persons who
beneficially own more than 10% of our outstanding shares of common stock to file reports of
securities ownership and changes in such ownership with the SEC. Officers, directors and greater
than 10% beneficial owners are also required to furnish us with copies of all Section 16(a) forms
they file.
Based solely upon a review of the copies of such forms furnished to us, we believe that during
2009 all Section 16(a) filing requirements applicable to our officers, directors and persons who
own more than 10% of our outstanding shares of common stock were complied with.
94
Table of Contents
Code of Ethics for Financial Professionals
The Company has adopted a Code of Ethics for Financial Professionals. The Code of Ethics has
been posted and may be viewed on our website at: www.radient-pharma.com.
Audit Committee and Financial Expert
Our Board has established an Audit Committee consisting of Mr. Boswell, Dr. Thompson and Dr.
Arquilla, each of whom is independent within the meaning of the rules of the NYSE Amex and the
enhanced independence requirements for audit committee members under Exchange Act Rule 10A-3. The
Audit Committee met four times in 2009. The Audit Committee has been established in accordance with
Section 3(a)(58)(A) of the Securities and Exchange Act of 1934. The primary functions of this
Committee are to: appoint (subject to shareholder approval), and be directly responsible for the
compensation, retention and oversight of, the firm that will serve as the Companys independent
accountants to audit our financial statements and to perform services related to the audit
(including the resolution of disagreements between management and the independent accountants
regarding financial reporting); review the scope and results of the audit with the independent
accountants; review with management and the independent accountants, prior to the filing thereof,
the annual and interim financial results (including Managements Discussion and Analysis) to be
included in Forms 10-K and 10-Q, respectively; consider the adequacy and effectiveness of our
internal accounting controls and auditing procedures; review, approve and thereby establish
procedures for the receipt, retention and treatment of complaints received by Radient regarding
accounting, internal accounting controls or auditing matters and for the confidential, anonymous
submission by employees of concerns regarding questionable accounting or auditing matters; review
and approve related person transactions in accordance with the policies and procedures of the
Company; and consider the accountants independence and establish policies and procedures for
pre-approval of all audit and non-audit services provided to Radient by the independent accountants
who audit its financial statements. At each meeting, Committee members may meet privately with
representatives of our independent accountants and with Radients Chief Financial Officer.
The Board has determined that Mr. Boswell, an independent director, satisfies the financially
sophisticated requirements set forth in the NYSE Amex Company Guide, and has designated Mr.
Boswell as the audit committee financial expert, as such term is defined by the Amex. Mr.
Boswells qualifications as an audit committee financial expert are described in his biography
above.
A current copy of our Audit Committees amended and restated charter is available upon
request.
Item 11. Executive Compensation
The following table sets forth all compensation received during the two years ended December
31, 2009 by our Chief Executive Officer, Chief Financial Officer and each of the other two most
highly compensated individuals whose total compensation exceeded $100,000 in such fiscal year.
These officers and individuals are referred to as the Named Executive Officers in this Report. As
of October 31, 2008, Mr. Dreher resigned as our President and CEO and Douglas MacLellan was
appointed to fill those positions; however, we are required to provide executive compensation
information for the last two completed fiscal years. Upon Mr. MacLellans appointment, we agreed to
pay him an annual base salary of $360,000, to be paid in equal monthly installments, and he is also
entitled to certain bonuses, the latter of which he has deferred until the Companys cash position
improves.
95
Table of Contents
SUMMARY COMPENSATION TABLE
Non- | ||||||||||||||||||||||||||||||||||||
Equity | Non- | |||||||||||||||||||||||||||||||||||
Incentive | qualified | |||||||||||||||||||||||||||||||||||
Plan | Deferred | |||||||||||||||||||||||||||||||||||
Compens | Compens | All Other | ||||||||||||||||||||||||||||||||||
Name and | Stock | Option | ation | ation | Compens | |||||||||||||||||||||||||||||||
Principal | Salary | Bonus | Awards | Awards | Earnings | Earnings | ation | Total | ||||||||||||||||||||||||||||
Position | Year | ($) | ($) | ($) | ($)(8) | ($) | ($) | ($) | ($) | |||||||||||||||||||||||||||
Gary L. Dreher(1) |
2009 | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||||||||||||||
Gary L. Dreher President & CEO(1) |
2008 | $ | 541,667 | $ | 100,000 | $ | | $ | 500,420 | (2) | $ | | $ | | $ | 164,815 | (3)(4) | $ | 1,306,902 | |||||||||||||||||
Douglas MacLellan, |
2009 | $ | 360,000 | $ | 30,000 | $ | | $ | 127,940 | $ | | $ | | $ | | $ | 517,940 | |||||||||||||||||||
President, CEO & Chairman |
2008 | $ | | $ | 60,000 | (6) | $ | | $ | | $ | | $ | | $ | 180,000 | (5) | $ | 240,000 | |||||||||||||||||
Douglas MacLellan, President, CEO & Chairman(1) |
||||||||||||||||||||||||||||||||||||
Akio Ariura, CFO |
2009 | $ | 300,000 | $ | 20,000 | $ | | $ | 40,900 | $ | | $ | | $ | | $ | 360,900 | |||||||||||||||||||
Akio Ariura |
2008 | $ | 218,749 | $ | 20,000 | $ | | $ | | $ | | $ | | $ | | $ | 238,749 | |||||||||||||||||||
Frank Zheng(7) |
2009 | $ | 186,667 | $ | | $ | | $ | 20,000 | $ | | $ | | $ | | $ | 206,667 | |||||||||||||||||||
Frank Zheng |
2008 | $ | 360,000 | $ | 85,000 | $ | | $ | 48,958 | $ | | $ | | $ | | $ | 493,958 | |||||||||||||||||||
Minghui Jia(7) |
2009 | $ | 186,667 | $ | | $ | | $ | 20,000 | $ | | $ | | $ | | $ | 206,667 | |||||||||||||||||||
Minghui Jia |
2008 | $ | 240,000 | $ | 85,000 | $ | | $ | 48,958 | $ | | $ | | $ | | $ | 373,958 |
(1) | Effective as of October 31, 2008, Mr. Dreher resigned from all of his positions; Mr. MacLellan replaced Mr. Dreher as our President, Chief Executive Officer and Chairman in November 2008. | |
(2) | The value of option awards included in this column represents the compensation costs recognized by the Company in fiscal year 2008 for option awards made or modified in 2008 calculated pursuant to ASC 718. The values included within this column have not been, and may never be realized. The options might never be exercised and the value received by Mr. Dreher, if any, will depend on the share price on the exercise date. The assumptions we used with respect to the valuation of the option awards are set forth in the Notes to our Consolidated Financial Statements, which are included in our Form 10-K for the year ending December 31, 2009. There were no forfeitures during the year. | |
(3) | Mr. Drehers perquisites and other personal benefits include certain amounts for life insurance, car allowance and membership dues aggregate $14,815. | |
(4) | Effective as of October 31, 2008, Mr. Dreher resigned and his compensation as an executive officer ceased as of such date. He received $125,000 upon the effective date of his Severance Agreement, and we paid $25,000 of his legal expenses. In addition, we agreed to pay Mr. Dreher $540,000 in monthly installments of $18,000, commencing January 31, 2009 for consulting services, as well as continuation of certain insurance coverages. | |
(5) | As Chairman of our Compensation Committee and as Chairman of our Governance and Audit Committees, Douglas MacLellan received an additional $15,000 per month. | |
(6) | Pursuant to Mr. MacLellans appointment as our President and CEO in November 2008, he earned a bonus of $60,000 for the quarter ended December 31, 2008. |
96
Table of Contents
(7) | Due to the compensation received, we are including Mr. Zheng (a former director of the Company and current director of JPI) and Mr. Jia (one of our directors) in this table since disclosure would be required but for the fact that they were not serving as an executive officer at the end of the last completed fiscal year. | |
(8) | Represents the fair vale of the repriced options during 2009. |
Employment Agreements
On March 31, 2008, we entered into a three-year employment agreement with Gary L. Dreher, our
the Chief Executive Officer, President and a member of the Board of Directors. The agreement was
effective as of January 31, 2008, at a base $650,000 plus certain other benefits and participation
in our various Equity Incentive Plans. The employment agreement also contained standard provisions
concerning confidentiality, non-competition and non-solicitation.
Effective October 31, 2008, Mr. Dreher resigned and we agreed to enter into certain mutual
general releases and related covenants, and to tender to him certain payments as described below.
In connection with Mr. Drehers retirement, we entered into a Severance Agreement with him, which
provides that his compensation as an executive ceased as of the effective date of his retirement.
In lieu of the compensation and other terms and benefits provided by his then current employment
agreement, the Company agreed to pay him $125,000 and pay $25,000 in legal expenses on his behalf,
following the expiration of a seven-day statutory period. Further, Mr. Dreher agreed to consult for
us on an as-requested, mutually agreed basis (not to exceed four hours per month). Thereafter, Mr.
Dreher is entitled to receive $540,000 in consulting fees consisting of 30 monthly payments of
$18,000, commencing January 31, 2009. Mr. Dreher is also entitled to continuation of certain
insurance coverage. We also agreed to allow Mr. Dreher to continue to vest in stock options granted
to him and to disregard the expiration of options that would have occurred upon termination of
employment. The Severance Agreement contains other terms and conditions standard and customary for
the retirement of executive officers.
97
Table of Contents
On November 4, 2008 Douglas C. MacLellan was appointed as our President and Chief
Executive Officer. Mr. MacLellan does not have any employment agreement and is compensated at a
base salary of $30,000 per month and he participates in the Companys health insurance and other
benefits available to executive officers. Additionally, Mr. MacLellan earned a bonus of $60,000 for
the quarter ended December 31, 2008.
On September 28, 2006, we entered into three-year employment agreements with Minghui Jia, one
of our directors and Executive Vice-President of JPI, providing for a base salary of $156,000 per
annum and a signing bonus of $50,000. Also on that date, we entered into a three-year employment
agreement with Fang Zheng, President of JPI, providing for a base salary of $204,000 per annum and
a signing bonus of $50,000.
Effective January 1, 2008, Mr. Zhengs base compensation was increased to $30,000 per month
and Mr. Jias base compensation was increased to $20,000 per month. In February 2008, Messrs. Jia
and Zheng each received an additional bonus of $25,000 each.
Each of these agreements with Radient Pharmaceuticals Corporation expired in August 2009.
Outstanding Equity Awards at Fiscal Year End
Equity Incentive | ||||||||||||||||||||
Plan Awards: | ||||||||||||||||||||
Number of | Number of | Number of | ||||||||||||||||||
Securities | Securities | Securities | ||||||||||||||||||
Underlying | Underlying | Underlying | ||||||||||||||||||
Unexercised | Unexercised | Unexercised | Option | Option | ||||||||||||||||
Options (#) | Options (#) | Unearned | Exercise | Expiration | ||||||||||||||||
Name | Exercisable | Unexercisable | Options (#) | Price ($/Sh) | Date | |||||||||||||||
(a) | (b) | (c) | (d) | (e) | (f) | |||||||||||||||
Gary Dreher |
60,001 | | | 2.85 | 2/27/2011 | |||||||||||||||
200,000 | | | 3.70 | 10/8/2011 | ||||||||||||||||
172,000 | | | 4.06 | 5/31/2012 | ||||||||||||||||
262,500 | 37,500 | | 3.45 | 3/3/2013 | ||||||||||||||||
Douglas MacLellan |
36,000 | | | 0.75 | 2/27/2011 | |||||||||||||||
120,000 | | | 0.75 | 10/8/2011 | ||||||||||||||||
90,000 | | | 0.75 | 5/31/2012 | ||||||||||||||||
175,000 | 25,000 | | 0.75 | 3/3/2013 | ||||||||||||||||
Akio Ariura |
40,000 | | 0.75 | 10/8/2011 | ||||||||||||||||
50,000 | | 0.75 | 5/31/2012 | |||||||||||||||||
43,750 | 6,250 | | 0.75 | 3/3/2013 | ||||||||||||||||
Frank Zheng |
43,750 | 6,250 | | 0.75 | 3/3/2013 | |||||||||||||||
Minghui Jia |
43,750 | 6,250 | | 0.75 | 3/3/2013 |
Market Value of | Equity Incentive Plan | Equity Incentive | ||||||||||||||
Number of Shares | Shares of | Awards: Number of | Plan Awards: Market | |||||||||||||
or Units of Stock | Units of | Unearned Shares, Units or | or Payout Value of | |||||||||||||
That Have | Stock That Have | Other Rights That Have | Unearned Shares, | |||||||||||||
Not Vested | Not Vested | Not Vested | Units or Other Rights | |||||||||||||
Name | (#) | ($) | (#) | That Have Not Vested | ||||||||||||
(a) | (g) | (h) | (i) | (j) | ||||||||||||
Gary Dreher |
0 | 0 | 0 | 0 | ||||||||||||
Douglas MacLellan |
0 | 0 | 0 | 0 | ||||||||||||
Akio Ariura |
0 | 0 | 0 | 0 | ||||||||||||
Frnak Zheng |
0 | 0 | 0 | 0 | ||||||||||||
Minghui Jia |
0 | 0 | 0 | 0 | ||||||||||||
98
Table of Contents
2008-2009 Performance and Equity Incentive Plan
On January 7, 2009, we adopted a new performance based incentive plan, entitled the 2008-2009
Performance and Equity Incentive Plan ( Performance Plan) for key executives that is based on
meeting specific comprehensive net income targets established by the Board of Directors. The
Performance Plan authorizes us to issue up to 1,000,000 shares of our common stock. The Performance
Plan was not approved by our stockholders and all shares issued or options granted under the
Performance Plan were cancelled.
Change in Control Severance Pay Plan
On March 31, 2008, the board of directors adopted an Executive Management Change in Control
Severance Pay Plan. The director, who is also the Companys Chief Executive Officer, who may become
entitled to benefits under the plan did not participate in the deliberations or vote to approve the
plan.
The plan covers 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),are employed by the Company as Chief Executive Officer
and/or president and are not party to a separate agreement which makes such person ineligible to
participate in the plan. These persons become eligible for benefits under the plan if (1) (a) the
Company terminates his or her employment for any reason other than his or her death or cause (as
defined in the plan) or (b) the person terminates his or her employment with the Company for good
reason (as defined in the plan) and (2) the termination occurs within the period beginning on the
date of a change in control and ending on the last day of the twelfth month that begins after the
month in which the change in control occurs or prior to a change in control if the termination was
either a condition of the change in control or at the request or insistence of a person related to
the change in control.
The plan requires the Company to make a cash payment in an amount equal to three hundred
percent (300%) of the participants average total compensation of the prior three years preceding
the change in control or notice of termination.
If the total payments made to a person result in an excise tax imposed by Internal Revenue
Code § 4999, the Company will make an additional cash payment to the person equal to an amount such
that after payment by the person of all taxes (including any interest or penalties imposed with
respect to such taxes), including any excise tax, imposed upon the additional payment, the person
would retain an amount of the additional payment equal to the excise tax imposed upon the total
payments.
Immediately following a change in control, the Company is required to establish a trust and
fund the trust with the amount of any payments which may become owing to persons entitled to
receive benefits under the plan but only to the extent that the funding of the trust would not
impair the working capital of the Company.
The Change in Control Severance Pay Plan was terminated in April 2009.
99
Table of Contents
Director Compensation
The following table contains information regarding the compensation of our directors for the
fiscal year ending December 31, 2009:
Nonqualified | ||||||||||||||||||||||||||||
Non-equity | Deferred | |||||||||||||||||||||||||||
Stock | Option | Incentive Plan | Compensation | All other | ||||||||||||||||||||||||
Fees Earned or | Awards | Awards | Compensation | Earnings | Compensation on | Total | ||||||||||||||||||||||
Name | Paid in Cash ($) | ($)(1) | ($) | ($) | ($) | ($) | ($) | |||||||||||||||||||||
William M. Thompson, III, MD |
$ | 1,000 | $ | 24,000 | $ | | $ | | $ | | $ | | $ | 25,000 | ||||||||||||||
Michael Boswell |
$ | 37,500 | $ | 24,000 | $ | | $ | | $ | | $ | | $ | 61,500 | ||||||||||||||
Edward R Arquilla, MD, PhD |
$ | 15,500 | $ | 24,000 | $ | | $ | | $ | | $ | | $ | 39,500 |
(1) | On January 7, 2009, the Company granted 40,000 shares of common stock to each of the Companys three independent directors, subject to stockholder approval. The grant was based on performance through 2008. On August 21, 2009, the Companys stockholders approved the total grant of 120,000 shares of common stock and approximately $72,000 in expense has been recorded based on the stock price at August 21, 2009. |
Effective June 1, 2009, in connection with across-the-board comprehensive cost containment
measures, our Board of Directors voted to reduce fees paid to independent directors to $1,500 for
in-person attendance and $500 for telephonic attendance at Board meetings. As Chairman of our
Compensation Committee and of our Audit Committee, Mr. Boswell will receive an additional $10,000
per year and, as Chairman of our Governance Committee, Dr. Thompson will receive an additional
$1,000 per year.
We indemnify our directors and officers to the fullest extent permitted by law so that they
will be free from undue concern about personal liability in connection with their service to us.
This is permitted by our Certificate of Incorporation and our Bylaws.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Equity Compensation Plan Information
The following provides information concerning compensation plans under which equity securities
of the Company were authorized for issuance as of December 31, 2009:
Number of Securities | ||||||||||||
Remaining Available | ||||||||||||
for Future Issuance | ||||||||||||
Number of | Under Equity | |||||||||||
Securities to be | Compensation | |||||||||||
Issued Upon | Weighted-Average | Plans (Excluding | ||||||||||
Exercise of | Exercise Price of | Securities | ||||||||||
Outstanding Options, | Outstanding Options, | Reflected in Column | ||||||||||
Plan Category | Warrants and Rights | Warrants and Rights | (a)) | |||||||||
(a) | (b) | (c) | ||||||||||
Equity Compensation plans approved by security holders |
1,858,001 | 1.92 | 1,206,237 | |||||||||
Equity compensations plans not approved by security holders |
| | | |||||||||
Total |
1,858,001 | 1.92 | 1,206,237 | |||||||||
100
Table of Contents
Stock Ownership of Certain Beneficial Owners and Management
The following table shows the beneficial ownership of our shares of common stock as of April
29, 2010 by (i) each person who is known by us to be the beneficial owner of more than five percent
(5%) of our common stock, (ii) each of our directors and executive officers and (iii) all directors
and executive officers as a group. Except as otherwise indicated, the beneficial owners listed in
the table have sole voting and investment powers of their shares.
Number of | Percentage | |||||||
Name and Address(1) | Shares | Owned | ||||||
Douglas C. MacLellan |
446,000(2) | 1.5 | % | |||||
Akio Ariura |
140,000(3) | * | ||||||
William M. Thompson III, M.D. |
220,000(4) | * | ||||||
408 Town Square Lane |
||||||||
Huntington Beach, CA 92648 |
||||||||
Edward R. Arquilla, M.D., Ph.D |
136,494(5) | * | ||||||
Department of Pathology |
||||||||
University of California Irvine |
||||||||
Irvine, CA 92697 |
||||||||
Minghui Jia |
1,622,672(6) | 5.5 | % | |||||
Room 2502 Shun Hing Square |
||||||||
5002 Shennan Ave LuoHu |
||||||||
Shenzhen China 518008 |
||||||||
Fang Zheng |
1,622,672(7) | 5.5 | % | |||||
Room 2502 Shun Hing Square |
||||||||
5002 Shennan Ave LuoHu |
||||||||
Shenzhen China 518008 |
||||||||
Jade Capital Group |
972,672(8) | 3.2 | % | |||||
Room 2502 Shun Hing Square |
||||||||
5002 Shennan Ave LuoHu |
||||||||
Shenzhen China 518008 |
||||||||
Mike Boswell |
40,000 | * | ||||||
400 Professional Drive |
||||||||
Suite 310 |
||||||||
Gaithersburg, MD 20879 |
||||||||
All Directors and Officers as a
group (6 persons) |
3,255,172(9) | 10.8 | % |
(1) | Unless otherwise indicated, address is 2492 Walnut Avenue, Suite 100, Tustin, California, 92780. | |
(2) | Includes, 446,000 shares of common stock issuable upon the exercise of options at $0.75 per share. | |
(3) | Includes 140,000 shares of common stock issuable on exercise of options at $0.75 per share. | |
(4) | Includes, 180,000 shares of common stock issuable upon the exercise of options at $0.75 per share. | |
(5) | Includes, 80,000 shares of common stock issuable upon the exercise of options at $0.75 per share. |
101
Table of Contents
(6) | Includes 972,672 shares held in the name of Jade Capital Group Limited of which Mr. Jia is a director and principal stockholder and 50,000 shares of common stock issuable upon the exercise of options at $0.75 per share. | |
(7) | Includes 972,672 shares held in the name of Jade Capital Group Limited of which Mr. Zheng is a director and principal stockholder, options to purchase 50,000 shares of common stock issuable upon the exercise of options at $0.75 per share. | |
(8) | Includes 100,000 shares held in escrow held by a third party for the issuance by the SFDA of a permit or the equivalent regulatory approval for the Company to sell and distribute ONKO-SUREtm in the PRC. Amendment No. 3 to the Escrow agreement was executed on March 24 2009 extending the required approval date to March 28, 2010. |
102
Table of Contents
Item 13. Certain Relationships and Related Transactions, and Director Independence
During 2008, the Company advanced approximately $650,000 to KangDa in the form of a note
receivable. One of the shareholders of KangDa is a current key employee of the Company. The note
relates to taxes resulting from the Companys 2006 acquisition of JPI that were the responsibility
of the seller. JJB made the payment on behalf of KangDa. The note bore interest at the rate of 6%
per annum, and provided for the repayment of amounts due in three equal monthly installments,
starting in September 2008, with interest payable in the last installment. The note was guaranteed
by three employee/shareholders and collateralized by 220,000 shares of the Companys common stock
that they own or control, and was repaid in full at December 31, 2008.
Review, Approval and Ratification of Related Party Transactions
Given our small size and limited financial resources, we do not have formal policies and
procedures for the review, approval or ratification of transactions, such as those described above,
with our executive officers, directors and significant shareholders. However, we intend that such
transactions will, on a going-forward basis, be subject to the review, approval or ratification of
our board of directors, or an appropriate committee thereof.
Promoters and Certain Control Persons
None of our management or other control persons were promoters (within the meaning of Rule
405 under the Securities Act), and none of such persons took the initiative in the formation of our
business or received any of our debt or equity securities or any of the proceeds from the sale of
such securities in exchange for the contribution of property or services, during the last five
years.
Non-management members of the Board of Directors conduct at least one regularly scheduled
meeting per year without members of management being present. Mr. Boswell serves as the presiding
director of such meetings. Following an executive session of non-employee directors, the presiding
director may act as a liaison between the non-employee directors and the Chairman, provide the
Chairman with input regarding agenda items for Board and Committee meetings, and coordinate with
the Chairman regarding information to be provided to the non-employee directors in performing their
duties.
Director Independence
Under the Companys corporate governance principles (the Corporate Governance Principles), a
majority of the Board will consist of independent directors. An independent director is a
director who meets the NYSE Amex definition of independence and other applicable independence
standards under SEC guidelines, as determined by the Board. The Corporate Governance and Nominating
Committee conducts an annual review of the independence of the members of the Board and its
Committees and reports its findings to the full Board. Based on the report and recommendation of
the Corporate Governance Committee, the Board has determined that each of the non-employee
directors Dr. Arquilla, Mr. Boswell, and Dr. Thompson satisfies the independence criteria
(including the enhanced criteria with respect to members of the Audit Committee) set forth in the
applicable NYSE Amex listing standards and SEC rules. Each Board Committee consists entirely of
independent, non-employee directors.
For a director to be considered independent, the Board must determine that the director does
not have any direct or indirect material relationships (including vendor, supplier, consulting,
legal, banking, accounting, charitable and family relationships) with Radient, other than as a
director and shareholder. NYSE Amex listing standards also impose certain per se bars to
independence, which are based upon a directors relationships with Radient currently and during the
three years preceding the Boards determination of independence.
The Board considered all relevant facts and circumstances in making its determinations,
including the following:
| No non-employee director receives any direct compensation from Radient other than under the director compensation program described in this proxy statement. | ||
| No immediate family member (within the meaning of the NYSE Amex listing standards) of any non-employee director is an employee of Radient or otherwise receives direct compensation from Radient. | ||
| No non-employee director (or any of their respective immediate family members) is affiliated with or employed in a professional capacity by Radients independent accountants. | ||
| No non-employee director is a member, partner, or principal of any law firm, accounting firm or investment banking firm that receives any consulting, advisory or other fees from Radient. | ||
| No Radient executive officer is on the compensation committee of the board of directors of a company that employs any of our non-employee directors (or any of their respective immediate family members) as an executive officer. |
103
Table of Contents
| No non-employee director (or any of their respective immediate family members) is indebted to Radient, nor is Radient indebted to any non-employee director (or any of their respective immediate family members). | ||
| No non-employee director serves as an executive officer of a charitable or other tax-exempt organization that received contributions from Radient. |
Non-management members of the Board of Directors conduct at leastone regularly-scheduled
meetings per year without members of management being present. Mr. Boswell serves as the presiding
director of such meetings. Following an executive session of non-employee directors, the presiding
director may act as a liaison between the non-employee directors and the Chairman, provide the
Chairman with input regarding agenda items for Board and Committee meetings, and coordinate with
the Chairman regarding information to be provided to the non-employee directors in performing their
duties.
Item 14. Principal Accountant Fees and Services
Aggregate fees for professional services rendered to the Company by KMJ Corbin & Company LLP
for the years ended December 31, 2009 and 2008 were as follows:
Services Provided | 2009 | 2008 | ||||||
Audit Fees |
$ | 297,000 | $ | 430,000 | ||||
Audit Related Fees |
| 41,000 | ||||||
Tax Fees |
| | ||||||
All Other Fees |
| | ||||||
Total |
$ | 297,000 | $ | 471,000 | ||||
Audit Fees. The aggregate fees billed for the years ended December 31, 2009 and 2008 were for
the audits of our financial statements and reviews of our interim financial statements included in
our annual and quarterly reports.
Audit Related Fees. There were no fees billed for the years ended December 31, 2009 and 2008
for the audit or review of our financial statements that are not reported under Audit Fees.
Tax Fees. There were no fees billed for the years ended December 31, 2009 and 2008 for
professional services related to tax compliance, tax advice and tax planning.
All Other Fees. The aggregate fees billed for the years ended December 31, 2009 and 2008 were
for services other than the services described above. These services include attendance and
preparation for shareholder and Audit Committee meetings, consultation on accounting, on internal
control matters and review of and consultation on our registration statements and issuance of
related consents (Forms S-3).
Audit Committee Pre-Approval Policies and Procedures
The Audit Committee has implemented pre-approval policies and procedures related to the
provision of audit and non-audit services. Under these procedures, the Audit Committee pre-approves
both the type of services to be provided by KMJ Corbin & Company LLP and the estimated fees related
to these services.
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) Documents filed as part of this Annual Report on Form 10-K/A:
(1) | The financial statements required to be included in this Annual Report on Form 10-K/A are included in Item 8 of this Report. | |
(2) | All other schedules have been omitted because they are not required. | |
(3) | Exhibits: |
104
Table of Contents
Exhibit | ||
Number | Description: | |
3.1
|
Certificate of Incorporation of Registrant. (Incorporated by reference to the Companys Report on Form 10-KSB for the year ended December 31, 1989.) | |
3.2
|
Bylaws of the Company. (Incorporated by reference to the Companys Report on Form 10-KSB for the year ended December 31, 1991.) | |
3.3
|
Certificate of Amendment of Certificate of Incorporation. (Incorporated by reference to the Companys Report on Form 10-QSB for the period ended September 30, 1998.) | |
3.4
|
Certificate of Amendment of Certificate of Incorporation filed with the Delaware Secretary of State on September 8, 2006. (Incorporated by reference to the Companys definitive Proxy Statement dated July 14, 2006.) | |
3.5
|
Specimen of Common Stock Certificate. (Incorporated by reference to the Companys Report on Form 10-KSB for the year ended December 31, 1999.) | |
3.6
|
Certificate of Designations. (Incorporated by reference to the Companys Report on Form 10-KSB for the year ended December 31, 1999.) | |
9.1
|
Voting Trust Agreement by and between Jeanne Lai and Gary L. Dreher, as Co-Trustees, and Chinese Universal Technologies Co., Ltd. (Incorporated by reference to the Companys Report on Form 8-K dated December 26, 2000.) | |
10.1
|
Amendments to License Agreement between the Company and AMDL Canada, Inc., dated September 20, 1989, June 16, 1990 and July 5, 1990. (Incorporated by reference to the Companys Report on Form 10-KSB for the year ended December 31, 1990.) | |
10.2
|
The Companys 1992 Stock Option Plan. (Incorporated by reference to the Companys Report on Form 10-KSB for the year ended December 31, 1991.) | |
10.3
|
Operating Agreement of ICD, L.L.C. (Incorporated by reference to the Companys Report on Form 10-KSB for the year ended December 31, 1993.) | |
10.4
|
Letter Agreement between the Company and BrianaBio-Tech, Inc. and AMDL Canada, Inc., dated February 7, 1995 (Incorporated by reference to the Companys Report on Form 10-KSB for the year ended December 31, 1993.) | |
10.5
|
The Companys Stock Bonus Plan (Incorporated by reference to the Companys Report on Form 10-KSB for the year ended December 31, 1995.) | |
10.6
|
Employment Agreement between the Company and Gary L. Dreher dated January 15, 1998 (Incorporated by reference to the Companys Report on Form 10-KSB for the year ended December 31, 1997.) | |
10.7
|
Salary Continuation Agreement between the Company and That T. Ngo, Ph.D., dated May 21, 1998 (Incorporated by reference to the Companys Report on Form 10-QSB for the period ended June 30, 1998.) | |
10.8
|
Salary Continuation Agreement between the Company and Thomas V. Tilton dated May 21, 1998 (Incorporated by reference to the Companys Report on Form 10-QSB for the period ended June 30, 1998.) | |
10.9
|
Salary Continuation Agreement between the Company and Harry Berk dated May 21, 1998 (Incorporated by reference to the Companys Report on Form 10-QSB for the period ended June 30, 1998.) | |
10.1
|
Salary Continuation Agreement between the Company and Gary L. Dreher dated May 21, 1998 (Incorporated by reference to the Companys Report on Form 10-QSB for the period ended June 30, 1998.) | |
10.11
|
Agreement between the Company and William M. Thompson, M.D., dated May 21, 1998 (Incorporated by reference to the Companys Report on Form 10-QSB for the period ended June 30, 1998.) | |
10.12
|
Amendment No. 1 to Employment Agreement with That T. Ngo, Ph.D., dated July 1, 1998 (Incorporated by reference to the Companys Report on Form 10-QSB for the period ended June 30, 1998.) | |
10.13
|
Agreement Relating to Salary deferral between the Company and Thomas V. Tilton dated July 1, 1998 (Incorporated by reference to the Companys Report on Form 10-QSB for the period ended June 30, 1998.) |
105
Table of Contents
Exhibit | ||
Number | Description: | |
10.14
|
Agreement Relating to Salary deferral between the Company and Harry Berk dated July 1, 1998 (Incorporated by reference to the Companys Report on Form 10-QSB for the period ended June 30, 1998.) | |
10.15
|
Securities Purchase Agreement between the Company and the Purchasers listed on the Purchaser Signature Pages attached thereto, dated February 17, 1999. (Incorporated by reference to the Companys Registration Statement on Form 10-SB dated October 15, 1999.) | |
10.16
|
The Companys 1999 Stock Option Plan (Incorporated by reference to the Companys Registration Statement on Form 10-SB dated October 15, 1999.) | |
10.17
|
Agreement Regarding Cancellation of Indebtedness between the Company and William M. Thompson, III, M.D., dated July 1, 1999 (Incorporated by reference to the Companys Registration Statement on Form 10-SB dated October 15, 1999.) | |
10.18
|
Agreement Regarding Cancellation of Indebtedness between the Company and Harry Berk dated July 1, 1999 (Incorporated by reference to the Companys Registration Statement on Form 10-SB dated October 15, 1999.) | |
10.19
|
Agreement Regarding Cancellation of Indebtedness between the Company and Edward Arquilla, M.D., dated July 1, 1999 (Incorporated by reference to the Companys Registration Statement on Form 10-SB dated October 15, 1999.) | |
10.20
|
Agreement Regarding Cancellation of Indebtedness between the Company and Thomas V. Tilton dated July 1, 1999 (Incorporated by reference to the Companys Registration Statement on Form 10-SB dated October 15, 1999.) | |
10.21
|
Agreement Regarding Cancellation of Indebtedness between the Company and Donald Rounds, dated July 1, 1999 (Incorporated by reference to the Companys Registration Statement on Form 10-SB dated October 15, 1999.) | |
10.22
|
Agreement Regarding Cancellation of Indebtedness between the Company and That T. Ngo, Ph.D., dated July 1, 1999 (Incorporated by reference to the Companys Registration Statement on Form 10-SB dated October 15, 1999.) | |
10.23
|
Agreement Regarding Cancellation of Indebtedness between the Company and Gary L. Dreher dated July 1, 1999 (Incorporated by reference to the Companys Registration Statement on Form 10-SB dated October 15, 1999.) | |
10.24
|
Agreement Regarding Cancellation of Indebtedness between the Company and Douglas C. MacLellan dated July 1, 1999 (Incorporated by reference to the Companys Registration Statement on Form 10-SB dated October 15, 1999.) | |
10.25
|
Employment Agreement of Gary L. Dreher dated November 23, 1999 (Incorporated by reference to the Companys Report on Form 10-KSB for the year ended December 31, 1999.) | |
10.26
|
Consulting Agreement with That T. Ngo dated October 1, 1999 (Incorporated by reference to the Companys Report on Form 10-KSB for the year ended December 31, 1999.) | |
10.27
|
Securities Purchase Agreement between the Company and the Purchasers listed on the Purchaser Signature Pages attached thereto dated February 9, 2000 (Incorporated by reference to the Companys Report on Form 10-KSB for the year ended December 31, 1999.) | |
10.28
|
Securities Purchase Agreement dated as of December 14, 2000 executed December 19, 2000 (Incorporated by reference to the Companys Report on Form 8-K dated December 26, 2000.) | |
10.29
|
Secured Promissory Note dated December 14, 2000, effective December 19, 2000 (Incorporated by reference to the Companys Report on Form 8-K dated December 26, 2000.) | |
10.30
|
Security and Pledge Agreement dated as of December 14, 2000, executed December 19, 2000 (Incorporated by reference to the Companys Report on Form 8-K dated December 26, 2000.) | |
10.31
|
Voting Trust Agreement dated as of December 14, 2000, executed December 19, 2000. (Incorporated by reference to the Companys Report on Form 8-K dated December 26, 2000.) | |
10.32
|
Exclusive Distribution Agreement dated December 14, 2000, effective December 19, 2000. (Incorporated by reference to the Companys Report on Form 8-K dated December 26, 2000.) | |
10.33
|
Technology Transfer Agreement effective July 30, 2001 between the Company and Lung-Ji Chang, Ph.D. (Incorporated by reference from the Companys Report on Form 8-K dated August 31, 2001.) |
106
Table of Contents
Exhibit | ||
Number | Description: | |
10.34
|
Executive Management Change in Control Severance Plan. (Incorporated by reference from the Companys Report on Form 10-KSB for the year ended December 31, 2001.) | |
10.35
|
The Companys 2002 Stock Option Plan. (Incorporated by reference from the Companys Report on Form 10-KSB for the year ended December 31, 2002.) | |
10.36
|
The Companys 2004 Stock Option Plan. (Incorporated by reference from the Companys Report on Form 10-KSB for the year ended December 31, 2004.) | |
10.37
|
Employment Agreement of Gary L. Dreher dated January 31, 2005. (Incorporated by reference from the Companys Form 8-K filed February 1, 2005.) | |
10.38
|
Letter of Intent with Jade Capital Group Ltd. dated November 21, 2005. (Incorporated by reference from the Companys Form 8-K filed November 22, 2005.) | |
10.39
|
Stock Purchase and Sale Agreement between the Company and Jade Capital Group Limited dated May 12, 2006 and First Amendment to Purchase and Sale Agreement dated June 30, 2006. (Incorporated by reference from the Companys definitive Proxy Statement dated July 14, 2006.) | |
10.40
|
2006 Equity Incentive Plan. (Incorporated by reference from the Companys definitive Proxy Statement dated July 14, 2006.) | |
10.41
|
Escrow Agreement between the Company and Jade Capital Group Limited (dated as of the closing on September 28, 2006. (Incorporated by reference from the Companys definitive Proxy Statement dated July 14, 2006.) | |
10.42
|
Opinion of Amaroq Capital, LLC dated May 9, 2006. (Incorporated by reference from the Companys definitive Proxy Statement dated July 14, 2006.) | |
10.43
|
Amendment No. 1 to Escrow Agreement dated August 10, 2007. (Incorporated by reference from the Companys Form 10-K filed March 31, 2008) | |
10.44
|
Amendment No 2 to Escrow Agreement dated March 11, 2007 (Incorporated by reference from the Form 10-K filed April 15, 2009). | |
10.45
|
Employment Agreement of Gary L. Dreher dated March 31, 2008. (Incorporated by reference from the Form 10-K filed March 31, 2008) | |
10.46
|
Change in Control Severance Pay Plan. (Incorporated by reference from the Form 10-K filed March 31, 2008) | |
10.47
|
Product License, Distribution and Manufacturing Agreement with MGI dated March 28, 2008. (Incorporated by reference from the Companys Form 8-K filed April 2, 2008.) | |
10.48
|
2008-2009 Performance Incentive Plan (Incorporated from the Companys Form 8-K filed January 9, 2009) | |
10.49
|
Amendment No. 3 to Escrow Agreement dated March 24, 2008 (Incorporated by reference from the Form 10-K filed April 15, 2009.) | |
10.50
|
Note and Warrant Purchase Agreement dated March 22, 2010 (Incorporated by reference from the Form 8-K filed March 26, 2010.) | |
10.51
|
Form of Note (Incorporated by reference from the Form 8-K filed March 26, 2010.) | |
10.52
|
Form of Warrant (Incorporated by reference from the Form 8-K filed March 26, 2010.) | |
10.53
|
Form of Registration Rights Agreement dated March 22, 2010 (Incorporated by reference from the Form 8-K filed March 26, 2010.) | |
10.54
|
Commercial Lease dated August 30, 2008 for the premises at 2492 Walnut Avenue, Suite 100, Tustin, California 92780 (Incorporated by reference from the Form 10-K/A filed May 3, 2010) | |
10.55
|
Collaboration Agreement with Mayo Validation Support Services dated December 12, 2008 (Incorporated by reference from the Form 10-K/A filed May 3, 2010) | |
10.56
|
Exclusive Distribution Agreement between the Company and Grifols USA, LLC dated September 20, 2009 (Incorporated by reference from the Form 10-K/A filed May 3, 2010) | |
10.57
|
Distribution Agreement between the Company and Tarom Applied Technologies dated September 30, 2009 (Incorporated by reference from the Form 10-K/A filed May 3, 2010) | |
10.58
|
Form of Note and Warrant Purchase Agreement (Incorporated by reference from the Form 8-K filed April 13, 2010.) |
107
Table of Contents
Exhibit | ||
Number | Description: | |
10.59
|
Form of Note (Incorporated by reference from the Form 8-K filed April 13, 2010.) | |
10.60
|
Form of Warrant (Incorporated by reference from the Form 8-K filed April 13, 2010.) | |
10.61
|
Form of Addendum to Note and Warrant Purchase Agreement (Incorporated by reference from the Form 8-K filed April 13, 2010.) | |
10.62
|
Form of Exchange Agreement (Incorporated by reference from the Form 8-K filed March 16, 2010.) | |
10.63
|
Form of Waiver of Default dated February 16, 2010 (Incorporated by reference from the Form 8-K filed March 16, 2010.) | |
21.1
|
Subsidiaries of AMDL, Inc. include Jade Pharmaceutical Inc., a British Virgin Islands corporation, Jiangxi Jiezhong Bio-Chemical Pharmacy Company Limited, a China WFOE, Yangbian Yiqiao Bio-Chemical Pharmacy Company Limited, a China WFOE, and AMDL Diagnostics, Inc, a United States corporation. | |
23.1
|
Consent of KMJ Corbin & Company LLP. (Filed herewith.) | |
24.1
|
Power of Attorney. (Included on signature page.) | |
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.) |
108
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Tustin, State of California on
September 24, 2010.
RADIENT PHARMACEUTICALS CORPORATION |
||||
By: | /s/ Douglas C. MacLellan | |||
Douglas C. MacLellan | ||||
Chief Executive Officer | ||||
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints Douglas C. MacClellan and Akio Ariura, or either of them, as his true and lawful
attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual
Report on Form 10-K and any documents related to this report and filed pursuant to the Securities
Exchange Act of 1934, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in connection therewith as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitute or substitutes may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this registration statement has
been signed by the following persons in the capacities and on the dates indicated.
Signature | Title | Date | ||
/s/ DOUGLAS C. MACLELLAN
|
President, Chief Executive Officer, and Director (Principal Executive Officer) |
September 24, 2010 | ||
/s/ AKIO ARIURA
|
Chief Operating Officer, Chief Financial Officer and secretary (Principal Financial Officer and Principal Accounting Officer) |
September 24, 2010 | ||
Director | Now Deceased | |||
/s/ MICHAEL BOSWELL
|
Director | September 24, 2010 | ||
Director | September , 2010 | |||
/s/ WILLIAM M. THOMPSON III
|
Director | September 24, 2010 | ||
Director | September , 2010 |
109
Table of Contents
EXHIBIT INDEX
Exhibit | ||
Number | Description: | |
3.1
|
Certificate of Incorporation of Registrant. (Incorporated by reference to the Companys Report on Form 10-KSB for the year ended December 31, 1989.) | |
3.2
|
Bylaws of the Company. (Incorporated by reference to the Companys Report on Form 10-KSB for the year ended December 31, 1991.) | |
3.3
|
Certificate of Amendment of Certificate of Incorporation. (Incorporated by reference to the Companys Report on Form 10-QSB for the period ended September 30, 1998.) | |
3.4
|
Certificate of Amendment of Certificate of Incorporation filed with the Delaware Secretary of State on September 8, 2006. (Incorporated by reference to the Companys definitive Proxy Statement dated July 14, 2006.) | |
3.5
|
Specimen of Common Stock Certificate. (Incorporated by reference to the Companys Report on Form 10-KSB for the year ended December 31, 1999.) | |
3.6
|
Certificate of Designations. (Incorporated by reference to the Companys Report on Form 10-KSB for the year ended December 31, 1999.) | |
9.1
|
Voting Trust Agreement by and between Jeanne Lai and Gary L. Dreher, as Co-Trustees, and Chinese Universal Technologies Co., Ltd. (Incorporated by reference to the Companys Report on Form 8-K dated December 26, 2000.) | |
10.1
|
Amendments to License Agreement between the Company and AMDL Canada, Inc., dated September 20, 1989, June 16, 1990 and July 5, 1990. (Incorporated by reference to the Companys Report on Form 10-KSB for the year ended December 31, 1990.) | |
10.2
|
The Companys 1992 Stock Option Plan. (Incorporated by reference to the Companys Report on Form 10-KSB for the year ended December 31, 1991.) | |
10.3
|
Operating Agreement of ICD, L.L.C. (Incorporated by reference to the Companys Report on Form 10-KSB for the year ended December 31, 1993.) | |
10.4
|
Letter Agreement between the Company and BrianaBio-Tech, Inc. and AMDL Canada, Inc., dated February 7, 1995 (Incorporated by reference to the Companys Report on Form 10-KSB for the year ended December 31, 1993.) | |
10.5
|
The Companys Stock Bonus Plan (Incorporated by reference to the Companys Report on Form 10-KSB for the year ended December 31, 1995.) | |
10.6
|
Employment Agreement between the Company and Gary L. Dreher dated January 15, 1998 (Incorporated by reference to the Companys Report on Form 10-KSB for the year ended December 31, 1997.) | |
10.7
|
Salary Continuation Agreement between the Company and That T. Ngo, Ph.D., dated May 21, 1998 (Incorporated by reference to the Companys Report on Form 10-QSB for the period ended June 30, 1998.) | |
10.8
|
Salary Continuation Agreement between the Company and Thomas V. Tilton dated May 21, 1998 (Incorporated by reference to the Companys Report on Form 10-QSB for the period ended June 30, 1998.) | |
10.9
|
Salary Continuation Agreement between the Company and Harry Berk dated May 21, 1998 (Incorporated by reference to the Companys Report on Form 10-QSB for the period ended June 30, 1998.) | |
10.1
|
Salary Continuation Agreement between the Company and Gary L. Dreher dated May 21, 1998 (Incorporated by reference to the Companys Report on Form 10-QSB for the period ended June 30, 1998.) | |
10.11
|
Agreement between the Company and William M. Thompson, M.D., dated May 21, 1998 (Incorporated by reference to the Companys Report on Form 10-QSB for the period ended June 30, 1998.) | |
10.12
|
Amendment No. 1 to Employment Agreement with That T. Ngo, Ph.D., dated July 1, 1998 (Incorporated by reference to the Companys Report on Form 10-QSB for the period ended June 30, 1998.) | |
10.13
|
Agreement Relating to Salary deferral between the Company and Thomas V. Tilton dated July 1, 1998 (Incorporated by reference to the Companys Report on Form 10-QSB for the period ended June 30, 1998.) |
110
Table of Contents
Exhibit | ||
Number | Description: | |
10.14
|
Agreement Relating to Salary deferral between the Company and Harry Berk dated July 1, 1998 (Incorporated by reference to the Companys Report on Form 10-QSB for the period ended June 30, 1998.) | |
10.15
|
Securities Purchase Agreement between the Company and the Purchasers listed on the Purchaser Signature Pages attached thereto, dated February 17, 1999. (Incorporated by reference to the Companys Registration Statement on Form 10-SB dated October 15, 1999.) | |
10.16
|
The Companys 1999 Stock Option Plan (Incorporated by reference to the Companys Registration Statement on Form 10-SB dated October 15, 1999.) | |
10.17
|
Agreement Regarding Cancellation of Indebtedness between the Company and William M. Thompson, III, M.D., dated July 1, 1999 (Incorporated by reference to the Companys Registration Statement on Form 10-SB dated October 15, 1999.) | |
10.18
|
Agreement Regarding Cancellation of Indebtedness between the Company and Harry Berk dated July 1, 1999 (Incorporated by reference to the Companys Registration Statement on Form 10-SB dated October 15, 1999.) | |
10.19
|
Agreement Regarding Cancellation of Indebtedness between the Company and Edward Arquilla, M.D., dated July 1, 1999 (Incorporated by reference to the Companys Registration Statement on Form 10-SB dated October 15, 1999.) | |
10.20
|
Agreement Regarding Cancellation of Indebtedness between the Company and Thomas V. Tilton dated July 1, 1999 (Incorporated by reference to the Companys Registration Statement on Form 10-SB dated October 15, 1999.) | |
10.21
|
Agreement Regarding Cancellation of Indebtedness between the Company and Donald Rounds, dated July 1, 1999 (Incorporated by reference to the Companys Registration Statement on Form 10-SB dated October 15, 1999.) | |
10.22
|
Agreement Regarding Cancellation of Indebtedness between the Company and That T. Ngo, Ph.D., dated July 1, 1999 (Incorporated by reference to the Companys Registration Statement on Form 10-SB dated October 15, 1999.) | |
10.23
|
Agreement Regarding Cancellation of Indebtedness between the Company and Gary L. Dreher dated July 1, 1999 (Incorporated by reference to the Companys Registration Statement on Form 10-SB dated October 15, 1999.) | |
10.24
|
Agreement Regarding Cancellation of Indebtedness between the Company and Douglas C. MacLellan dated July 1, 1999 (Incorporated by reference to the Companys Registration Statement on Form 10-SB dated October 15, 1999.) | |
10.25
|
Employment Agreement of Gary L. Dreher dated November 23, 1999 (Incorporated by reference to the Companys Report on Form 10-KSB for the year ended December 31, 1999.) | |
10.26
|
Consulting Agreement with That T. Ngo dated October 1, 1999 (Incorporated by reference to the Companys Report on Form 10-KSB for the year ended December 31, 1999.) | |
10.27
|
Securities Purchase Agreement between the Company and the Purchasers listed on the Purchaser Signature Pages attached thereto dated February 9, 2000 (Incorporated by reference to the Companys Report on Form 10-KSB for the year ended December 31, 1999.) | |
10.28
|
Securities Purchase Agreement dated as of December 14, 2000 executed December 19, 2000 (Incorporated by reference to the Companys Report on Form 8-K dated December 26, 2000.) | |
10.29
|
Secured Promissory Note dated December 14, 2000, effective December 19, 2000 (Incorporated by reference to the Companys Report on Form 8-K dated December 26, 2000.) | |
10.30
|
Security and Pledge Agreement dated as of December 14, 2000, executed December 19, 2000 (Incorporated by reference to the Companys Report on Form 8-K dated December 26, 2000.) | |
10.31
|
Voting Trust Agreement dated as of December 14, 2000, executed December 19, 2000. (Incorporated by reference to the Companys Report on Form 8-K dated December 26, 2000.) | |
10.32
|
Exclusive Distribution Agreement dated December 14, 2000, effective December 19, 2000. (Incorporated by reference to the Companys Report on Form 8-K dated December 26, 2000.) | |
10.33
|
Technology Transfer Agreement effective July 30, 2001 between the Company and Lung-Ji Chang, Ph.D. (Incorporated by reference from the Companys Report on Form 8-K dated August 31, 2001.) |
111
Table of Contents
Exhibit | ||
Number | Description: | |
10.34
|
Executive Management Change in Control Severance Plan. (Incorporated by reference from the Companys Report on Form 10-KSB for the year ended December 31, 2001.) | |
10.35
|
The Companys 2002 Stock Option Plan. (Incorporated by reference from the Companys Report on Form 10-KSB for the year ended December 31, 2002.) | |
10.36
|
The Companys 2004 Stock Option Plan. (Incorporated by reference from the Companys Report on Form 10-KSB for the year ended December 31, 2004.) | |
10.37
|
Employment Agreement of Gary L. Dreher dated January 31, 2005. (Incorporated by reference from the Companys Form 8-K filed February 1, 2005.) | |
10.38
|
Letter of Intent with Jade Capital Group Ltd. dated November 21, 2005. (Incorporated by reference from the Companys Form 8-K filed November 22, 2005.) | |
10.39
|
Stock Purchase and Sale Agreement between the Company and Jade Capital Group Limited dated May 12, 2006 and First Amendment to Purchase and Sale Agreement dated June 30, 2006. (Incorporated by reference from the Companys definitive Proxy Statement dated July 14, 2006.) | |
10.40
|
2006 Equity Incentive Plan. (Incorporated by reference from the Companys definitive Proxy Statement dated July 14, 2006.) | |
10.41
|
Escrow Agreement between the Company and Jade Capital Group Limited (dated as of the closing on September 28, 2006. (Incorporated by reference from the Companys definitive Proxy Statement dated July 14, 2006.) | |
10.42
|
Opinion of Amaroq Capital, LLC dated May 9, 2006. (Incorporated by reference from the Companys definitive Proxy Statement dated July 14, 2006.) | |
10.43
|
Amendment No. 1 to Escrow Agreement dated August 10, 2007. (Incorporated by reference from the Companys Form 10-K filed March 31, 2008) | |
10.44
|
Amendment No 2 to Escrow Agreement dated March 11, 2007 (Incorporated by reference from the Form 10-K filed April 15, 2009). | |
10.45
|
Employment Agreement of Gary L. Dreher dated March 31, 2008. (Incorporated by reference from the Form 10-K filed March 31, 2008) | |
10.46
|
Change in Control Severance Pay Plan. (Incorporated by reference from the Form 10-K filed March 31, 2008) | |
10.47
|
Product License, Distribution and Manufacturing Agreement with MGI dated March 28, 2008. (Incorporated by reference from the Companys Form 8-K filed April 2, 2008.) | |
10.48
|
2008-2009 Performance Incentive Plan (Incorporated from the Companys Form 8-K filed January 9, 2009) | |
10.49
|
Amendment No. 3 to Escrow Agreement dated March 24, 2008 (Incorporated by reference from the Form 10-K filed April 15, 2009.) | |
10.50
|
Note and Warrant Purchase Agreement dated March 22, 2010 (Incorporated by reference from the Form 8-K filed March 26, 2010.) | |
10.51
|
Form of Note (Incorporated by reference from the Form 8-K filed March 26, 2010.) | |
10.52
|
Form of Warrant (Incorporated by reference from the Form 8-K filed March 26, 2010.) | |
10.53
|
Form of Registration Rights Agreement dated March 22, 2010 (Incorporated by reference from the Form 8-K filed March 26, 2010.) | |
10.54
|
Commercial Lease dated August 30, 2008 for the premises at 2492 Walnut Avenue, Suite 100, Tustin, California 92780 (Incorporated by reference from the Form 10-K/A filed May 3, 2010) | |
10.55
|
Collaboration Agreement with Mayo Validation Support Services dated December 12, 2008 (Incorporated by reference from the Form 10-K/A filed May 3, 2010) | |
10.56
|
Exclusive Distribution Agreement between the Company and Grifols USA, LLC dated September 20, 2009 (Incorporated by reference from the Form 10-K/A filed May 3, 2010) | |
10.57
|
Distribution Agreement between the Company and Tarom Applied Technologies dated September 30, 2009 (Incorporated by reference from the Form 10-K/A filed May 3, 2010) | |
10.58
|
Form of Note and Warrant Purchase Agreement (Incorporated by reference from the Form 8-K filed April 13, 2010.) |
112
Table of Contents
Exhibit | ||
Number | Description: | |
10.59
|
Form of Note (Incorporated by reference from the Form 8-K filed April 13, 2010.) | |
10.60
|
Form of Warrant (Incorporated by reference from the Form 8-K filed April 13, 2010.) | |
10.61
|
Form of Addendum to Note and Warrant Purchase Agreement (Incorporated by reference from the Form 8-K filed April 13, 2010.) | |
10.62
|
Form of Exchange Agreement (Incorporated by reference from the Form 8-K filed March 16, 2010.) | |
10.63
|
Form of Waiver of Default dated February 16, 2010 (Incorporated by reference from the Form 8-K filed March 16, 2010.) | |
21.1
|
Subsidiaries of AMDL, Inc. include Jade Pharmaceutical Inc., a British Virgin Islands corporation, Jiangxi Jiezhong Bio-Chemical Pharmacy Company Limited, a China WFOE, Yangbian Yiqiao Bio-Chemical Pharmacy Company Limited, a China WFOE, and AMDL Diagnostics, Inc, a United States corporation. | |
23.1
|
Consent of KMJ Corbin & Company LLP. (Filed herewith.) | |
24.1
|
Power of Attorney. (Included on signature page.) | |
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.) |
113