Attached files

file filename
EX-31 - EXHIBIT 31.1 - POLYMEDIX, INCexhibit311093010.htm
EX-32 - EXHIBIT 32 - POLYMEDIX, INCexhibit321093010.htm
EX-31 - EXHIBIT 31.2 - POLYMEDIX, INCexhibit312093010.htm

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

 þ

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

 

 

For the Quarterly Period Ended September 30, 2010

 

 

 

 

 

Or

 

 

 

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

 

 

For the Transition Period from                         to                         

 

 

 

 

 

COMMISSION FILE NUMBER: 000-51895

POLYMEDIX, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

DELAWARE

 

27-0125925

(State or Other Jurisdiction of
Incorporation or Organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

170 N. Radnor-Chester Road; Suite 300

Radnor, PA  19087

(Address of Principal Executive Offices)

 

 

 

(484) 598-2400

(Registrant’s Telephone Number, Including Area Code)

 

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. þ Yes o No

 

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes o No

 

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 x

                                                                             (Do not check if a smaller reporting company)

 

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

 

As of November 9, 2010 the issuer had 80,999,610 shares of issued and outstanding common stock, par value $0.001 per share.

 

 

 


 

 

POLYMEDIX, INC.

 

INDEX

 

 

PART I - FINANCIAL INFORMATION

 

Item 1.  Financial Statements (unaudited)

Page

 

 

CONDENSED CONSOLIDATED BALANCE SHEETS – as of September 30, 2010 and December 31, 2009

2

 

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS – for the Three-and Nine-Months Ended September 30, 2010 and 2009 and for the Period from August 8, 2002 (Inception) to September 30, 2010

3

 

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS – for the Nine-Months Ended September 30, 2010 and 2009 and for the Period from August 8, 2002 (Inception) to September 30, 2010

4

 

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

5

 

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

10

 

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

14

 

 

Item 4.  Controls and Procedures

14

 

 

PART II - OTHER INFORMATION

 

 

 

 

 

 

 

 

 

1


 

 

PART I - FINANCIAL INFORMATION

 

Item 1.  Financial Statements.

PolyMedix, Inc.

(A Development Stage Company)

Condensed Consolidated Balance Sheets

(unaudited) (in thousands)

 

September 30,

December 31,

2010

2009

ASSETS

 

 

 

 

 

Current Assets:

Cash and cash equivalents

 

 

 $                        20,898

 

 $                        23,974

Short-term investments

                             1,900

                                     -

Prepaid expenses and other current assets

 

 

                                114

 

                                258

Grant and contract receivable

                                504

                                778

Total current assets

 

 

                         23,416

 

                         25,010

Property and Equipment:

Computers

 

 

                                617

 

                                214

Office furniture and lab equipment

                                734

                                725

Accumulated depreciation

 

 

                              (635)

 

                              (557)

Total property and equipment

                               716

                               382

 

 

Long-term investments

 

 

                             1,650

 

                                     -

Long-term assets - other

                                  93

                                     -

 

 

 

 

 

 

TOTAL ASSETS

 $                      25,875

 $                      25,392

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:

 

 

 

 

 

Accounts payable

 $                          1,714

 $                             892

Accrued expenses

 

 

                             1,325

 

                             1,254

Current portion of long-term debt

                             2,548

                                     -

Total current liabilities

 

 

                            5,587

 

                            2,146

Long-term debt, less current portion

                             7,087

                                     -

Deferred rent

 

 

                                938

 

                                927

Total liabilities

                         13,612

                            3,073

 

 

 

 

 

 

Commitments and contingencies

                                     -

                                     -

 

 

 

 

 

 

Stockholders' Equity:

Preferred Stock ($0.001 par value; 10,000 shares authorized; 0 issued and outstanding at September 30, 2010 and December 31, 2009)

 

 

                                     -

 

                                     -

Common Stock ($0.001 par value; 250,000 shares authorized; 81,000 issued and outstanding at September 30, 2010 and December 31, 2009)

                                  81

                                  81

Additional paid-in capital

 

 

                           72,775

 

                           70,926

Deficit accumulated during the development stage

                         (60,593)

                         (48,688)

Total stockholders' equity

 

 

                         12,263

 

                         22,319

 

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 $                      25,875

 $                      25,392

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

 

2


 

 

PolyMedix, Inc.

(A Development Stage Company)

Condensed Consolidated Statements of Operations

(unaudited)

(in thousands, except per share amounts)

 

Three-Months Ended September 30,

Nine-Months Ended September 30,

For the period August 8, 2002 (Inception) to September 30,

2010

2009

2010

2009

2010

Revenues:

 

 

 

 

 

 

 

 

 

 

Grant and contract revenues

 $                     484

 $                     447

 $                1,512

 $                   591

 $                  6,073

Total revenues

 

                       484

 

                       447

 

                  1,512

 

                     591

 

                    6,073

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

Research and development

                     2,775

                     2,267

                   8,764

                   5,507

                   40,729

General and administrative

 

                     1,352

 

                     1,463

 

                   4,034

 

                   4,240

 

                   26,865

Total operating expenses

                    4,127

                   3,730

                12,798

                  9,747

                  67,594

 

 

 

 

 

 

 

 

 

 

 

Other Income and Expenses:

Interest income

 

                          35

 

                            6

 

                        73

 

                        47

 

                     1,668

Interest expense

                       (346)

                          (1)

                     (692)

                         (4)

                       (740)

Total other income / (expenses)

 

                      (311)

 

                           5

 

                    (619)

 

                        43

 

                       928

 

 

 

 

 

Net loss

 

 $               (3,954)

 

 $              (3,278)

 

 $           (11,905)

 

 $             (9,113)

 

 $             (60,593)

Beneficial conversion feature on Series 2008 preferred stock, conversion inducement and dividends on Series 1 preferred stock

 

                             -

 

                            -

 

                           -

 

                           -

 

                  (11,118)

Net loss attributable to common stockholders

 $               (3,954)

 $              (3,278)

 $           (11,905)

 $             (9,113)

 $             (71,711)

 

 

 

 

 

 

 

 

 

 

 

Net loss per common share - basic and diluted

 $                 (0.05)

 $                 (0.05)

 $               (0.15)

 $               (0.15)

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - basic and diluted

                  81,000

                 59,845

                81,000

                59,845

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3


 

 

PolyMedix, Inc.

(A Development Stage Company)

Condensed Consolidated Statements of Cash Flows

(unaudited) (in thousands)

Nine-Months Ended September 30,

For the period August 8, 2002 (Inception) to

2010

2009

September 30, 2010

Cash Flows from Operating Activities:

 

 

 

 

 

 

Net loss

 $                  (11,905)

 $                    (9,113)

 $                          (60,593)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

Depreciation

                            139

                            155

                                   867

Amortization

 

                              23

 

                                -

 

                                     23

Accretion of discount on investment securities

                              (2)

                            (16)

                                  (461)

Stock-based compensation

 

                         1,453

 

                         1,414

 

                                9,083

Non-cash interest expense

                              60

                                -

                                     60

(Increase) decrease in prepaid expenses and other current assets

 

                            464

 

                          (111)

 

                                  (572)

Increase in accounts payable, accrued expenses and deferred rent

                            555

                            307

                                3,540

Loss on disposal of fixed assets

 

                                -

 

                                -

 

                                     23

Net cash used in operating activities

                      (9,213)

                      (7,364)

                           (48,030)

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

Cash paid for property and equipment

 

                            (48)

 

                            (15)

 

                                  (837)

Purchases of investments

                       (5,448)

                       (3,798)

                             (39,489)

Proceeds from maturities of investments

 

                         1,900

 

                         9,800

 

                              36,401

Net cash provided by (used in) investing activities

                      (3,596)

                       5,987

                             (3,925)

 

 

 

 

 

 

 

Cash Flows from Financing Activities:

Proceeds from issuance of stock, net of financing costs

 

                          (106)

 

                          (114)

 

                              62,447

Proceeds from warrant and stock option exercises

                                -

                                -

                                   898

Principal payments on capital lease obligations

 

                                -

 

                            (93)

 

                                  (331)

Proceeds from issuance of debt, net of issue costs

                         9,839

                                -

                                9,839

Net cash provided by (used in) financing activities

                       9,733

                         (207)

                             72,853

 

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

                      (3,076)

                      (1,584)

                             20,898

 

 

 

 

 

 

 

Cash and cash equivalents - beginning of period

                       23,974

                         7,206

                                        -

 

 

 

 

 

 

 

Cash and cash equivalents - end of period

 $                  20,898

 $                    5,622

 $                         20,898

 

 

 

 

 

 

 

Cash Paid for Interest

 $                         528

                                -

 $                                528

 

 

 

 

 

 

 

Non-Cash Investing Activities:

Capital expenditures acquired on account

 

 $                         440

 

 $                             -

 

 $                                440

Non-Cash Financing Activities:

 

 

 

 

 

 

Conversion inducement and dividends on Series 1 Preferred Stock and Beneficial conversion feature on Series 2008 Preferred Stock

 $                             -

 $                             -

 $                           11,118

Warrants issued to placement agent

 

 $                             -

 

 $                             -

 

 $                             3,059

Accrued financing costs

 $                             -

 $                         178

 $                                     -

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

 

 

4


 

 

PolyMedix, Inc.

(A Development Stage Company)

Notes to Unaudited Condensed Consolidated Financial Statements

 

In these condensed consolidated financial statements, “PolyMedix,” “we,” “us” and “our” refer to PolyMedix, Inc. and its wholly owned subsidiary PolyMedix Pharmaceuticals, Inc., and "Common Stock" refers to the common stock, par value $0.001 per share of PolyMedix, Inc. 

 

1 – Organization and Business Activities

 

We are a development stage biotechnology company focused on developing treatments for life threatening infectious diseases and acute cardiovascular disorders with synthetic small molecule compounds that mimic the activity of large natural protein molecules, compounds referred to as biomimetics. Using our proprietary computational drug design technology, we have created novel defensin mimetic antibiotic compounds, novel heparin antagonist compounds, and other drug compounds intended for human therapeutic use. Since 2002, we have been a development stage enterprise, and accordingly, our operations have been directed primarily toward developing business strategies, raising capital, research and development activities, conducting pre-clinical testing and human clinical trials of our product candidates, exploring marketing channels and recruiting personnel.

 

We have incurred operating losses since inception, have not generated any product sales revenues and have not achieved profitable operations. Our deficit accumulated during the development stage through September 30, 2010 was $60,593,000, and we expect to continue to incur substantial losses in future periods.   None of our product candidates have received regulatory approval for commercial sale and our product candidates may never be commercialized.  In addition, all of our product candidates are in the early stages of development and several programs are on hold pending additional financing.  Our development programs require a significant amount of cash to support the development of product candidates.  The progress and results of our current and any future clinical trials or future pre‑clinical testing are uncertain, and if our product candidates do not receive regulatory approvals, our business, operating results, financial condition and cash flows will be materially adversely affected.

 

We are highly dependent on the success of our research, development and licensing efforts and, ultimately, upon regulatory approval and market acceptance of our products under development. Our short and long-term capital requirements depend upon a variety of factors, including the timing and results of our clinical trials, market acceptance for our technologies and product candidates and various other factors. We believe that our current cash and investment balances as of the date of this filing will be sufficient to fund our operations for at least the next 12 monthsOur ability to advance the clinical development of our drug candidates and ultimately seek regulatory approval depends upon our ability to meet the regulatory requirements of the United States Food and Drug Administration (FDA) and other regulatory authorities on an ongoing basis, many of which develop and change over time and are subject to interpretation by such regulatory authorities.  Any changes in regulatory requirements may have significant impacts on the timing and cost of clinical trials, and our ability to complete such trials, if at all.

 

In March 2010, we closed a debt financing for gross proceeds of $10,000,000, and in November 2009, we closed an equity financing for gross proceeds of $20,700,000.  Proceeds from these financing activities are being used to fund our ongoing clinical development of PMX-30063 and PMX-60056 and for general corporate purposes.  We may seek additional funds through equity or debt financing, among other sources, or through government grants and contracts. However, we may not be able to obtain additional funding on favorable terms, if at all. If we are unable to secure adequate additional funding in the future, we may delay, scale-back or eliminate certain of our planned research, drug discovery and development activities and certain other aspects of our operations and our business until such time as we are successful in securing adequate additional funding. As a result, our business, operating results, financial condition and cash flows may be materially and adversely affected. 

 

 

 

 

5


 

 

Interim Financial Information

 

The condensed consolidated financial statements include the accounts of PolyMedix, Inc. and its wholly-owned subsidiary, PolyMedix Pharmaceuticals, Inc.  All intercompany accounts and transactions have been eliminated in consolidation.  The information as of September 30, 2010, and for the periods ended September 30, 2010 and 2009, and the period from August 8, 2002 (Inception) to September 30, 2010 is unaudited, but includes all adjustments (consisting only of normal recurring adjustments) which, in our opinion, are necessary to state fairly the financial information set forth in accordance with accounting principles generally accepted in the United States of America. The interim results are not necessarily indicative of the results to be expected for the full fiscal year. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2009 included in our annual report on Form 10-K filed with the U.S. Securities and Exchange Commission on March 12, 2010.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Significant estimates include the value of our common stock, stock options, warrants, and debt.

 

Reclassification

 

Certain prior year amounts have been reclassified to conform to current year presentation.  Specifically, interest income and expense have been disclosed separately on our condensed consolidated statement of operations.

 

2 – Recent Accounting Pronouncements

 

In January 2010, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) relating to fair value disclosures, to add new requirements for disclosures about transfers into and out of Levels 1 and 2, and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. It also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value.  The guidance in this ASU is effective for the first reporting period (including interim periods) beginning after December 15, 2009, except for the requirement to provide the Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which will be effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.  The adoption of this guidance as it relates to Levels 1 and 2 investments did not have a material impact on our condensed consolidated financial statements.  We do not expect the adoption of this guidance as it relates to Level 3 investments to have a material impact on our condensed consolidated financial statements.

 

In February 2010, the FASB issued an ASU which amends existing guidance regarding an entity’s requirement to perform and disclose subsequent events procedures.  The amendments add definitions for “SEC filer” and “revised financial statements,” and remove the requirement for SEC filers to disclose the date through which subsequent events have been evaluated, and clarify that an SEC filer is to evaluate subsequent events through the date the financial statements are issued.  The guidance in this ASU was effective immediately.  The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.

 

3 – Comprehensive Loss

Comprehensive loss consists of reported net loss and unrealized gains or losses on available for sale securities. The comprehensive loss for each of the periods presented approximates the net loss in the condensed consolidated statements of operations.

 

 

 

 

6


 

 

4 – Fair Value Measurements

 

The FASB has established a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on management’s own assumptions used to measure assets and liabilities at fair value.  Classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. 

As of December 31, 2009, we did not have any assets or liabilities measured at fair value which were in the scope of this guidance.  As of September 30, 2010, we did not have any financial or nonfinancial instruments carried at fair value measured on a nonrecurring basis.  The following table provides financial and nonfinancial assets and liabilities carried at fair value measured on a recurring basis as of September 30, 2010 (in thousands):

 

 

 

Fair Value Measurements at September 30, 2010

 


September 30, 2010

Quoted prices in
active markets
(Level 1)

Significant other
observable
inputs
(Level 2)

Significant
unobservable
inputs
(Level 3)

Short-term investments

 $          1,900

$              1,900

$                 -

$            -

 

 

 

 

 

 

 

 

 

 

Our short-term investments consist of investment grade fixed income government securities with original maturities of greater than three months.  They are measured at fair value using prices quoted on active markets, and accordingly are classified within Level 1 of the valuation hierarchy.  See Note 5 for additional information.

 

5 –Investments

               

Short-term investments

 

Short-term investments consist of investment grade fixed income government securities with original maturities of greater than three months and less than one year. All short-term investments are classified as “available for sale.”

We did not hold any short-term investments as of December 31, 2009.  The following summarizes the short-term investments as of September 30, 2010, which were invested solely in U.S. government obligations (in thousands):

 

 

Amortized Cost

Gross Unrealized Gains

Gross Unrealized Losses

Fair Value

September 30, 2010

$        1,900

$                  -

$              -            

$       1,900

 

Long-term investments

 

Long-term investments consist of investments with maturities greater than one year.  All long-term investments represent certificates of deposit, and are classified as “held to maturity” and are recorded at cost.

 

6 –Debt

 

On March 31, 2010, we entered into a Loan and Security Agreement (LSA) with Hercules Technology II, L.P. (HTGC) whereby we borrowed $10,000,000.  This loan bears an interest rate at the greater of 12.35%, or the Federal Reserve Prime Rate plus 7.10%, not to exceed 14%, and has a term of 42 months with interest-only payments for the first nine months.  In connection with this loan, we also issued to HTGC a detachable warrant to purchase 627,586 shares of our common stock which expires on March 30, 2015 (see Note 8 for additional information on the warrant).  The following table summarizes our debt included in our unaudited condensed consolidated balance sheet as of September 30, 2010 (in thousands):

7


 

 

 

Principal

Unamortized Discount

Current portion

$         2,670

  $             122

Long-term portion

           7,330

                 243

Total

$      10,000

$              365

 

We allocated the $10,000,000 of proceeds received to both the debt and the detachable warrant based on the relative fair value of the debt instrument without the warrant and the warrant itself.  The relative fair value at the time of issuance was $9,574,000 and $426,000 for the debt and warrant, respectively.  The carrying value of the Company's long-term debt approximates fair value because the interest rate approximates current market rates available to the company.  The portion allocated to the warrant was recorded in additional paid-in capital, and will be amortized to interest expense as a discount to the principal balance of the debt.  As of September 30, 2010, we had not repaid any portion of the principal balance and had accrued interest of $103,000.  There are no financial covenants associated with this debt.  As of September 30, 2010, we were in compliance with all nonfinancial covenants.

 

We incurred $161,000 in debt issue costs in connection with securing the LSA, which we have recorded as an asset to be amortized over the life of the loan.

 

7 – Stock-Based Compensation

 

We maintain equity compensation plans under which grants of incentive stock options, nonqualified stock options, stock appreciation rights, stock awards, stock units and other stock-based awards are granted to employees, non-employee directors and key advisors.  We have also granted certain awards outside of such equity compensation plans.  Since our inception on August 8, 2002, we have recognized equity compensation expense over the requisite service period using the Black-Scholes-Merton formula to estimate the fair value of stock options.  The following table summarizes the total stock-based compensation expense included in our unaudited condensed consolidated statements of operations (in thousands):

                               

 

 

Three-Months Ended

September 30,

Nine-Months Ended

September 30,

Period from

August 8, 2002 (Inception) to

 

2010

2009

2010

2009

September 30, 2010

Research and Development

$          254

$             180

$           704

$           522

$          3,209

General and administrative

263

 298

749

892

       5,874

Total stock-based compensation expense

 $          517

 $           478

 $        1,453

 $       1,414

$          9,083

 

 

During the nine-months ended September 30, 2010, stock options to purchase 4,513,000 shares of common stock were awarded to employees, nonemployee directors, and consultants at a combined grant date fair value of $2,747,000.  There have been no significant changes to the assumptions used to calculate fair value from those which were disclosed in our Annual Report on Form 10-K for the year ended December 31, 2009. As of September 30, 2010, there were 15,142,000 shares of common stock issuable upon exercise of outstanding stock options and 11,452,000 shares of common stock available for issuance of future equity compensation awards in connection with our equity compensation plans.  As of September 30, 2010, there was $3,354,000 of total unrecognized compensation cost related to non-vested stock options, which will be amortized over the weighted average remaining service period of approximately one year. 

 

8


 

 

8 – Stockholders’ Equity

Common Stock

 

We are authorized to issue 250,000,000 shares of common stock, with a par value of $0.001, of which 80,999,610 were issued and outstanding at both September 30, 2010 and December 31, 2009.

Preferred Stock

 

We are authorized to issue 10,000,000 shares of preferred stock, with a par value of $0.001, of which no shares were issued and outstanding at September 30, 2010 and December 31, 2009, respectively.

 

Warrants

 

We presently have the following warrants outstanding to purchase shares of our common stock (number of warrants in thousands):

 

 

 

 Warrant Series

Number of Warrants Outstanding

Exercise Price

Expiration Date

2005/2006*

4,372

$1.16

November 2010

2007

2,489

$1.10

December 2012

Series A

22,285

$1.00

July 2013

Series B

6,368

$1.00

September 2013

Series C

6,417

$1.25

November 2014

HTGC

628

$1.16

March 2015

Total

42,559

 

 

* These warrants contain certain weighted average anti-dilution protection if we issue certain securities at a price per share less than $1.16 per share

 

In March 2010, we issued to HTGC a warrant to purchase 627,586 shares of our common stock in connection with the signing of a LSA with HTGC (included in table above). The fair value of this warrant at the time of issuance was $445,000, which was estimated using the Black-Scholes-Merton formula with the following assumptions: no dividends; risk-free interest rate of 2.55%; estimated life of five years and volatility of 72%.  This warrant expires on March 30, 2015.  As discussed in Note 6, this value was used to determine the relative fair value of the warrants of $426,000, which was recorded to additional paid-in capital.  There have been no significant changes to the assumptions used to calculate fair value from those which were disclosed in our Annual Report on Form 10-K for the year ended December 31, 2009.

 

Equity Line

 

We presently have an Investment Agreement (“Investment Agreement”) with Dutchess Opportunity Fund, II, L.P. (formerly known as Dutchess Equity Fund, L.P.) (“Dutchess”), pursuant to which Dutchess committed to purchase up to $10,000,000 (but not to exceed 12,000,000 shares) of the Company’s common stock, subject to the terms and conditions of the Investment Agreement.  As of September 30, 2010, we have not issued any shares pursuant to this Investment Agreement.  This Investment Agreement expires in July 2012.

 

 

 

 

 

9


 

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

You should read the following discussion in conjunction with our Annual Report on  Form 10-K filed with the SEC on March 12, 2010, as well as our unaudited condensed consolidated financial statements and risk factors included in this report on Form 10-Q.

 

Special Note Regarding Forward-Looking Statements

 

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are subject to risks and uncertainties. All statements other than statements of historical facts contained in this report, including statements regarding our financial condition, operations, plans, objectives, goals, business strategies, future events, capital expenditures, future results, our competitive strengths, and the trends in our industry are forward-looking statements. The words “believe,” “may,” “could,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” “appear,” “future,” “likely,” “probably,” “suggest,” “goal,” “potential” and similar expressions, as they relate to us, are intended to identify forward-looking statements.

 

Forward-looking statements reflect only our current expectations. In any forward-looking statement, where we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith as of the date of such statement and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will be achieved or accomplished. Our actual results, performance or achievements could differ materially from those expressed in or inferred from the forward-looking statements due to a number of uncertainties, many of which are unforeseen, including:

 

Ø  our need for, and the availability of, substantial capital in the future to fund our operations and planned clinical trials;

Ø  the conditions in the capital markets and the biopharmaceutical industry that make raising capital or entering into strategic arrangements difficult and expensive;

Ø  the timing of our product development and evaluation;

Ø  the timing and magnitude of expenditures we may incur in connection with our ongoing research and development activities;

Ø  the results of our preclinical and clinical trials, including regulatory approvals necessary for advancement and continuation of our development programs;

Ø  the maintenance of our existing licenses with the University of Pennsylvania (Penn) and the University of Massachusetts (UMass);

Ø  the success, timing and financial consequences of our formation of new business relationships and alliances; and

Ø  the timing and volume of sales of products for which we may obtain marketing approval.

In addition, you should refer to the “Risk Factors” section of this report for a discussion of other factors that may cause our actual results to differ materially from those implied by our forward-looking statements. Because of these factors or others, the forward-looking statements in this report may not prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, if at all. Accordingly, you should not place undue reliance on these forward-looking statements. All subsequent written and oral forward looking statements attributable to us or the persons acting on our behalf are expressly qualified in their entirety by the applicable cautionary statements. We undertake no obligation to update any forward looking statements, whether as a result of new information, future events or otherwise, except as may be required by applicable law or regulation.

 

 

10


 

 

General

 

We are a development stage biotechnology company focused on developing treatments for life threatening infectious diseases and acute cardiovascular disorders with synthetic small molecule compounds referred to as biomimetics. Using our proprietary computational drug design technology, we have created novel defensin mimetic antibiotic compounds, heparin antagonist compounds, and other drug compounds intended for human therapeutic use.  Since 2002, we have been a development stage enterprise, and accordingly, our operations have been directed primarily toward developing business strategies, raising capital, research and development activities, conducting pre-clinical testing and human clinical trials of our product candidates, exploring marketing channels and recruiting personnel.

 

We have incurred operating losses since inception, have not generated any product sales revenues and have not achieved profitable operations. Our deficit accumulated during the development stage through September 30, 2010 was $60,593,000, and we expect to continue to incur substantial losses in future periods.   None of our product candidates have received regulatory approval for commercial sale and our product candidates may never be commercialized.  In addition, all of our product candidates are in the early stages of development and several programs are on hold pending additional financing.  The progress and results of our current and any future clinical trials or future pre‑clinical testing are uncertain, and if our product candidates do not receive regulatory approvals, our business, operating results, financial condition and cash flows will be materially adversely affected. Our development programs require a significant amount of cash to support the development of product candidates. 

 

We are highly dependent on the success of our research, development and licensing efforts and, ultimately, upon regulatory approval and market acceptance of our products under development. Our short and long-term capital requirements depend upon a variety of factors, including market acceptance for our technologies and product candidates and various other factors. We believe that our current cash and investment balances as of the date of this filing will be sufficient to fund our operations for at least the next 12 months.

 

In March 2010, we successfully completed a Phase 1B clinical study in Canada with our novel defensin-mimetic antibiotic, PMX-30063. The data from the study suggest that administration of multiple doses of PMX-30063 can be well-tolerated at dose levels which showed bactericidal activity in blood samples drawn from subjects in the study. PMX-30063, a small-molecule mimetic of host defense proteins, has a novel mechanism of action distinct from other antibiotics, which is believed to make bacterial resistance unlikely to develop.  In September 2010, we initiated a Phase 2 trial in Canada for PMX-30063.

 

Our clinical studies to date have been, and in the future will continue to be, conducted in accordance with United States and International Conference on Harmonization (ICH) standards, and we plan to seek regulatory approval for PMX-30063 in both the United States and internationally. 

 

FDA is actively working to revise certain of its guidance and in August 2010 issued draft guidance for clinical trial conduct, evaluation, clinical endpoints, and requirements for regulatory approval for antibiotic product candidates intended for use in acute bacterial infections, including skin and skin structure infections (ABSSSI), which has been the intended first clinical indication for PMX-30063.  Based on the potential impacts of revised final FDA guidance, there may be delays in completing Phase 2 clinical trials in the United States until there is additional clarity with respect to the final revised guidance. In addition, we plan to conduct a Phase 1 clinical trial studying the longer term administration of PMX-30063 before conducting a Phase 2 trial in the United States.  Furthermore, there has not been a new product candidate for heparin reversal considered by the FDA in recent years, and there has never to date been a product candidate for reversal of LMWH considered by the FDA.  As a result, our present plans for clinical development, including the cost and timing for development of our product candidates, may ultimately be substantially different than our present expectations, and there is no way of predicting what impacts on our timelines, cost projections, and clinical trials requirements may result from these changes in policy, requirements, standards, and guidance of the FDA and other regulatory authorities.

 

 

 

11


 

 

In June 2010, we completed a Phase 1B/2 clinical study to evaluate the safety and efficacy of PMX-60056 in reversing the anticoagulant activity of the low molecular weight heparin (LMWH) tinzaparin.   In August 2010, we completed a Phase 1B/2 dose-ranging clinical study evaluating heparin reversal with PMX-60056.  PMX-60056 met the study endpoints regarding both the reversal of varying heparin levels, and allowing re-anticoagulation and re-reversal. We intend to use these data to support the development of a Phase 2 clinical trial in patients undergoing interventional cardiology procedures, which we are planning to initiate late this year or early next year, subject to regulatory approval.

 

In October 2010, we had an end of Phase 1 meeting with the United States Food and Drug Administration (FDA), the primary purpose of which was to seek advice from the FDA on the next steps for the clinical development of PMX-60056. Based on comments received, we plan to study PMX-60056 in a Phase 2 clinical trial in interventional cardiology, such as Percutaneous Coronary Intervention (PCI) patients instead of next conducting a Phase 2 study in Coronary Artery Bypass Grafts (CABG), and anticipate filing a Phase 2 protocol with the FDA in the fourth quarter of 2010. Commencement of this Phase 2 clinical trial will depend on a variety of factors, including clearance of the protocol by the FDA, Institutional Review Board approvals at clinical study sites, and other regulatory processes, which can vary in duration. We are also evaluating the possibilities for other Phase 2 clinical trials, such as reversal of LMWH, as well as a Phase 2 clinical trial in CABG patients in the future.

 

Our ability to advance the clinical development of our drug candidates and ultimately seek regulatory approval depends upon our ability to meet the regulatory requirements of the FDA and other regulatory authorities on an ongoing basis, many of which develop and change over time.  Any changes in regulatory requirements, particularly those of the FDA relating to antibiotic product candidates and, more specifically, those intended for use in ABSSSI, may have significant impacts on the timing and cost of continued clinical trials for PMX-30063, and our ability to complete such trials, if at all.

 

The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of our results of operations for the three- and nine-months ended September 30, 2010 and 2009, and financial condition as of September 30, 2010 and December 31, 2009.

Critical Accounting Policies and Practices

The preparation of our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to adopt critical accounting policies and to make estimates and assumptions that affect the amounts reported in our condensed consolidated financial statements and accompanying notes. These critical accounting policies and estimates have been reviewed by the audit committee of our board of directors. The principal items in our condensed consolidated financial statements reflecting critical accounting policies or requiring significant estimates and judgments are as follows:

Stock-based compensation

Since inception, we have used the Black-Scholes-Merton formula to estimate the fair value of stock options and warrants and have elected to continue to estimate the fair value of stock options and warrants using the Black-Scholes-Merton formula. The volatility and expected term assumptions have the most significant effect on the results obtained from the Black-Scholes-Merton formula. We have to date assumed that stock options and warrants have an expected life of five years, representing about half of their contractual life, and assumed Common Stock volatility of between 41% and 75%. Higher estimates of volatility and expected life of the option increase the value of an option and the resulting expense. Given the absence of an active market for our Common Stock in prior periods, the fair value of our Common Stock has periodically been estimated using several criteria, including progress and milestones achieved in our research activities along with the price per share of our preferred and Common Stock offerings.  

 

 

 

 

12


 

 

Results of Operations

 

Grant and contract revenues were $484,000 and $1,512,000 for the three and nine-month periods ended September 30, 2010, respectively.  This was an increase from $447,000 and $591,000 for the three- and nine-month periods ended September 30, 2009, respectively. The increases were due to several new grants and contracts that commenced during the third quarter of 2009 and continued into the third quarter of 2010. 

 

Research and development expenses were $2,775,000 and $8,764,000 for the three and nine-month periods ended September 30, 2010, respectively.  This was an increase from $2,267,000 and $5,507,000 for the three and nine-month periods ended September 30, 2009, respectively. The increases were due to the additional Phase 1B activities completed in the second quarter of 2010 for PMX-60056, and drug manufacturing and other activities in preparation for Phase 2 clinical trials for PMX-30063 and PMX-60056, as well as increased costs associated with our research grants and contracts.

General and administrative expenses were $1,352,000 and $4,034,000 for the three and nine-month periods ended September 30, 2010, respectively.  General and administrative expenses remained relatively consistent with the same periods a year ago, which were $1,463,000 and $4,240,000 for the three and nine-month periods ended September 30, 2009, respectively.

Interest income was $35,000 and $73,000 for the three and nine-month periods ended September 30, 2010, respectively.  This was an increase from $6,000 and $47,000 for the three and nine-month periods ended September 30, 2009, respectively.  The increase was due to higher average cash and investment balances and higher interest rates in the current year.

Interest expense was $346,000 and $692,000 for the three and nine-month periods ended September 30, 2010, respectively.  This was an increase from $1,000 and $4,000 for the three and nine-month periods ended September 30, 2009, respectively.  The increase was due to interest on our $10,000,000 long-term debt which commenced on March 31, 2010 resulting in significantly higher interest expense than was incurred solely from our capital lease obligations in 2009.

Historical Cash Flows

Operating Activities. Cash used in operating activities was $9,213,000 and $7,364,000 for the nine-month periods ended September 30, 2010 and 2009, respectively.    The increase was driven primarily by an increase in research and development costs to advance our lead product candidates through Phase 1B clinical trials and preparations for Phase 2.

Investing Activities. Cash provided by or used in investing activities primarily represents cash paid for the purchase, and proceeds received from, the maturity of investments.  During the nine-month periods ended September 30, 2010 and 2009, $5,448,000 and $3,798,000 was used to purchase investments, respectively.  During the nine-month periods ended September 30, 2010 and 2009, $1,900,000 and $9,800,000 were received from the maturities of investments, respectively. 

Financing Activities. To date, we have financed our operating and investing activities primarily from the proceeds from the sale of equity securities and issuance of debt. During the nine-month period ended September 30, 2010, we received net proceeds of $9,839,000 from the issuance of debt, and paid $106,000 in financing costs associated with our November 2009 equity financing and the filing of a shelf registration statement in 2010.  During the nine-month period ended September 30, 2009, we paid $114,000 in financing costs associated with our registration of securities under an equity line of credit and in preparation of our November 2009 equity financing, and paid $93,000 in principal associated with our then outstanding capital lease obligations.

Financial Condition, Liquidity and Capital Resources

In March 2010, we closed a debt financing for initial gross proceeds of $10,000,000, and in November 2009, we closed an equity financing for gross proceeds of $20,700,000.  Proceeds from these financing activities are being used to fund our ongoing clinical development of PMX-30063 and PMX-60056 and for general corporate purposes.  We may seek additional funds through equity or debt financing, among other sources, or through government grants and contracts. However, we may not be able to obtain additional funding on favorable terms, if at all. If we are unable to secure adequate additional funding in the future, we may delay, scale-back or eliminate certain of our planned research, drug discovery and development activities and certain other aspects of our operations and our business until such time as we are successful in securing adequate additional funding. As a result, our business may be materially and adversely affected.

13


 

 

As of September 30, 2010 and December 31, 2009, we had cash and investment balances of approximately $24,448,000 and $23,974,000, respectively, and total liabilities of approximately $13,612,000 and $3,073,000, respectively.  The increase in our cash and investment balances from December 31, 2009 to September 30, 2010 was primarily attributable to proceeds received from our March 2010 debt financing, offset by cash used to fund our ongoing operations. The increase in our total liabilities was primarily attributable to our March 2010 debt financing.


We presently have an Investment Agreement (“Investment Agreement”) with Dutchess Opportunity Fund, II, L.P. (formerly known as Dutchess Equity Fund, L.P.) (“Dutchess”), pursuant to which Dutchess committed to purchase up to $10,000,000 (but not to exceed 12,000,000 shares) of our common stock, subject to the terms and conditions of the Investment Agreement.  As of September 30, 2010, we have not issued any shares pursuant to this Investment Agreement.  This Investment Agreement expires in July 2012.

 

We are a development stage company and have not experienced significant revenue generating activities since our formation.  We have incurred operating losses for each year since our inception in 2002. To achieve operating profits, we, alone or with others, must successfully identify, develop and market product candidates.

 

We are subject to many risks associated with development-stage businesses, including risks associated with the ability to raise capital. Please see the section entitled “Risk Factors” in this Quarterly Report on Form 10-Q for more information regarding risks associated with our business.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

 

We have evaluated the information required under this item that was disclosed in our 2009 Annual Report on Form 10-K and believe there have been no material changes to this information.

 

Item 4.  Controls and Procedures.

 

Conclusions regarding disclosure controls and procedures. An evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, of the effectiveness of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) or 15d-15(e) promulgated under the Exchange Act as of the end of the period covered by this report. Based on that evaluation, our management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective as of such date to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported, and also accumulated and communicated to our management, including the CEO and CFO, to allow timely decisions regarding required disclosure as specified in SEC rules and forms.

Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

14


 

 

PART II - OTHER INFORMATION

 

Item 1A. Risk Factors

 

Risks Related to Our Business

 

We have incurred losses since inception and anticipate that we will continue to incur losses for the foreseeable future.

 

We are a development stage company with a limited operating history.  As of September 30, 2010, we had an accumulated deficit of approximately $60,593,000.  We expect to continue to incur significant and increasing operating losses, in the aggregate and on a per share basis, for the foreseeable future.  These losses, among other things, have had and will continue to have an adverse effect on our results of operations, financial condition, stockholders’ equity, net current assets and working capital.

 

Because of the numerous risks and uncertainties associated with developing new drugs, we are unable to predict the extent of any future losses or when we will become profitable, if at all.  Currently, we have no products available for commercial sale, and, to date, we have not generated any product revenue.  We have financed our operations and internal growth primarily through equity and debt financings.  We have devoted substantially all of our efforts to research and development, including current Good Manufacturing Practices (cGMP) manufacturing and current Good Laboratory Practices (cGLP) compliant toxicology, safety pharmacology, genotoxicity studies and clinical studies for our lead clinical product candidates.

 

If we are unable to meet our needs for additional funding in the future, we will be required to limit, scale back or cease operations.

 

We do not currently have the funding resources necessary to carry out all of our proposed operating activities.  We estimate that it will cost $65 to $85 million in research, drug development and clinical development costs over 30 - 42 months to file a New Drug Application (NDA) for PMX-30063, and a like amount for PMX-60056, in each case assuming adequate and timely financing. We will need to obtain additional financing in the future in order to fully fund these product candidates through the regulatory approval process. Costs of our proposed activities unrelated to our two lead product candidates would be in addition to these estimates.

We believe that our current cash and investment balances as of the date of this filing will be sufficient to fund our operations for at least the next 12 months. If we are unable to secure adequate additional funding in the future, we may delay, scale-back or eliminate certain of our planned research, drug discovery and development activities and certain other aspects of our operations and our business until such time as we are successful in securing adequate additional funding. As a result, our business may be materially and adversely affected.

Our future capital requirements will depend on many factors, including:

Ø  the timing and success of our clinical trials for PMX-30063 and PMX-60056;

Ø  continued progress of and increased spending related to our research and development activities, including our plan to hire additional research and development employees;

Ø  the conditions in the capital markets and the biopharmaceutical industry that make raising capital or entering into strategic arrangements difficult and expensive;

Ø  progress with preclinical experiments and clinical trials, including regulatory approvals necessary for advancement and continuation of our development programs;

Ø  changes in regulatory requirements and guidance of the FDA and other regulatory authorities, particularly relating to antibiotic product candidates, which may require additional clinical trials to evaluate safety and/or efficacy, and thus have significant impacts on our timelines, cost projections, and financial requirements;

Ø  ongoing general and administrative expenses related to our being a reporting company;

15


 

 

Ø  the cost, timing, and results of regulatory reviews and approvals;

Ø  the maintenance of our existing licenses with Penn and UMass;

Ø  the success, timing, and financial consequences of any future collaborative, licensing and other arrangements that we may establish;

Ø  the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;

Ø  the costs of commercializing any of our other product candidates;

Ø  technological and market developments;

Ø  the cost of manufacturing development; and

Ø  timing and volume of sales of products for which we obtain marketing approval.

These factors could result in variations from our currently projected operating and liquidity requirements.  Additional funds may not be available when needed, or, if available, we may not be able to obtain such funds on terms acceptable to us.  If adequate funds are unavailable, we may be required, among other things, to:

Ø  delay, reduce the scope of or eliminate one or more of our research or development programs;

Ø  license rights to technologies, product candidates or products at an earlier stage than otherwise would be desirable or on terms that are less favorable to us than might otherwise be available; or

Ø  obtain funds through arrangements that may require us to relinquish rights to product candidates or products that we would otherwise seek to develop or commercialize by ourselves.

Funding, especially on terms acceptable to us, may not be available to meet our future capital needs because of the state of the credit and capital markets.

 

Global market and economic conditions have been, and continue to be, disruptive and volatile. The debt and equity capital markets have been impacted by significant write-offs in the financial services sector and the re-pricing of credit risk in the broadly syndicated market, among other things. These events have negatively affected general economic conditions and it is uncertain when the credit and capital markets will stabilize or improve.

 

In particular, the cost of raising money in the debt and equity capital markets has increased substantially while the availability of funds from those markets has diminished significantly. Also, as a result of concern about the stability of financial markets generally and the solvency of counterparties specifically, the cost of obtaining money from the credit markets has increased as many lenders and institutional investors have increased interest rates, enacted tighter lending standards and reduced and, in some cases, ceased to provide funding to borrowers. Low valuations and decreased appetite for equity investments, among other factors, may make the equity markets difficult to access on acceptable terms or unavailable altogether.

 

If funding is not available when needed, or is available only on unfavorable terms, meeting our capital needs or otherwise taking advantage of business opportunities may become challenging, which could have a material adverse effect on our business plans.

We have a Loan and Security Agreement with Hercules Technology II, L.P., who is a secured creditor of ours and has certain remedies available to it in the event we default on our loan.

If we become unable to make our principal and interest payments to Hercules on a timely basis, fail to uphold any of the covenants set forth in the loan and security agreement, experience a material adverse effect, or experience any other event of default under the loan and security agreement, we will be in default of our loan obligations.  We have granted Hercules a security interest in our personal property other than intellectual property.  Hercules, as a secured creditor, has certain remedies available to it in the event of our default which could result in the acceleration of any of our obligations under the agreement, our inability to request further advances, and seizure of some or all of our assets to satisfy our loan obligations.

16


 

 

We may not be able to access sufficient funds under our Equity Line with Dutchess Opportunity Fund, II, L.P. when needed.

 

Our ability to put shares to Dutchess and obtain funds under our Equity Line is limited by the terms and conditions in the Investment Agreement with Dutchess, including restrictions on when we may exercise our put rights, restrictions on the amount we may put to Dutchess at any one time, which is determined in part by the trading volume of our common stock, and a limitation on our ability to put shares to Dutchess to the extent that it would cause Dutchess to beneficially own more than 4.99% of our outstanding shares. In addition, we do not expect the Equity Line to satisfy all of our funding needs, even if we are able and choose to take full advantage of the Equity Line.

 

Development of our product candidates is a lengthy, expensive and uncertain process that requires investment of substantial amounts of time and money that may not yield viable products which may cause our business and results of operations to suffer.

We face the risks of failure inherent in developing drugs based on new technologies and particularly those with novel mechanisms of action. Product candidates with novel mechanisms of action may receive increased scrutiny by the FDA and other regulatory bodies due to the greater uncertainty and questions regarding potential novel toxicities, which could result in requirements for additional safety and other studies, which, if required, would increase the time and cost of development. None of our product candidates have received regulatory approval for commercial sale and our product candidates may never be commercialized. In addition, all of our product candidates are in the early stages of development and certain of our programs are on hold until we are able to obtain and allocate sufficient resources, including financing. The progress and results of any ongoing or future clinical trials or future pre-clinical testing are uncertain, and if our product candidates do not receive regulatory approvals, our business, operating results, financial condition and cash flows will be materially adversely affected. Our product candidates are not expected to be commercially available for several years, if at all.

Our development programs require a significant amount of cash to support the development of product candidates. We estimate that it will cost $65 to $85 million in research, drug development and clinical development costs over 30-42 months to file an NDA for PMX-30063, and a like amount for PMX-60056, in each case assuming adequate and timely financing. We will need to obtain additional financing in the future. We may not be able to obtain such additional financing on terms acceptable to us or at all.

In addition, a number of potential drugs, including drugs intended to be utilized for similar indications as our product candidates, have shown promising results in early studies, but failed in subsequent clinical trials and/or failed to obtain necessary regulatory approvals. Data obtained from such studies are susceptible to varying interpretations, which may delay, limit or prevent regulatory approval. Regulatory authorities may refuse or delay approval as a result of many other factors, including changes in regulatory policy during the period of product development.

FDA is actively working to revise certain of its guidance and in August 2010 issued draft guidance for clinical trial conduct, evaluation, clinical endpoints, and requirements for regulatory approval for antibiotic product candidates intended for use in acute bacterial infections, including skin and skin structure infections (ABSSSI), which has been the intended first clinical indication for PMX-30063.  Based on the potential impacts of revised final FDA guidance, there may be delays in completing Phase 2 clinical trials in the United States until there is additional clarity with respect to the final revised guidance. In addition, we plan to conduct a Phase 1 clinical trial studying the longer term administration of PMX-30063 before conducting a Phase 2 trial in the United States.  Furthermore, there has not been a new product candidate for heparin reversal considered by the FDA in recent years, and there has never to date been a product candidate for reversal of LMWH considered by the FDA.  As a result, our present plans for clinical development, including the cost and timing for development of our product candidates, may ultimately be substantially different than our present expectations, and there is no way of predicting what impacts on our timelines, cost projections, and clinical trials requirements may result from these changes in policy, requirements, standards, and guidance of the FDA and other regulatory authorities.

17


 

 

Completion of clinical trials may take many years. The length of time required varies substantially according to the type, complexity, novelty and intended use of the product candidate. The FDA and/or other foreign regulatory authorities monitor the progress of each phase of testing, and may require the modification, suspension, or termination of a trial if it is determined to present excessive risks to patients. The clinical trial process may also be accompanied by substantial delay and expense and the data generated in these studies ultimately may not be sufficient for marketing approval by the FDA and/or other foreign regulatory authorities. Our rate of commencement and completion of clinical trials may be delayed by many factors, including:

Ø  our inability to manufacture or obtain sufficient quantities of materials for use in clinical trials;

Ø  variability in the number and types of patients available for each study;

Ø  difficulty in maintaining contact with patients after treatment, resulting in incomplete data;

Ø  safety issues or side effects;

Ø  poor or unanticipated effectiveness of products during the clinical trials; 

Ø  government or regulatory delays; and/or

Ø  changes in regulatory requirements and guidance of the FDA and other regulatory authorities, particularly relating to antibiotic product candidates, which may require additional clinical trials to evaluate safety and/or efficacy, and thus have significant impacts on our timelines, cost projections, and financial requirements.

Notwithstanding our efforts during the application process and the submission of any requested additional information, the FDA and/or other foreign regulatory authorities ultimately may decide that the application does not satisfy the regulatory criteria for approval and refuse to approve the application.  Furthermore, the FDA and/or other foreign regulatory authorities may prevent us from marketing a product candidate under a label for its desired indications or place other conditions, including restrictive labeling, on distribution as a condition of any approvals, which may impair commercialization of the product.

We are a development stage company, which makes it difficult to evaluate our existing business and business prospects and increases the risk that the value of any investment in our company may decline.

We are a development stage company and to date, our only revenues have been from research grants and contracts.  We will not be able to generate revenue from product sales or royalties unless and until we receive regulatory approval and begin commercialization of our product candidates or otherwise out license our compounds.  We are not certain of when, if ever, that will occur.  Although we intend to introduce products, we may not do so.  Because the expected markets for our products are not established, uncertain and evolving, and because we are a development stage company, it is difficult to assess or predict the growth rate, if any, and the size of this market.  We may not develop additional product candidates or be able to introduce products, a market for our products may not develop, and/or our products may not achieve market acceptance.

If our product candidates are not demonstrated to be sufficiently safe and effective in clinical trials, they will not receive regulatory approval and we will be unable to commercialize them and our business and results of operations will suffer.

Our product candidates must satisfy rigorous standards of safety and efficacy before they can be approved by the FDA and/or other foreign regulatory authorities for commercial use.  The FDA and foreign regulatory authorities have full discretion over this approval process.  We will need to conduct significant additional research, involving testing in animals and in humans, before we can file applications for product approval.  Typically, in the pharmaceutical industry there is a high rate of attrition for product candidates in pre‑clinical testing and clinical trials.  Also, satisfaction of regulatory requirements typically takes many years, is dependent upon the type, complexity and novelty of the product and requires the expenditure of substantial resources.  Success in pre‑clinical testing and early clinical trials does not ensure that later clinical trials will be successful.  For example, a number of companies in the pharmaceutical industry, including biotechnology companies, have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials and in interim analyses.  In addition, delays or rejections may be encountered based upon additional government regulation, including any changes in regulatory policy, during the process of product development, clinical trials and regulatory approvals.

18


 

 

If we are not able to retain our current management and advisory team and attract and retain qualified scientific, technical and business personnel, our business will suffer.

We are highly dependent on our executive officers and other key management and technical personnel, including Nicholas Landekic, Richard Scott, Ph.D., Eric McAllister, M.D., Ph.D., Edward Smith, and Bozena Korczak, Ph.D.  The loss of any of them could have a material adverse effect on our future operations.  We presently do not maintain “key person” life insurance policies on any of our personnel.

Our success is also dependent on our ability to attract, retain and motivate highly trained technical, marketing, sales and management personnel for the development, maintenance and expansion of our activities.  We may not be able to retain our existing personnel or attract additional qualified employees.  The loss of key personnel or the inability to hire and retain additional qualified personnel in the future could have a material adverse effect on our business, financial condition and results of operation.

Our success is dependent on the continuation of certain licensing arrangements and other strategic relationships with third parties.  These arrangements and relationships may not continue and we may not be successful in entering into other similar arrangements and relationships.

All of our product candidates are licensed from or based upon licenses from either Penn or UMass.  If either or any of these license agreements are properly terminated, our ability to advance our current product candidates or develop new product candidates will be materially adversely affected. 

We depend, and will continue to depend, on these arrangements, and potentially on other licensing arrangements and/or strategic relationships with third parties for the research, development, manufacturing and commercialization of our product candidates.  If any of our licenses or relationships are terminated or breached, we may:

Ø  lose our rights to develop and market our product candidates;

Ø  lose patent and/or trade secret protection for our product candidates;

Ø  experience significant delays in the development or commercialization of our product candidates;

Ø  not be able to obtain any other licenses on acceptable terms, if at all; and/or

Ø  incur liability for damages.

Licensing arrangements and strategic relationships in the pharmaceutical and biotechnology industries can be very complex, particularly with respect to intellectual property rights.  Disputes may arise in the future regarding ownership rights to technology developed by or with other parties.  These and other possible disagreements between us and third parties with respect to our licenses or our strategic relationships could lead to delays in the research, development, manufacture and commercialization of our product candidates.  These third parties may also pursue alternative technologies or product candidates either on their own or in strategic relationships with others in direct competition with us.  These disputes could also result in litigation or arbitration, both of which are time consuming and expensive, and could require significant time and attention from our management.

 

19


 

 

Even if regulatory authorities approve our product candidates, they may not be commercially successful.

Our product candidates may not be commercially successful because physicians, government agencies and other third party payors may not accept them.  Third parties may develop superior products or have proprietary rights that preclude us from marketing our products.  We also expect that most of our product candidates will be very expensive, if approved.  If we do obtain regulatory approval for any of our product candidates, we will need to achieve patient acceptance and demand in order to be commercially successful.  Patient acceptance of and demand for any product candidates will depend upon many factors, including but not limited to, the extent, if any, of reimbursement of drug and treatment costs by government agencies and other third party payers, pricing, the safety and effectiveness of alternative products, and the prevalence and severity of side effects associated with our products.  If we do not achieve product acceptance and sufficient demand, we will not be able to sell any products that we may receive regulatory approval to introduce and our operating results and financial condition will be materially adversely affected.

We do not currently have sales, marketing or distribution capabilitiesIf we fail to effectively sell, market and distribute any product candidate for which we receive regulatory approval, our business and results of operations will suffer.

If we are unable to create sales, marketing and distribution capabilities or enter into agreements with third parties to perform these functions, we will not be able to successfully commercialize any of our product candidates that may receive regulatory approval in the future.  We currently have no sales, marketing or distribution capabilities.  In order to successfully commercialize any of our product candidates, we must either internally develop sales, marketing and distribution capabilities or make arrangements with third parties to perform these services.

If we do not develop a marketing and sales force with technical expertise and supporting distribution capabilities, we will be unable to market any of our products directly.  To promote any of our products through third parties, we will have to locate acceptable third parties for these functions and enter into agreements with them on acceptable terms and we may not be able to do so.  In addition, any third-party arrangements we are able to enter into may result in lower revenues than we could have achieved by directly marketing and selling our products.

We may suffer losses from product liability claims.

Any of our product candidates could cause adverse events to patients, such as immunologic or allergic reactions.  These reactions may not be observed in clinical trials, but may nonetheless occur after commercialization.  If any of these reactions occur, they may render our product candidates ineffective in some patients and our sales would suffer.

We may be susceptible to product liability lawsuits from events arising out of the use of product candidates in clinical studies.  If product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit commercialization of any products or product candidates.  Our business exposes us to potential product liability risks, which are inherent in the testing, manufacturing, marketing and sale of pharmaceutical products.  We may not be able to avoid product liability claims. Product liability insurance for the pharmaceutical and biotechnology industries is generally expensive, if available at all.  If we are unable to protect against potential product liability claims, we may be unable to commercialize our product candidates.  A successful product liability claim brought against us in excess of our insurance coverage may cause us to incur substantial liabilities and, as a result, our business may fail.

Due to our reliance on third party manufacturers, suppliers and research organizations, we may be unable to implement our manufacturing, supply and clinical operations strategies, which would materially harm our business.

If our current and future licensing, manufacturing and supply strategies are unsuccessful, then we may be unable to complete any preclinical or clinical trials and/or commercialize our product candidates in a timely manner, if at all.  Completion of any preclinical or clinical trials and/or commercialization of our product candidates will require access to, or development of, facilities to manufacture a sufficient supply of our product candidates, or the ability to license them to other companies to perform these functions.  We do not have the resources, facilities or experience to manufacture our product candidates on our own and do not intend to develop or acquire facilities for the manufacture of product candidates for pre‑clinical trials, clinical trials or commercial purposes in the foreseeable future.  We intend to continue to license technology and/or rely on contract manufacturers to produce sufficient quantities of our product candidates necessary for any pre‑clinical or clinical testing we undertake.  Such contract manufacturers may be the sole source of production and may have limited experience at manufacturing, formulating, analyzing, filling and finishing our types of product candidates.

20


 

 

We also intend to rely on third parties to supply the components that we will need to develop, test and commercialize all of our product candidates.  There may be a limited supply of these components.  We might not be able to enter into agreements that assure us of the availability of such components in the future from any supplier.  Our potential suppliers may not be able to adequately supply us with the components necessary to successfully conduct our pre‑clinical and clinical trials and/or to commercialize our product candidates.  If we cannot acquire an acceptable supply of components to produce our product candidates, we will not be able to complete pre‑clinical and clinical trials and will not be able to commercialize our product candidates.

In addition, we rely on contract research organizations in conducting clinical trials for our product candidates.  We do not have the resources, facilities or experience to conduct clinical studies for our product candidates on our own and do not intend to develop or acquire such resources, facilities or experience in the foreseeable future.  The quality, cost and timing of work performed by our contracted contract research organizations has a significant impact on our clinical programs and our business. 

If we make technology or product acquisitions, we may incur a number of costs, may have integration difficulties and may experience other risks that could harm our business and results of operations.

All of our product candidates are licensed from, or based upon technologies licensed from, third parties.  We may acquire and/or license additional product candidates and/or technologies in the future.  Any product candidate or technology we license or acquire will likely require additional development efforts prior to commercial sale, including extensive clinical testing and approval by the FDA and applicable foreign regulatory authorities, if any.  All product candidates are prone to risks of failure inherent in biotechnology product development, including the possibility that the product candidate or product developed based on licensed technology will not be shown to be sufficiently safe and effective for approval by regulatory authorities.  In addition, we cannot assure you that any product candidate that we develop based on acquired or licensed technology that is granted regulatory approval will be manufactured or produced economically, successfully commercialized or widely accepted in the marketplace.  Moreover, integrating any newly acquired product could be expensive and time-consuming.  If we cannot effectively manage these aspects of our business strategy, our business may not succeed.

Furthermore, proposing, negotiating and implementing an economically viable acquisition or license can be a lengthy, costly and complex process.  Other companies, including those with substantially greater financial, marketing and sales resources, may compete with us for the acquisition or license of product candidates and/or technologies.  We may not be able to acquire the rights to alternative product candidates and/or technologies on terms that we find acceptable, or at all.  Our failure to acquire or license alternative products and/or technologies could have a material adverse effect on our business, prospects and financial condition.

Failure to effectively manage our growth may have a material adverse effect on our business, results of operations and financial condition.

In November 2009 and March 2010, we obtained significant additional financing to fund the continued clinical development of our two lead drug candidates, PMX-30063 and PMX-60056. As a result, we have begun to expand our operations, including hiring of additional personnel. However, we may not be able to effectively grow and expand our business. Successful implementation of our business plan will require management of growth, which will result in an increase in the level of responsibility for management personnel. To manage growth effectively, we will be required to continue to implement and improve our operating and financial systems and controls to expand, train and manage our employee base. The management, systems and controls currently in place or to be implemented may not be adequate for such growth, and the steps taken to hire personnel and to improve such systems and controls might not be sufficient. If we are unable to manage our growth effectively, it will have a material adverse effect on our business, results of operations and financial condition.  

21


 

 

Our executive officers and directors have the ability to significantly influence matters submitted to our stockholders for approval.

As of September 30, 2010, our executive officers and directors, in the aggregate, beneficially owned shares representing approximately 13% of our common stock.  Beneficial ownership includes shares over which an individual or entity has investment or voting power and includes shares that could be issued upon the exercise of options and warrants within 60 days after the date of determination.  On matters submitted to our stockholders for approval, holders of our common stock are entitled to one vote per share.  If our executive officers and directors choose to act together, they would have significant influence over all matters submitted to our stockholders for approval, as well as our management and affairs.  For example, these individuals, if they chose to act together, would have significant influence on the election of directors and approval of any merger, consolidation or sale of all or substantially all of our assets.  This concentration of voting power could delay or prevent an acquisition of our company on terms that other stockholders may desire.

Risks Related to our Intellectual Property

We rely on third parties to provide software necessary to the future success of our business.

Currently, we rely on a non‑exclusive license from Penn to use, copy, perform, display, distribute, modify and prepare derivative works based on three software packages, which include a suite of proprietary computational algorithms that we use in the development, refinement, and testing of our product candidates.  If this license agreement is properly terminated by Penn, our ability to advance our current product candidates or develop new product candidates may be adversely affected.

In the future, we expect to rely upon the software programs licensed from Penn, as well as software licensed from other third parties, including software that might be integrated with our software and used to perform key functions.  If we license such third-party software, it is likely that certain of these licenses may not contain favorable terms for us, including duration for limited terms, can be renewed only by mutual consent and may be terminated if we breach the terms of the license and fail to cure the breach within a specified period of time.  Such licenses may not be available to us on commercially reasonable terms, if at all.  The loss of or inability to maintain or obtain licenses on such third party software could result in the discontinuation of, or delays or reductions in, product availability unless and until equivalent technology is identified, licensed and integrated with our software.  Any such discontinuation, delay or reduction would harm our business, results of operations and financial condition.  In addition, financial or other difficulties that may be experienced by such third-party vendors may have a material adverse effect upon the technologies that may be incorporated into our products.  If such technologies become unavailable, we may not be able to find suitable alternatives, which could harm our business, operating results, and financial condition.

The obstacles to procurement and enforcement of our intellectual property and proprietary rights could harm our competitive position by allowing competitors access to our proprietary technology and to introduce competing products.

We regard our product candidates as proprietary and rely primarily on a combination of patents, trademarks, copyrights, and trade secrets and other methods to protect our proprietary rights.  We maintain confidentiality agreements with our employees, consultants and current and potential affiliates, customers and business partners.

If we fail to secure and then enforce patents and other intellectual property rights underlying our product candidates and technologies, we may be unable to compete effectively.  The pharmaceutical industry places considerable importance on obtaining patent and trade secret protection for new technologies, products and processes.  Our success will depend, in part, on our ability, and the ability of our licensors, to obtain and to keep protection for our products and technologies under the patent laws of the U.S. and other countries, so that we can stop others from using our inventions.  Our success also will depend on our ability to prevent others from using our trade secrets.

22


 

 

Our pending U.S. and foreign patent applications may not result in the issuance of patents to us or may not result in the issuance of patents that will be advantageous to us.  If we do not receive patents for these applications or do not receive adequate protections, our developments will not have any proprietary protection and other entities will be able to make the products and compete with us.  Also, any patents we have obtained or do obtain may be challenged by reexamination, opposition or other administrative proceeding, or may be challenged in litigation, and such challenges could result in a determination that the patent is invalid or unenforceable.  In addition, competitors may be able to design alternative methods or devices that avoid infringement of our patents.  To the extent our intellectual property protection offers inadequate protection, or is found to be invalid, we are exposed to a greater risk of direct competition.  Both the patent application process and the process of managing patent disputes can be time consuming and expensive and may require significant time and attention from our management.  Furthermore, the laws of some foreign countries may not protect our intellectual property rights to the same extent as do the laws of the United States.

In addition, the standards that the United States Patent and Trademark Office, (U.S. PTO), uses to grant patents can change.  Consequently, we may be unable to determine the type and extent of patent claims that will be issued to us or to our licensors in the future, if any patent claims are issued at all.  In addition, if the U.S. PTO and/or other patent offices where we file our patent applications increase the fees associated with filing and prosecuting patent applications we would incur higher expenses and our intellectual property strategy could be adversely affected.

The confidentiality agreements we require of our employees and those which we enter into with other parties may not provide adequate protection for our trade secrets, know‑how or other confidential information or prevent any unauthorized use or disclosure or the unlawful development by others.  If any of our confidential intellectual property is disclosed, our business may suffer.  Such agreements may not be enforceable or may not provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure or other breaches of the agreements, and we may not be able to prevent such unauthorized disclosure.  Monitoring unauthorized disclosure is difficult, and we do not know whether the steps we have taken to prevent such disclosure are, or will be, adequate.

We may have to engage in costly litigation to enforce or protect our proprietary technology, which may harm our business, results of operations, financial condition and cash flows.

The pharmaceutical field is characterized by a large number of patent filings involving complex legal and factual questions, and, therefore, we cannot predict with certainty whether any patents or in‑licensed patents will be enforceable.  Additionally, we may not be aware of all of the patents potentially adverse to our interests that may have been issued to others.  Should third parties file patent applications, or be issued patents, claiming technology also claimed by us in pending applications, we may be required to participate in interference proceedings in the U.S. PTO to determine priority of invention.  We, or our licensors, also could be required to participate in interference proceedings involving our issued patents and pending applications of another entity.

In the event a competitor infringes upon our patent or other intellectual property rights, litigation to enforce our intellectual property rights or to defend our patents against challenge, even if successful, could be expensive and time consuming and could require significant time and attention from our management.  We may not have sufficient resources to enforce our intellectual property rights or to defend any patents against challenges from others.  If our intellectual property does not provide adequate protection against our competitors’ products, our competitive position and business could be adversely affected.

Our commercial success depends significantly on our ability to develop and commercialize our products without infringing the intellectual property rights of third parties.

Our commercial success will depend, in part, on our not infringing the patents or proprietary rights of third parties.  Third parties that believe we are infringing on their rights could bring actions against us claiming damages and seeking to enjoin clinical testing, manufacturing and marketing of the affected product or products.

23


 

 

If we become involved in any litigation, it could consume a substantial portion of our resources, regardless of the outcome of the litigation.  If any of these actions are successful, we could be required, in addition to any potential liability for damages, to obtain a license to continue to manufacture or market the affected product, in which case we may be required to pay substantial royalties or grant cross licenses to our patents.  However, any such license may not be available on acceptable terms or at all.  Ultimately, we could be prevented from commercializing a product, or forced to cease some aspect of our business operations, as a result of patent infringement claims, which would harm our business.

We may enter into licensing agreements with third party intellectual property owners for use of their property in connection with our products in order to ensure that such third party’s rights are not infringed.  Although we are not aware that any of our intended products would materially infringe the rights of others, a claim of infringement may be asserted against us and any such assertion may result in costly litigation or may require us to obtain a license in order to make, use, or sell our products.  Third parties may assert infringement claims against us in the future with respect to current or future products.  Any such claims or litigation, with or without merit, could be costly and a diversion of management’s attention, which could have a material adverse effect on our business, operating results and financial condition.  Adverse determinations in such claims or litigation could harm our business, operating results and financial condition.

We may be unable to protect the intellectual property rights of the third parties from whom we license certain of our intellectual property or with whom we have entered into other strategic relationships, which may harm our business.

We are, and will continue to be, reliant upon such third parties to protect their intellectual property rights to this technology.  Such third parties may determine not to protect the intellectual property rights that we license from them and we may be unable defend such intellectual property rights on our own or we may have to undertake costly litigation to defend the intellectual property rights of such third parties.  We may not continue to have proprietary rights to the intellectual property that we license from such third parties or otherwise have the right to use through similar strategic relationships.  Any loss or limitations on use with respect to our right to use such intellectual property licensed from third parties or otherwise obtained from third parties with whom we have entered into strategic relationships could have a material adverse effect on our business, operating results and financial condition.

Many countries, including certain countries in Europe, have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties.  In addition, most countries limit the enforceability of patents against government agencies or government contractors.  In these countries, the patent owner may be limited to monetary relief and may be unable to enjoin infringement, which could materially diminish the value of the patent.  Compulsory licensing of life‑saving products is also becoming increasingly popular in developing countries, through either direct legislation or international initiatives.  Such compulsory licenses could be extended to include some of our product candidates, which may limit our potential revenue opportunities.

International patent protection is particularly uncertain, and if we are involved in opposition proceedings in foreign countries, we may have to expend substantial sums and management resources.

Patent law outside the U.S. is even more uncertain than in the U.S. and is periodically reviewed and revised in many countries.  Further, the laws of some foreign countries may not protect our intellectual property rights to the same extent as U.S. laws.  For example, certain countries do not grant patent claims that are related to the treatment of humans.  We may participate in opposition proceedings to determine the validity of our foreign patents or our competitors’ foreign patents, which could result in substantial costs and diversion of our management’s efforts.

 

 

24


 

 

Risks Related to our Industry

We may experience delays in obtaining or we may not obtain required regulatory approvals in the U.S. to market our proposed product candidates.

Delays in regulatory approval, limitations in regulatory approval and withdrawals of regulatory approval may have a negative impact on our results of operations.  If we experience significant delays in testing or approvals, or in our ability to license product candidates, our product development costs may increase.  If the FDA grants regulatory approval of a product, this approval will be limited to those disease states and conditions for which the product has been demonstrated through clinical trials to be safe and effective.  Any product approvals that we receive in the future could also include significant restrictions on the use or marketing of our products.  Product approvals, if granted, can be withdrawn for failure to comply with regulatory requirements or upon the occurrence of adverse events following commercial introduction of the products.  Failure to comply with applicable FDA or other applicable regulatory requirements may result in criminal prosecution, civil penalties, recall or seizure of products, total or partial suspension of production or injunction, as well as other regulatory action against our product candidates or us.  If approvals are withdrawn for a product, or if a product were seized or recalled, we would be unable to sell or license that product and our revenues would suffer.  In addition, outside the U.S., our ability to market any of our potential products is contingent upon receiving market application authorizations from the appropriate regulatory authorities and these foreign regulatory approval processes include all of the risks associated with the FDA approval process described above.

FDA is actively working to revise certain of its guidance and in August 2010 issued draft guidance for clinical trial conduct, evaluation, clinical endpoints, and requirements for regulatory approval for antibiotic product candidates intended for use in acute bacterial infections, including skin and skin structure infections (ABSSSI), which has been the intended first clinical indication for PMX-30063.  Based on the potential impacts of revised final FDA guidance, there may be delays in completing Phase 2 clinical trials in the United States until there is additional clarity with respect to the final revised guidance. In addition, we plan to conduct a Phase 1 clinical trial studying the longer term safety of PMX-30063 before conducting a Phase 2 trial in the United States.  Furthermore, there has not been a new product candidate for heparin reversal considered by the FDA in recent years, and there has never to date been a product candidate for reversal of LMWH considered by the FDA.  As a result, our present plans for clinical development, including the cost and timing for development of our product candidates, may ultimately be substantially different than our present expectations, and there is no way of predicting what impacts on our timelines, cost projections, and clinical trials requirements may result from these changes in policy, requirements, standards, and guidance of the FDA and other regulatory authorities.

If competitors develop and market products that offer advantages as compared to our product candidates, our commercial opportunities will be limited.

Other companies have products and product candidates in development to treat the conditions we are seeking to ultimately treat.  If these competitors are able to develop products that are more effective, have fewer side effects, are less expensive or offer other advantages as compared to our product candidates, our commercial opportunities will be limited.  Furthermore, if our competitors commercialize competing products before we do, then our ability to penetrate the market and sell our products may be impaired.

Our competitors include fully integrated pharmaceutical companies and biotechnology companies, universities and public and private research institutions.  Many of the organizations competing with us have substantially greater capital resources, larger research and development staffs and facilities, greater experience in drug development and in obtaining regulatory approvals, and greater manufacturing and marketing capabilities than we do.  These organizations also compete with us to:

Ø  attract parties for acquisitions, joint ventures or other collaborations;

Ø  license proprietary technology that is competitive with the technology we are practicing;

Ø  attract funding; and

Ø  attract and hire scientific talent.

25


 

 

In the antibiotic market, many major pharmaceutical companies, such as GlaxoSmithKline, Pfizer, Bayer, Merck and Sanofi Aventis have already established significant positions.  Additionally, many smaller companies, such as Cubist Pharmaceuticals, Trius Therapeutics, NovaBay Pharmaceuticals, Inc., Ceragenix and Inhibitex either have marketed, or are attempting to enter this market by developing, novel and more potent antibiotics that are intended to be effective against drug‑resistant bacterial strains.  In the UFH antagonist market, protamine is the only available antidote for and antagonist to UFH and, as such, protamine currently dominates this market.  Because of protamine’s virtual monopoly of the UFH antidote/antagonist market, we believe that it may be difficult for our future UFH antidote/antagonist products to penetrate this market.  There may be additional competitive products about which we are not aware.

Healthcare reform measures could adversely affect our business.

The business and financial condition of pharmaceutical companies is affected by the efforts of governmental and third party payors to contain or reduce the costs of healthcare.  In the U.S. and in foreign jurisdictions there have been, and we expect that there will continue to be, a number of legislative and regulatory proposals aimed at changing the healthcare system.  For example, in some countries other than the U.S., pricing of prescription drugs is subject to government control, and we expect proposals to implement similar controls in the U.S. to continue.  The implementation of such additional controls could have the effect of reducing the prices that we are able to charge for any products we develop and sell through these plans.  Prescription drug legislation and related amendments or regulations could also cause third party payors other than the federal government, including the states under the Medicaid program, to discontinue coverage for any products we develop or to lower reimbursement amounts that they pay.

Further federal, state and foreign healthcare proposals and reforms are likely.  While we cannot predict the legislative or regulatory proposals that will be adopted or what effect those proposals may have on our business, including the future reimbursement status of any of our product candidates, the pendency or approval of such proposals could result in a decrease in our stock price or limit our ability to raise capital or to obtain strategic partnerships or licenses.

Because our activities may involve the use of hazardous materials, we may be subject to claims relating to improper handling, storage or disposal of these materials that could be time consuming and costly.

If we use biological and hazardous materials in a manner that causes injury, we may be liable for damages.  Our research and development activities may involve the controlled use of potentially harmful biological materials as well as hazardous materials, chemicals and various radioactive compounds.  We cannot completely eliminate the risk of accidental contamination or injury from the use, storage, handling or disposal of these materials.  In the event of contamination or injury, we could be held liable for damages that result, and any liability could exceed our resources.  We are subject to federal, state and local laws and regulations governing the use, storage, handling and disposal of these materials and specified waste products.  The cost of compliance with these laws and regulations could be significant.

Risks Related to our Capital Stock

Our common stock price is volatile, our stock is highly illiquid, and any investment in our securities could decline substantially in value.

Our common stock is currently quoted on the OTC Bulletin Board. Trading of our stock through the OTC Bulletin Board is frequently thin and highly volatile. In light of our small size and limited resources, as well as the uncertainties and risks that can affect our business and industry, our stock price is expected to continue to be highly volatile and can be subject to substantial drops, with or even in the absence of news affecting our business. The following factors, in addition to the other risk factors described in this Form 10-Q and the potentially low volume of trades in our common stock, may have a significant impact on the market price of our common stock, some of which are beyond our control:

 

        results and timing for achievement of pre-clinical and clinical milestones;

        commercial success of approved products;

        corporate partnerships;

26


 

 

        technological innovations by us or competitors;

        changes in laws and government regulations both in the U.S. and overseas;

        changes in key personnel at our company;

        developments concerning proprietary rights, including patents and litigation matters;

        public perception relating to the commercial value or safety of any of our product candidates;

        future sales of our common stock;

        future issuance of our common stock causing dilution;

        anticipated or unanticipated changes in our financial performance or future prospects;

        general trends related to the biopharmaceutical and biotechnological industries; and

        general conditions in the stock market

 

The stock market in general has experienced relatively large price and volume fluctuations. In particular, the market prices of securities of smaller biotechnology companies have experienced dramatic fluctuations that often have been unrelated or disproportionate to the operating results of these companies. Continued market fluctuations could result in extreme volatility in the price of our common stock, which could cause a decline in its value. You should also be aware that price volatility may be worse if the trading volume of the common stock remains limited or declines.

 

A decline in the price of our common stock could affect our ability to raise further working capital and adversely impact our ability to continue operations.

A prolonged decline in the price of our common stock could result in a reduction in the liquidity of our common stock and a reduction in our ability to raise capital.  Because a significant portion of our operations has been and will continue to be financed through the sale of equity securities, a decline in the price of our common stock could be especially detrimental to our liquidity and our operations.  Such reductions may force us to reallocate funds from other planned uses and may have a significant negative effect on our business plans and operations, including our ability to develop our product candidates and continue our current operations.  If our stock price declines, it may be more difficult to raise additional capital.  If we are unable to raise sufficient capital in the future, and we are unable to generate funds from operations sufficient to meet our obligations, we will not be able to have the resources to continue our normal operations.

The market price for our common stock may also be affected by our ability to meet or exceed expectations of analysts or investors.  Any failure to meet these expectations, even if minor, may have a material adverse effect on the market price of our common stock.

When we issue additional shares in the future, it will likely result in the dilution of our existing stockholders.

Our certificate of incorporation authorizes the issuance of up to 250,000,000 shares of common stock with a $0.001 par value and 10,000,000 preferred shares with a par value of $0.001, of which 80,999,610 common shares were issued and outstanding as of September 30, 2010. We may need to increase our authorized share count in order to issue additional shares of common stock in the future.  From time to time we also will increase the number of shares available for issuance in connection with our equity compensation plans and we may issue awards to our employees outside the terms of our stock plans. As of September 30, 2010, we had 11,452,000 additional shares of common stock reserved for future issuance under our stock plans. Our board of directors may fix and determine the designations, rights, preferences or other variations of each class or series within each class of preferred stock and may choose to issue some or all of such shares to provide additional financing or acquire more businesses in the future.

Moreover, in the past, we issued warrants and options to acquire shares of common stock. As of September 30, 2010, we had warrants and options to purchase 57,700,000 shares of our common stock. Warrants to purchase 4,372,000 shares of our common stock have weighted average anti-dilution protection if we sell certain securities at a price per share less than $1.16 per share. In addition, our Equity Line with Dutchess contemplates the issuance of up to 12,000,000 shares of our common stock to Dutchess, subject to certain restrictions and obligations. 

The issuance of any securities for acquisition, licensing or financing efforts, upon conversion of any preferred stock or exercise of warrants and options, pursuant to our equity compensation plans, or otherwise may result in a reduction of the book value and market price of the outstanding shares of our common stock. If we issue any such additional shares, such issuance will cause a reduction in the proportionate ownership and voting power of all current stockholders. Further, such issuance may result in a change in control of our corporation.

27


 

 

Financial Industry Regulatory Authority (FINRA) sales practice requirements may also limit a stockholder’s ability to buy and sell our Common Stock.

FINRA has adopted rules that require that in recommending an investment to a customer, a broker‑dealer must have reasonable grounds for believing that the investment is suitable for that customer.  Prior to recommending speculative low priced securities to their non‑institutional customers, broker‑dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information.  Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers.  FINRA requirements make it more difficult for broker‑dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.

We have never paid dividends on our common stock and do not anticipate paying any in the foreseeable future.

We have never declared or paid a cash dividend on our common stock and we do not expect to pay cash dividends in the foreseeable future.  If we do have available cash, we intend to use it to grow our business.

Sales of a substantial number of shares of our common stock into the public market, including shares of common stock that we may issue to Dutchess pursuant to our Equity Line, may result in significant downward pressure on the price of our common stock and could affect your ability to realize the current trading price of our common stock.

We have registered the resale by Dutchess of a maximum of 12,000,000 shares of common stock that may be issued to Dutchess pursuant to our Equity Line. The common stock to be issued to Dutchess pursuant to the Investment Agreement with Dutchess will be sold at a 5% discount to the volume weighted average price (VWAP) of our common stock during the five consecutive trading day period beginning on the trading day immediately following the date of delivery of a put notice by us to Dutchess, subject to certain exceptions. Dutchess has a financial incentive to sell our common stock upon receiving the shares to realize the profit equal to the difference between the discounted price and the market price.

 

Sales of a substantial number of shares of our common stock in the public market, including shares of common stock that we may issue to Dutchess pursuant to our Equity Line, could cause a reduction in the market price of our common stock. To the extent stockholders sell shares of common stock, the price of our common stock may decrease due to the additional shares of common stock in the market.

 

Any significant downward pressure on the price of our common stock as stockholders sell their shares could encourage short sales by our stockholders or others. Any such short sales could place further downward pressure on the price of our common stock.

 

Delaware law, our stockholder rights plan, and our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that could delay and discourage takeover attempts that stockholders may consider favorable.

Certain provisions of our amended and restated certificate of incorporation and our amended and restated bylaws and applicable provisions of Delaware corporate law may make it more difficult for or prevent a third party from acquiring control of us or changing our board of directors and management. These provisions include:

Ø  the ability of our board of directors to issue preferred stock with voting or other rights or preferences;

28


 

 

Ø  limitations on the ability of stockholders to amend our charter documents, including stockholder supermajority voting requirements;

Ø  requirements that special meetings of our stockholders may only be called by the chairman of our board of directors, our president, or upon a resolution adopted by, or an affirmative vote of, a majority of our board of directors; and

Ø  advance notice procedures our stockholders must comply with in order to nominate candidates for election to our board of directors or to place stockholders’ proposals on the agenda for consideration at meetings of stockholders.

We will also be afforded the protections of Section 203 of the Delaware General Corporation Law, which will prevent us from engaging in a business combination with a person who acquires at least 15% of our common stock for a period of three years from the date such person acquired such common stock, unless board or stockholder approval were obtained.

 

We review these provisions from time to time. Any delay or prevention of a change in control transaction or changes in our board of directors or management could deter potential acquirers or prevent the completion of a transaction in which our stockholders could receive a premium over the then current market price for their shares.

 

In addition, we have a stockholder rights plan pursuant to which we distributed rights to purchase shares of our Series C Preferred Stock. The rights become exercisable upon the earlier of ten business days after a public announcement that a person or group of affiliated or associated persons has acquired, or obtained the right to acquire, 15% or more of our common stock then outstanding or ten business days after the commencement of a tender or exchange offer that would result in a person or group beneficially owning 15% or more of our common stock then outstanding. These rights may cause substantial dilution to a person or group that attempts to acquire us (or which otherwise acquires 15% or more of our common stock) on terms or in a manner not approved by our board of directors, except pursuant to an offer conditioned upon the negation, purchase or redemption of these rights. Accordingly, these rights could delay or discourage someone from acquiring our business, even if doing so would benefit our stockholders.  

 

Item 6.  Exhibits

 

 

Exhibit 31.1 – Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

 

Exhibit 31.2 – Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

 

Exhibit 32.1 – Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

 

* Filed herewith.

 

 

 

 

 

 

 

 

 

 

 

 

 

29


 

 

SIGNATURES

 

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

 

 

PolyMedix, Inc.

 

 

 

November 9, 2010                                                              By:          /s/ Nicholas Landekic       

Date                                                                                       Nicholas Landekic

President & Chief Executive Officer (Principal Executive Officer)

 

 

November 9, 2010                                                            By:            /s/ Edward F. Smith           

Date                                                                                       Edward F. Smith

Vice President, Finance &

Chief Financial Officer (Principal Financial and Accounting Officer) 

 

30


 

 

EXHIBITS INDEX

 

Exhibit No.

Description of Exhibit

 

 

 

 

 

 

 

 

Exhibit 31.1

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

 

 

Exhibit 31.2

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

 

 

Exhibit 32.1

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

 

 

 

 

 

 

 

* Filed herewith.

 

 

31