10-K 1 a15-2678_110k.htm 10-K

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-K

 

(Mark one)

 

x      ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2014

 

o         TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to              .

 

Commission file number 000-24477

 


 

RESTORGENEX CORPORATION

(Exact name of registrant as specified in its charter)

 

Nevada

 

30-0645032

(State or other jurisdiction of incorporation or organization)

 

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

 

 

 

2150 East Lake Cook Road, Suite 750

 

 

Buffalo Grove, Illinois

 

60089

(Address of principal executive offices)

 

(Zip Code)

 

(847) 777-8092

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:  None

 

Securities registered pursuant to Section 12(g) of the Act:

 

Common Stock, par value $0.001 per share

(Title of each class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  YES o  NO x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  YES o  NO x

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES x  NO o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES x  NO o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See 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 (Do not check if a smaller reporting company) o

 

Smaller reporting company x

 

Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Act). YES o  NO x

 

The aggregate market value of the registrant’s common stock, excluding shares beneficially owned by affiliates, computed by reference to the closing sale price at which the common stock was last sold as of June 30, 2014 (the last business day of the registrant’s second fiscal quarter) as quoted by the OTCQB on that date was approximately $58.1 million. For purposes of this computation, all directors, executive officers and 10% beneficial owners of the registrant are deemed to be affiliates.

 

As of March 25, 2015, 18,614,968 shares of common stock of the registrant were outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

None.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 


 

 

 

Page

 

 

 

PART I

 

1

 

 

 

ITEM 1.

BUSINESS

1

 

 

 

ITEM 1A.

RISK FACTORS

22

 

 

 

ITEM 1B.

UNRESOLVED STAFF COMMENTS

60

 

 

 

ITEM 2.

PROPERTIES

61

 

 

 

ITEM 3.

LEGAL PROCEEDINGS

61

 

 

 

ITEM 4.

MINE SAFETY DISCLOSURES

61

 

 

 

PART II

 

62

 

 

 

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

62

 

 

 

ITEM 6.

SELECTED FINANCIAL DATA

63

 

 

 

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

64

 

 

 

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

75

 

 

 

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

76

 

 

 

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

108

 

 

 

ITEM 9A.

CONTROLS AND PROCEDURES

109

 

 

 

ITEM 9B.

OTHER INFORMATION

111

 

 

 

PART III

 

112

 

 

 

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

112

 

 

 

ITEM 11.

EXECUTIVE COMPENSATION

121

 

 

 

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

134

 

 

 

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

137

 

 

 

ITEM 14.

PRINCIPAL ACCOUNTING FEES AND SERVICES

140

 

 

 

PART IV

 

141

 

 

 

ITEM 15.

EXHIBITS, FINANCIAL STATEMENT SCHEDULES

141

 

 

 

EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K

143

 

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This annual report on Form 10-K contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbor created by those sections.  For more information, see “Part I.  Item 1.  Business — Cautionary Note Regarding Forward-Looking Statements.”

 

As used in this report, the terms “RestorGenex,” the “Company,” “we,” “us,” “our” and similar references refer to RestorGenex Corporation (formerly known as Stratus Media Group, Inc.) and our consolidated subsidiaries, and the term “common stock” refers to our common stock, par value $0.001 per share.

 

All share and per share amounts have been adjusted to reflect the one-for-100 reverse split of outstanding common stock effective March 7, 2014.

 

This report contains the following trademarks, trade names and service marks of ours: RestorGenex.  This report also contains trademarks, trade names and service marks that are owned by other persons or entities.

 

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PART I

 


 

ITEM 1.                                                BUSINESS

 

We are a specialty biopharmaceutical company focused on developing products for ophthalmology, oncology and dermatology.  Our lead product is a novel PI3K/Akt/mTOR pathway inhibitor which has completed two Phase I clinical trials for age-related macular degeneration and is in preclinical development in oncology, specifically glioblastoma multiforme.  Our current pipeline also includes a “soft” anti-androgen compound for the treatment of acne vulgaris.  Our novel inhibition of the PI3K/Akt/mTOR pathway and unique targeting of the androgen receptor show promise in a number of additional diseases, which we are evaluating for the purpose of creating innovative therapies that are safe and effective treatments to satisfy unmet medical needs.

 

Summary of Product Candidate Pipeline

 

Our portfolio of product candidates is summarized in the following table:

 

 

RES-529 and the PI3K/Akt/mTOR Pathway

 

A main area of focus for RestorGenex is a family of agents called “palomids” (lead compound: one of our palomids known as “RES-529”) which were developed from a non-steroidal, small molecule drug library through computational design, synthetic and medicinal chemistry.  RES-529 is the result of three generations of design work.  RES-529 is known to have potential applications in ophthalmology, oncology, dermatology, pulmonary fibrosis, central nervous system disorders, biodefense and infectious disease.

 

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RES-529 is a first-in-class, novel approach to inhibition of the PI3K/Akt/mTOR pathway. Rather than interfering with the pathway directly via specific signaling proteins (e.g. PI3K, Akt, mTOR), RES-529’s action results in the loss of the TORC1 and TORC2 protein complexes thus preventing these complexes from generating and potentiating signaling within the pathway.

 

 

RES-529 interference with TORC1 and TORC2 results in effects on certain activities of the PI3K/Akt/mTOR pathway that become dysregulated in many disease states:  translation, cell growth, ribosome biogenesis, metabolism, proliferation and authophagy.

 

RES-529 has been shown to have broad activity and non-clinical efficacy has been demonstrated in models of ocular disease, pulmonary fibrosis, oncology (including glioblastoma, prostate cancer, breast cancer, and lung cancer), central nervous system disorders (including Huntington’s and Parkinson’s disorder), and biodefense (treatment for radiation exposure).

 

We initially are focusing our development efforts with respect to RES-529 on ophthalmology (specifically age-related macular degeneration) and oncology (specifically glioblastoma multiforme, for which we applied for and received an orphan drug designation from the U.S. Food and Drug Administration, or FDA).

 

Ophthalmology Market Opportunity and Product Candidates

 

The specific focus of our prescription ophthalmology business is on pathologies showing an aberrant up-regulation of the PI3K/Akt/mTOR pathway in the area of ophthalmology.  Two human Phase I clinical studies “RES-529” have been completed for age-related macular degeneration, both studies of which showed preliminary evidence of biologic activity and no serious toxicity.  One of the two completed studies was sponsored by Paloma Pharmaceuticals, Inc., a company we acquired in March 2014, using intravitreal administration and was completed in December 2011.  The second study was sponsored and conducted by The National Eye Institute using subconjunctival administration

 

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and was completed in July 2012.  We currently are planning additional Phase I/Phase II studies with RES-529 for age-related macular degeneration that we expect to begin in 2016 after we finalize CMC (chemistry, manufacturing and control) work for subconjunctival administration and complete necessary preclinical studies.

 

The global ophthalmology drug and devices market is witnessing significant growth due to the increasing incidence and prevalence of eye-related disorders, such as macular degeneration, presbyopia and diabetic retinopathy, among the aging population.  As an example, according to the market research firms, EvaluatePharma and Adis R&D Insight, the wet age-related macular degeneration market today is over $5 billion worldwide.

 

Angiogenesis in the eye underlies the major causes of blindness in both developed and developing nations, including exudative age-related macular degeneration (“AMD”), proliferative diabetic retinopathy (“PDR”), diabetic macular edema (“DME”), central retinal vein occlusion (“CRVO”), neovascular glaucoma, corneal neovascularization (trachoma), and pterygium.

 

AMD is the leading cause of blindness in people over the age of 55.  AMD is a degenerative disease of the central portion of the retina (the macula) that results primarily in loss of central vision (i.e. peripheral vision is spared).  The prevalence of AMD increases with age, starting after age 50 and becoming more pronounced over age 65.  AMD is more common in whites than other races and more females are affected than males.  Wet AMD has more than $5 billion in worldwide sales.  Currently, approximately 20 million individuals in the United States and the European Union have macular degeneration.  Approximately 10 percent of patients 66 to 74 years of age will have a finding of macular degeneration and prevalence increases to 30 percent in patients 75 to 85 years of age.

 

While wet AMD accounts for only 10 to 15 percent of AMD cases, it is the cause of more than 80 percent of the cases with severe vision loss.  It may present as acute visual distortion or loss of central vision as a result of retinal bleeding or fluid accumulation.  Symptoms usually appear in one eye but disease is often present in both eyes.  Distortion of straight lines (metamorphopsia) is one of the earliest symptoms.

 

Approved treatments for wet AMD are limited.  These treatments were brought to market as anti-angiogenic agents, although it appears their activity in patients may revolve more around their ability to inhibit vascular permeability.  These drugs are given via intravitreal injection.  While AMD treatment has improved in recent years, there is a clear need for both more effective therapies as well as treatments that are less invasive. Many such drugs are currently in development.

 

RES-529 (formerly P529) has completed two Phase I studies in AMD.  Data from these studies have shown RES-529 to be generally well tolerated, in both the intravitreal and subconjunctival clinical studies.  Although the Phase I studies were designed to determine safety, biological activity was observed with reduction in fluid pockets, retinal thinning and cyst reduction.

 

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GRAPHIC

 

In ocular diseases, RES-529 may improve vision by simultaneously inhibiting capillary growth, reducing edema and hemorrhage, and, possibly, regress existing disease-causing ocular vessels. RES-529 has shown activity in animal models of macular degeneration and diabetic retinopathy.  In a retinal detachment fibrotic animal model, it has shown nearly complete elimination of retinal scar formation.

 

Clinical trials for RES-529 will be designed to demonstrate that patients may transition from initial therapy (Lucentis, Avastin, and EYLEA) to RES-529.  This could enable patients to move from frequent intravitreal (into the eyeball) injections to less frequent and less invasive subconjunctival (beneath the lower eyelid between the conjunctiva and sclera) injections every three months.  We believe the macular degeneration indication for RES-529 falls within a therapeutic area that exhibits certain unmet needs with a potential market size of more than $5 billion.

 

Oncology Market Opportunity and Product Candidates

 

The global consulting and market research firm Lucintel reported that the global oncology drugs industry experienced significant growth during the past five years and is expected to continue that momentum to reach an estimated $100 billion in 2018.  Lucintel’s study points to an aging population, changing lifestyles, more effective diagnosing, unhealthy eating habits, and an increasing incidence of chronic diseases across the entire global population as supporting growth opportunities for the oncology drugs industry players.

 

Our novel PI3K/Akt/mTOR pathway inhibitor, RES-529, is in preclinical development for oncology. Through a series of in vitro and in vivo animal models, RES-529 has been shown to have activity in several cancer types due to its ability to target and inhibit the PI3K/Akt/mTOR signal transduction pathway.  RES-529 is a first-in-class inhibitor of both TORC1 and TORC2 that is mechanistically differentiated from other PI3K/Akt/mTOR pathway inhibitors currently in development. Signaling components of the PI3K/Akt/mTOR pathway are central regulators of cell proliferation, growth, differentiation, survival and angiogenesis.  Up to 80 percent of tumor types have been shown to have an aberrant up-regulation of the PI3K pathway.  Activation of this pathway has been observed in glioblastoma patients and is being pursued aggressively as a target for therapeutic intervention.  We have shown activity in both in vitro and in vivo glioblastoma animal models and have demonstrated that RES-529 is orally bioavailable and can cross the blood brain barrier.

 

RES-529 (formerly P529) has been shown to inhibit tumor growth in subcutaneous xenograft models.  In one study in a fast growing glioblastoma tumor type (C6V10), mice were pretreated with RES-529 at 200

 

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mg per kg twice a day, intraperitoneal for one week.  At the second week, rat glioma cells were injected subcutaneously.  Treatment continued while the tumors were allowed to grow for 21 days.  At termination, the tumor volume was reduced by 70 percent in treated animals compared to control animals.

 

GRAPHIC

 

In another model, examining RES-529 in a slower growing glioblastoma model, mice were injected subcutaneously with U87 glioma cells.  At day three, the mice began treatment with RES-529 at doses of 25 mg and 50 mg per kg twice a day intraperitoneal.  The U87 tumors were allowed to grow for 24 days.  At termination, the tumor volume was reduced by 29 percent for the 25 mg dose and 76 percent for the 50 mg dose demonstrating a significant inhibition of tumor growth and a dose response for RES-529.

 

 

RES-529 has been studied extensively in preclinical oncology models.  Similar efficacy in a glioma subcutaneous xenograft model has been seen regardless of route of administration (iv, po, or ip).  Penetration of the blood brain barrier has been demonstrated with pharmacologically active levels reached in murine brain.  Potent effects have been demonstrated in multiple tumor types in NCI60 cell line panel.  In addition, efficacy in breast cancer orthotopic xenografts has been demonstrated, as has synergy with radiotherapy and chemotherapy in prostate cancer xenografts.

 

We believe glioblastoma represents substantial financial upside given the significant unmet medical need due to limited and modestly effective therapies.  We plan to complete necessary work to start a Phase I/II glioblastoma human clinical trial in 2016.  We also plan to initiate Phase II studies in other tumor types once the RES-529 maximum tolerated dose is determined in the initial portion of the glioblastoma study.  We intend to focus in areas where preclinical evidence of activity has been demonstrated, specifically breast, prostate and/or lung cancers.

 

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In January 2015, the FDA granted orphan drug designation for RES-529 for the treatment of glioblastoma multiforme.  Orphan drug designation, as granted by the U.S. Orphan Drug Act, is for a product to treat a rare disease or condition that affects fewer than 200,000 people in the United States.  Orphan drug designation qualifies the sponsor of the product for a tax credit and seven years of marketing exclusivity.

 

The worldwide market for glioblastoma is projected to grow from approximately $1 billion in 2013 to $4.5 billion by 2020 (a compound annual growth rate of approximately 28%) according to EvaluatePharma and Adis R&D Insight.  Growth will be driven primarily by new agents.  Current standard of care products are Temodar, Avastin and Gliadel Wafer.  The median survival with only supportive care is less than six months. The median survival with aggressive chemotherapy in combination with radiotherapy is 12 to 15 months.

 

Potential advantages of RES-529 include activity shown in multiple in vitro and in vivo animal models for glioblastoma with evidence that it can pass the blood brain barrier.  RES-529 has a first-in-class mechanism of action exerting PI3K/Akt/mTOR pathway control potentially above other drugs targeting this pathway.

 

Dermatology Market Opportunity and Product Candidates

 

Our prescription dermatology business is based primarily upon a “soft” anti-androgen, known as “RES-440,” which is under development for the treatment of acne vulgaris.  RES-440 has completed in vitro and in vivo proof-of-concept studies in tissue and animal models.  We currently are working on synthesis and formulations of products and are planning Phase I/Phase II studies in 2016 for the treatment of acne.

 

Excess androgens (testosterone-like hormones) in the skin of both men and women can lead to the overproduction of sebum which can block skin pores and lead to localized infection and inflammation.  An anti-androgen applied to the skin can block the actions of androgens and heal acne.  In some women, excess skin androgen can lead to unwanted localized hair growth (hirsutism).  An anti-androgen applied to those skin areas can minimize excess body hair growth caused by excess androgens in the skin. Paradoxically, excess androgen in the scalp can cause androgenic alopecia or baldness and is the most common cause of hair loss affecting both men and women.  An anti-androgen applied to the scalp at the first signs of thinning can block the actions of testosterone-like hormones.  Hair thinning in some women coincides with menopause when the balance between estrogen levels and androgen levels changes.  Although our lead focus for RES-440 is the treatment of acne, we will evaluate other potential uses as we make progress in our product development.  Additional indications could include hirsutism, androgenic alopecia and seborrhea.

 

We believe that the worldwide anti-acne market is approximately $2.8 billion and constitutes the largest prescription market in dermatology.  Currently available prescription anti-acne products are associated with undesirable side effects, such as skin irritation, photosensitivity, hypopigmentation and GI-upset.  Hirsutism affects about 10% of the female population and Americans spend $1 billion annually for the removal of unwanted hair.  Androgenic baldness is a greatly underserved market and is primed for a safe, effective, non-invasive treatment.  It affects both men and women, and women constitute nearly half of the hair-loss market.  In the United States alone, consumers spend $1.2 billion annually on topical treatments for thinning hair.  We believe that this market is greatly underserved and in need of safe and non-invasive remedies.

 

The expected major metabolite of RES-440 has no detectable androgen-receptor affinity or ability to interfere with the androgenic effects of endogenous androgens. In vivo proof-of-concept studies in the Golden Syrian Hamster showed local activity without affecting internal androgen sensitive tissues.  The Golden Syrian Hamster model has been used as a model for topical anti-androgens.  Since acne, seborrhea, hirsutism and alopecia are all caused by excess androgens in the skin or scalp, the Golden Syrian Hamster model is a good predictor of androgen-sensitive functional activity.  In this animal, the sebaceous gland flank organ spots are visible as a dark raised spot on each flank.  In castrated animals, these flank gland organs will gradually diminish and disappear over 14-21 days.  The application of dihydrotestostereone or other androgens can restore the flank gland spots in castrated hamsters.  Topical doses of RES-440 from 10 to 300 µg/day were administered to male Golden Syrian Hamsters following a protocol that has been used to evaluate the effects of

 

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flutamide (a known anti-androgen with systemic effects).  In addition to monitoring the untreated flank organ size for systemic effects, androgen-sensitive tissues collected at the end of the experiment were weighed and compared to vehicle-treated intact animals and castrated controls.  The results of the Golden Syrian Hamster study with RES-440 are shown below:

 

GRAPHIC

 

As shown above, RES-440 treatment resulted in a significant dose-related reduction in the treated flank organ size.  Moreover, the untreated flank organ size was unaffected by RES-440 over the course of the study.  This demonstrates differentiation from the published effects of topical flutamide.  In addition there was no evidence of systemic anti-androgen effects on any of the five most androgen sensitive internal tissues analyzed at the end of the 21-day study of RES-440.

 

The melting point of RES-440 is 40-42°C, just above body temperature, making it ideal for permeation into the pilosebaceous unit of the skin where the androgen receptors are found.  In summary, RES-440 may have the ideal topical anti-androgenic drug profile for the treatment of acne, seborrhea, alopecia and hirsutism; it is very potent at the androgen receptor, has a short half-life with no active anti-androgenic metabolites.

 

Description of Other Indications/Products

 

We have rights to and own technologies and potential products beyond just those described above.  It is our strategy to focus at the current time on ophthalmology, oncology and dermatology, specifically wet AMD, gliobastoma and acne, as described in this report.  Beyond the potential products described in this report, we intend to continue to review our technologies and potential products on a regular basis and consider internal development in the future and the potential to out-license portions of our technology and potential products to other biopharmaceutical companies with greater focus and resources than ours or potentially in-license late stage products which are in or ready for human clinical trials.  These other indications include for example the use of our palomids in certain CNS disorders (i.e., Huntington’s disease and Parkinson’s disease), pulmonary fibrosis and biodefense.

 

In addition, we have developed small molecule zinc-finger transcription factor inhibitors/activators.  Zinc finger transcription factors are a subset of transcription factors utilizing zinc at its core for activity.  Transcription factors are proteins that bind to specific parts of DNA that control the transfer of genetic information from DNA to RNA.  RNA in turn directs the protein making machinery to manufacture one or more proteins controlled by the transcription factor.  Small molecule zinc-finger transcription factor inhibitors/activations can specifically inhibit or activate the synthesis of one or more proteins controlled by the particular transcription factor.

 

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Many diseases can be linked to the activation of particular proteins whose synthesis is controlled by transcription factors.  Inhibition or activation of such transcription factors could be a means of controlling disease pathology.  Since transcription factors are functionally closer to the ultimate pathological protein(s), specific inhibition or activation of transcription factors may result in a greater degree of specificity providing an improved benefit to risk ratio compared to other treatments.  This may have advantage over conventional small molecule drugs that directly inhibit their target protein through a one-to-one interaction as transcription factor inhibitors will turn off or on pathological protein manufacturing capability at its source.

 

Subject to prioritization and available resources, we may expand or out-license our work with zinc finger small molecule drug development to conduct IND enabling studies and Phase I clinical development in oncology.  We are not aware of any other company developing small molecule drugs targeting the disruption of the zinc finger transcription factor and DNA interaction.

 

Competition

 

Our industry is highly competitive and subject to rapid and significant change. Potential competitors in the United States are numerous and include major pharmaceutical and specialty pharmaceutical companies, universities and other institutions.  In general, competition in the pharmaceutical industry can be divided into four categories:  (1) corporations with large research and developmental departments that develop and market products in many therapeutic areas; (2) companies that have moderate research and development capabilities and focus their product strategy on a small number of therapeutic areas; (3) small companies with limited development capabilities and only a few product offerings; and (4) university and other research institutions.  Many of our competitors have longer operating histories, greater name recognition, substantially greater financial resources and larger research and development staffs than we do, as well as substantially greater experience than us in developing products, obtaining regulatory approvals, and manufacturing and marketing pharmaceutical products.  A significant amount of research is carried out at academic and government institutions.  These institutions are aware of the commercial value of their findings and are aggressive in pursuing patent protection and negotiating licensing arrangements to collect royalties for use of technology that they have developed.

 

Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among a smaller number of our competitors.  Our commercial opportunity could be reduced or eliminated if our competitors develop or market products or other novel therapies that are more effective, safer or less costly than our current or future product candidates, or obtain regulatory approval for their products more rapidly than we may obtain approval for our product candidates.  In addition, the first product to reach the market in a therapeutic or preventative area is often at a significant competitive advantage relative to later entrants in the market and may result in certain marketing exclusivity as per federal legislation.  Acceptance by physicians and other health care providers, including managed care groups, also is critical to the success of a product versus competitor products.  Our success will be based in part on our ability to identify, develop and manage a portfolio of product candidates that are safer and more effective than competing products.

 

There are several firms currently marketing or developing products that may be competitive with our products.  We believe RES-529 is a first-in-class PI3K/Akt/mTOR pathway inhibitor.  Other companies also are developing drugs to target this pathway, notably AstraZeneca plc, OSI Pharmaceuticals, Inc., Wyeth Pharmaceuticals, ARIAD Pharmaceuticals, Inc. and Takeda Pharmaceutical Company Limited having small molecule drug inhibitors in the clinic.  We believe that success in the development of other PI3K/Akt/mTOR acting inhibitor drugs may increase the value of the drugs in our pipeline by potentially creating bigger markets for products similar to ours.

 

If approved for the treatment of AMD, we anticipate that RES-529 would compete with a number of therapies currently marketed for age-related macular degeneration, including established drugs such as Lucentis and Avastin, which are marketed by Genentech (a member of the Roche Group) in the United States,

 

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and EYLEA, which is marketed by Regeneron Pharmaceuticals, Inc. in the United States.  In addition to established therapies, there are a number of new drug candidates in clinical trials or being developed by others that potentially could be used to treat AMD and compete with RES-529.

 

If approved for the treatment of acne, we anticipate that RES-440 would compete with other approved prescription acne products, including topical retinoids, topical antimicrobial products, oral antibiotics, oral isotretinoin products and oral hormonal therapies.  In addition to approved prescription acne therapies, a number of prescription products are used off-label for the treatment of acne.  In addition to prescription acne therapies, a wide range of over-the-counter and device products are used to treat acne, including over-the-counter benzoyl peroxide products and skin cleansers.  In addition to commercially available products, there are several product candidates in development that potentially could be used to treat acne and compete with RES-440.

 

Research and Product Development

 

We spent approximately $2.9 million in 2014 and $0.3 million in 2013 on research and product development activities.  We anticipate that our research and development expenses during 2015 will increase compared to 2014 and will consist primarily of expenses associated with the synthesis and formulations of our products in development, additional preclinical studies and planning for Phase I/Phase II studies.

 

Intellectual Property

 

Our success depends and will continue to depend in part upon our ability to maintain our exclusive licenses, to obtain and maintain proprietary protection for our products and technologies, to preserve our proprietary information, trademarks and trade secrets and to operate without infringing the proprietary rights of others.  Our policy is to attempt to protect our technology by, among other things, filing patent applications on inventions that are important to the development and conduct of our business with the U.S. Patent and Trademark Office, or USPTO, and its foreign counterparts or obtaining license rights for technology that we consider important to the development of our business.

 

As of March 25, 2015, we own or have an exclusive license to two issued U.S. patents and six issued foreign patents, which include granted European patent rights that have been validated in various EU member states, and 26 pending patent applications worldwide, covering the product candidates we currently intend to develop.  Of these patents and patent applications:

 

·                  There is one issued U.S. patent, 8,475,776, five foreign issued patents and 25 patent applications pending worldwide relating to RES-529. The issued RES-529 patents contain claims directed to compositions and methods for treating diseases involving angiogenesis using RES-529 and its derivatives.  The pending applications are directed to compositions and methods for treating diseases involving angiogenesis, methods of treating fibrotic disorders and treating radiation damage.  The issued U.S. and foreign patents relating to RES-529 will expire between 2026 and 2032 and the pending U.S. and foreign patent applications relating to RES-529, if issued, will expire between 2026 and 2032.

 

·                  There is one issued U.S. patent, U.S. 8,552,061, related to RES-440 and one Japanese patent, both of which contain claims directed to anti-androgenic compounds and methods for the treatment of androgen excess in the skin using the anti-androgenic compounds.  A pending RES-440 patent application contains similar claims.  The issued U.S. and foreign patents relating to RES-440 will expire between 2028 and 2030 and the pending U.S. and foreign patent applications relating to RES-440, if issued, will expire between 2022 and 2028.

 

Patents extend for varying periods according to the date of patent filing or grant and the legal term of patents in various countries where patent protection is obtained.  The actual protection afforded by a patent,

 

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which can vary from country to country, depends on the type of patent, the scope of its coverage and the availability of legal remedies in the country.

 

In addition to patents, we use other forms of protection, such as trademark, copyright and trade secret protection, to protect our intellectual property, particularly where we do not believe patent protection is appropriate or obtainable.  We aim to take advantage of all of the intellectual property rights that are available to us and believe that this comprehensive approach will provide us with proprietary positions for our product candidates, where available.

 

We also protect our proprietary information by requiring our employees, consultants, contractors and other advisors to execute nondisclosure and assignment of invention agreements upon commencement of their respective employment or engagement.  Agreements with our employees also prevent them from bringing the proprietary rights of third parties to us.  In addition, we also require confidentiality or service agreements from third parties that receive our confidential information or materials.

 

License Agreement

 

We are party to an exclusive license agreement with Yale University pursuant to which we have a worldwide exclusive license to practice, enforce and otherwise exploit certain patent rights, know-how and data related to RES-440.  The licensed patent under the exclusive license agreement includes U.S. Pat. No. 8,552,061 and corresponding applications in Europe and Japan, which cover anti-androgenic compounds (having a particular claimed chemical structure) for the treatment of excess androgens in the skin (i.e. resulting in acne, baldness and hirsutism).  The license agreement requires us to use reasonable commercial efforts to develop and commercialize products using the licensed patent rights, know-how and data.

 

Under the license agreement, we are required to pay an annual license maintenance royalty of $20,000 until we start to pay minimum royalty payments.  We also are required to pay up to $1.85 million upon the achievement of specified development, commercialization and other milestones related to each licensed product.  In addition, we are obligated to pay Yale University low-to-mid single-digit royalties on net product sales and minimum annual royalty payments commencing on the first anniversary of the first sale of a licensed product.

 

We are permitted to grant sublicenses to the licensed rights and may assign the license agreement upon a change of control.  The license agreement will terminate automatically if we experience certain insolvency events.  Yale University may terminate the license agreement if we fail to make any payment when due or commit a material breach of the license agreement, subject to applicable cure provisions, or fail to obtain or maintain adequate insurance.  We may terminate the license agreement at any time on 90 days notice to Yale University and payment of all amounts then due and owing or if Yale University commits a material breach of the license agreement, subject to applicable cure provisions.  Subject to earlier termination, the license agreement remains in effect until the date that the last patent or patent application in the licensed patent rights has expired or been revoked, invalidated or abandoned.  As of March 25, 2015, the last-to-expire issued patent relating to RES-440 that we license under the license agreement with Yale University expires in 2030.

 

Government Regulation

 

FDA Drug Approval Process

 

In the United States, pharmaceutical products are subject to extensive regulation by the FDA.  The Federal Food, Drug, and Cosmetic Act, or the FDC Act, and other federal and state statutes and regulations, govern, among other things, the research, development, testing, manufacture, storage, recordkeeping, approval, labeling, promotion and marketing, distribution, post-approval monitoring and reporting, sampling and import and export of pharmaceutical products.  Failure to comply with applicable U.S. requirements may subject a company to a variety of administrative or judicial sanctions, such as FDA refusal to approve pending new drug

 

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applications, or NDAs, warning or untitled letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, civil penalties and criminal prosecution.

 

Pharmaceutical product development for a new product or certain changes to an approved product in the United States typically involves preclinical laboratory and animal tests, the submission to the FDA of an investigational new drug application, or IND, which must become effective before clinical testing may commence, and adequate and well-controlled clinical trials to establish the safety and effectiveness of the drug for each indication for which FDA approval is sought.  Satisfaction of FDA pre-market approval requirements typically takes many years and the actual time required may vary substantially based upon the type, complexity and novelty of the product or disease.

 

Preclinical tests include laboratory evaluation of product chemistry, formulation and toxicity, as well as animal trials to assess the characteristics and potential safety and efficacy of the product.  The conduct of the preclinical tests must comply with federal regulations and requirements, including good laboratory practices.  The results of preclinical testing are submitted to the FDA as part of an IND, along with other information, including information about product chemistry, manufacturing and controls and a proposed clinical trial protocol.  Long term preclinical tests, such as animal tests of reproductive toxicity and carcinogenicity, may continue after the IND is submitted.

 

A 30-day waiting period after the submission of each IND is required prior to the commencement of clinical testing in humans.  If the FDA has neither commented on nor questioned the IND within this 30-day period, the clinical trial proposed in the IND may begin.

 

Clinical trials involve the administration of the investigational new drug to healthy volunteers or patients under the supervision of a qualified investigator.  Clinical trials must be conducted: (1) in compliance with federal regulations; (2) in compliance with good clinical practice, or GCP, an international standard meant to protect the rights and health of patients and to define the roles of clinical trial sponsors, administrators and monitors; and (3) under protocols detailing the objectives of the trial, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated.  Each protocol involving testing on U.S. patients and subsequent protocol amendments must be submitted to the FDA as part of the IND.

 

The FDA may order the temporary, or permanent, discontinuation of a clinical trial at any time, or impose other sanctions, if it believes that the clinical trial either is not being conducted in accordance with FDA requirements or presents an unacceptable risk to the clinical trial patients.  The study protocol and informed consent information for patients in clinical trials must also be submitted to an institutional review board, or IRB, for approval at each site at which the clinical trial will be conducted.  An IRB may also require the clinical trial at the site to be halted, either temporarily or permanently, for failure to comply with the IRB’s requirements, or may impose other conditions.

 

Clinical trials to support NDAs for marketing approval are typically conducted in three sequential phases, but the phases may overlap. In Phase 1, the initial introduction of the drug into healthy human subjects or patients, the drug is tested to assess pharmacological actions, side effects associated with increasing doses and, if possible, early evidence on effectiveness.  Phase 2 usually involves trials in a limited patient population to determine metabolism, pharmacokinetics, the effectiveness of the drug for a particular indication, dosage tolerance and optimum dosage, and to identify common adverse effects and safety risks.  If a compound demonstrates evidence of effectiveness and an acceptable safety profile in Phase 2 evaluations, Phase 3 clinical trials are undertaken to obtain the additional information about clinical efficacy and safety in a larger number of patients, typically at geographically dispersed clinical trial sites, to permit the FDA to evaluate the overall benefit-risk relationship of the drug and to provide adequate information for the labeling of the drug. In most cases the FDA requires two adequate and well-controlled Phase 3 clinical trials with statistically significant results to demonstrate the efficacy of the drug.  A single Phase 3 clinical trial with other confirmatory evidence may be sufficient in rare instances where the study is a large multicenter trial demonstrating internal consistency and a statistically very persuasive finding of an effect on mortality, irreversible morbidity or

 

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prevention of a disease with a potentially serious outcome and confirmation of the result in a second trial would be practically or ethically impossible.

 

After completion of the required clinical testing, an NDA is prepared and submitted to the FDA. FDA approval of the NDA is required before marketing of the product may begin in the United States.  The NDA must include the results of all preclinical, clinical and other testing and a compilation of data relating to the product’s pharmacology, chemistry, manufacture and controls.  The cost of preparing and submitting an NDA is substantial.  The submission of most NDAs is additionally subject to a substantial application user fee, and the manufacturer and sponsor under an approved new drug application are also subject to annual product and establishment user fees.  These fees are typically increased annually.

 

The FDA has 60 days from its receipt of an NDA to determine whether the application will be accepted for filing based on the agency’s threshold determination that it is sufficiently complete to permit substantive review. Once the submission is accepted for filing, the FDA begins an in-depth review.  The FDA has agreed to certain performance goals in the review of new drug applications.  Priority review can be applied to drugs that the FDA determines offer major advances in treatment, or provide a treatment where no adequate therapy exists.  For certain drugs, priority review is further limited only for drugs intended to treat a serious or life-threatening disease relative to the currently approved products.  The review process for both standard and priority review may be extended by the FDA for three additional months to consider certain late-submitted information, or information intended to clarify information already provided in the submission.

 

The FDA may also refer applications for novel drug products, or drug products that present difficult questions of safety or efficacy, to an advisory committee, typically a panel that includes clinicians and other experts, for review, evaluation and a recommendation as to whether the application should be approved.  The FDA is not bound by the recommendation of an advisory committee, but it generally follows such recommendations. Before approving an NDA, the FDA will typically inspect one or more clinical sites to assure compliance with GCP. Additionally, the FDA will inspect the facility or the facilities at which the drug is manufactured.  The FDA will not approve the product unless compliance with current good manufacturing practice, or cGMP, is satisfactory and the NDA contains data that provide substantial evidence that the drug is safe and effective in the indication studied.

 

After the FDA evaluates the NDA and the manufacturing facilities, it issues either an approval letter or a complete response letter.  A complete response letter generally outlines the deficiencies in the submission and may require substantial additional testing, or information, in order for the FDA to reconsider the application.  If, or when, those deficiencies have been addressed to the FDA’s satisfaction in a resubmission of the NDA, the FDA will issue an approval letter.  The FDA has committed to reviewing such resubmissions in two or six months depending on the type of information included.

 

An approval letter authorizes commercial marketing of the drug with specific prescribing information for specific indications.  As a condition of NDA approval, the FDA may require a risk evaluation and mitigation strategy, or REMS, to help ensure that the benefits of the drug outweigh the potential risks.  REMS can include medication guides, communication plans for healthcare professionals and elements to assure safe use, or ETASU.  ETASU can include, but are not limited to, special training or certification for prescribing or dispensing, dispensing only under certain circumstances, special monitoring and the use of patient registries. The requirement for a REMS can materially affect the potential market and profitability of the drug.  Moreover, product approval may require substantial post-approval testing and surveillance to monitor the drug’s safety or efficacy.  Once granted, product approvals may be withdrawn if compliance with regulatory standards is not maintained or problems are identified following initial marketing.

 

Changes to some of the conditions established in an approved application, including changes in indications, labeling, or manufacturing processes or facilities, require submission and FDA approval of a new NDA or NDA supplement before the change can be implemented.  An NDA supplement for a new indication

 

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typically requires clinical data similar to that in the original application, and the FDA uses the same procedures and actions in reviewing NDA supplements as it does in reviewing NDAs.

 

The Hatch-Waxman Act

 

Orange Book Listing

 

In seeking approval for a drug through an NDA, applicants are required to list with the FDA each patent whose claims cover the applicant’s product.  Upon approval of a drug, each of the patents listed in the application for the drug is then published in the FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations, commonly known as the Orange Book. Drugs listed in the Orange Book can, in turn, be cited by potential generic competitors in support of approval of an abbreviated new drug application, or ANDA. An ANDA provides for marketing of a drug product that has the same active ingredients in the same strengths and dosage form as the listed drug and has been shown through bioequivalence testing to be therapeutically equivalent to the listed drug.  Other than the requirement for bioequivalence testing, ANDA applicants are not required to conduct, or submit results of, preclinical or clinical tests to prove the safety or effectiveness of their drug product.  Drugs approved in this way are commonly referred to as “generic equivalents” to the listed drug, and can often be substituted by pharmacists under prescriptions written for the original listed drug.

 

The ANDA applicant is required to certify to the FDA concerning any patents listed for the approved product in the FDA’s Orange Book.  Specifically, the applicant must certify that: (1) the required patent information has not been filed; (2) the listed patent has expired; (3) the listed patent has not expired, but will expire on a particular date and approval is sought after patent expiration; or (4) the listed patent is invalid or will not be infringed by the new product.  The ANDA applicant may also elect to submit a section viii statement certifying that its proposed ANDA label does not contain (or carves out) any language regarding the patented method-of-use rather than certify to a listed method-of-use patent.  If the applicant does not challenge the listed patents, the ANDA will not be approved until all the listed patents claiming the referenced product have expired.

 

A certification that the new product will not infringe the already approved product’s listed patents, or that such patents are invalid, is called a Paragraph IV certification.  If the ANDA applicant has provided a Paragraph IV certification to the FDA, the applicant must also send notice of the Paragraph IV certification to the NDA and patent holders once the ANDA has been accepted for filing by the FDA.  The NDA and patent holders may then commence a patent infringement lawsuit in response to the notice of the Paragraph IV certification.  The filing of a patent infringement lawsuit within 45 days of the receipt of a Paragraph IV certification automatically prevents the FDA from approving the ANDA until the earlier of 30 months, expiration of the patent, settlement of the lawsuit, or a decision in the infringement case that is favorable to the ANDA applicant.

 

The ANDA also will not be approved until any applicable non-patent exclusivity listed in the Orange Book for the referenced product has expired.

 

Exclusivity

 

Upon NDA approval of a new chemical entity, or NCE, which is a drug that contains no active moiety that has been approved by the FDA in any other NDA, that drug receives five years of marketing exclusivity during which the FDA cannot receive any ANDA seeking approval of a generic version of that drug.  Certain changes to a drug, such as the addition of a new indication to the package insert, are associated with a three-year period of exclusivity during which the FDA cannot approve an ANDA for a generic drug that includes the change.

 

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An ANDA may be submitted one year before NCE exclusivity expires if a Paragraph IV certification is filed.  If there is no listed patent in the Orange Book, there may not be a Paragraph IV certification and, thus, no ANDA may be filed before the expiration of the exclusivity period.

 

Section 505(b)(2) New Drug Applications

 

Most drug products obtain FDA marketing approval pursuant to an NDA or an ANDA. A third alternative is a special type of NDA, commonly referred to as a Section 505(b)(2), or 505(b)(2), NDA, which enables the applicant to rely, in part, on the FDA’s previous approval of a similar product, or published literature, in support of its application.

 

505(b)(2) NDAs often provide an alternate path to FDA approval for new or improved formulations or new uses of previously approved products. Section 505(b)(2) permits the filing of an NDA where at least some of the information required for approval comes from studies not conducted by, or for, the applicant and for which the applicant has not obtained a right of reference.  If the 505(b)(2) applicant can establish that reliance on the FDA’s previous approval is scientifically appropriate, it may eliminate the need to conduct certain preclinical or clinical studies of the new product.  The FDA may also require companies to perform additional studies or measurements to support the change from the approved product.  The FDA may then approve the new product candidate for all, or some, of the label indications for which the referenced product has been approved, as well as for any new indication sought by the Section 505(b)(2) applicant.

 

To the extent that the Section 505(b)(2) applicant is relying on studies conducted for an already approved product, the applicant is required to certify to the FDA concerning any patents listed for the approved product in the Orange Book to the same extent that an ANDA applicant would.  Thus approval of a 505(b)(2) NDA can be stalled until all the listed patents claiming the referenced product have expired, until any non-patent exclusivity, such as exclusivity for obtaining approval of a new chemical entity, listed in the Orange Book for the referenced product has expired, and, in the case of a Paragraph IV certification and subsequent patent infringement suit, until the earlier of 30 months, settlement of the lawsuit or a decision in the infringement case that is favorable to the Section 505(b)(2) applicant.

 

Patent Term Extension

 

After NDA approval, owners of relevant drug patents may apply for up to a five-year patent extension. The allowable patent term extension is calculated as half of the drug’s testing phase, the time between IND application and NDA submission, and all of the review phase, the time between NDA submission and approval, up to a maximum of five years.  The time can be shortened if the FDA determines that the applicant did not pursue approval with due diligence.  The total patent term after the extension may not exceed 14 years.

 

For patents that might expire during the application phase, the patent owner may request an interim patent extension. An interim patent extension increases the patent term by one year and may be renewed up to four times.  For each interim patent extension granted, the post-approval patent extension is reduced by one year.  The director of the USPTO must determine that approval of the drug covered by the patent for which a patent extension is being sought is likely.  Interim patent extensions are not available for a drug for which an NDA has not been submitted.

 

Post-Approval Requirements

 

Once an NDA is approved, a product will be subject to certain post-approval requirements.  For instance, the FDA closely regulates the post-approval marketing and promotion of drugs, including standards and regulations for direct-to-consumer advertising, off-label promotion, industry-sponsored scientific and educational activities and promotional activities involving the internet.  Drugs may be marketed only for the approved indications and in accordance with the provisions of the approved labeling.

 

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Adverse event reporting and submission of periodic reports is required following FDA approval of an NDA.  The FDA also may require post-marketing testing, known as Phase 4 testing, risk evaluation and mitigation strategies, or REMS, and surveillance to monitor the effects of an approved product, or the FDA may place conditions on an approval that could restrict the distribution or use of the product.  In addition, quality-control, drug manufacture, packaging and labeling procedures must continue to conform to cGMPs after approval.  Drug manufacturers and certain of their subcontractors are required to register their establishments with the FDA and certain state agencies.  Registration with the FDA subjects entities to periodic unannounced inspections by the FDA, during which the agency inspects manufacturing facilities to assess compliance with cGMPs.  Accordingly, manufacturers must continue to expend time, money and effort in the areas of production and quality-control to maintain compliance with cGMPs.  Regulatory authorities may withdraw product approvals or request product recalls if a company fails to comply with regulatory standards, if it encounters problems following initial marketing, or if previously unrecognized problems are subsequently discovered.

 

Pediatric Information

 

Under the Pediatric Research Equity Act, NDAs or supplements to NDAs must contain data to assess the safety and effectiveness of the drug for the claimed indications in all relevant pediatric subpopulations and to support dosing and administration for each pediatric subpopulation for which the drug is safe and effective.  The FDA may grant full or partial waivers, or deferrals, for submission of data.

 

The Best Pharmaceuticals for Children Act, or BPCA, provides NDA holders a six-month extension of any exclusivity, patent or non-patent, for a drug if certain conditions are met.  Conditions for exclusivity include the FDA’s determination that information relating to the use of a new drug in the pediatric population may produce health benefits in that population, the FDA making a written request for pediatric studies and the applicant agreeing to perform, and reporting on, the requested studies within the statutory timeframe.  Applications under the BPCA are treated as priority applications, with all of the benefits that designation confers.

 

Disclosure of Clinical Trial Information

 

Sponsors of clinical trials of FDA-regulated products, including drugs, are required to register and disclose certain clinical trial information.  Information related to the product, patient population, phase of investigation, study sites and investigators and other aspects of the clinical trial is then made public as part of the registration. Sponsors are also obligated to discuss the results of their clinical trials after completion. Disclosure of the results of these trials can be delayed until the new product or new indication being studied has been approved.  Competitors may use this publicly-available information to gain knowledge regarding the progress of development programs.

 

Regulation Outside of the United States

 

In addition to regulations in the United States, we will be subject to regulations of other countries governing any clinical trials and commercial sales and distribution of our product candidates.  Whether or not we obtain FDA approval for a product, we must obtain approval by the comparable regulatory authorities of countries outside of the United States before we can commence clinical trials in such countries and approval of the regulators of such countries or economic areas, such as the European Union, before we may market products in those countries or areas.  Certain countries outside of the United States have a process similar to the FDA’s that requires the submission of a clinical trial application, or CTA, much like the IND prior to the commencement of human clinical trials. In the European Union, for example, a CTA must be submitted to each country’s national health authority and an independent ethics committee, much like the FDA and IRB, respectively.  Once the CTA is approved in accordance with a country’s requirements, clinical trial development may proceed. The approval process and requirements governing the conduct of clinical trials,

 

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product licensing, pricing and reimbursement vary greatly from place to place, and the time may be longer or shorter than that required for FDA approval.

 

Under European Union regulatory systems, a company may submit marketing authorization applications either under a centralized or decentralized procedure.  The centralized procedure, which is compulsory for medicines produced by biotechnology or those medicines intended to treat AIDS, cancer, neurodegenerative disorders or diabetes and is optional for those medicines which are highly innovative, provides for the grant of a single marketing authorization that is valid for all European Union member states.  The decentralized procedure provides for mutual recognition of national approval decisions.  Under this procedure, the holder of a national marketing authorization may submit an application to the remaining member states.  Within 90 days of receiving the applications and assessments report, each member state must decide whether to recognize approval.  If a member state does not recognize the marketing authorization, the disputed points are eventually referred to the European Commission, whose decision is binding on all member states.

 

Anti-Kickback and False Claims Laws

 

In addition to FDA restrictions on marketing of pharmaceutical products, several other types of state and federal laws have been applied to restrict certain marketing practices in the pharmaceutical industry.  These laws include, among others, anti-kickback statutes, false claims statutes and other statutes pertaining to healthcare fraud and abuse.  The federal healthcare program anti-kickback statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce, or in return for, purchasing, leasing, ordering or arranging for the purchase, lease or order of any healthcare item or service reimbursable under Medicare, Medicaid or other federally financed healthcare programs.  The Patient Protection and Affordable Care Act, or PPACA, as amended, amended the intent element of the federal anti-kickback statute so that a person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it.  This statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on the one hand and prescribers, purchasers and formulary managers on the other.  Although there are a number of statutory exceptions and regulatory safe harbors protecting certain common activities from prosecution or other regulatory sanctions, the exceptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchases or recommendations may be subject to scrutiny if they do not qualify for an exception or safe harbor.

 

Federal false claims laws prohibit any person or entity from, among other things, knowingly presenting, or causing to be presented, a false claim for payment to the federal government, or knowingly making, or causing to be made, a false statement to have a false claim paid.  This includes claims made to programs where the federal government reimburses, such as Medicaid, as well as programs where the federal government is a direct purchaser, such as when it purchases off the Federal Supply Schedule.  Pharmaceutical and other healthcare companies have been prosecuted under these laws for, among other things, allegedly inflating drug prices they report to pricing services, which in turn were used by the government to set Medicare and Medicaid reimbursement rates, and for allegedly providing free product to customers with the expectation that the customers would bill federal programs for the product. In addition, certain marketing practices, including off-label promotion, may also violate federal false claims laws.  Additionally, PPACA amended the federal healthcare program anti-kickback statute such that a violation of that statute can serve as a basis for liability under certain federal false claims laws.

 

The majority of states also have statutes or regulations similar to the federal anti-kickback law and false claims laws, which apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor.

 

Other federal statutes pertaining to healthcare fraud and abuse include the civil monetary penalties statute, which prohibits, among other things, the offer or payment of remuneration to a Medicaid or Medicare beneficiary that the offerer or payor knows or should know is likely to influence the beneficiary to order or

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receive a reimbursable item or service from a particular supplier, and the healthcare fraud and false statements statutes, which prohibit, among other things, knowingly and willfully executing or attempting to execute a scheme to defraud any healthcare benefit program or obtain by means of false or fraudulent pretenses, representations, or promises any money or property owned by or under the control of any healthcare benefit program in connection with the delivery of or payment for healthcare benefits, items, or services.

 

Violations of these federal healthcare fraud and abuse laws are punishable by imprisonment, criminal fines, civil monetary penalties and exclusion from participation in federal healthcare programs.

 

Other Federal and State Regulatory Requirements

 

The Centers for Medicare & Medicaid Services, or CMS, has issued a final rule pursuant to PPACA that requires certain manufacturers of prescription drugs to annually collect and report information on payments or transfers of value to physicians and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members.  Manufacturers were required to begin collecting information on August 1, 2013, with the first reports due March 31, 2014.  The reported data is posted in searchable form on a public website. Failure to submit required information may result in civil monetary penalties.

 

In addition, several states now require prescription drug companies to report expenses relating to the marketing and promotion of drug products and to report gifts and payments to individual healthcare practitioners and entities in these states.  Other states prohibit various other marketing-related activities.  Still other states require the posting of information relating to clinical studies and their outcomes.  In addition, California, Connecticut, Nevada and Massachusetts require pharmaceutical companies to implement compliance programs and marketing codes.  Several additional states are considering similar proposals. Some of the state laws are broader in scope than federal laws.  Compliance with these laws is difficult and time consuming, and companies that do not comply with these state laws face civil penalties.

 

Reimbursement

 

Sales of any of our product candidates that are approved will depend, in part, on the extent to which the costs of our approved products will be covered by third-party payors, such as government health programs, commercial insurance and managed healthcare organizations.  These third-party payors are increasingly challenging the prices charged for medical products and services.  Additionally, the containment of healthcare costs has become a priority of federal and state governments and the prices of drugs have been a focus in this effort.  The U.S. government, state legislatures and foreign governments have shown significant interest in implementing cost-containment programs, including price controls, restrictions on reimbursement and requirements for substitution of generic products.  Adoption of price controls and cost-containment measures, and adoption of more restrictive policies in jurisdictions with existing controls and measures, could further limit our net revenue and results.  If any of our products are approved and these third-party payors do not consider our approved products to be cost-effective compared to other therapies, they may not cover our approved products as a benefit under their plans or, if they do, the level of payment may not be sufficient to allow us to sell our approved products on a profitable basis.

 

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or MMA, imposed new requirements for the distribution and pricing of prescription drugs for Medicare beneficiaries.  Under Part D, Medicare beneficiaries may enroll in prescription drug plans offered by private entities which will provide coverage of outpatient prescription drugs. Part D plans include both stand-alone prescription drug benefit plans and prescription drug coverage as a supplement to Medicare Advantage plans.  Unlike Medicare Part A and B, Part D coverage is not standardized. Part D prescription drug plan sponsors are not required to pay for all covered Part D drugs, and each drug plan can develop its own drug formulary that identifies which drugs it will cover and at what tier or level.  However, Part D prescription drug formularies must include drugs within each therapeutic category and class of covered Part D drugs, though not necessarily all the drugs in each

 

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category or class. Any formulary used by a Part D prescription drug plan must be developed and reviewed by a pharmacy and therapeutic committee.  Government payment for some of the costs of prescription drugs may increase demand for our products for which we receive marketing approval.  However, any negotiated prices for our approved products covered by a Part D prescription drug plan will likely be lower than the prices we might otherwise obtain.  Moreover, while the MMA applies only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own payment rates.  Any reduction in payment that results from the MMA may result in a similar reduction in payments from non-governmental payors.

 

The ARRA provides funding for the federal government to compare the effectiveness of different treatments for the same illness.  A plan for the research will be developed by the Department of Health and Human Services, the Agency for Healthcare Research and Quality and the National Institutes for Health, and periodic reports on the status of the research and related expenditures will be made to the U.S. Congress. Although the results of the comparative effectiveness studies are not intended to mandate coverage policies for public or private payors, it is not clear what effect, if any, the research will have on the sales of any approved product, if any such product or the condition that it is intended to treat is the subject of a study.  It is also possible that comparative effectiveness research demonstrating benefits in a competitor’s product could adversely affect the sales of our product candidates.  If third-party payors do not consider our approved products to be cost-effective compared to other available therapies, they may not cover our approved products as a benefit under their plans or, if they do, the level of payment may not be sufficient to allow us to sell our approved products on a profitable basis.

 

The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act of 2010, collectively referred to as the ACA, enacted in March 2010, is expected to have a significant impact on the health care industry.  The ACA is expected to expand coverage for the uninsured while at the same time containing overall healthcare costs. With regard to pharmaceutical products, among other things, the ACA is expected to expand and increase industry rebates for drugs covered under Medicaid programs and make changes to the coverage requirements under the Medicare Part D program. We cannot predict the impact of the ACA on pharmaceutical companies, as many of the ACA reforms require the promulgation of detailed regulations implementing the statutory provisions, which has not yet occurred. In addition, although the U.S. Supreme Court upheld the constitutionality of most of the ACA, some states have indicated that they intend to not implement certain sections of the ACA, and some members of the U.S. Congress are still working to repeal parts of the ACA.  These challenges add to the uncertainty of the legislative changes enacted as part of ACA.

 

In addition, in some non-U.S. jurisdictions, the proposed pricing for a product candidate must be approved before it may be lawfully marketed.  The requirements governing drug pricing vary widely from country to country.  For example, the European Union provides options for its member states to restrict the range of medicinal products for which their national health insurance systems provide reimbursement and to control the prices of medicinal products for human use.  A member state may approve a specific price for the medicinal product or it may instead adopt a system of direct or indirect controls on the profitability of the company placing the medicinal product on the market.  There can be no assurance that any country that has price controls or reimbursement limitations for pharmaceutical products will allow favorable reimbursement and pricing arrangements for any of our product candidates.  Historically, product candidates launched in the European Union do not follow price structures of the United States and generally tend to be significantly lower.

 

Manufacturing and Supply

 

We do not have any facilities suitable for manufacturing on a commercial scale basis any of our product candidates nor do we have any experience in volume manufacturing.  We currently use third-party current Good Manufacturing Practices (cGMP) contract manufacturing organizations, or CMOs, to manufacture our product candidates for our preclinical studies and clinical trials and intend to continue doing

 

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so in the future in accordance with FDA and other appropriate regulations.  We anticipate that these CMOs will have capacity to support commercial scale, but we do not have any formal agreements at this time with any of these CMOs to cover commercial production.  We also may elect to pursue other CMOs for manufacturing supplies for later-stage trials and for commercialization.  We currently have no plans to establish a manufacturing capability, but rather plan to continue to rely on third-party cGMP manufacturers for any future trials and commercialization of our product candidates for which we retain manufacturing responsibility.

 

Sales and Marketing

 

We currently have no sales and marketing personnel to sell any of our product candidates on a commercial basis if and when our product candidates received required regulatory approvals.  If and when we are ready to launch commercially a product, we will either contract with or hire qualified sales and marketing personnel or seek a joint marketing partner or licensee to assist us with this function.

 

Employees

 

As of December 31, 2014, we had eight employees, including four in product development and four in management or administrative positions.  We also retain independent consultants to support our organization. None of our employees is represented by a labor union or covered by a collective bargaining agreement.

 

Corporate Information and History

 

We are a Nevada corporation.  We changed our name to RestorGenex Corporation in March 2014.  Our principal executive offices are located at 2150 East Lake Cook Road, Suite 750, Buffalo Grove, Illinois 60089.  Our telephone number is (847) 777-8092, and our Internet web site address is www.restorgenex.com.  The information contained on our web site or connected to our web site is not incorporated by reference into and should not be considered part of this annual report on Form 10-K.

 

Prior to our repositioning as a specialty biopharmaceutical company in 2013, we operated various entertainment and sports events businesses, which we acquired in a series of acquisitions beginning in March 2008.

 

In March 2008, pursuant to an agreement and plan of merger dated August 20, 2007 between Feris International, Inc. (“Feris”) and Pro Sports & Entertainment, Inc. (“PSEI”), Feris issued 495,000 shares of its common stock for all issued and outstanding shares of PSEI, resulting in PSEI becoming a wholly owned subsidiary of Feris and the surviving entity for accounting purposes.  In July 2008, Feris’s corporate name was changed to Stratus Media Group, Inc.  PSEI specialized in various entertainment and sports events that it owned and operated.  PSEI also owned Stratus Rewards LLC that planned to operate a credit card rewards program.  In June 2011, we acquired shares of series A convertible preferred stock of ProElite, Inc. (“ProElite”) that organized and promoted mixed martial arts (“MMA”) matches.  These holdings of series A convertible preferred stock provided us voting rights on an as-converted basis equivalent to a 95% ownership in ProElite.  During the first quarter of 2013, we decided to focus on the MMA business and temporarily suspended development of our other businesses.  Because of lack of working capital at that time, we suspended operations of ProElite effective June 30, 2013.  Following the repositioning of our company as a specialty biopharmaceutical company, our Board of Directors voted to discontinue the operations of ProElite effective March 31, 2014.  We intend to dissolve ProElite during 2015.

 

In 2013, in order to reposition our company as a specialty biopharmaceutical company, our Board of Directors authorized management to pursue acquisition opportunities in the life sciences sector in view of the experience and expertise in that area of our largest stockholders, Sol J. Barer and Isaac Blech.  In November 2013, we completed the acquisition of Canterbury Laboratories, LLC and Hygeia Therapeutics, Inc.  On March 28, 2014, we completed the acquisition of Paloma Pharmaceuticals, Inc. and VasculoMedics, Inc.

 

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Effective September 30, 2013, we entered into an agreement and plan of merger with Canterbury Acquisition LLC, Hygeia Acquisition, Inc., Canterbury Laboratories, LLC (“Canterbury”), Hygeia Therapeutics, Inc. (“Hygeia”) and Yael Schwartz, Ph.D., as holder representative, pursuant to which we acquired through a merger all of the capital stock of Canterbury and Hygeia, with Canterbury and Hygeia becoming our wholly owned subsidiaries.  Canterbury and Hygeia (the “Canterbury Group”) are related companies that were engaged in the development of pharmaceuticals and cosmeceuticals (cosmetic products with “drug-like” benefits) which, depending on the specific product involved, may treat acne, hirsutism (unwanted hair) and alopecia (thinning hair) and may revitalize hormonally-aged skin and hair in women over the age of 45.  The Canterbury Group licensed the technology underlying its proposed products on an exclusive basis from Yale University.  The consideration for the mergers was the issuance by us of an aggregate of 1,150,116 shares of our common stock issued to the stakeholders of Canterbury and Hygeia.  Closing of the mergers occurred on November 18, 2013.

 

As we continued to position our company as a specialty biopharmaceutical company, in early March 2014, we appointed Stephen M. Simes as our Chief Executive Officer.  Mr. Simes is an executive with extensive experience in the pharmaceutical and biotechnology industry.

 

On March 3, 2014, we entered into an agreement and plan of merger with Paloma Acquisition, Inc., Paloma Pharmaceuticals, Inc. (“Paloma”) and David Sherris, Ph.D., as founding stockholder and holder representative, pursuant to which we agreed to acquire all of the capital stock of Paloma, with Paloma becoming our wholly owned subsidiary.  On March 28, 2014, the merger with Paloma was closed and we issued an aggregate of 2,500,000 shares of common stock to all the holders of Paloma common stock and its derivative securities, which included the assumption of promissory notes of Paloma in the aggregate amount (principal and interest at that time) of $1,151,725 to be paid on the first anniversary of the closing of the Paloma merger.  Paloma had developed a non-steroidal, synthetic, small molecule drug library that may have potential applications in ophthalmology, cancer, dermatology, biodefense and anti-viral application.  The lead product, RES-529, targets and inhibits the PI3K/Akt/mTOR signal transduction pathway, specifically as a first-in-class dual TORC1/TORC2 inhibitor.

 

Also on March 3, 2014, we entered into an agreement and plan of merger with VasculoMedics Acquisition, Inc., VasculoMedics, Inc. (“VasculoMedics”) and David Sherris, Ph.D., pursuant to which we agreed to acquire all of the capital stock of VasculoMedics, with VasculoMedics becoming our wholly owned subsidiary.  The VasculoMedics merger was concurrently closed with and was a condition to the closing of the Paloma merger on March 28, 2013.  In the VasculoMedics merger, we issued an aggregate of 220,000 shares of common stock to the VasculoMedics stockholders.  VasculoMedics was founded as a platform epigenetic company to develop orally available small molecular inhibitors of zinc finger transcription factors.  Zinc finger transcription factors are a subset of transcription factors utilizing zinc at its core for activity.

 

On March 7, 2014, we effected a reverse stock split of one-for-100 of our common stock, and we changed our corporate name from Stratus Media Group, Inc. to RestorGenex Corporation.  All share and per share amounts in this report have been adjusted to reflect the one-for-100 reverse split of outstanding common stock.

 

Effective May 27, 2014, we appointed Phillip B. Donenberg as our Chief Financial Officer, and effective August 4, 2014, we appointed Mark A. Weinberg, M.D. as Senior Vice President — Clinical Development.  Both Mr. Donenberg and Dr. Weinberg have extensive experience in the pharmaceutical and biotechnology industry.

 

Available Information

 

We make available, free of charge and through our Internet web site, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to any such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as

 

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soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.  We also make available, free of charge and through our Internet web site, to any shareholder who requests, the charters of our board committees, our Corporate Governance Guidelines and our Code of Business Conduct and Ethics.  Requests for copies can be directed to Investor Relations at (847) 777-8092.

 

Cautionary Note Regarding Forward-Looking Statements

 

This annual report on Form 10-K contains not only historical information, but also forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbor created by those sections.  In addition, we or others on our behalf may make forward-looking statements from time to time in oral presentations, including telephone conferences and/or web casts open to the public, in news releases or reports, on its Internet web site or otherwise.  All statements other than statements of historical facts included in this report that address activities, events or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements including, in particular, the statements about our plans, objectives, strategies and prospects regarding, among other things, our business, operating results and financial condition.  We have identified some of these forward-looking statements with words like “believe,” “may,” “could,” “would,” “might,” “possible,” “potential,” “project,” “will,” “should,” “expect,” “intend,” “plan,” “predict,” “anticipate,” “estimate,” “approximate,” “contemplate” and “continue,” the negative of these words, other words and terms of similar meaning and the use of future dates.  These forward-looking statements may be contained in this section, the notes to our financial statements and elsewhere in this report, including under the heading “Part II.  Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.”  Our forward-looking statements generally relate to:

 

·                  the status of our product development programs;

 

·                  our future operating expenses, anticipated burn rate and whether and how long our existing cash and cash equivalents will be sufficient to fund our operations;

 

·                  the market size and market acceptance of our product candidates;

 

·                  the effect of new accounting pronouncements and future health care, tax and other legislation; and

 

·                  our substantial and continuing losses.

 

Forward-looking statements involve risks and uncertainties.  These uncertainties include factors that affect all businesses as well as matters specific to us.  Some of the factors known to us that could cause our actual results to differ materially from what we have anticipated in our forward-looking statements are described under the heading “Part I.  Item 1A. Risk Factors” below.  We caution readers not to place undue reliance on any forward-looking statement that speaks only as of the date made and to recognize that forward-looking statements are predictions of future results, which may not occur as anticipated.  Actual results could differ materially from those anticipated in the forward-looking statements and from historical results, due to the risks and uncertainties described under the heading “Part I.  Item 1A. Risk Factors” below, as well as others that we may consider immaterial or do not anticipate at this time.  Although we believe that the expectations reflected in our forward-looking statements are reasonable, we do not know whether our expectations will prove correct.  Our expectations reflected in our forward-looking statements can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties, including those described below under the heading “Part I. Item 1A. Risk Factors.”  The risks and uncertainties described under the heading “Item 1A. Risk Factors” below are not exclusive and further information concerning us and our business, including factors that potentially could materially affect our operating results or financial condition, may emerge from time to time.  We assume no obligation to update our forward-looking statements to reflect actual results or changes in factors or assumptions affecting such forward-looking statements.  We advise you, however, to consult any further disclosures we make on related subjects in our quarterly reports on

 

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Form 10-Q and current reports on Form 8-K that we file with or furnish to the Securities and Exchange Commission.

 

ITEM 1A.                                       RISK FACTORS

 

The following are significant factors known to us that could materially harm our business, operating results or financial condition or could cause our actual results to differ materially from our anticipated results or other expectations, including those expressed in any forward-looking statement made in this report:

 

Risks Related to Development, Regulatory Approval and Commercialization

 

Our business is dependent on the successful development, regulatory approval and commercialization of our product candidates, which include primarily RES-529 and RES-440, which are in early stage development.

 

Our portfolio of product candidates includes RES-529, which is a novel PI3K/Akt/mTOR pathway inhibitor which has completed two Phase I clinical trials for age-related macular degeneration and is in preclinical development for glioblastoma multiforme, and RES-440, which is a “soft” anti-androgen compound for the treatment of acne vulgaris.  In addition, our RES-529 and of its novel approach to inhibition of the P13K/Akt/mTOR pathway may have potential applications in ophthalmology, oncology, dermatology, pulmonary fibrosis, central nervous system disorders and biodefense.  The success of our business, including our ability to finance our company and generate any revenue in the future, primarily will depend on the successful development, regulatory approval and commercialization of our product candidates.  In the future, we may also become dependent on one or more of other product candidates or any future product candidates that we may in-license, acquire or develop.

 

The clinical and commercial success of our product candidates will depend on a number of factors, including the following:

 

·                  the ability to raise additional capital on acceptable terms, or at all;

 

·                  timely completion of our clinical trials, which may be significantly slower or cost more than we currently anticipate and will depend substantially upon the performance of third-party contractors;

 

·                  whether we are required by the U.S. Food and Drug Administration or similar foreign regulatory agencies to conduct additional clinical trials beyond those planned to support the approval and commercialization of our product candidates or any future product candidates;

 

·                  acceptance of our proposed indications and primary endpoint assessments relating to the proposed indications of our product candidates by the FDA and similar foreign regulatory authorities;

 

·                  our ability to demonstrate to the satisfaction of the FDA and similar foreign regulatory authorities, the safety and efficacy of our product candidates or any future product candidates;

 

·                  the prevalence, duration and severity of potential side effects experienced with our product candidates or future approved products, if any;

 

·                  the timely receipt of necessary marketing approvals from the FDA and similar foreign regulatory authorities;

 

·                  achieving and maintaining, and, where applicable, ensuring that our third-party contractors achieve and maintain, compliance with our contractual obligations and with all regulatory

 

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requirements applicable to our product candidates or any future product candidates or approved products, if any;

 

·                  the ability of third parties with whom we contract to manufacture clinical trial and commercial supplies of our product candidates or any future product candidates, remain in good standing with regulatory agencies and develop, validate and maintain commercially viable manufacturing processes that are compliant with current good manufacturing practices, or cGMP;

 

·                  a continued acceptable safety profile during clinical development and following approval of our product candidates or any future product candidates;

 

·                  our ability to successfully commercialize our product candidates or any future product candidates in the United States and internationally, if approved for marketing, sale and distribution in such countries and territories, whether alone or in collaboration with others;

 

·                  acceptance by physicians and patients of the benefits, safety and efficacy of our product candidates or any future product candidates, if approved, including relative to alternative and competing treatments;

 

·                  our and our partners’ ability to establish and enforce intellectual property rights in and to our product candidates or any future product candidates;

 

·                  our and our partners’ ability to avoid third-party patent interference or intellectual property infringement claims; and

 

·                  our ability to in-license or acquire additional product candidates or commercial-stage products that we believe can be successfully developed and commercialized.

 

If we do not achieve one or more of these factors, many of which are beyond our control, in a timely manner or at all, we could experience significant delays or an inability to obtain regulatory approvals or commercialize our product candidates.  Even if regulatory approvals are obtained, we may never be able to successfully commercialize any of our product candidates.  Accordingly, we cannot assure you that we will be able to generate sufficient revenue through the sale of our product candidates or any future product candidates to continue our business.

 

We expect to incur significant operating expenses and expect to require substantial additional financing to achieve our goals, which we may not be able to obtain when needed and on acceptable terms, or at all.  We have a history of losses and may not be able to achieve or maintain profitability, which could cause our business and operating results to suffer.

 

We are an early clinical-stage specialty biopharmaceutical company with a limited operating history upon which you can evaluate our business and prospects.  We are not profitable and we expect to incur significant losses for the foreseeable future.  We incurred net losses of $14.4 million and $2.5 million for the years ended December 31, 2014 and 2013.  As of December 31, 2014, we had an accumulated deficit of $75.3 million.

 

We have financed our operations primarily through the sale of equity securities and convertible debt securities. We expect that most of our resources will be dedicated to the preclinical and clinical development of our product candidates.  The size of our future net losses will depend, in part, on our future expenses and our ability to generate revenue, if any.

 

As of December 31, 2014, we had capital resources consisting of cash and cash equivalents of $21.9 million. We expect to continue to expend substantial cash resources for the foreseeable future for the

 

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preclinical and clinical development of our product candidates and development of any other indications and product candidates we may choose to pursue.  We anticipate that these expenditures will include costs associated with research and development, conducting preclinical studies and clinical trials, manufacturing and supply, as well as marketing and selling any products approved for sale.  In addition, other unanticipated costs may arise.  Because the conduct and results of any clinical trial are highly uncertain, we cannot reasonably estimate the actual amounts necessary to successfully complete the development and commercialization of our current and any future product candidates.

 

We believe that our existing cash and cash equivalents, together with interest thereon, will be sufficient to fund our operations through at least the next 12 months.  We have based these estimates, however, on assumptions that may prove to be wrong, and we could spend our available capital resources much faster than we currently expect or require more capital to fund our operations than we currently expect.  Our currently anticipated expenditures for the development of our product candidates exceed our existing cash and cash equivalents.  Therefore, we will need to raise additional capital to fund our operations and continue to support our planned research and development and commercialization activities.

 

The amount and timing of our future funding requirements will depend on many factors, including:

 

·                  the timing, rate of progress and cost of any preclinical and clinical trials and other product development activities for our current and any future product candidates that we develop, in-license or acquire;

 

·                  the results of the clinical trials for our product candidates in the United States and any foreign countries;

 

·                  the timing of, and the costs involved in, FDA approval and any foreign regulatory approval of our product candidates, if at all;

 

·                  the number and characteristics of any additional future product candidates we develop or acquire;

 

·                  our ability to establish and maintain strategic collaborations, licensing, co-promotion or other arrangements and the terms and timing of such arrangements;

 

·                  the cost of commercialization activities if our current or any future product candidates are approved for sale, including manufacturing, marketing, sales and distribution costs;

 

·                  the degree and rate of market acceptance of any approved products;

 

·                  costs under our third-party manufacturing and supply arrangements for our current and any future product candidates and any products we commercialize;

 

·                  costs and timing of completion of any additional outsourced commercial manufacturing or supply arrangements that we may establish;

 

·                  costs of preparing, filing, prosecuting, maintaining, defending and enforcing any patent claims and other intellectual property rights associated with our product candidates;

 

·                  costs associated with prosecuting or defending any litigation that we are or may become involved in and any damages payable by us that result from such litigation;

 

·                  costs associated with any product recall that could occur;

 

·                  costs of operating as a public company;

 

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·                  the emergence, approval, availability, perceived advantages, relative cost, relative safety and relative efficacy of alternative and competing products or treatments;

 

·                  costs associated with any acquisition or in-license of products and product candidates, technologies or businesses; and

 

·                  personnel, facilities and equipment requirements.

 

We cannot be certain that additional funding will be available on acceptable terms, or at all.  Any future debt financing into which we enter may impose upon us covenants that restrict our operations, including limitations on our ability to incur liens or additional debt, pay dividends, redeem our stock, make certain investments and engage in certain merger, consolidation or asset sale transactions.  In addition, we may seek additional capital due to favorable market conditions or strategic considerations even if we believe that we have sufficient funds for our current or future operating plans.

 

In order to fund the development and potential commercialization of our product candidates, we also may need to enter into collaboration agreements with pharmaceutical and biotechnology companies.  Our ability to establish and maintain these collaborations is highly uncertain and subject to a number of variables.  Under these arrangements, we may be responsible for substantial costs in connection with the clinical development, regulatory approval or the commercialization of a partnered product candidate.  Furthermore, the payments we could receive from our potential collaboration partners may be subject to numerous conditions and may ultimately be insufficient to cover the cost of this development and commercialization.

 

If we are unable to raise additional capital when required or on acceptable terms, we may be required to significantly delay, scale back or discontinue one or more of our product development programs or commercialization efforts, or other aspects of our business plan. In addition, our ability to achieve profitability or to respond to competitive pressures would be significantly limited.

 

Clinical drug development for our product candidates is very expensive, time-consuming and uncertain.  Our clinical trials may fail to adequately demonstrate the safety and efficacy of our product candidates, which could prevent or delay regulatory approval and commercialization.

 

Clinical drug development for our product candidates is very expensive, time-consuming, difficult to design and implement and its outcome is inherently uncertain.  Before obtaining regulatory approval for the commercial sale of a product candidate, we must demonstrate through clinical trials that a product candidate is both safe and effective for use in the target indication.  Most product candidates that commence clinical trials are never approved by regulatory authorities for commercialization.  Our product candidates are in early stages of development.  We expect that clinical trials for these product candidates will take several years, but may take significantly longer than expected to complete.  In addition, we, any partner with which we may in the future collaborate, the FDA, an IRB or other regulatory authorities, including state and local agencies and counterpart agencies in foreign countries, may suspend, delay, require modifications to or terminate our clinical trials at any time, for various reasons, including:

 

·                  discovery of serious or unexpected toxicities or side effects experienced by study participants or other safety issues;

 

·                  lack of effectiveness of any product candidate during clinical trials or the failure of our product candidates to meet specified endpoints;

 

·                  slower than expected rates of subject recruitment and enrollment rates in clinical trials resulting from numerous factors, including the prevalence of other companies’ clinical trials for their product candidates for the same indication, or clinical trials for indications for which patients do not as commonly seek treatment;

 

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·                  difficulty in retaining subjects who have initiated a clinical trial but may withdraw at any time due to adverse side effects from the therapy, insufficient efficacy, fatigue with the clinical trial process or for any other reason;

 

·                  difficulty in obtaining IRB approval for studies to be conducted at each site;

 

·                  delays in manufacturing or obtaining, or inability to manufacture or obtain, sufficient quantities of materials for use in clinical trials;

 

·                  inadequacy of or changes in our manufacturing process or the product formulation or method of delivery;

 

·                  changes in applicable laws, regulations and regulatory policies;

 

·                  delays or failure in reaching agreement on acceptable terms in clinical trial contracts or protocols with prospective clinical regulatory organizations, or CROs, clinical trial sites and other third-party contractors;

 

·                  inability to add a sufficient number of clinical trial sites;

 

·                  uncertainty regarding proper dosing;

 

·                  failure of our CROs or other third-party contractors to comply with contractual and regulatory requirements or to perform their services in a timely or acceptable manner;

 

·                  failure by us, our employees, our CROs or their employees or any partner with which we may collaborate or their employees to comply with applicable FDA or other regulatory requirements relating to the conduct of clinical trials or the handling, storage, security and recordkeeping for drug products;

 

·                  scheduling conflicts with participating clinicians and clinical institutions;

 

·                  failure to design appropriate clinical trial protocols;

 

·                  insufficient data to support regulatory approval;

 

·                  inability or unwillingness of medical investigators to follow our clinical protocols; or

 

·                  difficulty in maintaining contact with subjects during or after treatment, which may result in incomplete data.

 

In the case of our topical product candidates, we are seeking to deliver sufficient concentrations of the active pharmaceutical ingredient, or API, through the skin barrier to the targeted dermal tissue to achieve the intended therapeutic effect.  As a result, safety and efficacy can be difficult to establish.  The topical route of administration may involve new dosage forms, which can be difficult to develop and manufacture and may raise novel regulatory issues and result in development or review delays.

 

We or any partner with which we may collaborate may suffer significant setbacks in our clinical trials similar to the experience of a number of other companies in the pharmaceutical and biotechnology industries, even after receiving promising results in earlier trials.  In the event that we or our potential partners abandon or are delayed in the clinical development efforts related to our product candidates, we may not be able to execute on our business plan effectively and our business, financial condition, operating results and prospects would be harmed.

 

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We may be unable to obtain regulatory approval for RES-529 or RES-440 for the indications of which we are seeking or our other future product candidates under applicable regulatory requirements.  The FDA and foreign regulatory bodies have substantial discretion in the approval process, including the ability to delay, limit or deny approval of product candidates.  The delay, limitation or denial of any regulatory approval would adversely impact commercialization, our potential to generate revenue, our business and our operating results.

 

We currently have no products approved for sale, and we may never obtain regulatory approval to commercialize any of our current or future product candidates.  The research, testing, manufacturing, safety surveillance, efficacy, quality control, recordkeeping, labeling, packaging, storage, approval, sale, marketing, distribution, import, export, and reporting of safety and other post-market information related to our drug products are subject to extensive regulation by the FDA and other regulatory authorities in the United States and in foreign countries, and such regulations differ from country to country.  We are not permitted to market any of our current product candidates in the United States until we receive approval of a new drug application, or NDA, or other applicable regulatory filing from the FDA.  We are also not permitted to market any of our current product candidates in any foreign countries until we receive the requisite approval from the applicable regulatory authorities of such countries.

 

To gain approval to market a new drug, such as RES-529 or RES-440, the FDA and foreign regulatory authorities must receive preclinical and clinical data that adequately demonstrate the safety, purity, potency, efficacy and compliant manufacturing of the product for the intended indication applied for in an NDA or other applicable regulatory filing.  The development and approval of new drug products involves a long, expensive and uncertain process, and delay or failure can occur at any stage.  A number of companies in the pharmaceutical and biopharmaceutical industry have suffered significant setbacks in clinical trials, including in Phase 3 clinical development, even after promising results in earlier preclinical studies or clinical trials.  These setbacks have been caused by, among other things, findings made while clinical trials were underway and safety or efficacy observations made in clinical trials, including previously unreported adverse events.  Success in preclinical testing and early clinical trials does not ensure that later clinical trials will be successful, and the results of clinical trials by other parties may not be indicative of the results in trials we or our partners may conduct.

 

The FDA and foreign regulatory bodies have substantial discretion in the drug approval process, including the ability to delay, limit or deny approval of product candidates for many reasons, including:

 

·                  the FDA or the applicable foreign regulatory body may disagree with the design or implementation of one or more clinical trials;

 

·                  the FDA or the applicable foreign regulatory body may not deem a product candidate safe and effective for its proposed indication, or may deem a product candidate’s safety or other perceived risks to outweigh its clinical or other benefits;

 

·                  the FDA or the applicable foreign regulatory body may not find the data from preclinical studies and clinical trials sufficient to support approval, or the results of clinical trials may not meet the level of statistical or clinical significance required by the FDA or the applicable foreign regulatory body for approval;

 

·                  the FDA or the applicable foreign regulatory body may disagree with our interpretation of data from preclinical studies or clinical trials performed by us or third parties, or with the interpretation of any partner with which we may collaborate;

 

·                  the data collected from clinical trials may not be sufficient to support the submission of an NDA or other applicable regulatory filing;

 

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·                  the FDA or the applicable foreign regulatory body may require additional preclinical studies or clinical trials;

 

·                  the FDA or the applicable foreign regulatory agency may identify deficiencies in the formulation, quality control, labeling or specifications of our current or future product candidates;

 

·                  the FDA or the applicable foreign regulatory agency may require clinical trials in pediatric patients in order to establish pharmacokinetics or safety for this more drug-sensitive population;

 

·                  the FDA or the applicable foreign regulatory agency may grant approval contingent on the performance of costly additional post-approval clinical trials;

 

·                  the FDA or the applicable foreign regulatory agency also may approve our current or any future product candidates for a more limited indication or a narrower patient population than we originally requested;

 

·                  the FDA or applicable foreign regulatory agency may not approve the labeling that we believe is necessary or desirable for the successful commercialization of our product candidates;

 

·                  the FDA or the applicable foreign regulatory body may not approve of the manufacturing processes, controls or facilities of third-party manufacturers or testing labs with which we contract; or

 

·                  the FDA or the applicable foreign regulatory body may change its approval policies or adopt new regulations in a manner rendering our clinical data or regulatory filings insufficient for approval.

 

Of the large number of drugs in development, only a small percentage successfully complete the FDA or other regulatory approval processes and are commercialized.  Our product candidates may not be approved by the FDA or applicable foreign regulatory agencies even if they meet specified endpoints in our clinical trials.  The FDA or applicable foreign regulatory agencies may ask us to conduct additional costly and time-consuming clinical trials in order to obtain marketing approval or approval to enter into an advanced phase of development, or may change the requirements for approval even after such agency has reviewed and commented on the design for the clinical trials.

 

Any delay in obtaining, or inability to obtain, applicable regulatory approval for any of our product candidates would delay or prevent commercialization of our product candidates and would harm our business, financial condition, operating results and prospects.

 

Even if our product candidates obtain regulatory approval, they may fail to achieve the broad degree of physician and patient adoption and use necessary for commercial success.

 

The commercial success of any of our current or future product candidates, if approved, will depend significantly on the broad adoption and use of the resulting product by physicians and patients for approved indications, and may not be commercially successful.  The degree and rate of physician and patient adoption of our current or future product candidates, if approved, will depend on a number of factors, including:

 

·                  the clinical indications for which the product is approved and patient demand for approved products that treat those indications;

 

·                  the effectiveness of our product as compared to other available therapies;

 

·                  the availability of coverage and adequate reimbursement from managed care plans and other healthcare payors for any of our product candidates that may be approved;

 

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·                  the cost of treatment with our product candidates in relation to alternative treatments and willingness to pay for the product, if approved, on the part of patients;

 

·                  acceptance by physicians, major operators of clinics and patients of the product as a safe and effective treatment;

 

·                  physician and patient willingness to adopt a new therapy over other available therapies to treat approved indications;

 

·                  overcoming any biases physicians or patients may have toward particular therapies for the treatment of approved indications;

 

·                  proper training and administration of our product candidates by physicians and medical staff;

 

·                  patient satisfaction with the results and administration of our product candidates and overall treatment experience;

 

·                  the willingness of patients to pay for certain of our product candidates relative to other discretionary items, especially during economically challenging times;

 

·                  the revenue and profitability that our product candidate may offer a physician as compared to alternative therapies;

 

·                  the prevalence and severity of side effects;

 

·                  limitations or warnings contained in the FDA-approved labeling for our product candidates;

 

·                  any FDA requirement to undertake a risk evaluation and mitigation strategy, or REMS;

 

·                  the effectiveness of our sales, marketing and distribution efforts;

 

·                  adverse publicity about our product candidates or favorable publicity about competitive products; and

 

·                  potential product liability claims.

 

Our product candidates, if approved, will face significant competition and our failure to effectively compete may prevent us from achieving significant market penetration.

 

The pharmaceutical industry is characterized by rapidly advancing technologies, intense competition and a strong emphasis on developing proprietary therapeutics.  Numerous companies are engaged in the development, patenting, manufacturing and marketing of health care products competitive with those that we are developing.  We face competition from a number of sources, such as pharmaceutical companies, generic drug companies, biotechnology companies and academic and research institutions, many of which have greater financial resources, marketing capabilities, sales forces, manufacturing capabilities, research and development capabilities, clinical trial expertise, intellectual property portfolios, experience in obtaining patents and regulatory approvals for product candidates and other resources than us.  Some of the companies that offer competing products also have a broad range of other product offerings, large direct sales forces and long-term customer relationships with our target physicians, which could inhibit our market penetration efforts. In addition, certain of our product candidates, if approved, may compete with other products, including over-the-counter treatments, for a share of some patients’ discretionary budgets and for physicians’ attention within their clinical practices.

 

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Many pharmaceutical companies currently offer products, and continue to develop additional alternative product candidates and technologies, for indications similar to those targeted by our product candidates.  We anticipate that, if we obtain regulatory approval of our product candidates, we will face significant competition from other approved therapies.  If approved, our product candidates may also compete with unregulated, unapproved and off-label treatments.  Certain of our product candidates, if approved, will present novel therapeutic approaches for the approved indications and will have to compete with existing therapies, some of which are widely known and accepted by physicians and patients.  To compete successfully in this market, we will have to demonstrate that the relative cost, safety and efficacy of our approved products, if any, provide an attractive alternative to existing and other new therapies.  Such competition could lead to reduced market share for our product candidates and contribute to downward pressure on the pricing of our product candidates, which could harm our business, financial condition, operating results and prospects.  For more information about the competition we face, see “Business—Competition.”

 

Due to less stringent regulatory requirements in certain foreign countries, there are many more products and procedures available for use in those international markets than are approved for use in the United States.  In certain international markets, there are also fewer limitations on the claims that our competitors can make about the effectiveness of their products and the manner in which they can market them. As a result, we expect to face more competition in these markets than in the United States.

 

Any product candidates that we commercialize, or that any partner with which we may collaborate commercializes, will be subject to ongoing and continued regulatory review.

 

Even after we or our partners achieve U.S. regulatory approval for a product candidate, if any, we or our partners will be subject to continued regulatory review and compliance obligations.  For example, with respect to our product candidates, the FDA may impose significant restrictions on the approved indicated uses for which the product may be marketed or on the conditions of approval.  A product candidate’s approval may contain requirements for potentially costly post-approval studies and surveillance, including Phase 4 clinical trials or a REMS, to monitor the safety and efficacy of the product.  We will also be subject to ongoing FDA obligations and continued regulatory review with respect to, among other things, the manufacturing, processing, labeling, packaging, distribution, adverse event reporting, storage, advertising, promotion and recordkeeping for our product candidates.  These requirements include submissions of safety and other post-marketing information and reports, registration, as well as continued compliance with cGMP requirements and with the FDA’s good clinical practice, or GCP, requirements and good laboratory practice, or GLP, requirements, which are regulations and guidelines enforced by the FDA for all of our product candidates in clinical and preclinical development, and for any clinical trials that we conduct post-approval.  To the extent that a product candidate is approved for sale in other countries, we may be subject to similar restrictions and requirements imposed by laws and government regulators in those countries.

 

In addition, manufacturers of drug products and their facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance with cGMP regulations.  If we or a regulatory agency discovers previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where, or processes by which, the product is manufactured, a regulatory agency may impose restrictions on that product or us, including requesting that we initiate a product recall, or requiring notice to physicians, withdrawal of the product from the market or suspension of manufacturing.

 

If we, our product candidates or the manufacturing facilities for our product candidates fail to comply with applicable regulatory requirements, a regulatory agency may:

 

·                  impose restrictions on the marketing or manufacturing of the product, suspend or withdraw product approvals or revoke necessary licenses;

 

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·                  mandate modifications to promotional materials or require us to provide corrective information to healthcare practitioners;

 

·                  require us or our partners to enter into a consent decree, which can include imposition of various fines, reimbursements for inspection costs, required due dates for specific actions and penalties for noncompliance;

 

·                  issue warning letters, show cause notices or untitled letters describing alleged violations, which may be publicly available;

 

·                  commence criminal investigations and prosecutions;

 

·                  impose injunctions, suspensions or revocations of necessary approvals or other licenses;

 

·                  impose other civil or criminal penalties;

 

·                  suspend any ongoing clinical trials;

 

·                  delay or refuse to approve pending applications or supplements to approved applications filed by us or our potential partners;

 

·                  refuse to permit drugs or precursor chemicals to be imported or exported to or from the United States;

 

·                  suspend or impose restrictions on operations, including costly new manufacturing requirements; or

 

·                  seize or detain products or require us or our partners to initiate a product recall.

 

The regulations, policies or guidance of the FDA and other applicable government agencies may change and new or additional statutes or government regulations may be enacted that could prevent or delay regulatory approval of our product candidates or further restrict or regulate post-approval activities.  We cannot predict the likelihood, nature or extent of adverse government regulation that may arise from future legislation or administrative action, either in the United States or abroad. If we are not able to achieve and maintain regulatory compliance, we may not be permitted to market our product candidates, which would adversely affect our ability to generate revenue and achieve or maintain profitability.

 

We have conducted and may in the future conduct clinical trials for our product candidates outside the United States and the FDA and applicable foreign regulatory authorities may not accept data from such trials.

 

We have conducted and may in the future choose to conduct one or more of our clinical trials outside the United States.  Although the FDA or applicable foreign regulatory authority may accept data from clinical trials conducted outside the United States or the applicable jurisdiction, acceptance of such study data by the FDA or applicable foreign regulatory authority may be subject to certain conditions.  Where data from foreign clinical trials are intended to serve as the basis for marketing approval in the United States, the FDA will not approve the application on the basis of foreign data alone unless those data are applicable to the U.S. population and U.S. medical practice; the studies were performed by clinical investigators of recognized competence; and the data are considered valid without the need for an on-site inspection by the FDA or, if the FDA considers such an inspection to be necessary, the FDA is able to validate the data through an on-site inspection or other appropriate means. Many foreign regulatory bodies have similar requirements.  In addition, such foreign studies would be subject to the applicable local laws of the foreign jurisdictions where the studies are conducted.  There can be no assurance the FDA or applicable foreign regulatory authority will accept data

 

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from trials conducted outside of the United States or the applicable jurisdiction.  If the FDA or applicable foreign regulatory authority does not accept such data, it would likely result in the need for additional trials, which would be costly and time-consuming and delay aspects of our business plan.

 

Our product candidates may cause undesirable side effects or have other unexpected properties that could delay or prevent their regulatory approval, limit the commercial profile of an approved label or result in post-approval regulatory action.

 

Unforeseen side effects from any of our product candidates could arise either during clinical development or, if approved, after the approved product has been marketed.  Undesirable side effects caused by product candidates could cause us, any partners with which we may collaborate or regulatory authorities to interrupt, modify, delay or halt clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA or comparable foreign authorities.  In such an event, trials could be suspended or terminated and the FDA or comparable foreign regulatory authorities could order us, or our potential partners, to cease further development of or deny approval of product candidates for any or all targeted indications.  The drug-related side effects could affect patient recruitment or the ability of enrolled patients to complete the trial or result in product liability claims. Any of these occurrences may harm our business, financial condition, operating results and prospects.

 

Additionally, if we or others identify undesirable side effects, or other previously unknown problems, caused by our product candidates after obtaining U.S. or foreign regulatory approval or other products with the same or related active ingredients, a number of potentially negative consequences could result, including:

 

·                  regulatory authorities may withdraw their approval of the product;

 

·                  regulatory authorities may require a recall of the product or we or our potential partners may voluntarily recall a product;

 

·                  regulatory authorities may require the addition of warnings or contraindications in the product labeling, narrowing of the indication in the product label or field alerts to physicians and pharmacies;

 

·                  we may be required to create a medication guide outlining the risks of such side effects for distribution to patients or institute a REMS;

 

·                  we may have limitations on how we promote the product;

 

·                  we may be required to change the way the product is administered or modify the product in some other way;

 

·                  the FDA or applicable foreign regulatory authority may require additional clinical trials or costly post-marketing testing and surveillance to monitor the safety or efficacy of the product;

 

·                  sales of the product may decrease significantly;

 

·                  we could be sued and held liable for harm caused to patients; and

 

·                  our brand and reputation may suffer.

 

Any of the above events resulting from undesirable side effects or other previously unknown problems could prevent us or our potential partners from achieving or maintaining market acceptance of the affected product candidate and could substantially increase the costs of commercializing our product candidates.

 

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We may face product liability exposure, and if successful claims are brought against us, we may incur substantial liability if our insurance coverage for those claims is inadequate.

 

We face an inherent risk of product liability as a result of the clinical testing of our product candidates and will face an even greater risk if we commercialize any products.  This risk exists even if a product is approved for commercial sale by the FDA and manufactured in facilities licensed and regulated by the FDA or an applicable foreign regulatory authority.  Our products and product candidates are designed to affect important bodily functions and processes.  Any side effects, manufacturing defects, misuse or abuse associated with our product candidates could result in injury to a patient or even death.  We cannot offer any assurance that we will not face product liability suits in the future, nor can we assure you that our insurance coverage will be sufficient to cover our liability under any such cases.

 

In addition, a liability claim may be brought against us even if our product candidates merely appear to have caused an injury.  Product liability claims may be brought against us by consumers, health care providers, pharmaceutical companies or others selling or otherwise coming into contact with our product candidates, among others.  If we cannot successfully defend ourselves against product liability claims we will incur substantial liabilities and reputational harm. In addition, regardless of merit or eventual outcome, product liability claims may result in:

 

·                  withdrawal of clinical trial participants;

 

·                  termination of clinical trial sites or entire trial programs;

 

·                  the inability to commercialize our product candidates;

 

·                  decreased demand for our product candidates;

 

·                  impairment of our business reputation;

 

·                  product recall or withdrawal from the market or labeling, marketing or promotional restrictions;

 

·                  substantial costs of any related litigation or similar disputes;

 

·                  distraction of management’s attention and other resources from our primary business;

 

·                  substantial monetary awards to patients or other claimants against us that may not be covered by insurance; or

 

·                  loss of revenue.

 

We intend to obtain product liability insurance coverage for our clinical trials.  Large judgments have been awarded in class action or individual lawsuits based on drugs that had unanticipated side effects.  Our insurance coverage may not be sufficient to cover all of our product liability related expenses or losses and may not cover us for any expenses or losses we may suffer.  Moreover, insurance coverage is becoming increasingly expensive, and, in the future, we may not be able to maintain insurance coverage at a reasonable cost, in sufficient amounts or upon adequate terms to protect us against losses due to product liability.  We will need to increase our product liability coverage if any of our product candidates receive regulatory approval, which will be costly, and we may be unable to obtain this increased product liability insurance on commercially reasonable terms, or at all.  A successful product liability claim or series of claims brought against us could cause our stock price to decline and, if judgments exceed our insurance coverage, could decrease our cash and could harm our business, financial condition, operating results and prospects.

 

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If any of our product candidates are approved for marketing and we are found to have improperly promoted off-label uses, or if physicians misuse our products or use our products off-label, we may become subject to prohibitions on the sale or marketing of our products, product liability claims and significant fines, penalties and sanctions, and our brand and reputation could be harmed.

 

The FDA and other regulatory agencies strictly regulate the marketing and promotional claims that are made about drug products.  In particular, a product may not be promoted for uses or indications that are not approved by the FDA or such other regulatory agencies as reflected in the product’s approved labeling and comparative safety or efficacy claims cannot be made without direct comparative clinical data.  If we are found to have promoted off-label uses of any of our product candidates, we may receive warning or untitled letters and become subject to significant liability, which would materially harm our business.  Both federal and state governments have levied large civil and criminal fines against companies for alleged improper promotion and have enjoined several companies from engaging in off-label promotion.  If we become the target of such an investigation or prosecution based on our marketing and promotional practices, we could face similar sanctions, which would materially harm our business.  In addition, management’s attention could be diverted from our business operations, significant legal expenses could be incurred and our brand and reputation could be damaged.  The FDA has also requested that companies enter into consent decrees or permanent injunctions under which specified promotional conduct is changed or curtailed.  If we are deemed by the FDA to have engaged in the promotion of our products for off-label use, we could be subject to FDA regulatory or enforcement actions, including the issuance of an untitled letter, a warning letter, injunction, seizure, civil fine or criminal penalties.  It is also possible that other federal, state or foreign enforcement authorities might take action if they consider our business activities constitute promotion of an off-label use, which could result in significant penalties, including criminal, civil or administrative penalties, damages, fines, disgorgement, exclusion from participation in government healthcare programs and the curtailment or restructuring of our operations.

 

We cannot, however, prevent a physician from using our product candidates outside of those indications for use when in the physician’s independent professional medical judgment he or she deems appropriate.  Physicians may also misuse our product candidates or use improper techniques, potentially leading to adverse results, side effects or injury, which may lead to product liability claims.  If our product candidates are misused or used with improper technique, we may become subject to costly litigation by physicians or their patients.  Furthermore, the use of our product candidates for indications other than those cleared by the FDA may not effectively treat such conditions, which could harm our reputation among physicians and patients.

 

We may choose not to continue developing or commercializing any of our product candidates at any time during development or after approval, which would reduce or eliminate our potential return on investment for those product candidates.

 

At any time, we may decide to discontinue the development of any of our product candidates or not to continue commercializing one or more of our approved product candidates for a variety of reasons, including changes in our internal product, technology or indication focus, the appearance of new technologies that make our product obsolete, competition from a competing product or changes in or failure to comply with applicable regulatory requirements.  If we terminate a program in which we have invested significant resources, we will not receive any return on our investment and we will have missed the opportunity to have allocated those resources to potentially more productive uses.

 

We or our prospective partners may be subject to product recalls in the future that could harm our brand and reputation and could negatively affect our business.

 

We or our prospective partners may be subject to product recalls, withdrawals or seizures if any of our product candidates, if approved for marketing, fail to meet specifications or are believed to cause injury or illness or if we are alleged to have violated governmental regulations including those related to the

 

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manufacture, labeling, promotion, sale or distribution.  Any recall, withdrawal or seizure in the future could materially and adversely affect consumer confidence in our brands and lead to decreased demand for our approved products.  In addition, a recall, withdrawal or seizure of any of our approved products would require significant management attention, would likely result in substantial and unexpected expenditures and would harm our business, financial condition and operating results.

 

If we or any partners with which we may collaborate are unable to achieve and maintain coverage and adequate levels of reimbursement for any of our product candidates for which we receive regulatory approval, or any future products we may seek to commercialize, their commercial success may be severely hindered.

 

For any of our product candidates that become available only by prescription, successful sales by us or by any partners with which we may collaborate depend on the availability of coverage and adequate reimbursement from third-party payors.  Patients who are prescribed medicine for the treatment of their conditions generally rely on third-party payors to reimburse all or part of the costs associated with their prescription drugs.  The availability of coverage and adequate reimbursement from governmental healthcare programs, such as Medicare and Medicaid, and private third-party payors is critical to new product acceptance. Coverage decisions may depend upon clinical and economic standards that disfavor new drug products when more established or lower cost therapeutic alternatives are already available or subsequently become available. If any of our product candidates do not demonstrate attractive efficacy profiles, they may not qualify for coverage and reimbursement.  Even if we obtain coverage for a given product, the resulting reimbursement payment rates might not be adequate or may require co-payments that patients find unacceptably high.  Patients are unlikely to use our products unless coverage is provided and reimbursement is adequate to cover a significant portion of the cost of our products.

 

In addition, the market for our product candidates will depend significantly on access to third-party payors’ drug formularies, or lists of medications for which third-party payors provide coverage and reimbursement.  The industry competition to be included in such formularies often leads to downward pricing pressures on pharmaceutical companies.  Also, third-party payors may refuse to include a particular branded drug in their formularies or otherwise restrict patient access to a branded drug when a less costly generic equivalent or other alternative is available.

 

Third-party payors, whether foreign or domestic, or governmental or commercial, are developing increasingly sophisticated methods of controlling healthcare costs. In addition, in the United States, although private third-party payors tend to follow Medicare, no uniform policy of coverage and reimbursement for drug products exists among third-party payors.  Therefore, coverage and reimbursement for drug products can differ significantly from payor to payor.  As a result, the coverage determination process is often a time-consuming and costly process that will require us to provide scientific and clinical support for the use of our product candidates to each payor separately, with no assurance that coverage and adequate reimbursement will be obtained.

 

Further, we believe that future coverage and reimbursement will likely be subject to increased restrictions both in the United States and in international markets.  Third-party coverage and reimbursement for any of our product candidates for which we may receive regulatory approval may not be available or adequate in either the United States or international markets, which could harm our business, financial condition, operating results and prospects.

 

Healthcare reform measures could hinder or prevent the commercial success of our products and product candidates.

 

In the United States, there have been, and we expect there will continue to be, a number of legislative and regulatory changes to the healthcare system that could affect our future revenue and profitability and the future revenue and profitability of any partner with which we may collaborate.  Federal and state lawmakers

 

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regularly propose and, at times, enact legislation that results in significant changes to the healthcare system, some of which are intended to contain or reduce the costs of medical products and services. For example, in March 2010, President Obama signed one of the most significant healthcare reform measures in decades, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or collectively, the Affordable Care Act.  It contains a number of provisions, including those governing enrollment in federal healthcare programs, reimbursement changes and fraud and abuse measures, all of which are expected to impact existing government healthcare programs and result in the development of new programs.  The Affordable Care Act, among other things, (1) increased the minimum Medicaid rebates owed by most manufacturers under the Medicaid Drug Rebate Program and extended the rebate program to certain individuals enrolled in Medicaid managed care organizations, (2) established annual fees on manufacturers of certain branded prescription drugs and (3) enacted a Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% point-of-sale discounts off negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for the manufacturer’s outpatient drugs to be covered under Medicare Part D.

 

In addition, other legislative changes have been proposed and adopted in the United States since the Affordable Care Act was enacted.  On August 2, 2011, the Budget Control Act of 2011, among other things, created measures for spending reductions by Congress.  A Joint Select Committee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, thereby triggering the legislation’s automatic reduction to several government programs.  This includes aggregate reductions of Medicare payments to providers up to 2% per fiscal year, which went into effect on April 1, 2013.  On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, which, among other things, further reduced Medicare payments to several providers, including hospitals and imaging centers.

 

More recently, the Protecting Access to Medicare Act of 2014, signed into law in April 2014, provides for a 0.5% change from 2013 federal payment rates under the Medicare Physician Fee Schedule through 2014 and a 0% update from January 1 until April 1, 2015.  Congressional failure to intervene to prevent these changes in payment rates may adversely affect our future revenue and operating results.

 

We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for our products once approved or additional pricing pressures.

 

We may also be subject to healthcare laws, regulation and enforcement and our failure to comply with those laws could adversely affect our business, operations and financial condition.

 

Certain federal and state healthcare laws and regulations pertaining to fraud and abuse and patients’ rights are and will be applicable to our business.  We are subject to regulation by both the federal government and the states in which we or our partners conduct our business.  The laws and regulations that may affect our ability to operate include:

 

·                  the federal Anti-Kickback Statute, which prohibits, among other things, any person or entity from knowingly and willfully offering, soliciting, receiving or providing any remuneration (including any kickback, bribe or rebate), directly or indirectly, overtly or covertly, in cash or in kind, to induce either the referral of an individual or in return for the purchase, lease, or order of any good, facility item or service, for which payment may be made, in whole or in part, under federal healthcare programs such as the Medicare and Medicaid programs;

 

·                  federal civil and criminal false claims laws and civil monetary penalty laws, including, for example, the federal civil False Claims Act, which impose criminal and civil penalties, including civil whistleblower or qui tam actions, against individuals or entities for, among other things, knowingly presenting, or causing to be presented, to the federal government, including the

 

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Medicare and Medicaid programs, claims for payment that are false or fraudulent or making a false statement to avoid, decrease or conceal an obligation to pay money to the federal government;

 

·                  the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which created new federal criminal statutes that prohibit knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program or obtain, by means of false or fraudulent pretenses, representations or promises, any of the money or property owned by, or under the custody or control of, any healthcare benefit program, regardless of the payor (e.g., public or private), knowingly and willfully embezzling or stealing from a health care benefit program, willfully obstructing a criminal investigation of a health care offense and knowingly and willfully falsifying, concealing or covering up by any trick or device a material fact or making any materially false statements in connection with the delivery of, or payment for, healthcare benefits, items or services relating to healthcare matters;

 

·                  HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, and their implementing regulations, which impose obligations on covered entities, including healthcare providers, health plans, and healthcare clearinghouses, as well as their respective business associates that create, receive, maintain or transmit individually identifiable health information for or on behalf of a covered entity, with respect to safeguarding the privacy, security and transmission of individually identifiable health information;

 

·                  the federal physician sunshine requirements under the Affordable Care Act, which require manufacturers of drugs, devices, biologics and medical supplies to report annually to the Centers for Medicare & Medicaid Services information related to payments and other transfers of value provided to physicians and teaching hospitals, and ownership and investment interests held by physicians and their immediate family members; and

 

·                  state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws, which may apply to items or services reimbursed by any third-party payor, including commercial insurers; state laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the applicable compliance guidance promulgated by the federal government, or otherwise restrict payments that may be provided to healthcare providers and other potential referral sources; state laws that require drug manufacturers to report information related to payments and other transfers of value to healthcare providers or marketing expenditures; and state laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts.

 

Recent health care reform legislation has strengthened these laws.  For example, the recently enacted Affordable Care Act, among other things, amended the intent requirement of the federal Anti-Kickback Statute and certain criminal healthcare fraud statutes.  A person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it.  In addition, the Affordable Care Act provided that the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act.

 

Achieving and sustaining compliance with these laws may prove costly.  In addition, any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business.  If our operations are found to be in violation of any of the laws described above or any other governmental laws or regulations that apply to us, we may be subject to penalties, including administrative, civil and criminal penalties, damages, fines, disgorgement, the exclusion from participation in federal and state healthcare

 

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programs, individual imprisonment or the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our financial results.

 

Our business involves the use of hazardous materials and we and our third-party suppliers and manufacturers must comply with environmental laws and regulations, which can be expensive and restrict how we do business.

 

The manufacturing activities of our third-party suppliers and manufacturers involve the controlled storage, use and disposal of hazardous materials owned by us, including the components of our product candidates and other hazardous compounds.  We and our manufacturers and suppliers are subject to laws and regulations governing the use, manufacture, storage, handling and disposal of these hazardous materials.  In some cases, these hazardous materials and various wastes resulting from their use are stored at our suppliers’ or manufacturers’ facilities pending use and disposal.  We and our suppliers and manufacturers cannot completely eliminate the risk of contamination, which could cause an interruption of our commercialization efforts, research and development efforts and business operations, injury to our service providers and others and environmental damage resulting in costly clean-up and liabilities under applicable laws and regulations governing the use, storage, handling and disposal of these materials and specified waste products.  Although we believe that the safety procedures utilized by our third-party suppliers and manufacturers for handling and disposing of these materials generally comply with the standards prescribed by these laws and regulations, we cannot guarantee that this is the case or eliminate the risk of accidental contamination or injury from these materials.  In such an event, we may be held liable for any resulting damages and such liability could exceed our resources.  We do not currently carry biological or hazardous waste insurance coverage.

 

Our employees, independent contractors, principal investigators, consultants, vendors, CROs and any partners with which we may collaborate may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements.

 

We are exposed to the risk that our employees, independent contractors, principal investigators, consultants, vendors, CROs and any partners with which we may collaborate may engage in fraudulent or other illegal activity.  Misconduct by these persons could include intentional, reckless or negligent conduct or unauthorized activity that violates: laws or regulations, including those laws requiring the reporting of true, complete and accurate information to the FDA or foreign regulatory authorities; manufacturing standards; federal, state and foreign healthcare fraud and abuse laws and data privacy; or laws that require the true, complete and accurate reporting of financial information or data. In particular, sales, marketing and other business arrangements in the healthcare industry are subject to extensive laws intended to prevent fraud, kickbacks, self-dealing and other abusive practices.  These laws may restrict or prohibit a wide range of business activities, including research, manufacturing, distribution, pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements.  Activities subject to these laws also involve the improper use of information obtained in the course of clinical trials, or illegal misappropriation of drug product, which could result in regulatory sanctions or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations, and serious harm to our reputation. In addition, federal procurement laws impose substantial penalties for misconduct in connection with government contracts and require certain contractors to maintain a code of business ethics and conduct.  If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of civil, criminal and administrative penalties, damages, monetary fines, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings, and curtailment of our operations, any of which could adversely affect our ability to operate our business and our operating results.

 

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Risks Related to Our Dependence on Third Parties

 

We expect to rely on third-party CROs and other third parties to conduct and oversee our clinical trials and other aspects of product development. If these third parties do not meet our requirements or otherwise conduct the trials as required, we may not be able to satisfy our contractual obligations or obtain regulatory approval for, or commercialize, our product candidates when expected or at all.

 

We expect to rely on third-party CROs to conduct and oversee our clinical trials and other aspects of product development.  We also rely upon various medical institutions, clinical investigators and contract laboratories to conduct our trials in accordance with our clinical protocols and all applicable regulatory requirements, including the FDA’s regulations and GCPs, which are an international standard meant to protect the rights and health of patients and to define the roles of clinical trial sponsors, administrators and monitors, and state regulations governing the handling, storage, security and recordkeeping for drug products.  These CROs and other third parties play a significant role in the conduct of these trials and the subsequent collection and analysis of data from the clinical trials. We rely heavily on these parties for the execution of our clinical trials and preclinical studies, and control only certain aspects of their activities.  We and our CROs and other third-party contractors are required to comply with GCP and GLP requirements, which are regulations and guidelines enforced by the FDA and comparable foreign regulatory authorities for products in clinical development. Regulatory authorities enforce these GCP and GLP requirements through periodic inspections of trial sponsors, principal investigators and trial sites.  If we or any of these third parties fail to comply with applicable GCP and GLP requirements, the clinical data generated in our clinical trials may be deemed unreliable and the FDA or other regulatory authority may require us to perform additional clinical trials before approving our or our partners’ marketing applications.  We cannot assure you that upon inspection by a given regulatory authority, such regulatory authority will determine that any of our clinical or preclinical trials complies with applicable GCP and GLP requirements.  In addition, our clinical trials must generally be conducted with product produced under cGMP regulations. Our failure to comply with these regulations and policies may require us to repeat clinical trials, which would delay the regulatory approval process.

 

If any of our CROs or clinical trial sites terminate their involvement in one of our clinical trials for any reason, we may not be able to enter into arrangements with alternative CROs or clinical trial sites, or do so on commercially reasonable terms.  In addition, if our relationship with clinical trial sites is terminated, we may experience the loss of follow-up information on patients enrolled in our ongoing clinical trials unless we are able to transfer the care of those patients to another qualified clinical trial site.  In addition, principal investigators for our clinical trials may serve as scientific advisors or consultants to us from time to time and could receive cash or equity compensation in connection with such services.  If these relationships and any related compensation result in perceived or actual conflicts of interest, the integrity of the data generated at the applicable clinical trial site may be questioned by the FDA.

 

We rely completely on third-party contractors to supply, manufacture and distribute clinical drug supplies for our product candidates, including certain sole-source suppliers and manufacturers, we intend to rely on third parties for commercial supply, manufacturing and distribution if any of our product candidates receive regulatory approval and we expect to rely on third parties for supply, manufacturing and distribution of preclinical, clinical and commercial supplies of any future product candidates. We do not currently have, nor do we plan to acquire, the infrastructure or capability to supply, manufacture or distribute preclinical, clinical or commercial quantities of drug substances or products.

 

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Our ability to develop our product candidates depends and our ability to commercially supply our products will depend, in part, on our ability to successfully obtain the APIs and other substances and materials used in our product candidates from third parties and to have finished products manufactured by third parties in accordance with regulatory requirements and in sufficient quantities for preclinical and clinical testing and commercialization.  If we fail to develop and maintain supply relationships with these third parties, we may be unable to continue to develop or commercialize our product candidates.

 

We do not have direct control over the ability of our contract suppliers and manufacturers to maintain adequate capacity and capabilities to serve our needs, including quality control, quality assurance and qualified personnel.  Although we are ultimately responsible for ensuring compliance with regulatory requirements such as cGMPs, we are dependent on our contract suppliers and manufacturers for day-to-day compliance with cGMPs for production of both APIs and finished products.  Facilities used by our contract suppliers and manufacturers to produce the APIs and other substances and materials or finished products for commercial sale must pass inspection and be approved by the FDA and other relevant regulatory authorities. Our contract suppliers and manufacturers must comply with cGMP requirements enforced by the FDA through its facilities inspection program and review of submitted technical information.  If the safety of any product or product candidate or component is compromised due to a failure to adhere to applicable laws or for other reasons, we may not be able to successfully commercialize or obtain regulatory approval for the affected product or product candidate, and we may be held liable for injuries sustained as a result.  Any of these factors could cause a delay or termination of preclinical studies, clinical trials or regulatory submissions or approvals of our product candidates, and could entail higher costs or result in our being unable to effectively commercialize our approved products on a timely basis, or at all.

 

We also rely and will continue to rely on certain third parties as the sole source of the materials they supply or the finished products they manufacture.  Some of the APIs and other substances and materials used in our product candidates are currently available only from one or a limited number of domestic or foreign suppliers and foreign manufacturers and certain of our finished product candidates are manufactured by one or a limited number of contract manufacturers.  In the event an existing supplier fails to supply product on a timely basis or in the requested amount, supplies product that fails to meet regulatory requirements, becomes unavailable through business interruption or financial insolvency or loses its regulatory status as an approved source or if we or our manufacturers are unable to renew current supply agreements when such agreements expire and we do not have a second supplier, we likely would incur added costs and delays in identifying or qualifying replacement manufacturers and materials and there can be no assurance that replacements would be available to us on a timely basis, on acceptable terms or at all.  We are currently in the process of transitioning the manufacture of certain of our APIs and product candidates to new contract manufacturers, which creates risks of additional cost and delay.  In certain cases we may be required to get regulatory approval to use alternative suppliers, and this process of approval could delay production of our products or development of product candidates indefinitely.  We and our manufacturers do not currently maintain inventory of these APIs and other substances and materials.  Any interruption in the supply of an API or other substance or material or in the manufacture of a finished product could have a material adverse effect on our business, financial condition, operating results and prospects.

 

In addition, these contract manufacturers are engaged with other companies to supply and manufacture materials or products for such companies, which also exposes our suppliers and manufacturers to regulatory risks for the production of such materials and products.  As a result, failure to meet the regulatory requirements for the production of those materials and products may also affect the regulatory clearance of a contract supplier’s or manufacturer’s facility. If the FDA or a comparable foreign regulatory agency does not approve these facilities for the supply or manufacture of our product candidates, or if it withdraws its approval in the future, we may need to find alternative supply or manufacturing facilities, which would negatively impact our ability to develop, obtain regulatory approval of or market our product candidates, if approved.

 

To date, our drug substances and product candidates have been manufactured in small quantities for preclinical studies and early-stage clinical trials.  As we prepare for later-stage clinical trials and potential

 

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commercialization, we will need to take steps to increase the scale of production of our drug substances and product candidates, which may include transferring production to new third-party suppliers or manufacturers. In order to conduct larger or late-stage scale clinical trials for our product candidates and supply sufficient commercial quantities of the resulting drug product and its components, if that product candidate is approved for sale, our contract manufacturers and suppliers will need to produce our drug substances and product candidates in larger quantities, more cost effectively and, in certain cases, at higher yields than they currently achieve.  These third-party contractors may not be able to successfully increase the manufacturing capacity for any of such drug substance and product candidates in a timely or cost-effective manner or at all.  Significant scale up of manufacturing may require additional processes, technologies and validation studies, which are costly, may not be successful and which the FDA and foreign regulatory authorities must review and approve. In addition, quality issues may arise during those scale-up activities because of the inherent properties of a product candidate itself or of a product candidate in combination with other components added during the manufacturing and packaging process, or during shipping and storage of the APIs or the finished product.  If our third-party contractors are unable to successfully scale up the manufacture of any of our product candidates in sufficient quality and quantity and at commercially reasonable prices, and we are unable to find one or more replacement suppliers or manufacturers capable of production at a substantially equivalent cost in substantially equivalent volumes and quality, and we are unable to successfully transfer the processes on a timely basis, the development of that product candidate and regulatory approval or commercial launch for any resulting products may be delayed, or there may be a shortage in supply, either of which could significantly harm our business, financial condition, operating results and prospects.

 

We expect to continue to depend on third-party contract suppliers and manufacturers for the foreseeable future.  Our supply and manufacturing agreements, if any, do not guarantee that a contract supplier or manufacturer will provide services adequate for our needs.  We and our contract suppliers and manufacturers continue to improve production processes, certain aspects of which are complex and unique, and we may encounter difficulties with new or existing processes.  While we attempt to build in certain contractual obligations on such third-party suppliers and manufacturers, we may not be able to ensure that such third parties comply with these obligations.  Depending on the extent of any difficulties encountered, we could experience an interruption in clinical or commercial supply, with the result that the development, regulatory approval or commercialization of our product candidates may be delayed or interrupted. In addition, third-party suppliers and manufacturers may have the ability to increase the price payable by us for the supply of the APIs and other substances and materials used in our product candidates, in some cases without our consent.

 

Additionally, any damage to or destruction of our third-party manufacturers’ or suppliers’ facilities or equipment may significantly impair our ability to have our product candidates manufactured on a timely basis.  Furthermore, if a contract manufacturer or supplier becomes financially distressed or insolvent, or discontinues our relationship beyond the term of any existing agreement for any other reason, this could result in substantial management time and expense to identify, qualify and transfer processes to alternative manufacturers or suppliers, and could lead to an interruption in clinical or commercial supply.

 

Our reliance on contract manufacturers and suppliers further exposes us to the possibility that they, or third parties with access to their facilities, will have access to and may misappropriate our trade secrets or other proprietary information. In addition, the manufacturing facilities of certain of our suppliers are located outside of the United States.  This may give rise to difficulties in importing our products or product candidates or their components into the United States or other countries as a result of, among other things, regulatory agency approval requirements or import inspections, incomplete or inaccurate import documentation or defective packaging.

 

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Manufacturing and supply of the APIs and other substances and materials used in our product candidates and finished drug products is a complex and technically challenging undertaking, and there is potential for failure at many points in the manufacturing, testing, quality assurance and distribution supply chain, as well as the potential for latent defects after products have been manufactured and distributed.

 

Manufacturing and supply of APIs, other substances and materials and finished drug products is technically challenging.  Changes beyond our direct control can impact the quality, volume, price and successful delivery of our product candidates and can impede, delay, limit or prevent the successful development and commercialization of our product candidates.  Mistakes and mishandling are not uncommon and can affect successful production and supply.  Some of these risks include:

 

·                  failure of our manufacturers to follow cGMP requirements or mishandling of product while in production or in preparation for transit;

 

·                  inability of our contract suppliers and manufacturers to efficiently and cost-effectively increase and maintain high yields and batch quality, consistency and stability;

 

·                  difficulty in establishing optimal drug delivery substances and techniques, production and storage methods and packaging and shipment processes;

 

·                  transportation and import/export risk, particularly given the global nature of our supply chain;

 

·                  delays in analytical results or failure of analytical techniques that we depend on for quality control and release of product;

 

·                  natural disasters, labor disputes, financial distress, lack of raw material supply, issues with facilities and equipment or other forms of disruption to business operations of our contract manufacturers and suppliers; and

 

·                  latent defects that may become apparent after product has been released and which may result in recall and destruction of product.

 

Any of these factors could result in delays or higher costs in connection with our clinical trials, regulatory submissions, required approvals or commercialization of our products, which could harm our business, financial condition, operating results and prospects.

 

If we are not able to establish and maintain collaborations, we may have to alter our development and commercialization plans.

 

The development and potential commercialization of our product candidates will require substantial additional cash to fund expenses.  In order to fund further development of our product candidates, we may collaborate with pharmaceutical and biotechnology companies for the development and potential commercialization of those product candidates.  We face significant competition in seeking appropriate partners.  Whether we reach a definitive agreement for a collaboration will depend, among other things, upon our assessment of the partner’s resources and experience, the terms and conditions of the proposed collaboration and the proposed partner’s evaluation of a number of factors. Those factors may include the design or results of clinical trials; the likelihood of approval by the FDA or other regulatory authorities; the potential market for the subject product candidate; the costs and complexities of manufacturing and delivering such product candidate to patients; the potential of competing products; any uncertainty with respect to our ownership of our intellectual property; and industry and market conditions generally.  The partner may also consider alternative product candidates or technologies for similar indications that may be available for collaboration and whether such a collaboration could be more attractive than the one with us for our product candidate.  We may also be restricted under future license agreements from entering into agreements on certain

 

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terms with potential partners.  Collaborations are complex and time-consuming to negotiate and document. In addition, there have been a significant number of recent business combinations among large pharmaceutical companies that have resulted in a reduced number of potential future partners. Collaborations typically impose detailed obligations on each party.  If we were to breach our obligations, we may face substantial consequences, including potential termination of the collaboration, and our rights to our partners’ product candidates, in which we have invested substantial time and money, would be lost.

 

We may not be successful in our efforts to implement collaborations or other alternative arrangements for the development of our product candidates.  When we partner with a third party for development and commercialization of a product candidate, we can expect to relinquish to the third party some or all of the control over the future success of that product candidate.  Our collaboration partner may not devote sufficient resources to the commercialization of our product candidates or may otherwise fail in their commercialization.  The terms of any collaboration or other arrangement that we establish may not be favorable to us.  In addition, any collaboration that we enter into may be unsuccessful in the development and commercialization of our product candidates.  In some cases, we may be responsible for continuing preclinical and initial clinical development of a partnered product candidate or research program, and the payment we receive from our collaboration partner may be insufficient to cover the cost of this development.

 

We may not be able to negotiate collaborations on a timely basis, on acceptable terms or at all.  If we are unable to do so, we may have to curtail the development of a product candidate, reduce or delay its development program or one or more of our other development programs, delay its potential commercialization or increase our expenditures and undertake development or commercialization activities at our own expense.  If we elect to increase our expenditures to fund development or commercialization activities on our own, we may need to obtain additional capital, which may not be available to us on acceptable terms or at all.  If we do not have sufficient funds, we may not be able to further develop our product candidates or bring them to market and generate product revenue.

 

Risks Related to Our Business and Financial Operations

 

We will need to further increase the size and complexity of our organization in the future, and we may experience difficulties in executing our growth strategy and managing any growth.

 

Our management, personnel, systems and facilities currently in place are not adequate to support our business plan and future growth.  We will need to further expand our scientific, clinical, managerial, operational, financial and other resources to support our planned research, development and commercialization activities.

 

Our need to manage our operations, growth and various projects effectively requires that we:

 

·                  continue to improve our operational, clinical, financial, management and regulatory compliance controls and reporting systems and procedures;

 

·                  attract and retain sufficient numbers of talented employees;

 

·                  manage our preclinical and clinical trials effectively;

 

·                  manage our third-party supply and manufacturing operations effectively and in a cost-effective manner, while increasing production capabilities for our current product candidates to commercial levels;

 

·                  manage our development efforts effectively while carrying out our contractual obligations to partners and other third parties;

 

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·                  manage our commercialization activities for our product candidates effectively and in a cost-effective manner; and

 

·                  establish and maintain relationships with development and commercialization partners.

 

In addition, historically, we have utilized and continue to utilize the services of part-time outside consultants to perform a number of tasks for us, including tasks related to preclinical and clinical testing.  Our growth strategy may also entail expanding our use of consultants to implement these and other tasks going forward.  We rely on consultants for certain functions of our business and will need to effectively manage these consultants to ensure that they successfully carry out their contractual obligations and meet expected deadlines.  There can be no assurance that we will be able to manage our existing consultants or find other competent outside consultants, as needed, on economically reasonable terms, or at all.  If we are not able to effectively manage our growth and expand our organization by hiring new employees and expanding our use of consultants, we might be unable to implement successfully the tasks necessary to execute effectively on our planned research, development and commercialization activities and, accordingly, might not achieve our research, development and commercialization goals.

 

If we fail to attract and retain management and other key personnel, we may be unable to continue to successfully develop or commercialize our product candidates or otherwise implement our business plan.

 

Our ability to compete in the highly competitive pharmaceuticals industry depends upon our ability to attract and retain highly qualified managerial, clinical, scientific, medical, sales and marketing and other personnel.  We are highly dependent on our management and scientific personnel, including our Chief Executive Officer, Chief Financial Officer and our Senior Vice President of Clinical Development, and members of our Board of Directors who are well known and respected in our industry.  The loss of the services of any of these individuals could impede, delay or prevent the successful development of our product pipeline, completion of our planned clinical trials, commercialization of our product candidates or in-licensing or acquisition of new assets and could negatively impact our ability to successfully implement our business plan. If we lose the services of any of these individuals, we might not be able to find suitable replacements on a timely basis or at all, and our business could be harmed as a result.  We do not maintain “key man” insurance policies on the lives of these individuals or the lives of any of our other employees.  We employ all of our executive officers and key personnel on an at-will basis and their employment can be terminated by us or them at any time, for any reason and without notice. In order to retain valuable employees at our company, in addition to salary and cash incentives, we provide stock options that vest over time.  The value to employees of stock options that vest over time will be significantly affected by movements in our stock price that are beyond our control, and may at any time be insufficient to counteract offers from other companies.

 

We might not be able to attract or retain qualified management and other key personnel in the future due to the intense competition for qualified personnel among biotechnology, pharmaceutical and other businesses, particularly in the Chicago greater metropolitan area where we are headquartered.  We could have difficulty attracting experienced personnel to our company and may be required to expend significant financial resources in our employee recruitment and retention efforts.  Many of the other pharmaceutical companies with whom we compete for qualified personnel have greater financial and other resources, different risk profiles and longer histories in the industry than we do.  They also may provide more diverse opportunities and better chances for career advancement.  If we are not able to attract and retain the necessary personnel to accomplish our business objectives, we may experience constraints that will harm our ability to implement our business strategy and achieve our business objectives.

 

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We currently have no sales and marketing personnel or capabilities.  If we are unable to establish sales and marketing capabilities on our own or through third parties when we are ready to commercialize our product candidates, we will be unable to successfully commercialize our product candidates, if approved, or generate product revenue.

 

We currently have no sales and marketing personnel or capabilities.  To commercialize our product candidates, if approved, in the United States, Canada, the European Union and other jurisdictions we may seek to enter, we must build our marketing, sales, distribution, managerial and other non-technical capabilities or make arrangements with third parties to perform these services, and we may not be successful in doing so.  Although our employees have experience in the marketing, sale and distribution of pharmaceutical products from prior employment at other companies, we as a company have no prior experience in the marketing, sale and distribution of pharmaceutical products and there are significant risks involved in building and managing a sales organization, including our ability to hire, retain and incentivize qualified individuals, generate sufficient sales leads, provide adequate training to sales and marketing personnel and effectively manage a geographically dispersed sales and marketing team.  Any failure or delay in the development of our internal sales, marketing and distribution capabilities would adversely impact the commercialization of these products.  We may choose to collaborate with additional third parties that have direct sales forces and established distribution systems, either to augment our own sales force and distribution systems or in lieu of our own sales force and distribution systems.  If we are unable to enter into such arrangements on acceptable terms or at all, we may not be able to successfully commercialize our product candidates.  The inability to successfully commercialize our product candidates, either on our own or through collaborations with one or more third parties, would harm our business, financial condition, operating results and prospects.

 

Our failure to successfully in-license, acquire, develop and market additional product candidates or approved products would impair our ability to grow our business.

 

We are considering activities to in-license, acquire, develop and market additional products and product candidates.  If we implement these activities, we may be dependent upon pharmaceutical companies, academic scientists and other researchers to sell or license products or technology to us.  The success of this strategy depends partly upon our ability to identify and select promising pharmaceutical product candidates and products, negotiate licensing or acquisition agreements with their current owners and finance these arrangements.

 

The process of proposing, negotiating and implementing a license or acquisition of a product candidate or approved product is lengthy and complex.  Other companies, including some with substantially greater financial, marketing, sales and other resources, may compete with us for the license or acquisition of product candidates and approved products.  We have limited resources to identify and execute the acquisition or in-licensing of third-party products, businesses and technologies and integrate them into our current infrastructure.  Moreover, we may devote resources to potential acquisitions or licensing opportunities that are never completed, or we may fail to realize the anticipated benefits of such efforts.  We may not be able to acquire the rights to additional product candidates on terms that we find acceptable, or at all.

 

Further, any product candidate that we acquire may require additional development efforts prior to commercial sale, including preclinical or clinical testing and approval by the FDA and applicable foreign regulatory authorities.  All product candidates are prone to risks of failure typical of pharmaceutical product development, including the possibility that a product candidate will not be shown to be sufficiently safe and effective for approval by regulatory authorities.  In addition, we cannot provide assurance that any approved products that we acquire will be manufactured or sold profitably or achieve market acceptance.

 

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If we implement activities to in-license and acquire product candidates and we in-license and acquire commercial-stage products or engage in other strategic transactions, we could impact our liquidity, increase our expenses and present significant distractions to our management.

 

If we implement a strategy to in-license and acquire product candidates, we may in-license and acquire commercial-stage products or engage in other strategic transactions.  Additional potential transactions that we may consider include a variety of different business arrangements, including spin-offs, strategic partnerships, joint ventures, restructurings, divestitures, business combinations and investments.  Any such transaction may require us to incur non-recurring or other charges, may increase our near- and long-term expenditures and may pose significant integration challenges or disrupt our management or business, which could adversely affect our operations and financial results.  For example, these transactions entail numerous potential operational and financial risks, including:

 

·                  exposure to unknown liabilities;

 

·                  disruption of our business and diversion of our management’s time and attention in order to develop acquired products, product candidates or technologies;

 

·                  incurrence of substantial debt or dilutive issuances of equity securities to pay for acquisitions;

 

·                  substantial acquisition and integration costs;

 

·                  write-downs of assets or impairment charges;

 

·                  increased amortization expenses;

 

·                  difficulty and cost in combining the operations and personnel of any acquired businesses with our operations and personnel;

 

·                  impairment of relationships with key suppliers, partners or customers of any acquired businesses due to changes in management and ownership; and

 

·                  inability to retain our key employees or those of any acquired businesses.

 

Accordingly, there can be no assurance that we will undertake or successfully complete any transactions of the nature described above, and any transaction that we do complete could harm our business, financial condition, operating results and prospects.  We have no current plan, commitment or obligation to enter into any other transaction described above.

 

Our operating results may fluctuate significantly, which makes our future operating results difficult to predict and could cause our operating results to fall below expectations.

 

Our operations will be limited primarily to researching and developing our product candidates and undertaking preclinical studies and clinical trials of our product candidates.  We have not yet obtained regulatory approvals for any of our product candidates.  Consequently, any predictions you make about our future success or viability may not be as accurate as they could be if we had a longer operating history or approved products on the market.  From time to time, we may enter into collaboration agreements and license agreements with other companies that include development funding and significant upfront and milestone expenditures and payments, and we expect that amounts earned from or paid pursuant to these agreements will be a significant source of our capital expenditures and an important source of our revenue. Accordingly, our revenue and profitability may depend on development funding and the achievement of development and clinical milestones under potential future collaboration and license agreements and sales of our products, if approved.  These upfront and milestone payments may vary significantly from period to period and any such

 

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variance could cause a significant fluctuation in our operating results from one period to the next. In addition, we measure compensation cost for stock-based awards made to employees at the grant date of the award, based on the fair value of the award as determined by our Board of Directors, and recognize the cost as an expense over the employee’s requisite service period.  As the variables that we use as a basis for valuing these awards change over time, including our underlying stock price and stock price volatility, the magnitude of the expense that we must recognize may vary significantly. Furthermore, our operating results may fluctuate due to a variety of other factors, many of which are outside of our control and may be difficult to predict, including the following:

 

·                  delays in the commencement, enrollment and the timing of clinical testing for our product candidates;

 

·                  the timing and success or failure of clinical trials for our product candidates or competing product candidates, or any other change in the competitive landscape of our industry, including consolidation among our competitors or partners;

 

·                  any delays in regulatory review and approval of product candidates in clinical development;

 

·                  the timing and cost of, and level of investment in, research and development activities relating to our product candidates, which may change from time to time;

 

·                  the cost of manufacturing our product candidates, which may vary depending on FDA guidelines and requirements, and the quantity of production;

 

·                  our ability to obtain additional funding to develop our product candidates;

 

·                  expenditures that we will or may incur to acquire or develop additional product candidates and technologies;

 

·                  the level of demand for our product candidates, should they receive approval, which may vary significantly;

 

·                  potential side effects of our product candidates that could delay or prevent commercialization or cause an approved drug to be taken off the market;

 

·                  the ability of patients or healthcare providers to obtain coverage of or sufficient reimbursement for our product candidates, if approved;

 

·                  our dependency on third-party manufacturers to supply or manufacture our product candidates;

 

·                  our ability to establish an effective sales, marketing and distribution infrastructure in a timely manner;

 

·                  market acceptance of our product candidates, if approved, and our ability to forecast demand for those product candidates;

 

·                  our ability to receive approval and commercialize our product candidates outside of the United States;

 

·                  our ability to establish and maintain collaborations, licensing or other arrangements;

 

·                  our ability and third parties’ abilities to protect intellectual property rights;

 

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·                  costs related to and outcomes of potential litigation or other disputes;

 

·                  our ability to adequately support future growth;

 

·                  our ability to attract and retain key personnel to manage our business effectively;

 

·                  our ability to maintain adequate insurance policies; and

 

·                  future accounting pronouncements or changes in our accounting policies.

 

Our operating results and liquidity needs could be negatively affected by market fluctuations and economic downturn.

 

Our operating results and liquidity could be negatively affected by economic conditions generally, both in the United States and elsewhere around the world.  The market for discretionary drugs or medical products and procedures may be particularly vulnerable to unfavorable economic conditions.  Some patients may consider certain of our product candidates to be discretionary, and if full reimbursement for such products is not available, demand for these products may be tied to the discretionary spending levels of our targeted patient populations.  Domestic and international equity and debt markets have experienced and may continue to experience heightened volatility and turmoil based on domestic and international economic conditions and concerns.  In the event these economic conditions and concerns continue or worsen and the markets continue to remain volatile, our operating results and liquidity could be adversely affected by those factors in many ways, including weakening demand for certain of our products and making it more difficult for us to raise funds if necessary, and our stock price may decline.  Additionally, although we plan to market our products primarily in the United States, our partners may have extensive global operations, indirectly exposing us to risk.

 

Our ability to utilize our net operating loss, or NOL, carryforwards and research and development income tax credit carryforwards may be limited.

 

As of December 31, 2014, we had NOL carryforwards available to reduce future taxable income, if any, for income tax purposes of $57.5 million.  If not utilized, the federal and California NOL carryforwards will begin expiring during the year ended December 31, 2020. Under Section 382 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an “ownership change,” generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period, the corporation’s ability to use its pre-change NOL carryforwards and other pre-change tax attributes (such as research tax credits) to offset its post-change income may be limited.  We believe that, with the acquisitions we effected at the end of 2013 and beginning of 2014 and other transactions that have occurred over the past three years, we may have triggered an “ownership change” limitation.  We may also experience ownership changes in the future as a result of subsequent shifts in our stock ownership.  As a result, if we earn net taxable income, our ability to use our pre-change NOL carryforwards to offset U.S. federal taxable income may be subject to limitations, which could potentially result in increased future tax liability to us.  In addition, at the state level, there may be periods during which the use of NOL carryforwards is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed.

 

We may be adversely affected by natural disasters and other catastrophic events, and by man-made problems such as terrorism, that could disrupt our business operations and our business continuity and disaster recovery plans may not adequately protect us from a serious disaster.

 

Our corporate headquarters are located in Buffalo Grove, Illinois.  If a disaster, power outage or other event occurred that prevented us from using all or a significant portion of our headquarters, that damaged critical infrastructure, such as enterprise financial systems, manufacturing resource planning or enterprise quality systems, or that otherwise disrupted operations, it may be difficult or, in certain cases, impossible for

 

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us to continue our business for a substantial period of time.  Our contract manufacturers’ and suppliers’ facilities are located in multiple locations, where other natural disasters or similar events, such as blizzards, tornadoes, earthquakes, fires, explosions or large-scale accidents or power outages, could severely disrupt our operations and have a material adverse effect on our business, financial condition, operating results and prospects.  In addition, acts of terrorism and other geo-political unrest could cause disruptions in our business or the businesses of our partners, manufacturers or the economy as a whole.  All of the aforementioned risks may be further increased if we do not implement a disaster recovery plan or our partners’ or manufacturers’ disaster recovery plans prove to be inadequate.  To the extent that any of the above should result in delays in the regulatory approval, manufacture, distribution or commercialization of our product candidates, our business, financial condition, operating results and prospects would suffer.

 

Our business and operations would suffer in the event of failures in our internal computer systems.

 

Despite the implementation of security measures, our internal computer systems and those of our current and any future partners, contractors and consultants are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures.  While we have not experienced any such material system failure, accident or security breach to date, if such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our manufacturing activities, development programs and our business operations.  For example, the loss of manufacturing records or clinical trial data from completed or future clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data.  To the extent that any disruption or security breach were to result in a loss of, or damage to, our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability and the further commercialization and development of our products and product candidates could be delayed.

 

Risks Related to Our Intellectual Property

 

We may not be able to obtain or enforce patent rights or other intellectual property rights that cover our product candidates and technologies that are of sufficient breadth to prevent third parties from competing against us.

 

Our success with respect to our product candidates and technologies will depend in part on our ability to obtain and maintain patent protection in both the United States and other countries, to preserve our trade secrets and to prevent third parties from infringing upon our proprietary rights.  Our ability to protect any of our product candidates from unauthorized or infringing use by third parties depends in substantial part on our ability to obtain and maintain valid and enforceable patents.

 

Our patent portfolio includes patents and patent applications in the United States and foreign jurisdictions where we believe there is a market opportunity for our products.  The covered technology and the scope of coverage vary from country to country.  For those countries where we do not have granted patents, we may not have any ability to prevent the unauthorized use of our technologies.  Any patents that we may obtain may be narrow in scope and thus easily circumvented by competitors.  Further, in countries where we do not have granted patents, third parties may be able to make, use or sell products identical to or substantially similar to, our product candidates.

 

The patent application process, also known as patent prosecution, is expensive and time-consuming, and we and our current or future licensors and licensees may not be able to prepare, file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner.  It is also possible that we or our current licensors, or any future licensors or licensees, will fail to identify patentable aspects of inventions made in the course of development and commercialization activities before it is too late to obtain patent protection on them.  Therefore, these and any of our patents and applications may not be prosecuted and enforced in a manner consistent with the best interests of our business.  It is possible that defects of form in the preparation or filing of our patents or patent applications may exist, or may arise in the future, such as with

 

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respect to proper priority claims, inventorship, claim scope or patent term adjustments.  If our current licensors, or any future licensors or licensees, are not fully cooperative or disagree with us as to the prosecution, maintenance or enforcement of any patent rights, such patent rights could be compromised and we might not be able to prevent third parties from making, using and selling competing products.  If there are material defects in the form or preparation of our patents or patent applications, such patents or applications may be invalid and unenforceable.  Moreover, our competitors may independently develop equivalent knowledge, methods and know-how.  Any of these outcomes could impair our ability to prevent competition from third parties, which may have an adverse impact on our business, financial condition and operating results.

 

Due to legal standards relating to patentability, validity, enforceability and claim scope of patents covering pharmaceutical inventions, our ability to obtain, maintain and enforce patents is uncertain and involves complex legal and factual questions.  Accordingly, rights under any existing patents or any patents we might obtain or license may not cover our product candidates, or may not provide us with sufficient protection for our product candidates to afford a commercial advantage against competitive products or processes, including those from branded and generic pharmaceutical companies. In addition, we cannot guarantee that any patents will issue from any pending or future patent applications owned by or licensed to us.  Even if patents have issued or will issue, we cannot guarantee that the claims of these patents are or will be held valid or enforceable by the courts or will provide us with any significant protection against competitive products or otherwise be commercially valuable to us.

 

Competitors in the fields of ophthalmology, oncology and dermatology have created a substantial amount of prior art, including scientific publications, patents and patent applications.  Our ability to obtain and maintain valid and enforceable patents depends on whether the differences between our technology and the prior art allow our technology to be patentable over the prior art. Although we believe that our technology includes certain inventions that are unique and not duplicative of any prior art, we do not have outstanding issued patents covering all of the recent developments in our technology and we are unsure of the patent protection that we will be successful in obtaining, if any.  Even if the patents do successfully issue, third parties may design around or challenge the validity, enforceability or scope of such issued patents or any other issued patents we own or license, which may result in such patents being narrowed, invalidated or held unenforceable.  If the breadth or strength of protection provided by the patents we hold or pursue with respect to our product candidates is challenged, it could dissuade companies from collaborating with us to develop, or threaten our ability to commercialize, our product candidates.

 

The laws of some foreign jurisdictions do not provide intellectual property rights to the same extent as in the United States and many companies have encountered significant difficulties in protecting and defending such rights in foreign jurisdictions.  If we encounter such difficulties in protecting or are otherwise precluded from effectively protecting our intellectual property in foreign jurisdictions, our business prospects could be substantially harmed.  The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved.  Changes in either the patent laws or in the interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property.  Accordingly, we cannot predict the breadth of claims that may be allowed or enforced in our patents or in third-party patents.

 

The degree of future protection of our proprietary rights is uncertain.  Patent protection may be unavailable or severely limited in some cases and may not adequately protect our rights or permit us to gain or keep our competitive advantage. For example:

 

·                  we might not have been the first to invent or the first to file the inventions covered by each of our pending patent applications and issued patents;

 

·                  others may independently develop similar or alternative technologies or duplicate any of our technologies;

 

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·                  the patents of others may have an adverse effect on our business;

 

·                  any patents we obtain or our licensors’ issued patents may not encompass commercially viable products, may not provide us with any competitive advantages or may be challenged by third parties;

 

·                  any patents we obtain or our in-licensed issued patents may not be valid or enforceable; and

 

·                  we may not develop additional proprietary technologies that are patentable.

 

Patents have a limited lifespan.  In the United States, the natural expiration of a patent is generally 20 years after it is filed.  Various extensions may be available; however the life of a patent, and the protection it affords, is limited.  Without patent protection for our product candidates, we may be open to competition from generic versions of our product candidates.  Further, the extensive period of time between patent filing and regulatory approval for a product candidate limits the time during which we can market a product candidate under patent protection, which may particularly affect the profitability of our early-stage product candidates. The issued U.S. and foreign patents relating to RES-529 will expire between 2026 and 2032 and the pending U.S. and foreign patent applications relating to RES-529, if issued, will expire between 2026 and 2032.  The issued U.S. and foreign patents relating to RES-440 will expire between 2028 and 2030 and the pending U.S. and foreign patent applications relating to RES-440, if issued, will expire between 2022 and 2028.

 

Proprietary trade secrets and unpatented know-how are also very important to our business.  Although we have taken steps to protect our trade secrets and unpatented know-how by entering into confidentiality agreements with third parties, and intellectual property protection agreements with certain employees, consultants and advisors, third parties may still obtain this information or we may be unable to protect our rights.  We also have limited control over the protection of trade secrets used by our suppliers, manufacturers and other third parties.  There can be no assurance that binding agreements will not be breached, that we would have adequate remedies for any breach or that our trade secrets and unpatented know-how will not otherwise become known or be independently discovered by our competitors.  If trade secrets are independently discovered, we would not be able to prevent their use.  Enforcing a claim that a third party illegally obtained and is using our trade secrets or unpatented know-how is expensive and time-consuming, and the outcome is unpredictable.  In addition, courts outside the United States may be less willing to protect trade secret information.

 

Changes in patent law could diminish the value of patents in general, thereby impairing our ability to protect our product candidates.

 

The United States has recently enacted and is currently implementing wide-ranging patent reform legislation.  Further, recent U.S. Supreme Court rulings have either narrowed the scope of patent protection available in certain circumstances or weakened the rights of patent owners in certain situations.  In addition to increasing uncertainty with regard to our ability to obtain patents in the future, this combination of events has created uncertainty with respect to the scope and value of patents, once obtained.

 

For our U.S. patent applications containing a priority claim after March 16, 2013, there is a greater level of uncertainty in the patent law. In September 2011, the Leahy-Smith America Invents Act, also known as the America Invents Act, or AIA, was signed into law. The AIA includes a number of significant changes to U.S. patent law, including provisions that affect the way patent applications will be prosecuted and may also affect patent litigation.  The U.S. Patent and Trademark Office, or USPTO, is currently developing regulations and procedures to govern administration of the AIA, and many of the substantive changes to patent law associated with the AIA.  It is not clear what other, if any, impact the AIA will have on the operation of our business.  Moreover, the AIA and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have an adverse effect on our business.  An important change introduced by the AIA is that, as of March

 

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16, 2013, the United States transitioned to a “first-to-file” system for deciding which party should be granted a patent when two or more patent applications are filed by different parties claiming the same invention.  A third party that files a patent application in the USPTO after that date but before us could therefore be awarded a patent covering an invention of ours even if we had made the invention before it was made by the third party.  This will require us to be cognizant going forward of the time from invention to filing of a patent application.

 

Among some of the other changes introduced by the AIA are changes that limit where a patentee may file a patent infringement suit and providing opportunities for third parties to challenge any issued patent in the USPTO.  This applies to all of our U.S. patents, even those issued before March 16, 2013. Because of a lower evidentiary standard in USPTO proceedings compared to the evidentiary standard in United States federal court necessary to invalidate a patent claim, a third party could potentially provide evidence in a USPTO proceeding sufficient for the USPTO to hold a claim invalid even though the same evidence would be insufficient to invalidate the claim if first presented in a district court action.  Accordingly, a third party may attempt to use the USPTO procedures to invalidate our patent claims that would not have been invalidated if first challenged by the third party as a defendant in a district court action.

 

Depending on decisions by the U.S. Congress, the U.S. federal courts, the USPTO or similar authorities in foreign jurisdictions, the laws and regulations governing patents could change in unpredictable ways that may weaken our and our licensors’ ability to obtain new patents or to enforce existing patents we and our licensors or partners may obtain in the future.

 

We may not be able to protect our intellectual property rights throughout the world.

 

Filing, prosecuting and defending patents on our product candidates in all countries throughout the world would be prohibitively expensive.  The requirements for patentability may differ in certain countries, particularly developing countries.  In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as laws in the United States. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the United States.  Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and, further, may export otherwise infringing products to territories where we have patent protection, but enforcement on infringing activities is inadequate.  These products may compete with our products, and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.

 

Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions.  The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to pharmaceuticals, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally.  Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing, and could provoke third parties to assert claims against us.  We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful.  In addition, certain countries in Europe and certain developing countries have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties.  In those countries, we may have limited remedies if our patents are infringed or if we are compelled to grant a license to our patents to a third party, which could materially diminish the value of those patents.  This could limit our potential revenue opportunities.  Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we own or license.  Finally, our ability to protect and enforce our intellectual property rights may be adversely affected by unforeseen changes in foreign intellectual property laws.

 

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Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.

 

Periodic maintenance and annuity fees on any issued patent are due to be paid to the USPTO and foreign patent agencies in several stages over the lifetime of the patent.  The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process.  While an inadvertent lapse can in many cases be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction.  Non-compliance events that could result in abandonment or lapse of a patent or patent application include failure to respond to official actions within prescribed time limits, non-payment of fees and failure to properly legalize and submit formal documents.  If we or our licensors fail to maintain the patents and patent applications covering our product candidates, our competitors might be able to enter the market, which would have an adverse effect on our business.

 

If we fail to comply with our obligations under our intellectual property license agreements, we could lose license rights that are important to our business.

 

We are a party to certain license agreements that impose various diligence, milestone, royalty, insurance and other obligations on us.  If we fail to comply with these obligations, the respective licensors may have the right to terminate the license, in which event we may not be able to develop or market the affected product candidate.  The loss of such rights could materially adversely affect our business, financial condition, operating results and prospects.  For more information about these license arrangements, see “Business—License Agreements.”

 

If we are sued for infringing intellectual property rights of third parties, it will be costly and time-consuming, and an unfavorable outcome in that litigation could have a material adverse effect on our business.

 

Our commercial success depends upon our ability to develop, manufacture, market and sell our product candidates and use our proprietary technologies without infringing the proprietary rights of third parties.  We cannot assure you that marketing and selling such candidates and using such technologies will not infringe existing or future patents. Numerous U.S. and foreign issued patents and pending patent applications owned by third parties exist in the fields relating to our product candidates.  As the biotechnology and pharmaceutical industries expand and more patents are issued, the risk increases that others may assert that our product candidates, technologies or methods of delivery or use infringe their patent rights.  Moreover, it is not always clear to industry participants, including us, which patents cover various drugs, biologics, drug delivery systems or their methods of use, and which of these patents may be valid and enforceable.  Thus, because of the large number of patents issued and patent applications filed in our fields, there may be a risk that third parties may allege they have patent rights encompassing our product candidates, technologies or methods.

 

In addition, there may be issued patents of third parties that are infringed or are alleged to be infringed by our product candidates or proprietary technologies.  Because some patent applications in the United States may be maintained in secrecy until the patents are issued, because patent applications in the United States and many foreign jurisdictions are typically not published until eighteen months after filing and because publications in the scientific literature often lag behind actual discoveries, we cannot be certain that others have not filed patent applications for technology covered by our own and in-licensed issued patents or our pending applications.  Our competitors may have filed, and may in the future file, patent applications covering our product candidates or technology similar to ours.  Any such patent application may have priority over our own and in-licensed patent applications or patents, which could further require us to obtain rights to issued patents covering such technologies. If another party has filed a U.S. patent application on inventions similar to

 

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those owned or in-licensed to us, we or, in the case of in-licensed technology, the licensor may have to participate, in the United States, in an interference proceeding to determine priority of invention.

 

We may be exposed to, or threatened with, future litigation by third parties having patent or other intellectual property rights alleging that our product candidates or proprietary technologies infringe such third parties’ intellectual property rights, including litigation resulting from filing under Paragraph IV of the Hatch-Waxman Act.  These lawsuits could claim that there are existing patent rights for such drug and this type of litigation can be costly and could adversely affect our operating results and divert the attention of managerial and technical personnel, even if we do not infringe such patents or the patents asserted against us are ultimately established as invalid.  There is a risk that a court would decide that we are infringing the third party’s patents and would order us to stop the activities covered by the patents.  In addition, there is a risk that a court will order us to pay the other party damages for having violated the other party’s patents.

 

There is a substantial amount of litigation involving patent and other intellectual property rights in the biotechnology and pharmaceutical industries generally.  To date, no litigation asserting infringement claims has been brought against us.  If a third party claims that we infringe its intellectual property rights, we may face a number of issues, including:

 

·                  infringement and other intellectual property claims which, regardless of merit, may be expensive and time-consuming to litigate and may divert our management’s attention from our core business;

 

·                  substantial damages for infringement, which we may have to pay if a court decides that the product or technology at issue infringes or violates the third party’s rights, and if the court finds that the infringement was willful, we could be ordered to pay treble damages and the patent owner’s attorneys’ fees;

 

·                  a court prohibiting us from selling or licensing the product or using the technology unless the third party licenses its intellectual property rights to us, which it is not required to do;

 

·                  if a license is available from a third party, we may have to pay substantial royalties or upfront fees or grant cross-licenses to intellectual property rights for our products or technologies; and

 

·                  redesigning our products or processes so they do not infringe, which may not be possible or may require substantial monetary expenditures and time.

 

Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources.  In addition, any uncertainties resulting from the initiation and continuation of any litigation could harm our ability to raise additional funds or otherwise adversely affect our business, financial condition, operating results and prospects.

 

Because we rely on certain third-party licensors and partners, and will continue to do so in the future, if one of our licensors or partners is sued for infringing a third party’s intellectual property rights, our business, financial condition, operating results and prospects could suffer in the same manner as if we were sued directly.  In addition to facing litigation risks, we have agreed to indemnify certain third-party licensors and partners against claims of infringement caused by our proprietary technologies, and we have entered or may enter into cost-sharing agreements with some our licensors and partners that could require us to pay some of the costs of patent litigation brought against those third parties whether or not the alleged infringement is caused by our proprietary technologies.  In certain instances, these cost-sharing agreements could also require us to assume greater responsibility for infringement damages than would be assumed just on the basis of our technology.

 

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The occurrence of any of the foregoing could adversely affect our business, financial condition or operating results.

 

We may become involved in lawsuits to protect or enforce our patents or other intellectual property or the patents of our licensors, which could be expensive and time-consuming.

 

Competitors may infringe our intellectual property, including our patents or the patents of our licensors.  As a result, we may be required to file infringement claims to stop third-party infringement or unauthorized use.  This can be expensive, particularly for a company of our size, and time-consuming.  In addition, in an infringement proceeding, a court may decide that a patent of ours is not valid or is unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patent claims do not cover its technology or that the factors necessary to grant an injunction against an infringer are not satisfied.  An adverse determination of any litigation or other proceedings could put one or more of our patents at risk of being invalidated, interpreted narrowly or amended such that they do not cover our product candidates.  Moreover, such adverse determinations could put our patent applications at risk of not issuing, or issuing with limited and potentially inadequate scope to cover our product candidates or to prevent others from marketing similar products.

 

Interference, derivation or other proceedings brought at the USPTO may be necessary to determine the priority or patentability of inventions with respect to our patent applications or those of our licensors or potential partners.  Litigation or USPTO proceedings brought by us may fail or may be invoked against us by third parties.  Even if we are successful, domestic or foreign litigation or USPTO or foreign patent office proceedings may result in substantial costs and distraction to our management.  We may not be able, alone or with our licensors or potential partners, to prevent misappropriation of our proprietary rights, particularly in countries where the laws may not protect such rights as fully as in the United States.

 

Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation or other proceedings, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation or other proceedings.  In addition, during the course of this kind of litigation or proceedings, there could be public announcements of the results of hearings, motions or other interim proceedings or developments or public access to related documents.  If investors perceive these results to be negative, the market price for our common stock could be significantly harmed.

 

We may be subject to claims that our employees, consultants or independent contractors have wrongfully used or disclosed to us alleged trade secrets of their former employers or their former or current customers.

 

As is common in the biotechnology and pharmaceutical industries, certain of our employees were formerly employed by other biotechnology or pharmaceutical companies, including our competitors or potential competitors.  Moreover, we engage the services of consultants to assist us in the development of our product candidates, many of whom were previously employed at or may have previously been or are currently providing consulting services to, other biotechnology or pharmaceutical companies, including our competitors or potential competitors.  We may be subject to claims that these employees and consultants or we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers or their former or current customers.  Although we have no knowledge of any such claims being alleged to date, if such claims were to arise, litigation may be necessary to defend against any such claims.  Even if we are successful in defending against any such claims, any such litigation could be protracted, expensive, a distraction to our management team, not viewed favorably by investors and other third parties and may potentially result in an unfavorable outcome.

 

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Risks Related to Ownership of Our Common Stock

 

The trading volume and price of our common stock has been and may continue to be volatile and you may not be able to resell your shares at or above the price at which you purchased them.

 

The trading volume and prices of our common stock have been and may continue to be volatile and could fluctuate widely due to factors beyond our control.  During 2014, the sale price of our common stock ranged from $2.00 per share to $10.20 per share, as reported by the OTCQB. Such volatility may be the result of broad market and industry factors. In addition to market and industry factors, the price and trading volume for our common stock may be highly volatile for factors specific to our own operations, many of which are beyond our control, including:

 

·                  the results of our clinical trials and preclinical studies;

 

·                  the clinical results of our competitors or potential competitors;

 

·                  the development status of our product candidates, including whether any of our product candidates receive regulatory approval;

 

·                  the success of, and fluctuations in, the commercial sales of products approved for commercialization, if any;

 

·                  regulatory or legal developments in the United States and foreign countries;

 

·                  the execution of our partnering and manufacturing arrangements;

 

·                  our execution of any collaboration, co-promotion, licensing or other arrangements, and the timing of payments we may make or receive under these arrangements;

 

·                  variations in the level of expenses related to our preclinical and clinical development programs, including relating to the timing of invoices from, and other billing practices of, our CROs and clinical trial sites;

 

·                  variations in the level of expenses related to our commercialization activities, if any product candidates are approved;

 

·                  the performance of third parties on whom we rely for clinical trials, manufacturing, marketing, sales and distribution, including their ability to comply with regulatory requirements;

 

·                  overall performance of the equity markets;

 

·                  changes in operating performance and stock market valuations of other pharmaceutical companies;

 

·                  market conditions or trends in our industry or the economy as a whole;

 

·                  the public’s response to press releases or other public announcements by us or third parties, including our filings with the Securities and Exchange Commission, or the SEC, and announcements relating to acquisitions, strategic transactions, licenses, joint ventures, capital commitments, intellectual property, litigation or other disputes impacting us or our business;

 

·                  developments with respect to intellectual property rights;

 

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·                  our commencement of, or involvement in, litigation;

 

·                  FDA or foreign regulatory actions affecting us or our industry;

 

·                  changes in the structure of healthcare payment systems;

 

·                  financial or other forward-looking guidance we may provide to the public, any changes in these projections or our failure to meet these projections;

 

·                  changes in financial estimates by any securities analysts who follow our common stock, our failure to meet these estimates or failure of those analysts to initiate or maintain coverage of our common stock;

 

·                  ratings downgrades by any securities analysts who follow our common stock;

 

·                  the listing or lack of listing of our common stock on a national securities exchange;

 

·                  the development and sustainability of an active trading market for our common stock;

 

·                  the size of our market float;

 

·                  the expiration of market standoff or contractual lock-up agreements and future sales of our common stock by our officers, directors and significant stockholders;

 

·                  recruitment or departure of key personnel;

 

·                  changes in accounting principles;

 

·                  other events or factors, including those resulting from war, incidents of terrorism, natural disasters or responses to these events; and

 

·                  any other factors discussed in this report.

 

In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many pharmaceutical companies.  Stock prices of many pharmaceutical companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies.  In the past, stockholders have instituted securities class action litigation following periods of market volatility.  If we were involved in securities litigation, we could incur substantial costs and our resources and the attention of management could be diverted from our business.

 

In 2014 after careful review of our potential product portfolio, we determined we would focus our initial product development efforts on RES-529 for the treatment of age-related macular degeneration and glioblastoma, and RES-440 for the treatment of acne.  Some of our stockholders may not agree with this corporate strategic determination and may decide to sell their common stock, which could adversely affect the price of our common stock, or may commence litigation against us, which would be costly to defend and could distract our management from our business.

 

During the fourth quarter of 2014, we made a strategic decision to focus our initial development efforts on RES-529, a novel PI3K/Akt/mTOR pathway inhibitor which has completed two Phase I clinical trials for age-related macular degeneration and is in pre-clinical development for glioblastoma multiforme, and RES-440 for the treatment of acne. Some of our stockholders may not agree with this decision and may decide to sell their common stock, which could adversely affect the price of our common stock.  In addition, stockholders who disagree with our decision may decide to commence litigation against us, which would be costly to defend and could distract our management from our business.  We aware of one such stockholder who has contacted us and has threatened litigation against us as a result of our decision to defocus our development efforts with respect to certain of our other technologies.

 

Our common stock trades on the OTCQB and may be considered a “penny stock,” which may result in difficulty for our stockholders to sell shares of our common stock.

 

Our common stock may be subject to the “penny stock” rules adopted under Section 15(g) of the Exchange Act.  The penny stock rules generally apply to companies whose common stock is not listed on The NASDAQ Stock Market or other national securities exchange and trades at less than $5.00 per share, other than companies that have had average revenue of at least $6,000,000 for the last three years or that have tangible net worth of at least $5,000,000 ($2,000,000 if the company has been operating for three or more years).  Although we have applied to list our common stock on The NASDAQ Stock Market, our common stock has not been accepted for listing, due to our inability to meet the initial listing requirements.  No assurance can be provided that our initial listing application will ever be accepted for listing on The NASDAQ Stock Market or any other national securities exchange or if accepted for listing, will remain in compliance with the continued listing requirements and remain listed on The NASDAQ Stock Market or such other

 

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exchange.  The penny stock rules require, among other things, that brokers who trade penny stock to persons other than “established customers” complete certain documentation, make suitability inquiries of investors and provide investors with certain information concerning trading in the security, including a risk disclosure document and quote information under certain circumstances.  Many brokers have decided not to trade penny stocks because of the requirements of the penny stock rules and, as a result, the number of broker-dealers willing to act as market makers in such securities is limited.  If we remain subject to the penny stock rules for any significant period, it could have an adverse effect on the market, if any, for our securities.  If our common stock is subject to the penny stock rules, our stockholder will find it more difficult to sell our shares.

 

We are the result of a “reverse merger” with a shell entity in 2008, resulting in a limitation on the ability of our stockholders to use the Rule 144 safe harbor under the Securities Act of 1933, as amended, for resales of our common stock.

 

Since we had a “reverse merger” with a shell entity in 2008, resale of shares of our common stock under Rule 144 may be limited.  The use of Rule 144 is the most common method of selling restricted shares. Rule 144(i) pertains to shares issued by a former shell company that executed a reverse merger.  Under Rule 144(i), sales of shares may only be made under certain conditions, including a sale or intended sale of the stock and if we have filed all annual and quarterly reports required under the federal securities laws.  Therefore permission may be granted to remove the restrictive legend on stock certificates only for a specified sale of securities and not as a “blanket” removal of the restrictive legend.

 

If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud.  As a result, stockholders could lose confidence in our financial and other public reporting, which would harm our business and the trading price of our common stock.

 

Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and, together with adequate disclosure controls and procedures, are designed to prevent fraud.  Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could cause us to fail to meet our reporting obligations.  Ineffective internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock.  In addition, any future testing by us conducted in connection with Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), or any required subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses or that may require prospective or retroactive changes to our consolidated financial statements or identify other areas for further attention or improvement.

 

We are required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting as of December 31, 2014.  However, our independent registered public accounting firm is not required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404.  Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2014.  An independent assessment of the effectiveness of our internal controls could detect problems that our management’s assessment might not. Undetected material weaknesses in our internal controls could lead to financial statement restatements and require us to incur the expense of remediation.

 

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We incur significant costs as a result of our public company status and devote substantial management time to operating as a public company.

 

As a public company, we incur significant legal, accounting and other expenses to comply with the reporting requirements of the Securities Exchange Act of 1934, as amended, and applicable requirements of the Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as rules and regulations subsequently implemented by the SEC, including the establishment and maintenance of effective disclosure and financial controls, changes in corporate governance practices and required filing of annual, quarterly and current reports with respect to our business and operating results.  These requirements increase our legal and financial compliance costs and make some activities more time-consuming and costly. In addition, our management and other personnel devote significant time and attention to these public company requirements, which diverts their time attention from operational and other business matters.

 

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

 

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business.  We do not currently have and may never obtain research coverage by securities and industry analysts.  If no securities or industry analysts commence coverage of our company, the trading price for our common stock would be negatively impacted.  If we obtain securities or industry analyst coverage and if one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our common stock could decrease, which could cause our stock price and trading volume to decline.

 

Future sales of our common stock or securities convertible into our common stock may depress our stock price.

 

Sales of a substantial number of shares of our common stock or securities convertible into our common stock in the public market could occur at any time.  These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. If a large number of shares of our common stock or securities convertible into our common stock are sold in the public market, the sales could reduce the trading price of our common stock and impede our ability to raise future capital.

 

Our directors, executive officers and principal stockholders exert significant influence over us and could impede a change of corporate control.

 

Our directors, executive officers and holders of more than five percent of our common stock, together with their affiliates, beneficially own, in the aggregate, 29.8 percent of our outstanding common stock.  As a result, these stockholders, acting together, would have the ability to exert significant influence on matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation or sale of all or substantially all of our assets.  In addition, these stockholders, acting together, would have the ability to significantly influence the management and affairs of our company.  Accordingly, this concentration of ownership could harm the market price of our common stock by:

 

·                  delaying, deferring or preventing a change of control of us;

 

·                  impeding a merger, consolidation, takeover or other business combination involving us; or

 

·                  discouraging a potential acquiror from making a tender offer or otherwise attempting to obtain control of us.

 

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See “Part III. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” for more information regarding the ownership of our common stock by our directors, executive officers and holders of more than five percent of our common stock, together with their affiliates.

 

Nevada law and provisions in our restated articles of incorporation and restated bylaws could make a merger, tender offer or proxy contest difficult, thereby depressing the trading price of our common stock.

 

The anti-takeover provisions under Nevada corporate law may discourage, delay or prevent a change of control by prohibiting us from engaging in a business combination with stockholders owning in excess of 15 percent of our outstanding voting stock for a period of three years after the person becomes an interested stockholder, even if a change of control would be beneficial to our existing stockholders.  In addition, our restated articles of incorporation and restated bylaws contain provisions that may make the acquisition of our company more difficult, including the following:

 

·                  provide that only our Board of Directors will have the right to fill a vacancy created by the expansion of our Board of Directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our Board of Directors;

 

·                  provide that only our Chairman of the Board, our Chief Executive Officer or a majority of our Board of Directors will be authorized to call a special meeting of stockholders;

 

·                  require that certain litigation against us can only be brought in Nevada;

 

·                  authorize the issuance of undesignated preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval, and which may include rights superior to the rights of the holders of common stock;

 

·                  provide that our Board of Directors is expressly authorized to make, alter or repeal our bylaws; and

 

·                  establish advance notice requirements for nominations for elections to our Board of Directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.

 

These provisions could also discourage proxy contests and make it more difficult for our stockholders to elect directors of their choosing so as to cause us to take certain corporate actions our stockholders may desire to take.

 

We have never paid dividends on our capital stock, and we do not anticipate paying any cash dividends in the foreseeable future.

 

We have never declared nor paid cash dividends on our capital stock.  We currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not expect to declare or pay any dividends in the foreseeable future.  Consequently, stockholders must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment.

 

ITEM 1B.                                       UNRESOLVED STAFF COMMENTS

 

Item 1B is not applicable to RestorGenex as a smaller reporting company and has been omitted.

 

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ITEM 2.                                                PROPERTIES

 

Our principal executive office is located in a leased facility in Buffalo Grove, Illinois, where we lease approximately 2,900 square feet of office space for approximately $6,000 per month.  The lease for this space expires in February 2018.  Management of RestorGenex considers our leased properties suitable and adequate for our current and immediately foreseeable needs.

 

ITEM 3.                                                LEGAL PROCEEDINGS

 

From time to time, we are subject to various pending or threatened legal actions and proceedings, including those that arise in the ordinary course of our business, which may include employment matters, breach of contract disputes and stockholder litigation.  Such matters are subject to many uncertainties and to outcomes that are not predictable with assurance and that may not be known for extended periods of time.  We record a liability in our consolidated financial statements for costs related to claims, including future legal costs, settlements and judgments, where we have assessed that a loss is probable and an amount can be reasonably estimated.  If the reasonable estimate of a probable loss is a range, we record the most probable estimate of the loss or the minimum amount when no amount within the range is a better estimate than any other amount.  We disclose a contingent liability even if the liability is not probable or the amount is not estimable, or both, if there is a reasonable possibility that a material loss may have been incurred.

 

In July 2013, we received notice that a complaint for property damage had been filed by the Truck Insurance Exchange against us in Los Angeles Superior Court (Case No. BC513491) alleging damages for $393,592 related to water damage incurred by a printing company on the ground floor of our former office space in Los Angeles.  This damage was alleged to have occurred in connection with a water leak in our former office in February 2013.  We filed an answer to the complaint on or about August 23, 2013.  We had accrued $393,592 in connection with this matter as of September 30, 2014.  During fourth quarter of 2014, we settled this matter, and in connection with this settlement, made a cash payment to Truck Insurance Exchange in an amount less than our accrual as of September 30, 2014.  On December 22, 2014, this matter was dismissed with prejudice.

 

On August 7, 2014, a complaint was filed in the Superior Court of Los Angeles County, California by Paul Feller, our former Chief Executive Officer under the caption Paul Feller v. RestorGenex Corporation, Pro Sports & Entertainment, Inc., ProElite, Inc. and Stratus Media Group, GmbH (Case No. BC553996).  The complaint asserts various causes of action, including, among other things, promissory fraud, negligent misrepresentation, breach of contract, breach of employment agreement, breach of the covenant of good faith and fair dealing, violations of the California Labor Code and common counts.  The plaintiff is seeking, among other things, compensatory damages in an undetermined amount, punitive damages, accrued interest and an award of attorneys’ fees and costs.  On December 30, 2014, we filed a petition to compel arbitration and a motion to stay the action.  A hearing is scheduled for our petition and motion on April 14, 2015. We believe this action is without merit and intend to defend the action vigorously.  Because this lawsuit is in an early stage, we are unable to predict the outcome of the lawsuit and the possible loss or range of loss, if any, associated with its resolution or any potential effect the lawsuit may have on our operations.  Depending on the outcome or resolution of this lawsuit, it could have a material effect on our financial statements.

 

We are not involved in any other legal actions, however, from time to time may be subject to various pending or threatened legal actions and proceedings, including those that arise in the ordinary course of our business.  Such matters are subject to many uncertainties and to outcomes that are not predictable with assurance and that may not be known for extended periods of time.

 

ITEM 4.                                                MINE SAFETY DISCLOSURES

 

Not applicable.

 

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PART II

 


 

ITEM 5.                                                MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Price

 

Our common stock is quoted on the OTCQB marketplace of the OTC Market Groups, under the symbol “RESX.”  The following table sets forth the high and low daily sale prices for our common stock, as quoted by the OTCQB, for each calendar quarter during 2014 and 2013.  The over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

 

2014

 

High

 

Low

 

 

 

 

 

 

 

First Quarter

 

$

10.20

 

$

2.00

 

Second Quarter

 

6.20

 

3.82

 

Third Quarter

 

4.18

 

3.01

 

Fourth Quarter

 

4.50

 

2.88

 

 

2013

 

High

 

Low

 

 

 

 

 

 

 

First Quarter

 

$

20.00

 

$

8.00

 

Second Quarter

 

24.00

 

14.00

 

Third Quarter

 

19.00

 

6.00

 

Fourth Quarter

 

10.50

 

2.00

 

 

Number of Record Holders

 

As of March 25, 2015, there were 486 record holders of our common stock.

 

Dividends

 

To date, we have not declared or paid any cash dividends on our common stock and do not intend to do so in the near future.

 

Recent Sales of Unregistered Equity Securities

 

During the fourth quarter of 2014, we sold the following equity securities without registration under the Securities Act of 1933, as amended:

 

On October 21, 2014, we issued to one of the members of our Board of Directors 100,000 shares of common stock and a warrant to purchase 75,000 shares of our common stock at an exercise price of $4.80 per share upon conversion of a note payable in the principal amount of $200,000 issued by us.  The warrant is exercisable immediately and expires on October 21, 2018.

 

On December 2, 2014, we issued to two accredited investors an aggregate of 15,528 shares of common stock upon conversion of notes payable in the aggregate principal amount of $50,000 plus accrued aggregate interest in the amount of $12,110 issued by us. The per share conversion price was $4.00.

 

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On December 8, 2014, we issued to our investor relations consulting firm a warrant to purchase 250,000 shares of our common stock at an exercise price of $3.75 per share in consideration for investor relations services. The warrant is exercisable immediately and expires on December 8, 2019.

 

The foregoing sales of equity securities were made in reliance on either Section 4(a)(2) of the Securities Act of 1933, as amended, as transactions by an issuer not involving any public offering or Rule 506(b) under Regulation D of the Securities Act.  In all such transactions, certain inquiries were made by us to establish that such sales qualified for such exemption from the registration requirements.  In particular, we confirmed that with respect to the exemption claimed under Section 4(a)(2) of the Securities Act (i) all offers of sales and sales were made by personal contact from our officers and directors or other persons closely associated with us, (ii) each recipient made representations that the recipient was sophisticated in relation to the recipient’s investment (and we have no reason to believe that such representations were incorrect), (iii) each recipient gave assurance of investment intent and the certificates for the shares bear a legend accordingly, and (iv) offers and sales were made to a limited number of persons.

 

Issuer Purchases of Equity Securities

 

During the fourth quarter of 2014, we did not purchase any shares of our common stock or other equity securities of ours.

 

Our Board of Directors has not authorized any repurchase plan or program for the purchase of shares of our common stock or other securities on the open market or otherwise.

 

ITEM 6.                                                SELECTED FINANCIAL DATA

 

Item 6 is not applicable to RestorGenex as a smaller reporting company and has been omitted.

 

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ITEM 7.                                                MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This Management’s Discussion and Analysis provides material historical and prospective disclosures intended to enable investors and other users to assess our financial condition and results of operations. Statements that are not historical are forward-looking and involve risks and uncertainties discussed under the headings “Part I.  Item 1. Business—Cautionary Note Regarding Forward-Looking Statements” and “Part I.  Item 1A. Risk Factors” of this report.  The following discussion of our results of operations and financial condition should be read in conjunction with our financial statements and the related notes thereto included elsewhere in this report.  These risks could cause our actual results to differ materially from any future performance suggested below.

 

Business Overview

 

We are a specialty biopharmaceutical company focused on developing products for ophthalmology, oncology and dermatology.  Our lead product is a novel PI3K/Akt/mTOR pathway inhibitor which has completed two Phase I clinical trials for age-related macular degeneration and is in preclinical development in oncology, specifically glioblastoma multiforme. Our current pipeline also includes a “soft” anti-androgen compound for the treatment of acne vulgaris. Our novel inhibition of the PI3K/Akt/mTOR pathway and unique targeting of the androgen receptor show promise in a number of additional diseases, which we are evaluating for the purpose of creating innovative therapies that are safe and effective treatments to satisfy unmet medical needs.

 

Ophthalmology

 

The specific focus of our prescription ophthalmology business is on pathologies showing an aberrant up-regulation of the PI3K/Akt/mTOR pathway in the area of ophthalmology.  Two human Phase I clinical studies with one of our palomids known as “RES-529” have been completed for age-related macular degeneration, both studies of which showed preliminary evidence of biologic activity and no serious toxicity.  One of the two completed studies was sponsored by Paloma Pharmaceuticals, Inc., a company we acquired in March 2014, using intravitreal administration and was completed in December 2011.  The second study was sponsored and conducted by The National Eye Institute using subconjunctival administration and was completed in July 2012.  We currently are planning additional Phase I/Phase II studies with RES-529 for age-related macular degeneration that we expect to begin in 2016 after we finalize CMC (chemistry, manufacturing and control) work for subconjunctival administration and complete necessary preclinical studies.

 

Oncology

 

Our novel PI3K/Akt/mTOR pathway inhibitor, RES-529, is in preclinical development for oncology. Through a series of in vitro and in vivo animal models, RES-529 has been shown to have activity in several cancer types due to its ability to target and inhibit the PI3K/Akt/mTOR signal transduction pathway, RES-529 is a first-in-class inhibitor of both TORC1 and TORC2 that is mechanistically differentiated from other PI3K/Akt/mTOR pathway inhibitors currently in development. Signaling components of the PI3K/Akt/mTOR pathway are central regulators of cell proliferation, growth, differentiation, survival and angiogenesis.  Up to 80 percent of tumor types have been shown to have an aberrant up-regulation of the PI3K pathway.  Activation of this pathway has been observed in glioblastoma patients and is being pursued aggressively as a target for therapeutic intervention.  We have shown activity in both in vitro and in vivo glioblastoma animal models and have demonstrated that RES-529 is orally bioavailable and can cross the blood brain barrier.

 

We believe glioblastoma represents substantial financial upside given the significant unmet medical need due to limited and modestly effective therapies.  We plan to complete necessary work to start a Phase I/II glioblastoma human clinical trial in 2016.  We also plan to initiate Phase II studies in other tumor types once the RES-529 maximum tolerated dose is determined in the initial portion of the glioblastoma study.  We intend

 

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to focus in areas where preclinical evidence of activity has been demonstrated, specifically breast, prostate and/or lung cancers. In January 2015, the U.S. Food and Drug Administration, or FDA, granted Orphan Drug Designation for RES-529 for the treatment of glioblastoma multiforme.

 

Dermatology

 

Our prescription dermatology business is based primarily upon a “soft” anti-androgen, known as “RES-440,” which is under development for the treatment of acne vulgaris.  RES-440 has completed in vitro and in vivo proof-of-concept studies in tissue and animal models.  We currently are working on synthesis and formulations of products and are planning Phase I/Phase II studies in 2016 for the treatment of acne.

 

Other Indications/Products

 

We have rights to and own technologies and potential products beyond just those described above.  It is our strategy to focus at the current time on ophthalmology, oncology and dermatology, specifically wet AMD, gliobastoma and acne, as described in this report.  Beyond the potential products described in this report, we intend to continue to review our technologies and potential products on a regular basis and consider internal development in the future and the potential to out-license portions of our technology and potential products to other biopharmaceutical companies with greater focus and resources than ours or potentially in-license late stage products which are in or ready for human clinical trials.  These other indications include for example the use of our palomids in certain CNS disorders (i.e. Huntington’s disease and Parkinson’s disease) pulmonary fibrosis and biodefense.

 

In addition, we have developed small molecule zinc-finger transcription factor inhibitors/activators.  Zinc finger transcription factors are a subset of transcription factors utilizing zinc at its core for activity.  Transcription factors are proteins that bind to specific parts of DNA that control the transfer of genetic information from DNA to RNA. RNA in turn directs the protein making machinery to manufacture one or more proteins controlled by the transcription factor.  Small molecule zinc-finger transcription factor inhibitors/activations can specifically inhibit or activate the synthesis of one or more proteins controlled by the particular transcription factor.

 

Subject to prioritization and available resources, we may expand or out-license our work with zinc finger small molecule drug development to conduct IND enabling studies and Phase I clinical development in oncology.  We are not aware of any other company developing small molecule drugs targeting the disruption of the zinc finger transcription factor and DNA interaction.

 

Corporate History

 

Prior to our repositioning as a specialty biopharmaceutical company in 2013, we operated various entertainment and sports events businesses, which we acquired in a series of acquisitions beginning in March 2008.

 

On March 14, 2008, pursuant to an agreement and plan of merger dated August 20, 2007 between Feris International, Inc. (“Feris”) and Pro Sports & Entertainment, Inc. (“PSEI”), Feris issued 495,000 shares of its common stock for all issued and outstanding shares of PSEI, resulting in PSEI becoming a wholly owned subsidiary of Feris and the surviving entity for accounting purposes.  In July 2008, Feris’s corporate name was changed to Stratus Media Group, Inc.  PSEI specialized in various entertainment and sports events that it owned and operated.  PSEI also owned Stratus Rewards LLC that planned to operate a credit card rewards program.  In June 2011, we acquired shares of series A convertible preferred stock of ProElite, Inc. (“ProElite”), that organized and promoted mixed martial arts (“MMA”) matches.  These holdings of series A convertible preferred stock provided us voting rights on an as-converted basis equivalent to a 95 percent ownership in ProElite.  During the first quarter of 2013, we decided to focus on the MMA business and temporarily suspended development of our other businesses.  Because of lack of working capital, we

 

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suspended operations of ProElite effective June 30, 2013.  Following the repositioning of our company as a specialty biopharmaceutical company, our Board of Directors voted to discontinue the operations of ProElite effective March 31, 2014. We intend to dissolve ProElite during 2015.

 

Early in 2013, in order to reposition our company as a specialty biopharmaceutical company, our Board of Directors authorized management to pursue acquisition opportunities in the life sciences sector in view of the experience and expertise in that area of our largest stockholders, Sol J. Barer and Isaac Blech.  On November 18, 2013, we completed the acquisition of Canterbury Laboratories, LLC and Hygeia Therapeutics, Inc.  On March 28, 2014, we completed the acquisition of Paloma Pharmaceuticals, Inc. and VasculoMedics, Inc.

 

Effective September 30, 2013, we entered into an agreement and plan of merger with Canterbury Acquisition LLC, Hygeia Acquisition, Inc., Canterbury Laboratories, LLC (“Canterbury”), Hygeia Therapeutics, Inc. (“Hygeia”) and Yael Schwartz, Ph.D., as holder representative, pursuant to which we acquired all of the capital stock of Canterbury and Hygeia, with Canterbury and Hygeia becoming our wholly owned subsidiaries.  The total consideration for the Canterbury Group was $12,421,249 based on the issuance of 1,150,116 shares of our common stock at the market value of $10.80 per share as of the execution of the merger agreements on September 30, 2013.  Canterbury and Hygeia (the “Canterbury Group”) are related companies that were engaged in the development of pharmaceuticals and cosmeceuticals (cosmetic products with “drug-like” benefits) which, depending on the specific product involved, may treat acne, hirsutism (unwanted hair) and alopecia (thinning hair) and may revitalize hormonally-aged skin and hair in women over the age of 45.  For the year ended December 31, 2014, there were no revenues associated with Canterbury and Hygeia.

 

As we continued to position our company as a specialty biopharmaceutical company, in early March 2014, we hired Stephen M. Simes as our Chief Executive Officer.  Mr. Simes is an executive with extensive experience in the pharmaceutical and biotechnology industry.

 

On March 3, 2014, we entered into an agreement and plan of merger with Paloma Acquisition, Inc., Paloma Pharmaceuticals, Inc. (“Paloma”) and David Sherris, Ph.D., as founding stockholder and holder representative, pursuant to which we agreed to acquire all of the capital stock of Paloma, with Paloma becoming our wholly owned subsidiary.  On March 28, 2014, the merger with Paloma was closed and we issued an aggregate of 2,500,000 shares of our common stock to all the holders of Paloma common stock and its derivative securities, which included the assumption of promissory notes of Paloma in the aggregate amount (principal and accrued interest at that time) of $1,151,725 to be paid on the first anniversary of the closing of the Paloma merger.  The 2,500,000 shares of our common stock were valued at $2.50 per share, which was the closing market price of our common stock on March 3, 2014, resulting in $6,250,000 of consideration.  Paloma had developed a non-steroidal, synthetic, small molecule drug library that may have potential applications in ophthalmology, cancer, dermatology, pulmonary fibrosis, CNS, biodefense and anti-viral application.  The lead product, RES-529, targets and inhibits the PI3K/Akt/mTOR signal transduction pathway, specifically as a first-in-class dual TORC1/TORC2 inhibitor.

 

Also on March 3, 2014, we entered into an agreement and plan of merger with VasculoMedics Acquisition, Inc., VasculoMedics, Inc. (“VasculoMedics”) and Dr. Sherris, pursuant to which we agreed to acquire all of the capital stock of VasculoMedics, with VasculoMedics becoming our wholly owned subsidiary.  The VasculoMedics merger was concurrently closed with and was a condition to the closing of the Paloma merger on March 28, 2013.  In the VasculoMedics merger, we issued an aggregate of 220,000 shares of our common stock to the VasculoMedics stockholders.  These shares were valued at $2.50 per share, which was the closing price of our common stock on March 3, 2014, resulting in $550,000 of consideration, all of which was allocated to goodwill.  VasculoMedics was founded as a platform epigenetic company to develop orally available small molecular inhibitors of zinc finger transcription factors.  Zinc finger transcription factors are a subset of transcription factors utilizing zinc at its core for activity.

 

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On March 7, 2014, we effected a reverse stock split of one-for-100 of our common stock, and we changed our corporate name from Stratus Media Group, Inc. to RestorGenex Corporation.  All share and per share amounts in this report have been adjusted to reflect the one-for-100 reverse split of outstanding common stock.

 

Effective May 27, 2014, we appointed Phillip B. Donenberg as our Chief Financial Officer and effective August 4, 2014, we appointed Mark A. Weinberg, M.D. as Senior Vice President — Clinical Development.  Both Mr. Donenberg and Dr. Weinberg have extensive experience in the pharmaceutical and biotechnology industry.

 

Financial Summary

 

Our total working capital, as of December 31, 2014, totaled $21,832,217 including $21,883,887 in cash and cash equivalents, compared to a negative working capital of $(5,880,035), including $254,964 in cash and cash equivalents, as of December 31, 2013.

 

During 2014, we completed a private placement pursuant to which we raised approximately $35.6 million in gross proceeds and approximately $31.9 million in net proceeds, after paying placement agent fees and commission and offering expenses.  In the private placement, we issued an aggregate of 8,895,685 shares of our common stock and warrants to purchase an aggregate of 2,668,706 shares of common stock.  The purchasers of common stock received warrants to purchase 0.3 shares of common stock for each share of common stock that investors purchased in the private placement.  The purchase price of each common stock/warrant unit was $4.00.  Each warrant is exercisable into one share of common stock at an initial exercise price of $4.80 per share.

 

We recognized no revenues and our operating expenses were $14,613,818 during 2014.  We recognized a loss from continuing operations of $14,352,824 for 2014, compared to loss from continuing operations of $2,967,557 for 2013.

 

We expect to continue to recognize net losses for the foreseeable future.  We intend to use our existing cash and cash equivalents for working capital and to fund the research and development of our technologies and products.

 

Results of Operations for Year Ended December 31, 2014 Compared to the Year Ended December 31, 2013

 

Revenues

 

We recognized no revenues during 2014 and 2013.

 

Operating Expenses

 

Operating expenses were $14,613,818 during 2014, representing an increase of 14%, from operating expenses of $12,796,534 during 2013.  This increase was primarily due to the impairment of intangible assets, partially offset by lower expenses associated with our repositioning as a specialty biopharmaceutical company and ceasing to operate various entertainment and sports events businesses, including but not limited to, our ProElite MMA business.

 

As a result of our repositioning as a specialty biopharmaceutical company, we recognized $2,860,658 in research and development expenses during 2014 compared to $342,916 in research and development expenses recognized during 2013.  We expect that our research and development expenses will increase significantly in future periods compared to 2014 and prior year periods due to our anticipated efforts to advance the research and development of our technologies and products.

 

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General and administrative expenses were $4,760,145 during 2014, representing a decrease of 35% from $7,331,759 during 2013.  This decrease was primarily due to stock-based compensation expense related to a significant number of stock options and warrants granted to officers and financial advisors during 2013 compared to 2014. This decrease in stock-based compensation was offset by $1,147,098 of expense primarily related to amortization of $3,153,750 related to a July 2013 agreement with Maxim Group LLC to provide general financial advisory and investment banking services for three years on a non-exclusive basis and our repositioning as a specialty biopharmaceutical company and ceasing to operate various entertainment and sports events businesses, including but not limited to, our ProElite MMA business.  We expect that our general and administrative expenses will increase in future periods compared to 2014 as a result of increased personnel to support our efforts to advance our technologies and products.

 

During 2014, we recorded an impairment of our intangible assets of $6,670,345 due to our strategic decision in the fourth quarter of 2014 to focus our initial development efforts on RES-529 and RES-440 (for dermatology).  The impairment charge consisted of $3,035,000 of impairment of one of our in-process research and development intangible assets and $3,635,345 of impairment of finite lived intangible assets. During 2013, we recognized an impairment charge of $1,935,621 as a result of our decision during that time to suspend the operations of our ProElite MMA business.

 

Gain on settlement of property damage was $243,592 during 2014. In July 2013, we received notice that a complaint for property damage had been filed by the Truck Insurance Exchange against us for $393,592 related to water damage incurred by a printing company on the ground floor of our former office space in Los Angeles.  This complaint was settled for $150,000 in December 2014.

 

Fair value of common stock exchanged for warrants was $3,069,792 during 2013.  During the second quarter of 2013, we issued 1,023,264 shares of common stock in exchange for series E warrants that had a full-ratchet down anti-dilution provision and were extinguished.  These shares of common stock were valued at $3.00 per share, which was the price at which we sold shares during the second quarter of 2013, resulting in the charge of $3,058,210 during 2013.

 

Depreciation and amortization was $566,262 during 2014 compared with $116,446 during 2013.  This increase was primarily related to amortizing the amount attributed to intangible assets over the lives of those intangible assets.

 

Gain on Adjustments to Fair Value of Derivative Liability

 

In October 2012, we issued 1,000 shares of series E convertible preferred stock, and in May 2011, we issued 8,700 shares of series E convertible preferred stock.  The warrants issued in conjunction with the series E convertible preferred stock were determined to have an embedded derivative liability, which was revalued using Black-Scholes models upon the earlier of events that affect the value of this liability or the end of every quarter.  The difference between the value of this derivative liability at December 31, 2012 and May 6, 2013, the date these warrants were extinguished, resulted in a gain of $8,980,077 during 2013.  Since these warrants were extinguished in May 2013, there were no similar adjustments during 2014.

 

Gain on Extinguishment of Derivative Liability

 

In May 2013, the warrants issued in conjunction with the series E convertible preferred stock that gave rise to the derivative liability were exchanged for shares of our common stock and extinguished.  The value of the derivative liability was $1,635,967 for 2013 and a gain of this amount resulted when the liability was extinguished.  Since these warrants were extinguished in May 2013, there was no comparable gain or loss during 2014.

 

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Loss on Settlement of Notes Payable

 

Loss on settlement of notes payable — related parties was $1,907,772 during 2014.  During the second quarter of 2014, we issued shares of common stock and warrants to purchase shares of our common stock to a member of our Board of Directors in exchange for notes payable in the aggregate principal amount of $1,050,000.  These shares were valued at $3.55 per share, resulting in a charge of $1,650,378 during 2014.  In addition, during the fourth quarter of 2014, we issued shares of common stock and warrants to purchase shares of common stock to a member of our Board of Directors in exchange for a note payable in the principal amount of $200,000.  These shares were valued at $3.50 per share, resulting in a charge of $257,394 during 2014.

 

Loss on settlement of notes payable was $400,016 during 2014.  During the second quarter of 2014, we issued shares of common stock to a creditor upon conversion of a promissory note in the principal amount of $500,000.

 

Other (Income) Expenses

 

Other income was $25,401 during 2014 compared to other expenses of $660,586 during 2013.  Other income for 2014 related primarily to the recognition of interest income and other expenses in 2013 related primarily to expenses related to our repositioning as a specialty biopharmaceutical company.

 

Interest Expense

 

Interest expense was $273,503 during 2014, representing an increase of $147,022 from $126,481 during 2013. Interest expense increased primarily due to interest expense on notes payable we assumed in the Paloma acquisition on March 28, 2014. These notes plus interest expense accrued were paid in cash in August 2014.

 

Loss from Continuing Operations

 

We recognized a loss from continuing operations of $14,352,824 for 2014, compared to loss from continuing operations of $2,967,557 for 2013.  We expect to incur losses from continuing operations in future periods for the foreseeable future as we plan to continue our efforts to advance our technologies and products.

 

Income from Discontinued Operations

 

We recognized no net income or loss from discontinued operations during 2014. We recognized income from discontinued operations of $503,207 during 2013.  Operations of ProElite were suspended on June 30, 2013 and our Board of Directors determined to discontinue ProElite operations on March 31, 2014.

 

Dividends on Preferred Stock

 

Dividends on preferred stock were $171,625 during 2013, which were related to dividends on the series E convertible preferred stock, which was extinguished during 2013.  As a result, there were no dividends on preferred stock during 2014.

 

Liquidity and Capital Resources

 

Working Capital

 

Our financial position at the end of 2014 improved significantly compared to the end of 2013, as a result of the private placement we completed during 2014.  Our working capital, as of December 31, 2014 totaled $21,832,217, including $21,883,887 in cash and cash equivalents, compared to a negative working capital $(5,880,035), including $254,964 in cash and cash equivalents, as of December 31, 2013.

 

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During 2014, we completed a private placement pursuant to which we raised approximately $35.6 million in gross proceeds and approximately $31.9 million in net proceeds, after paying placement agent fees and commission and offering expenses.  In the private placement, we issued an aggregate of 8,895,685 shares of our common stock and warrants to purchase an aggregate of 2,668,706 shares of our common stock.  The purchasers of common stock received warrants to purchase 0.3 shares of common stock for each share of common stock that investors purchased in the private placement.  The purchase price of each common stock/warrant unit was $4.00.  Each warrant is exercisable into one share of common stock at an initial exercise price of $4.80 per share.

 

The following table summarizes our working capital as of December 31, 2014 and December 31, 2013:

 

Liquidity and Capital Resources

 

December 31, 2014

 

December 31, 2013

 

Cash and cash equivalents

 

$

21,883,887

 

$

254,964

 

Prepaid expenses, deposits and other assets

 

2,286,930

 

2,743,319

 

Total current liabilities

 

2,338,600

 

8,878,318

 

Working capital

 

$

21,832,217

 

$

(5,880,035

)

 

We expect to continue to incur net losses for the foreseeable future.  We intend to use our existing cash and cash equivalents for working capital and to fund the research and development of our acquired technologies.

 

Cash Flows

 

The following table sets forth our cash flows for the year ended December 31, 2014 and 2013:

 

 

 

Year Ended December 31,

 

 

 

2014

 

2013

 

Operating activities

 

$

(9,030,133

)

$

(1,184,630

)

Investing activities

 

(50,911

)

 

Financing activities

 

30,709,967

 

1,127,501

 

Net increase (decrease) in cash and cash equivalents

 

$

21,628,923

 

$

(57,129

)

 

Operating Activities

 

Net cash used in operating activities during 2014 of $9,030,133 consisted principally of cash expended on research and development and general and administrative activities, as well as $3,801,324 of net cash payments to settle liabilities which existed as of December 31, 2013 and related to prior years.

 

Negative operating cash flows during 2013 reflect our net loss of $2,457,949, partially offset by non-cash items primarily related to a $8,980,077 gain on adjustment to fair value of derivative liabilities, a $1,635,967 gain on extinguishment of derivative liability, offset by a $2,225,989 in stock-based compensation expense, $2,002,328 in stock warrant expense, a $3,069,792 charge for fair value of common stock exchanged for warrants and a $1,935,621 expense for impairment of assets.  Operating cash flows was further adjusted by increases in prepaid expenses, deposits and other assets of $627,377 and accounts payable, deferred salary and other accrued expenses and liabilities of $1,597,137.

 

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Investing Activities

 

Purchase of fixed assets accounted for $50,911 of cash used in investing activities in 2014 compared to no cash used in or provided by investing activities during 2013.

 

Financing Activities

 

Net cash provided by financing activities was $30,709,967 during 2014 compared to $1,127,501 during 2013.  Net cash provided by financing activities during 2014 was attributable primarily to proceeds from our private placement.  Net cash provided by financing activities during 2013 resulted from proceeds on notes payable and proceeds from the issuance of our common stock.

 

Capital Requirements

 

We expect to incur substantial expenses and generate significant operating losses as we continue to execute our business strategy, including:

 

·                  synthesis and formulation of our product candidates;

 

·                  conducting preclinical and clinical trials to pursue our product development initiatives;

 

·                  securing facilities as necessary to pursue our research and development capabilities;

 

·                  hiring additional personnel for managerial, research and development, operations and other functions; and

 

·                  implementing improved operational, financial and management systems.

 

To date, we have used primarily equity and debt financings to fund our ongoing business operations and short-term liquidity needs, and we expect to continue this practice for the foreseeable future.  As previously mentioned, during 2014, we completed a private placement pursuant to which we raised approximately $35.6 million in gross proceeds and $31.9 million in net proceeds, after paying placement agent fees and commission and offering expenses.

 

We believe our cash and cash equivalents as of December 31, 2014 will be sufficient to fund our planned operations at least through December 31, 2015 and into the first half of 2016.  However, we may require additional funds earlier.  Accordingly, there is no assurance that we will not need or seek additional funding prior to such time.  We may elect to raise additional funds even before we need them if market conditions for raising additional capital are favorable.

 

As of December 31, 2014, we did not have any existing credit facilities under which we could borrow funds.  We may seek to raise additional funds through various sources, such as equity and debt financings, or through strategic collaborations and license agreements.  We can give no assurances that we will be able to secure additional sources of funds to support our operations, or if such funds are available to us, that such additional financing will be sufficient to meet our needs or on terms acceptable to us.  This risk may increase if economic and market conditions deteriorate.  If we are unable to obtain additional financing when needed, we may need to terminate, significantly modify or delay the development of our product candidates and our operations, or we may need to obtain funds through collaborators that may require us to relinquish rights to our technologies or product candidates that we might otherwise seek to develop or commercialize independently.  If we are unable to obtain additional financing when needed, we may be forced to explore strategic alternatives, such as selling or merging our company or winding down our operations and liquidating our company.

 

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To the extent that we raise additional capital through the sale of our common stock, the interests of our current stockholders may be diluted.  If we issue preferred stock or convertible debt securities, it could affect the rights of our common stockholders or reduce the value of our common stock.  In particular, specific rights granted to future holders of preferred stock or convertible debt securities may include voting rights, preferences as to dividends and liquidation, conversion and redemption rights, sinking fund provisions, and restrictions on our ability to merge with or sell our assets to a third party.  Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.

 

Contractual Obligations

 

Set forth below is information concerning our known contractual obligations as of December 31, 2014 that are fixed and determinable by year starting with the twelve months ending December 31, 2015.

 

 

 

Payments Due By Period

 

Contractual
Obligations

 

Total

 

Less than
1 Year

 

1-3 Years

 

3-5 Years

 

More than
5 Years

 

Accrued board fees

 

$

55,000

 

$

55,000

 

$

 

$

 

$

 

Rent obligations

 

1,030,885

 

871,178

 

159,707

 

 

 

Employee contracts

 

4,523,334

 

2,033,000

 

1,985,417

 

504,917

 

 

Purchase obligations

 

793,391

 

786,711

 

6,680

 

 

 

Total

 

$

6,402,610

 

$

3,745,889

 

$

2,151,804

 

$

504,917

 

$

 

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements, as defined by the rules and regulations of the SEC that have or are reasonably likely to have a material effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.  As a result, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these arrangements.

 

Critical Accounting Policies

 

Certain of our critical accounting estimates require the application of significant judgment by management in selecting the appropriate assumptions in determining the estimate.  By their nature, these judgments are subject to an inherent degree of uncertainty.  We develop these judgments based on our historical experience, terms of existing contracts, our observance of trends in the industry and information available from other outside sources, as appropriate.  Actual results may differ from these judgments under different assumptions or conditions.  Different, reasonable estimates could have been used for the current period.  Additionally, changes in accounting estimates are reasonably likely to occur from period to period.  Both of these factors could have a material impact on the presentation of our financial condition, changes in financial condition or results of operations.  We believe the following accounting estimates are the most critical to aid in fully understanding and evaluating our financial statements as they require our most subjective or complex judgments:

 

Goodwill and Intangible Assets

 

Goodwill is the excess of the cost of an acquired entity over the net amounts assigned to tangible and intangible assets acquired and liabilities assumed.  We apply Accounting Standards Codification (“ASC”) 350 “Goodwill and Other Intangible Assets,” which requires allocating goodwill to each reporting unit and testing for impairment on an annual basis.  We assess goodwill for impairment as part of our annual reporting process.  In between valuations, we conduct additional tests if circumstances indicate a need for testing.

 

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The fair value of the reporting unit as of December 31, 2014, for the purpose of assessing the impairment of goodwill, was determined based on a primary analysis method.  This method entailed using the 2014 private placement financing agreed-upon unit price of $4.00 per unit less the Black Scholes value of the warrants included in the unit to arrive at an anchor stock price fair value of $3.55.  This anchor $3.55 per share value of common stock was then reconciled favorably with our common stock trading activity during the last half of the year, when quotes for our common stock as quoted by the OTCQB were within a range of approximately 85-115% of the $3.55 per share value of common stock. Due to the low trading volumes of our common stock, the private placement financing was deemed to be a better determinant of our fair value given the significant number of common shares acquired by new investors in the private placement.  This provided a market capitalization of $66.1 million as of December 31, 2014.  We determined that the fair value of our businesses for accounting purposes was equal to our market capitalization of approximately $66.1 million which we then compared to our stockholders’ equity of $38.2 million noting that fair value exceeds carrying value and therefore, indicated no impairment of our goodwill.

 

Our intangible assets as of December 31, 2014 consist of an in-process research and development (IPR&D) intangible asset acquired as part of the Paloma acquisition. The fair value of the IPR&D asset was determined as of the acquisition date using the cost approach. The cost approach was chosen as we were not able to estimate an income stream attributable to the IPR&D asset given the fact that the related product has only completed Phase I clinical trials and the timeline to commercial viability, if the FDA approval process is successful, is somewhat uncertain and would take a number of years. As the product continues in its development efforts, based on the facts and circumstances at the time of a future valuation for the purposes of assessing impairment, it is possible that the values for the IPR&D intangible assets currently on our consolidated balance sheets could be substantially reduced or eliminated, which could result in a maximum charge to operations equal to the current carrying value of our intangible assets of $6,449,628 as of December 31, 2014. We plan to next test the IPR&D intangible asset for impairment at our next annual impairment date in the second quarter of 2015.

 

In the fourth quarter of 2014, we strategically decided that our initial focus would be our development efforts with respect to RES-529 for ophthalmology (specifically age-related macular degeneration) and oncology (specifically glioblastoma multiforme) and RES-440 for dermatology (specifically acne vulgaris).  Based on our decision to abandon our development efforts on the Canterbury cosmeceutical finite lived intangible assets and the Canterbury IPR&D asset, we determined that the carrying value of such assets was no longer recoverable.  We recorded an impairment of our intangible assets of $6,670,345 on our consolidated statements of operations as of December 31, 2014.  The impairment consisted of $3,035,000 of impairment of the IPR&D asset and $3,635,345 of impairment of the finite lived intangible assets.

 

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Stock-Based Compensation

 

We account for stock-based compensation based on the grant date fair value of the award. We recognize this cost as an expense over the requisite service period, which is generally the vesting period of the respective award. Forfeitures rates are used in stock-based compensation to adjust the recognized stock-based compensation expense to reflect the expected attrition of employees prior to their full vesting in stock-based compensation awards. Due to the small number of employees at our company, we have assumed a forfeiture rate of zero as the population of employees is not large enough for our potential forfeitures to be adequately represented by a single percentage measurement, and in granting the awards, we would expect that the employee will remain at our company until the award vests. Should an employee leave our company, management will adjust stock-based compensation to reflect the expense related to the portion of those awards that were unvested at the time of the employee’s departure. We use the Black-Scholes option-pricing model to determine the estimated fair value of stock options. Critical inputs into the Black-Scholes option-pricing model include: the estimated grant

 

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date fair value of our common stock: the option exercise price: the expected term of the option in years: the annualized volatility of the stock: the risk-free interest rate: and the annual rate of quarterly dividends on the stock. If any of the assumptions used in the Black-Scholes model changes significantly. stock-based compensation for future awards may differ materially compared with the awards granted previously. The inputs that create the most sensitivity in our option valuation are the volatility and expected term.

 

Given our recent repositioning as a specialty biopharmaceutical company. we do not have sufficient trading data to calculate volatility based on our own common stock. the expected volatility is calculated as of each grant date based on reported data for a peer group of publicly traded companies for which historical information is available. While we are not aware of any news regarding or disclosure by our peers that may impact their respective volatilities. there is a risk that peer group volatility may increase. thereby increasing the future compensation expense resulting from future option grants. We intend to continue to consistently apply this process using the same or similar public companies until a sufficient amount of historical information regarding the volatility of our own common stock share price as a specialty biopharmaceutical company becomes available. or unless circumstances change such that the identified companies are no longer similar to us. in which case. more suitable companies whose share prices are publicly available would be utilized in the calculation.

 

The expected term of the stock options is determined based upon the simplified approach. allowed under SEC Staff Accounting Bulletin No. 110. which assumes that the stock options will be exercised evenly from vesting to expiration. as we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term. As we obtain data associated with future exercises. the expected term of future grants will be adjusted accordingly.

 

See Note 15. "Stock-Based Compensation." to the consolidated financial statements for the year ended December 31, 2014 included in this Annual Report on Form 10-K for additional information regarding the assumptions used in the Black-Scholes model.

 

Recent Accounting Pronouncements

 

We do not expect the adoption of any recent accounting pronouncements to have a material effect on our financial position, results of operations or cash flows. We describe such pronouncements in Note 2 to our consolidated financial statements under "recently issued accounting pronouncements."

 

ITEM 7A.                                       QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

Item 7A is not applicable to RestorGenex as a smaller reporting company and has been omitted.

 

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ITEM 8.                                                FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Description

 

Page

 

 

 

Report of Independent Registered Public Accounting Firm

 

77

 

 

 

Report of Independent Registered Public Accounting Firm

 

78

 

 

 

Consolidated Balance Sheets as of December 31, 2014 and 2013

 

79

 

 

 

Consolidated Statements of Operations for the years ended December 31, 2014 and 2013

 

80

 

 

 

Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2014, 2013 and 2012

 

81

 

 

 

Consolidated Statements of Cash Flows for the years ended December 31, 2014 and 2013

 

82

 

 

 

Notes to the Consolidated Financial Statements for the years ended December 31, 2014 and 2013

 

83

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of

RestorGenex Corporation

Buffalo Grove, Illinois

 

We have audited the accompanying consolidated balance sheet of RestorGenex Corporation and subsidiaries (the “Company”) as of December 31, 2014, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of RestorGenex Corporation and subsidiaries as of December 31, 2014, and the results of their operations and their cash flows for the year ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America.

 

 

/s/ DELOITTE & TOUCHE LLP

 

Chicago, Illinois

April 3, 2015

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders

RestorGenex Corporation

Los Angeles, California

 

We have audited the accompanying consolidated balance sheets of RestorGenex Corporation (the “Company”) as of December 31, 2013 and the related consolidated statements of operations, stockholders’ equity/(deficit) and cash flows for the year ended December 31, 2013.  These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of internal control over financial reporting.  Our audits considered internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of RestorGenex Corporation as of December 31, 2013, and the results of its operations and its cash flows for the year ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America.

 

/s/ GOLDMAN KURLAND AND MOHIDIN LLP

 

Goldman Kurland and Mohidin LLP

Encino, California

April 15, 2014 and for the removal of going concern emphasis of matter paragraph, for which the date is April 3, 2015.

 

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RESTORGENEX CORPORATION

Consolidated Balance Sheets

December 31, 2014 and December 31, 2013

 

 

 

December 31,

 

December 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

Cash and cash equivalents

 

$

21,883,887

 

$

254,964

 

Prepaid expenses, deposits and other assets

 

2,286,930

 

2,743,319

 

 

 

24,170,817

 

2,998,283

 

 

 

 

 

 

 

PROPERTY AND EQUIPMENT, NET

 

102,315

 

11,262

 

 

 

 

 

 

 

OTHER ASSETS

 

 

 

 

 

Intangible assets, net

 

6,449,628

 

7,691,682

 

Goodwill

 

12,055,991

 

7,642,825

 

TOTAL ASSETS

 

$

42,778,751

 

$

18,344,052

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

Accounts payable

 

$

417,307

 

$

1,520,206

 

Other accrued expenses and liabilities

 

1,921,293

 

3,480,009

 

Due to officer

 

 

156,358

 

Notes payable

 

 

1,667,002

 

Note payable - related party

 

 

200,000

 

Obligation to issue stock for transfer of liabilities

 

 

1,854,743

 

 

 

2,338,600

 

8,878,318

 

 

 

 

 

 

 

DEFERRED TAXES

 

2,274,526

 

3,000,576

 

TOTAL LIABILITIES

 

4,613,126

 

11,878,894

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

Common stock:

 

 

 

 

 

Issued and outstanding; $0.001 par value; 1,000,000,000 shares authorized; 2014 - 18,614,968; 2013 - 5,813,785

 

18,615

 

5,814

 

Additional paid-in-capital

 

113,437,384

 

67,390,493

 

Accumulated deficit

 

(75,290,374

)

(60,937,550

)

Total RestorGenex stockholders’ equity

 

38,165,625

 

6,458,757

 

Non-controlling interest equity

 

 

6,401

 

Total stockholders’ equity

 

38,165,625

 

6,465,158

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

42,778,751

 

$

18,344,052

 

 

See accompanying notes to the consolidated financial statements.

 

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RESTORGENEX CORPORATION

Consolidated Statements of Operations

December 31, 2014 and December 31, 2013

 

 

 

Year Ended December 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

REVENUES

 

$

 

$

 

 

 

 

 

 

 

TOTAL REVENUES

 

 

 

 

 

 

 

 

 

EXPENSES

 

 

 

 

 

Research and development

 

2,860,658

 

342,916

 

General and administrative

 

4,760,145

 

7,331,759

 

Impairment of intangible assets

 

6,670,345

 

1,935,621

 

Gain on property damage settlement

 

(243,592

)

 

Fair value of common stock exchanged for warrants

 

 

3,069,792

 

Depreciation and amortization

 

566,262

 

116,446

 

TOTAL EXPENSES

 

14,613,818

 

12,796,534

 

 

 

 

 

 

 

LOSS FROM OPERATIONS

 

(14,613,818

)

(12,796,534

)

 

 

 

 

 

 

OTHER EXPENSES/(INCOME)

 

 

 

 

 

Gain on adjustments to fair value of derivative liability

 

 

(8,980,077

)

Gain on extinguishment of derivative liability

 

 

(1,635,967

)

Loss on settlement of notes payable - related parties

 

1,907,772

 

 

Loss on settlement of notes payable

 

400,016

 

 

Other (income) expenses

 

(25,401

)

660,586

 

Interest expense

 

273,503

 

126,481

 

TOTAL OTHER EXPENSES/(INCOME)

 

2,555,890

 

(9,828,977

)

 

 

 

 

 

 

LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES

 

(17,169,708

)

(2,967,557

)

Benefit from income taxes

 

2,816,884

 

 

LOSS FROM CONTINUING OPERATIONS

 

(14,352,824

)

(2,967,557

)

Income from discontinued operations

 

 

503,207

 

 

 

 

 

 

 

NET LOSS

 

(14,352,824

)

(2,464,350

)

Preferred dividends

 

 

171,625

 

 

 

 

 

 

 

NET LOSS ATTRIBUTABLE TO RESTORGENEX CORPORATION

 

$

(14,352,824

)

$

(2,635,975

)

 

 

 

 

 

 

Basic and diluted loss per share for continuing operations - attributable to RestorGenex Corporation

 

$

(1.00

)

$

(1.19

)

Basic and diluted income per share for discontinued operations

 

 

0.19

 

TOTAL BASIC AND DILUTED LOSS PER SHARE

 

$

(1.00

)

$

(1.00

)

 

 

 

 

 

 

BASIC WEIGHTED AVERAGE SHARES OUTSTANDING

 

14,299,473

 

2,646,603

 

FULLY-DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING

 

14,299,473

 

2,646,603

 

 

See accompanying notes to the consolidated financial statements.

 

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RESTORGENEX CORPORATION

Consolidated Statements of Stockholders’ Equity

Years Ended December 31, 2014 and 2013

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

Paid-In

 

Accumulated

 

Preferred Stock Series

 

 

 

 

 

Shares

 

Amount

 

Capital

 

Deficit

 

D

 

E

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2013

 

890,837

 

$

891

 

$

38,329,046

 

$

(56,717,225

)

$

19

 

$

9

 

$

(18,387,260

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock for cash

 

142,501

 

143

 

427,358

 

 

 

 

427,501

 

Stock expense, value of warrants and options

 

 

 

4,527,067

 

 

 

 

4,527,067

 

Payment of preferred stock dividends with common stock

 

4,202

 

4

 

99,789

 

 

 

 

99,793

 

Conversion of Series D Preferred to common stock

 

11,611

 

12

 

(12

)

 

(19

)

 

(19

)

Conversion of Series E Preferred to common stock

 

1,575,000

 

1,575

 

(1,575

)

 

 

(9

)

(9

)

Conversion of debt to common stock

 

576,331

 

577

 

2,915,922

 

 

 

 

2,916,499

 

Conversion of warrants to common stock

 

1,023,264

 

1,023

 

(1,023

)

 

 

 

 

Common stock issued in settlement of contract

 

2,000

 

2

 

31,998

 

 

 

 

32,000

 

Remove accrued dividends for Series E extinguishment

 

 

 

802,994

 

 

 

 

802,994

 

Remove accrued interest for notes exchanged for common stock

 

 

 

63,602

 

 

 

 

63,602

 

Common stock issued as part of board compensation

 

(6,827

)

(8

)

41,757

 

 

 

 

41,749

 

Fair value charge for warrants retired

 

 

 

3,069,792

 

 

 

 

3,069,792

 

Adjustments related to ProElite

 

 

 

942,600

 

(1,584,350

)

 

 

(641,750

)

Common stock issued for Canterbury / Hygeia acquisition

 

1,150,116

 

1,150

 

12,420,099

 

 

 

 

12,421,249

 

Issuance of common stock for advisory agreements

 

243,250

 

243

 

3,231,482

 

 

 

 

3,231,725

 

Common stock issued as fee

 

1,500

 

2

 

10,498

 

 

 

 

10,500

 

Issuance of common stock to third party for assumption of liabilities

 

200,000

 

200

 

479,099

 

 

 

 

479,299

 

Net loss

 

 

 

 

(2,635,975

)

 

 

(2,635,975

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2013

 

5,813,785

 

$

5,814

 

$

67,390,493

 

$

(60,937,550

)

$

 

$

 

$

6,458,757

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock, net of offering costs

 

8,895,685

 

8,896

 

31,841,071

 

 

 

 

31,849,967

 

Employee and director stock-based compensation

 

 

 

1,606,947

 

 

 

 

1,606,947

 

Warrants issued to consultants

 

 

 

547,061

 

 

 

 

547,061

 

Common stock issued for Paloma acquisition

 

2,500,000

 

2,500

 

6,247,500

 

 

 

 

6,250,000

 

Common stock issued for VasculoMedics acquisition

 

220,000

 

220

 

549,780

 

 

 

 

550,000

 

Issuance of common stock to third party for assumption of liabilities

 

150,000

 

150

 

272,952

 

 

 

 

273,102

 

Retirement of common stock originally issued to a third party for assumption of liabilities

 

(99,332

)

(99

)

 

 

 

 

(99

)

Issuance of common stock as settlement of accounts payable and accrued liabilities

 

160,056

 

160

 

587,441

 

 

 

 

587,601

 

Common stock issued as settlement of an outstanding liability to law firm

 

53,457

 

53

 

214,112

 

 

 

 

214,165

 

Common stock issued as payment of notes payable

 

274,764

 

275

 

979,796

 

 

 

 

980,071

 

Common stock issued as payment of notes payable - related party

 

646,553

 

646

 

3,200,231

 

 

 

 

3,233,448

 

Net loss

 

 

 

 

(14,352,824

)

 

 

(14,352,824

)