| Corporate Overview | 1. Corporate overview:
Overview
The accompanying unaudited condensed financial statements of
HedgePath Pharmaceuticals, Inc., a Delaware corporation (the
“Company”, “HPPI”, “we”,
“us” or similar terminology), have been prepared by the
Company without audit. In the opinion of management, all
adjustments (which include normal recurring adjustments) necessary
to present fairly the financial position, results of operations and
cash flows as of March 31, 2016, and for all periods
presented, have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting
principles generally accepted in the United States of America
(“GAAP”) have been condensed or omitted pursuant to the
Securities and Exchange Commission (“SEC”) rules and
regulations. These unaudited condensed financial statements should
be read in conjunction with the audited financial statements and
notes thereto for the year ended December 31, 2015, which are
included in the Company’s 2015 Annual Report on Form 10-K,
filed with the SEC on February 1, 2016 (the “2015 Annual
Report”). The accompanying condensed balance sheet as of
December 31, 2015 has been derived from the audited financial
statements at that date, but does not include all information and
footnotes required by GAAP for complete financial statements.
As used herein, the term “Common Stock” means the
Company’s common stock, $0.0001 par value per share.
The results of operations for the three month period ended
March 31, 2016 are not necessarily indicative of results that
may be expected for any other interim period or for the full fiscal
year. Readers of this Quarterly Report are strongly encouraged to
review the risk factors relating to the Company which are set forth
in the 2015 Annual Report and our other filings with the SEC.
The accompanying financial statements have been prepared on a going
concern basis which contemplates the realization of assets and
satisfaction of liabilities of the Company in the normal course of
business. If the Company is unable to raise required funding to
continue to pursue its business plan, it may have to cease
operations. The financial statements do not include any adjustments
that might be necessary if the Company is unable to continue as a
going concern.
Nature of the Business and Background
The Company is a clinical stage biopharmaceutical company that is
seeking to discover, develop and commercialize innovative
therapeutics for patients with certain cancers. The
Company’s proposed therapy is based upon the use of
SUBA ™
The Company’s preliminary focus is on the development of
therapies for skin, lung and prostate cancers in the United States
of America (“U.S.”) market, with the first indication
targeting basal cell carcinoma in patients with Basal Cell
Carcinoma Nevus Syndrome (also known as Gorlin Syndrome) for which
the Company is presently conducting a Phase II(b) clinical
trial.
Relationship with Mayne Pharma Ventures Pty Ltd.
The Company has exclusive rights in the U.S. to develop and to
commercialize SUBA-Itraconazole capsules for the treatment of human
cancer via oral administration. SUBA-Itraconazole was developed and
is licensed to us by the Company’s manufacturing partner and
significant shareholder Mayne Pharma Ventures Pty Ltd. and its
affiliates (“Mayne Pharma”) under a supply and license
agreement, originally dated September 3, 2013 and most
recently amended and restated on May 15, 2015 (the
“SLA”). Mayne Pharma is an Australian specialty
pharmaceutical company that develops and manufactures branded and
generic products, which it distributes directly or through
distribution partners and also provides contract development and
manufacturing services. In addition to being the Company’s
licensor and supply partner, under the SLA and related agreements,
Mayne Pharma holds a significant minority equity stake in the
Company and holds important rights with respect to the Company,
such as the right to appoint a member to the Company’s Board
of Directors. | 1. Corporate overview:
Overview
The accompanying audited financial statements of HedgePath
Pharmaceuticals, Inc., a Delaware corporation (the
“Company”, “HPPI”, “we”,
“us” or similar terminology) as successor to
Commonwealth Biotechnologies, Inc., a Virginia corporation
(“CBI”), have been prepared by the Company as a going
concern, and in accordance with accounting principles generally
accepted in the United States of America (“GAAP”).
As used herein, the term “Common Stock” means the
Company’s common stock, $0.0001 par value per share.
Nature of the Business
The Company is a clinical stage biopharmaceutical company that is
seeking to discover, develop and commercialize innovative
therapeutics for patients with certain cancers. The
Company’s preliminary focus is on the development of
therapies for skin, lung and prostate cancers in the U.S. market,
with the first indication targeting basal cell carcinoma in
patients with Basal Cell Carcinoma Nevus Syndrome (also known as
Gorlin Syndrome) for which the Company has begun dosing its Phase
II(b) clinical trial. The Company’s proposed therapy is
based upon the use of SUBA-Itraconazole, which is a patented, oral
formulation of the currently marketed anti-fungal drug
itraconazole. The Company believes that the dosing of oral capsules
of this formulation can affect the Hedgehog signaling pathway, a
major regulator of many fundamental cellular processes, which, in
turn, can impact the development and growth of cancers such as
basal cell carcinoma. Itraconazole is approved by the U.S. Food and
Drug Administration (the “FDA”) for, and extensively
used to, treat fungal infections and has an extensive history of
safe and effective use in humans. The Company has developed,
optioned and licensed intellectual property and know-how related to
the treatment of cancer patients using itraconazole.
Second Amended and Restated Supply and License
Agreement
Pursuant to the Company’s Supply and License Agreement with
Mayne Pharma Ventures Pty Ltd. and its affiliates (“Mayne
Pharma”) which was originally entered into on
September 3, 2013, amended and restated on June 24, 2014
and most recently amended and restated on May 15, 2015, Mayne
Pharma is obligated to: (i) supply the Company with its
patented formulation of SUBA-Itraconazole in a particular dose
formulation for the treatment of human patients with cancer via
oral administration (with the initial areas of investigation being
prostate, lung and skin cancer) in the United States,
(ii) provide the Company with an exclusive license to perform
specified development activities and to commercialize
SUBA-Itraconazole for the treatment of cancer via oral
administration in the United States and (iii) participate in a
joint development committee (the “JDC”) with the
Company to clinically develop SUBA-Itraconazole for the treatment
of cancer in the United States. Mayne Pharma will also provide
certain services (in accordance with the development plan and
budget for the Company’s product) including to direct
clinical programming (subject to the oversight and approval by the
JDC and, in certain circumstances, the Board of Directors), and to
direct the regulatory approval process and intellectual property
strategy related to the product. Any services provided to the
Company by Mayne Pharma in this regard will be provided at Mayne
Pharma’s expense (other than third party costs agreed to by
the Company and Mayne Pharma), and such services will be subject to
the Company’s prior approval. The Supply and License
Agreement may be terminated by Mayne Pharma if the Company fails to
achieve regulatory approval to commercialize SUBA-Itraconazole in
the U.S. by June 30, 2017, if the Company breaches any
provision of the Equity Holders Agreement or purchase agreements
with Mayne Pharma (each as described below), if the Company
materially breaches the Supply and License Agreement and do not
cure such breach within a specified time period, or if either party
files for bankruptcy or insolvency proceedings.
Mayne Pharma Sublicense Agreement
On September 2, 2015, the Company entered into a sublicense
agreement with Mayne Pharma. Pursuant to the Agreement, Mayne
Pharma sublicensed to the Company the exclusive U.S. rights to two
additional patents regarding the use of Itraconazole for treatment
of cancer, namely US patent No 8,980,930 entitled
“Angiogenesis Inhibitors”, issued on March 17,
2015, and US patent No 8,653,083 entitled “Hedgehog Pathway
Antagonists to Treat Disease”, issued on February 28,
2014. Mayne Pharma is the sublicensee of the patents from Accelas
Holdings, a British Virgin Islands company, who in turn is the
licensee from The Johns Hopkins University, the owner of the
patents. The patents relate to the use of itraconazole as a
treatment for cancer and age-related macular degeneration. The
Company paid a license fee of $75,000 to Mayne Pharma upon entering
into the sublicense agreement, which is included in research and
development expenses in the accompanying 2015 condensed statement
of operations.
Mayne Pharma Securities Purchase Agreements
On June 24, 2014, the Company and Mayne Pharma entered into a
Securities Purchase Agreement (the “Mayne Purchase
Agreement”). Pursuant to the Mayne Purchase Agreement, the
Company (i) issued 258,363 shares of Series A Preferred Stock
(the “Mayne Series A Shares”) and (ii) issued,
upon closing of a separate Securities Purchase Agreement, dated
June 24, 2014 (as described further below, the “HPLLC
Purchase Agreement”) by and between the Company and
Hedgepath, LLC, a warrant to purchase 10,250,569 shares of Common
Stock (the “Mayne Make-Up Warrant”). The Mayne Series A
Shares converted into 87,843,897 shares of Common Stock on
August 14, 2014 pursuant to the terms of the Equity Holders
Agreement (discussed below) and in accordance with the terms of the
Series A Preferred Stock. The Mayne Make-Up Warrant has an exercise
price of $0.0878 per share and may be exercised at any time, from
time to time, by Mayne Pharma prior to the expiration on
June 24, 2019. In conjunction with the execution of the Mayne
Purchase Agreement, the Company has expensed, as in-process
research and development costs, approximately $1.9 million for the
fair value of the preferred stock and warrant issued. The value of
the issued stock was calculated by taking approximately 42% of the
market capitalization on the date the agreement was entered into to
reflect the 42% ownership exchanged for entering into the
agreement. The value of the warrant was calculated by using the
Black-Scholes valuation model that uses assumptions for expected
volatility (104.9%), expected dividends (none), expected term (5
years), and risk-free interest rate (1.7%). Expected volatilities
are based on historical volatilities of peer companies. The
risk-free rate is based upon the U.S. Treasury yield curve in
effect at the time of the grant for the period of the expected
term.
On May 15, 2015, the Company and Mayne Pharma entered into a
Securities Purchase Agreement (the “2015 Mayne Purchase
Agreement”) pursuant to which, in consideration of Mayne
Pharma’s investment of $2.5 million in the Company, the
Company issued (i) 33,333,333 shares of Common Stock and
(ii) a warrant to purchase 33,333,333 shares of Common Stock
(the “Warrant”) for an aggregate purchase price of
$2,500,000, or $0.075 per share. The transaction contemplated by
the 2015 Mayne Purchase Agreement formally closed on May 18,
2015. The Warrant is immediately exercisable, subject to certain
restrictions, at an exercise price of $0.075 per share and expires
on May 15, 2020.
Hedgepath, LLC Purchase Agreement
On June 24, 2014, the Company and Hedgepath, LLC entered into
the Hedgepath, LLC Purchase Agreement, pursuant to which the
Company sold Hedgepath, LLC 20,000,000 shares of Common Stock at a
purchase price of $0.075 per share for an aggregate purchase price
of $1,500,000, which monies were funded in monthly installments
through December 2014 pursuant to the promissory note (the
“HPLLC Note”) issued by Hedgepath, LLC to the Company
on June 24, 2014. Funds received under this transaction are
being used by the Company for research and development as well as
for general and administrative expenses.
Equity Holders Agreement
On June 24, 2014, in fulfillment of one of the conditions of
the Mayne Purchase Agreement, the Company, Mayne Pharma, Hedgepath,
LLC, Dr. Frank O’Donnell and Mr. Nicholas J.
Virca (who for these purposes are referred to together as the
“Equity Holder Parties”) entered into an Amended and
Restated Equity Holders Agreement (the “Equity Holders
Agreement”). On May 15, 2015, as a condition of the 2015
Mayne Purchase Agreement, the Equity Holder Parties entered into
the Second Amended and Restated Equity Holders Agreement. The
Equity Holders Agreement governs the rights and obligations of each
of the parties as they pertain to the Company’s securities
and to the present and future governance of the Company. Pursuant
to the Equity Holders Agreement:
• Mayne Pharma and Hedgepath, LLC each
agreed not to offer, pledge, sell, contract to sell, swap or enter
into any other transfer arrangement any of their company securities
until June 24, 2015 (which is referred to as the Lock-Up
Period) without prior written consent of the other Equity Holder
Parties, except for in limited circumstances as described in the
Equity Holders Agreement;
• Mayne Pharma, Hedgepath, LLC,
Mr. Virca and Dr. O’Donnell each agreed that during
the Lock-Up Period none of them will own greater than 49.5% of the
Company’s common stock on a fully-diluted basis (such
ownership to include individual and affiliate ownership) except
that Mayne Pharma is permitted to own greater than 49.5% of the
Company’s common stock on a fully-diluted basis, but only as
a result of its ownership of the shares and the warrant issued
pursuant to the 2015 Mayne Purchase Agreement, it being understood
that Mayne Pharma will not exercise the Warrant until after the
Lock-up Period;
• Mayne Pharma agreed that while the
Equity Holders Agreement remains in effect, Mayne Pharma will not
act in concert as part of a “group” (as defined in
Section 13(d) of the Securities Exchange Act of 1934, as
amended) with any other person or persons to own or control more
than fifty percent (50%) of the outstanding common stock;
• Mayne Pharma and its affiliates have
been granted a right of first refusal to purchase a pro rata share
of any new securities issued by us, such pro rata share to be
determined based upon the number of shares of common stock held by
Mayne Pharma on a fully diluted basis as compared to the number of
shares of common stock outstanding immediately prior to the
offering of the new securities on a fully diluted basis;
• Mayne Pharma has been granted the
right until June 24, 2016 to introduce accredited investors to
participate in a private offering of the Company’s securities
(with some exceptions as described in the Equity Holders
Agreement). In the event that the Company contemplates a private
offering of its securities, such accredited investors introduced by
Mayne Pharma to have the right to participate in up to 50% of the
private offering;
• Mr. Virca agreed to lock-up his
equity securities of our company until the earlier of:
(i) September 3, 2016, (ii) the receipt of written
notice of acceptance for the filing of an NDA for the product
licensed to us by Mayne Pharma, or, (iii) to the extent
provided in an applicable award agreement, upon his death or
disability;
• Dr. O’Donnell and the
Company agreed that Dr. O’Donnell is not entitled to
receive any equity securities under our EIP until the Performance
Goal Date (as described below);
• The Company agreed not to amend the
Company’s 2014 Equity Incentive Plan (the “EIP”)
in any way during the Lock-Up Period without written consent of
Mayne Pharma;
• For as long as either Hedgepath, LLC
or Mayne Pharma own more than forty percent (40%) of the
Company’s common stock on a fully-diluted basis, without the
approval of either or both of Hedgepath, LLC and Mayne Pharma, as
applicable, the Company shall not increase the number of shares
authorized under the EIP, amend the EIP, adopt a new stock grant
plan or issue, grant or award more than 5,000,000 shares of common
stock under the EIP in the aggregate (in addition to previous EIP
grants);
• The Equity Holder Parties agreed that
all awards included in the initial issuance of securities from the
EIP are subject to restriction on exercise until the earlier of:
(i) September 3, 2016 or (ii) the receipt of written
notice of acceptance for the filing of an NDA by us an NDA for the
product licensed to the Company by Mayne Pharma, provided that any
awards granted after June 24, 2014 are not subject to this
restriction;
• Mayne Pharma has the right to
designate one director to our Board of Directors and to designate a
second director if the size of the board is increased to seven
directors until the earlier to occur of: (i) the date that the
Supply and License Agreement is terminated or expires, or
(ii) the date on which the Mayne Pharma or its affiliates
ceases to own ten percent (10%) or more of the issued and
outstanding common stock on a fully diluted basis (which we call
the Voting Rights Termination Date);
• The Equity Holder Parties agree that,
for as long as Mayne Pharma has the right to designate a director
to our Board of Directors, all of the Equity Holder Parties will
vote their shares in favor of appointing the Mayne Pharma candidate
to the board;
• The Equity Holder Parties agree not
to increase or decrease the size of our Board of Directors except
with the unanimous consent of the board until the Voting Rights
Termination Date;
• Until the Voting Rights Termination
Date, the Equity Holder Parties agree that any replacement or
removal of Mr. Virca requires the unanimous approval of the
Board of Directors and any replacement or removal of
Dr. O’Donnell requires the approval of all of the
members of the Board of Directors except for
Dr. O’Donnell. Notwithstanding the foregoing,
Mr. Virca and Dr. O’Donnell may be removed without
unanimous approval of the Board of Directors upon the occurrence of
the Majority Holder Condition (described below), Failure Condition
(described below) or Material Breach Condition (described
below);
• The Equity Holder Parties agree to
use diligent good faith efforts to ensure that the Board of
Directors continues to consist of a majority of “Independent
Directors” (as defined in the Equity Holders Agreement) until
such time as (i) a single stockholder (not acting as part of a
“group”) of the Company owns greater than ninety
percent (90%) of our common stock or (ii) only for so
long as Mayne Pharma holds at least forty percent (40%) of the
Company’s outstanding common stock, there is a material
breach of any document relating to the transactions by and among
the Equity Holder Parties on May 15, 2015 other than by Mayne
Pharma, excluding the occurrence of a the Failure Condition, and
Mayne Pharma has not otherwise nominated, designated, elected or
appointed a majority of the directors on the Board of Directors
(collectively referred to as the Material Breach Condition);
• The Equity Holder Parties agree to
vote for the Board of Directors in its current composition (unless
mutually agreed upon by Mayne Pharma and Hedgepath, LLC) until such
time as (i) either Mayne Pharma or Hedgepath, LLC, alone, and
not in concert as part of a “group,” own a majority of
the Company’s outstanding shares of common stock (the Company
refers to this condition as the Majority Holder Condition),
(ii) one hundred and fifty days after the Performance Goal (as
described below) is not satisfied (the Company refers to this
condition as the Failure Condition) and (iii) upon the
occurrence of a Material Breach Condition. Upon the occurrence of
the Majority Holder Condition or Failure Condition, the majority
holder or Mayne Pharma, respectively, may remove any current
director and appoint a new director as long as the Board of
Directors continues to consist of a majority of Independent
Directors. Upon the occurrence of the Material Breach Condition,
the requirement that the Board of Directors consist of a majority
of Independent Directors will cease and Mayne Pharma will have the
right to remove any current director and appoint a new director.
Mayne Pharma may remove current directors and appoint new directors
by written consent or by calling a meeting in accordance with the
Bylaws, as amended; and
• Mayne Pharma was granted a right of
first refusal to purchase any shares of the Company’s common
stock being transferred or sold by the individual account of
Dr. O’Donnell or Mr. Virca except for certain
exempt transfers as described in the Equity Holders Agreement;
In addition to the foregoing, pursuant to the Equity Holders
Agreement, the Equity Holder Parties agreed that the Company would
seek to (i) close on one or more registered or unregistered
equity, debt or equity-linked financings in which the Company
receive aggregate net proceeds of at least $5,000,000 or
(ii) enter into a license, development, commercialization or
similar agreement relating to the Company’s product, provided
that the Company receive a net upfront payment of at least
$5,000,000 in connection with such agreement and that such
agreement will be subject to the approval of Mayne Pharma
(collectively, the Company refers to this goal as the Performance
Goal) on or before May 31, 2016 (the Company refers to this
date as the Performance Goal Date). Under the Equity Holders
Agreement, all previously required performance goals as set forth
in the original Equity Holders Agreement have been removed and
replaced solely with the Performance Goal.
If the Company does not meet the Performance Goal, in addition to
the remedies described above, Dr. O’Donnell may be
required by Mayne Pharma to resign from his position as Executive
Chairman (in connection with his removal as a director),
Dr. O’Donnell will forfeit all then unvested options,
warrants, restricted stock units, or other right to acquire common
stock (or securities convertible into common stock) and Hedgepath,
LLC may be required to forfeit certain shares of common stock it
owns. Furthermore, Mayne Pharma will continue to have the right to
purchase (i) by written notice to Dr. O’Donnell all
company securities owned by Dr. O’Donnell individually,
including vested options, vested warrants, vested restricted stock
units and the like, or otherwise transferred by him, as the case
may be, at the fair market value (as such term is described in the
Equity Holders Agreement) as of the date of such resignation or
termination and (ii) any shares required to be forfeited by
Hedgepath, LLC at the price described in the Equity Holders
Agreement.
The Equity Holders Agreement terminates (i) if the Company
receives an adjudication of bankruptcy, the Company executes an
assignment for the benefit of creditors, a receiver is appointed
for the Company or the Company is voluntarily or involuntarily
dissolved or (ii) if the Company, Hedgepath, LLC and Mayne
Pharma expressly agree in writing. Additionally, certain limited
provisions of the Amended and Restated Equity Holders Agreement
terminate at such time as the Mayne Pharma and its affiliates
collectively own less than ten percent (10%) of our common
stock on a fully diluted basis.
In connection with their entry into the Equity Holders Agreement,
the Equity Holder Parties agreed to waive, among other things,
certain specified prior breaches by us of our obligations under the
Amended and Restated Equity Holders Agreement entered into in June
2014.
Related Party Debt Forgiveness Agreement
Following the Company’s emergence from bankruptcy in August
2013, certain expenses had been incurred for officer salary,
travel, legal and patent expenses. These expenses, totaling
$639,768, were paid by Hedgepath, LLC on behalf of the Company.
This debt was forgiven pursuant to a Debt Forgiveness Agreement,
dated June 24, 2014 (the “Debt Forgiveness
Agreement”), which was entered into by the Company and
Hedgepath, LLC as a condition of closing of the Mayne Purchase
Agreement and was accounted for as a capital transaction due to the
related party nature of the agreement. Pursuant to the Debt
Forgiveness Agreement, Hedgepath, LLC waived, canceled and forgave
payment from the Company of the aforementioned $639,768 of
indebtedness previously advanced by Hedgepath, LLC to the Company
in exchange for 2,530,227 shares of Common Stock, 71,636 shares of
Series A Preferred Stock (the “Debt Forgiveness Series A
Shares”) and a warrant (the “Debt Forgiveness
Warrant”) to purchase 10,250,569 shares of Common Stock. The
Debt Forgiveness Series A Shares together with Series A Preferred
Shares previously issued to Hedgepath, LLC converted into
82,156,842 shares of Common Stock on August 14, 2014 pursuant
to the terms of the Equity Holders Agreement and in accordance the
with the terms of the Series A Preferred Stock. The Debt
Forgiveness Warrant may be exercised by Hedgepath, LLC at an
exercise price of $0.0878 per share at any time, from time to time,
prior to the expiration of the Debt Forgiveness Warrant on
June 24, 2019. |
