UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB/A
(Amendment No. 1)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2007 |
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT |
For the transition period from ______ to ______
Commission File Number: 001-33004
Opexa Therapeutics, Inc.
(Exact name of Issuer as specified in is charter)
Texas | 76-0333165 |
| (State of Incorporation) | (IRS Employer Identification No.) |
2635 North Crescent Ridge Drive
The Woodlands, Texas 77381
(Address of Principal Executive Offices)
(281) 272-9331
Issuer’s Telephone Number, Including Area Code
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Number of shares outstanding of the issuer's classes of common equity, as of November 29, 2007: 6,696,784 shares of common stock.
Transitional Small Business Disclosure Format (Check one): Yes o No x
OPEXA THERAPEUTICS INC.
INDEX TO FORM 10-QSB/A
March 31, 2007
Item | Description | Page |
| 1 | ||
Part I – FINANCIAL INFORMATION | ||
| 2 | ||
| Statements of Expenses for the Three Months Ended March 31, 2007 and 2006 and the Period from January 22, 2003 (Inception) to March 31, 2007 (unaudited) (RESTATED) | 3 | |
| Statements of Cash Flows for the Three Months Ended March 31, 2007 and 2006 and the Period from January 22, 2003 (Inception)to March 31, 2007 (unaudited) (RESTATED) | 4 | |
| Notes to Financial Statements (unaudited) | 5 | |
10 | ||
17 | ||
Part II | ||
| 18 | ||
18 | ||
18 | ||
| 18 | ||
18 | ||
18 | ||
| 19 |
We are amending our Quarterly Report on Form 10-QSB for the for the quarter ending March 31, 2007 in connection with restating our consolidated financial statements for the three months ended March 31, 2007 and 2006 and for the period January 22, 2003(Inception) to March 31, 2007. The restatement of our financial statements is the result of our determination that the intangible assets associated with the acquisition of Opexa Pharmaceuticals, Inc., the University of Chicago technology license and the Shanghai Institutes for Biological Sciences, Chinese Academy of Sciences of the Peoples Republic of China technology license should have been recorded as acquired in process research and development.
The purpose of this amendment is to restate the accompanying financial statements for the reasons further described in Note 2 to the financial statements included in Item 1 (Financial Information) herein.
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PART I
FINANCIAL INFORMATION
OPEXA THERAPEUTICS, INC. | ||||||||
(a development stage company) | ||||||||
BALANCE SHEETS (RESTATED) | ||||||||
(unaudited) | ||||||||
Restated | Restated | |||||||
March 31, | December 31, | |||||||
2007 | 2006 | |||||||
Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 12,060,839 | $ | 12,019,914 | ||||
| Investment in marketable securities | - | 2,952,096 | ||||||
| Other current assets | 782,037 | 472,881 | ||||||
| Total current assets | 12,842,876 | 15,444,891 | ||||||
| Property & equipment, net accumulated depreciation of $444,115 and $395,284, respectively | 1,373,764 | 1,361,377 | ||||||
| Total assets | $ | 14,216,640 | $ | 16,806,268 | ||||
Liabilities and Stockholders' Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 1,105,273 | $ | 868,862 | ||||
| Stock payable | 112,440 | 112,440 | ||||||
| Accrued expenses | 506,302 | 135,069 | ||||||
| Note payable | 1,500,000 | 1,500,000 | ||||||
| Current maturity of long term debt | 29,337 | 14,080 | ||||||
| Derivative liability | - | 6,656,677 | ||||||
| Total current liabilities | 3,253,352 | 9,287,128 | ||||||
| Long term liabilities: | ||||||||
| Loan payable | 130,034 | 96,242 | ||||||
| Total liabilities | 3,383,386 | 9,383,370 | ||||||
| Commitments and contingencies | - | - | ||||||
| Stockholders' equity: | ||||||||
| Convertible preferred stock, no par value, 10,000,000 shares | - | - | ||||||
| authorized, none issued and outstanding | ||||||||
| Common stock, $0.50 par value, 100,000,000 shares authorized, | 3,348,351 | 3,348,351 | ||||||
| 6,696,784 shares issued and outstanding | ||||||||
| Additional paid in capital | 74,500,068 | 63,118,180 | ||||||
| Deficit accumulated during the development stage | (67,015,165 | ) | (59,043,633 | ) | ||||
| Total stockholders' equity | 10,833,254 | 7,422,898 | ||||||
| Total liabilities and stockholders' equity | $ | 14,216,640 | $ | 16,806,268 | ||||
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OPEXA THERAPEUTICS, INC. | ||||||||||||
(a development stage company) | ||||||||||||
Three months ended March 31, 2007 and 2006 and the | ||||||||||||
Period from January 22, 2003 (Inception) to March 31, 2007 | ||||||||||||
(unaudited) | ||||||||||||
Restated | ||||||||||||
Inception | ||||||||||||
Restated | Restated | through | ||||||||||
2007 | 2006 | March 31, 2007 | ||||||||||
| Research and development | $ | 3,247,466 | $ | 863,450 | $ | 43,933,146 | ||||||
| General and administrative | 849,786 | 1,075,882 | 15,056,255 | |||||||||
| Depreciation | 48,831 | 23,050 | 334,086 | |||||||||
| Loss on disposal of assets | - | 362 | 482,309 | |||||||||
| Operating loss | (4,146,083 | ) | (1,962,744 | ) | (59,805,796 | ) | ||||||
| Interest income | 178,823 | 19,621 | 955,044 | |||||||||
| Other income | - | 3,385 | 77,003 | |||||||||
| Gain (loss) on derivative liability | - | 254,140 | - | |||||||||
| Interest expense | (2,453 | ) | (429 | ) | (8,241,416 | ) | ||||||
| Net loss | $ | (3,969,713 | ) | $ | (1,686,027 | ) | $ | (67,015,165 | ) | |||
| Basic and diluted loss per share | $ | (0.59 | ) | $ | (0.82 | ) | N/A | |||||
| Weighted average shares outstanding | 6,696,784 | 2,065,430 | N/A | |||||||||
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OPEXA THERAPEUTICS, INC. | ||||||||||||
(a development stage company) | ||||||||||||
Three months ended March 31, 2007 and 2006 and the | ||||||||||||
Period from January 22, 2003 (Inception) to March 31, 2007 | ||||||||||||
(unaudited) | ||||||||||||
Restated | ||||||||||||
Inception | ||||||||||||
Restated | Restated | through | ||||||||||
2007 | 2006 | March 31, 2007 | ||||||||||
| Cash flows from operating activities | ||||||||||||
| Net loss | $ | (3,969,713 | ) | $ | (1,686,027 | ) | $ | (67,015,165 | ) | |||
| Adjustments to reconcile net loss to net cash | ||||||||||||
| used in operating activities | ||||||||||||
| Stock payable for acquired research and development | 112,440 | |||||||||||
| Stock issued for acquired research and development | - | - | 26,286,589 | |||||||||
| Stock issued for services | - | - | 1,861,400 | |||||||||
| Stock issued for debt in excess of principal | - | - | 109,070 | |||||||||
| Amortization of discount on notes payable due | ||||||||||||
| to warrants and beneficial conversion feature | - | - | 6,313,205 | |||||||||
| Realized (unrealized) gain on marketable securities | 25,912 | - | - | |||||||||
| Gain on derivative liability | - | (254,140 | ) | - | ||||||||
| Depreciation | 48,831 | 23,050 | 334,086 | |||||||||
| Debt financing costs | - | - | 365,910 | |||||||||
| Option and warrant expense | 723,392 | 484,392 | 10,026,936 | |||||||||
| Loss on disposition of fixed assets | - | - | 482,309 | |||||||||
| Changes in: | ||||||||||||
| Accounts payable | 236,411 | 83,850 | 680,974 | |||||||||
| Marketable securities | 2,926,184 | - | - | |||||||||
| Prepaid expenses | (309,156 | ) | (25,965 | ) | (777,167 | ) | ||||||
| Accrued expenses | 371,233 | 29,393 | 320,974 | |||||||||
| Other assets | - | (62,734 | ) | (388,210 | ) | |||||||
| Net cash provided by (used in) operating activities | 53,094 | (1,408,181 | ) | (21,286,649 | ) | |||||||
| Cash flows from investing activities | ||||||||||||
| Purchase of property & equipment | (61,218 | ) | (92,629 | ) | (1,112,272 | ) | ||||||
| Net cash used in investing activities | (61,218 | ) | (92,629 | ) | (1,112,272 | ) | ||||||
| Cash flows from financing activities | ||||||||||||
| Common stock sold for cash, net of offering costs | - | - | 26,509,412 | |||||||||
| Proceeds from debt | 49,049 | - | 8,013,962 | |||||||||
| Repayments on notes payable | - | - | (63,614 | ) | ||||||||
| Net cash provided by financing activities | 49,049 | - | 34,459,760 | |||||||||
| Net change in cash and cash equivalents | 40,925 | (1,500,810 | ) | 12,060,839 | ||||||||
| Cash and cash equivalents at beginning of period | 12,019,914 | 2,560,666 | - | |||||||||
| Cash and cash equivalents at end of period | $ | 12,060,839 | $ | 1,059,856 | $ | 12,060,839 | ||||||
| Cash paid for: | ||||||||||||
| Income tax | $ | - | $ | - | $ | - | ||||||
| Interest | - | 429 | 429 | |||||||||
| NON-CASH TRANSACTIONS | ||||||||||||
| Issuance of common stock to Sportan shareholders | - | - | 147,733 | |||||||||
| Issuance of common stock for accrued interest | - | - | 525,513 | |||||||||
| Conversion of notes payable to common stock | - | - | 6,407,980 | |||||||||
| Conversion of accrued liabilities to common stock | - | 180,000 | 197,176 | |||||||||
| Conversion of accounts payable to note payable | - | - | 93,364 | |||||||||
| Discount on convertible notes relating to: | ||||||||||||
| - warrants | - | - | 3,309,790 | |||||||||
| - beneficial conversion feature | - | - | 1,715,973 | |||||||||
| - stock attached to notes | - | - | 1,287,440 | |||||||||
| Reclassification of derivative liabilities | 6,656,677 | - | 6,656,677 | |||||||||
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OPEXA THERAPEUTICS, INC.
(a development stage company)
(unaudited)
NOTE 1 – BASIS OF PRESENTATION
The accompanying unaudited interim financial statements of Opexa Therapeutics, Inc., a development stage company, have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission and should be read in conjunction with the audited financial statements and notes thereto contained in Opexa’s latest Annual Report filed with the SEC on Form 10-KSB. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements that would substantially duplicate the disclosure contained in the audited financial statements for the most recent fiscal year as reported in Form 10-KSB, have been omitted.
NOTE 2– RESTATEMENT OF FINANCIAL STATEMENTS
The Company is restating these financial statements for the three months ended March 31, 2006 and 2007 and for the period January 22, 2003 (Inception) to March 31, 2007.
Following is a description of the restatements:
The Company acquired Opexa Pharmaceuticals in October 2004 and originally accounted for the acquired in process research and development of $23,991,128 as intangible assets. In November 2007 the Company re-evaluated its accounting for acquired research and development and upon further consideration of Paragraph 11(c) of Statement of Financial Accounting Standards No. 2 (SFAS No. 2) and accounting guidance from Financial Accounting Standards Board Interpretation No. 4 “Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method” (FIN 4), the Company determined that these assets did not have an alternative future use at the date of acquisition. Therefore, they had no separate economic value and should be accordingly expensed to research and development in the period acquired.
In February 2004, the Company obtained a license from the University of Chicago for an adult stem cell technology. Costs associated with the acquisition of this license were originally accounted for as an intangible asset. The amounts originally capitalized as intangible assets were $3,051,706, $976,497 and $112,440 for the years ended December 31, 2004, 2005 and 2006 respectively. Upon further consideration of Paragraph 11(c) of SFAS No. 2, the Company determined that these assets had not reached technological feasibility at the date of acquisition and had no alternative future use. Therefore, the intangible asset should have been expensed to in process research and development in the period acquired.
In March 2006, the Company obtained an exclusive worldwide license for the intellectual property rights and research results of an autologous T cell vaccine for rheumatoid arthritis from the Shanghai Institutes for Biological Sciences (SIBS), Chinese Academy of Sciences of the People's Republic of China. The Company made a $125,000 license payment and accounted for the license as an intangible asset. Upon further consideration of Paragraph 11(c) of SFAS No. 2, the Company determined that this asset had not reached technological feasibility at the date of acquisition and had no alternative future use. Therefore, the intangible asset should have been expensed to in process research and development in the period acquired.
In the Consolidated Statements of Expenses, the effect of the adjustments on operating expenses, loss from operations and net loss for each of the three months ended March 31, 2006 and 2007 and the period January 22, 2003 (Inception) to March 31, 2007 was as follows:
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Three Months Ended March 31, | ||||||||||||||||||||||||||||||||
2007 ; | 2006 ; | |||||||||||||||||||||||||||||||
As Reported | Adjustment | As Restated | As Reported | Adjustment | As Restated | |||||||||||||||||||||||||||
| Research and development | $ | 3,247,466 | $ | - | (1) | $ | 3,247,466 | $ | 738,450 | $ | 125,000 | (1) | $ | 863,450 | ||||||||||||||||||
| General and administrative | 849,786 | - | 849,786 | 1,075,882 | - | 1,075,882 | ||||||||||||||||||||||||||
| Depreciation and amortization | 461,106 | (412,275 | ) | (2) | 48,831 | 432,333 | (409,283 | ) | (2) | 23,050 | ||||||||||||||||||||||
| Loss on disposal of assets | - | - | - | 362 | - | 362 | ||||||||||||||||||||||||||
| Operating loss | (4,558,358 | ) | 412,275 | (4,146,083 | ) | (2,247,027 | ) | 284,283 | (1,962,744 | ) | ||||||||||||||||||||||
| Interest income | 178,823 | - | 178,823 | 19,621 | - | 19,621 | ||||||||||||||||||||||||||
| Other income | - | - | - | 3,385 | - | 3,385 | ||||||||||||||||||||||||||
| Gain (loss) on derivative liability | - | - | - | 254,140 | - | 254,140 | ||||||||||||||||||||||||||
| Interest expense | (2,453 | ) | - | (2,453 | ) | (429 | ) | - | (429 | ) | ||||||||||||||||||||||
| Net loss | $ | (4,381,988 | ) | $ | 412,275 | $ | (3,969,713 | ) | $ | (1,970,310 | ) | $ | 284,283 | $ | (1,686,027 | ) | ||||||||||||||||
| Basic and diluted loss per share | $ | (0.65 | ) | $ | 0.06 | $ | (0.59 | ) | $ | (0.95 | ) | $ | 0.14 | $ | (0.82 | ) | ||||||||||||||||
January 22, 2003 (Inception) to | ||||||||||||||
March 31, 2007 | ||||||||||||||
As Reported | Adjustment | As Restated | ||||||||||||
| Research and development | $ | 15,676,375 | $ | 28,256,771 | (1) | $ | 43,933,146 | |||||||
| General and administrative | 15,056,255 | - | (2) | 15,056,255 | ||||||||||
| Depreciation and amortization | 4,279,929 | (3,945,843 | ) | 334,086 | ||||||||||
| Loss on disposal of assets | 482,309 | - | 482,309 | |||||||||||
| Operating loss | (35,494,868 | ) | (24,310,928 | ) | (59,805,796 | ) | ||||||||
| Interest income | 955,044 | - | 955,044 | |||||||||||
| Other income | 77,003 | - | 77,003 | |||||||||||
| Gain (loss) on derivative liability | - | - | - | |||||||||||
| Interest expense | (8,241,416 | ) | - | (8,241,416 | ) | |||||||||
| Net loss | $ | (42,704,237 | ) | $ | (24,310,928 | ) | $ | (67,015,165 | ) | |||||
| Basic and diluted loss per share | N/A | N/A | N/A | |||||||||||
(1) | Adjustment for capitalizing acquired research and development to intangible assets that should have been expensed to research and development (i) for the three months ended 3/31/2007 in the amount of $-0-, (ii) for the three months ended 3/31/2006 in the amount of $125,000 and (iii) the period inception to 3/31/2007 in the amount of $28,256,771. |
(2) | Reversal of amortization of intangible assets that should have been expensed to research and development (i) for the three months ended 3/31/2007 in the amount of $412,275, (ii) for the three months ended 3/31/2006 in the amount of $409,283 and (iii) the period inception to 3/31/2007 in the amount of $3,945,843. |
In the Balance Sheet, the effect of the adjustments on Intangible Assets and Accumulated Deficit as of March 31, 2007 and December 31, 2006 was as follows:
March 31, 2007 | December 31, 2006 | |||||||||||||||||||||||||||
As Reported | Adjustment | As Restated | As Reported | Adjustment | As Restated | |||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||
| Intangible Assets | $ | 24,310,928 | $ | (24,310,928 | ) | (1) | $ | - | $ | 24,723,203 | $ | (24,723,203 | ) | (1) | $ | - | ||||||||||||
Stockholders' Equity | ||||||||||||||||||||||||||||
| Accumulated Deficit | $ | (42,704,237 | ) | $ | (24,310,928 | ) | (1) | $ | (67,015,165 | ) | $ | (34,320,430 | ) | $ | (24,723,203 | ) | (1) | $ | (59,043,633 | ) | ||||||||
(1) Adjustment for capitalizing acquired research and development to intangible assets that should have been expensed to research and development, reversal of amortization of intangible assets that should have been expensed to research and development and reversal of impairment of intangible assets that should have been expensed to research and development. Adjustments include:
| a. | Adjustment for capitalizing acquired research and development to intangible assets that should have been expensed to research and development as of 3/31/2007 in the amount of $28,256,771 and as of December 31, 2006 in the amount of $28,256,771. |
| b. | Reversal of amortization of intangible assets that should have been expensed to research and development as of 3/31/2007 in the amount of $3,945,843 and as of December 31, 2006 in the amount of $3,533,568. |
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NOTE 2 – CASH AND CASH EQUIVALENTS
Opexa considers all highly liquid investments with an original maturity of three months or less, when purchased, to be cash equivalents. Investments with maturities in excess of three months but less than one year are classified as short-term investments and are stated at fair market value.
The primary objectives for our fixed income investment portfolio are liquidity and safety of principal. Investments are made with the objective of achieving the highest rate of return consistent with these two objectives. Opexa’s investment policy limits investments to certain types of instruments issued by institutions primarily with investment grade credit ratings and places restrictions on maturities and concentration by type and issuer.
At March 31, 2007, Opexa invested approximately $11.0 million in A-1/P-1 commercial paper with an average market yield of 5.38% and average time to maturity of less than one month. At March 31, 2007 $1.0 million was invested in a money market account with an average yield of 5.19%. Interest income of $178,823 was recognized for the three months ended March 31, 2007 in the statements of expenses.
NOTE 3 – COMMITMENTS
In September 2006, Opexa entered into an Individual Project Agreement (IPA) with PharmaNet, LLC, a contract research organization focused on managing central nervous system trials. Pursuant to such IPA, PharmaNet, LLC will provide Opexa with services in connection with its Phase IIb clinical trial. Under the terms of the IPA, Opexa is required to advance funds in the amount of (i) $400,000 for professional fees, (ii) $60,000 for out of pocket expenses and (iii) $175,000 for investigator grants. The fee advance is applied 1/12th per month to invoices and replenished once 75% depleted. The out of pocket advance will be held and applied to the final invoice. The investigator grant advance will be used as a draw down advance and replenished once 75% depleted. This process will continue until the end of the study. In February 2007 made replenishment fee advances of $400,000 for fees and $175,000 for investigator grants. As of March 31, 2007 the advance balance to PharmaNet, LLC was $674,026.
NOTE 4 – LOAN PAYABLE
Loan payable consists of an equipment line of up to $250,000 with Wells Fargo of which $159,371 was outstanding as of March 31, 2007. This loan has an interest rate of 7.61% per annum, matures in May 2011 and is secured by Opexa’s furniture and equipment purchased with the loan proceeds. Approximately $50,000 was drawn against the equipment line in the first quarter.
NOTE 5 – OPTIONS AND WARRANTS
During March 2007, Opexa issued 9,900 options to purchase common stock of Opexa to its new employees. These options are for a term of ten years, have an exercise price of $4.04 and vest over three years. Fair value of $36,805 was calculated using the Black-Scholes Model with a volatility of 103.91% and a discount rate of 4.52%. A first quarter expense of $101 was recorded.
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NOTE 6 – DERIVATIVE INSTRUMENTS
In June 2006, Opexa evaluated the application of SFAS 133 and EITF 00-19 for all of its financial instruments and it was determined that certain of the warrants to purchase common stock issued by Opexa associated with the bridge note exchange and private placement offerings in June 2005 and July 2005 were derivatives that Opexa was required to account for as free-standing derivative instruments under GAAP. These three series of warrants were considered at the time to be derivatives because the liquidated damage provision in the registration rights agreement covering each warrant resulted in the conclusion that it was more economic to issue registered shares than to issue unregistered shares and pay the penalty. Because issuing registered shares is outside of Opexa’s control, Opexa concluded the warrants should be accounted for as derivative liabilities under SFAS 133 and EITF 00-19. As a result, Opexa reported the value of these derivatives as current liabilities on its balance sheet and reported changes in the value of these derivatives as non-operating gains or losses on its statements of operations in the consolidated financial statements beginning with the year ended December 31, 2005 and re-measured and reported on a quarterly basis thereafter based on the Black Scholes Pricing Model.
In December 2006, the FASB issued FASB Staff Position No. EITF 00-19-2, Accounting for Registration Payment Arrangements (EITF 00-19-2). EITF 00-19-2 addresses an issuer’s accounting for registration payment arrangements. It specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with FASB Statement No. 5, Accounting for Contingencies. The guidance in EITF 00-19-2 amends FASB Statements No. 133, Accounting for Derivative Instruments and Hedging Activities, and No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, and FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others, to include scope exceptions for registration payment arrangements. EITF 00-19-2 also requires additional disclosure regarding the nature of any registration payment arrangements, alternative settlement methods, the maximum potential amount of consideration and the current carrying amount of the liability, if any. This EITF is effective immediately for registration payment arrangements and the financial instruments subject to those arrangements that are entered into or modified subsequent to the date of issue of this EITF. For registration payment arrangements and financial instruments subject to those arrangements that were entered into prior to the issuance of this EITF, this is effective for financial statements issued for fiscal years beginning after December 15, 2006, and interim periods within those fiscal years.
Opexa evaluated the application of EITF 00-19-2 for all its financial instruments and determined that certain warrants to purchase common stock issued by Opexa associated with the bridge note exchange and private placement offerings in June 2005 and July 2005 no longer qualified to be classified as derivative liabilities. In addition, Opexa accounts for registration rights agreement penalties as contingent liabilities, applying the accounting guidance of Financial Accounting Standard No. 5, “Accounting for Contingencies” (“FAS 5”). This accounting is consistent with views established by the FASB Staff Positions FSP EITF 00-19-2 “Accounting for Registration Payment Arrangements”, which was issued December 21, 2006. Accordingly, Opexa recognizes the damages when it becomes probable that they will be incurred and amounts are reasonably estimable.
Certain 4,600,000 shares of common stock and 2,513,720 warrants to purchase common stock are subject to a registration payment arrangement that provides if a resale registration statement is not effective for any period after April 13, 2007, the warrant holders may exercise their warrants on a cashless basis during the period the resale registration statement is not effective. If Opexa fails to register, achieve effectiveness of registration or maintain effectiveness of registration of shares underlying the warrants and shares, they are required to make certain liquidated damage payments of 1.5% of the offering per month for every month in default with a maximum of 24%. Opexa does not believe these payments are probable and thus no contingent liability has been recorded.
Certain 1,272,356 shares of common stock and 1,714,410 shares of common stock issuable upon the exercise of common stock purchase warrants issued in June 2005 and July 2005 are subject to a registration payment arrangement that provides if a resale registration statement is not effective for any period after the first anniversary of the warrant, the warrant holders may exercise their warrants on a cashless basis during the period the resale registration statement is not effective. If Opexa fails to register, achieve effectiveness of registration or maintain effectiveness of registration of shares underlying the warrants and shares, they are required to make certain liquidated damage payments of 1.0% of the offering per month for the first calendar month of registration default and 2% for every month in default after the first month. Opexa does not believe these payments are probable and thus no contingent liability has been recorded.
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The impact of implementing EITF 00-19-2 for the first quarter resulted in a cumulative effect of a change in accounting principle with a decrease in the derivative liability of $6,656,677 and a decrease to beginning retained earnings of $4,001,819 reversing gains posted to date and a reclassification of the original value of the warrants from liability to equity of $10,658,496.
NOTE 7 – SUBSEQUENT EVENTS
In April 2007 the Amended and Restated License Agreement dated December 30, 2004, between Opexa and the University of Chicago with respect to certain payment obligations of Opexa was amended as follows: (i) the April 30, 2007 $1,500,000 cash payment obligation was extended until July 31, 2007; and (ii) the obligation to issue 21,623 shares of Opexa’s common stock issuable was extended until July 31, 2007, with $112,440 accrued at March 31, 2007.
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The following discussion of our financial condition and results of operations should be read in conjunction with the accompanying financial statements and the related footnotes thereto.
Forward-Looking Statements
Some of the statements contained in this report discuss future expectations, contain projections of results of operations or financial condition, or state other "forward-looking" information. The words "believe," "intend," "plan," "expect," "anticipate," "estimate," "project," "goal" and similar expressions identify such statement was made. These statements are subject to known and unknown risks, uncertainties, and other factors that could cause the actual results to differ materially from those contemplated by the statements. The forward-looking information is based on various factors and is derived using numerous assumptions. Factors that might cause or contribute to such a discrepancy include, but are not limited to the risks discussed in this and our other SEC filings. We do not promise to update forward-looking information to reflect actual results or changes in assumptions or other factors that could affect those statements. Future events and actual results could differ materially from those expressed in, contemplated by, or underlying such forward-looking statements.
The following discussion and analysis of our financial condition is as of March 31, 2007. Our results of operations and cash flows should be read in conjunction with our unaudited financial statements and notes thereto included elsewhere in this report and the audited financial statements and the notes thereto included in our Form 10-KSB for the year ended December 31, 2006.
Business Overview
Opexa Therapeutics, Inc. (the “Company”, “we”, “Opexa” or “Opexa Therapeutics”) is a biopharmaceutical company developing autologous cellular therapies to treat several major illnesses, including multiple sclerosis (MS), rheumatoid arthritis (RA), diabetes, and cardiovascular disease. These therapies are based on the Company’s proprietary T-cell and adult stem cell technologies.
Opexa Therapeutics’ lead product, Tovaxin™, is a T-cell based therapeutic vaccine for MS licensed from the Baylor College of Medicine, which offers a unique and personalized approach to treating the disease by inducing an immune response against the autoimmune myelin peptide-reactive T-cells (MRTCs), which are believed to be responsible for the initiation of the disease process.
Tovaxin™ is currently in a Phase IIb clinical trial. Initial Phase I/II open-label human trials show that T-cell vaccination (TCV) appears to safely induce immune responses that deplete and regulate MRTCs. In two open-label Phase I/II clinical trials, the annualized relapse rates of patients were reduced by an average of approximately 90% compared to their prior history of relapses. Some patients also appear to experience an improvement of their Kurtzke Expanded Disability Status Scale, a scoring method used to measure the disability of MS patients (EDSS). Improvements in EDSS are not frequently observed in patients following treatment with other currently licensed therapies. Although the data from our Phase I/II trials appears to be promising, the Phase IIb trial is being conducted to confirm these results. Opexa Therapeutics believes that Tovaxin™ could be ready for commercialization as early as 2011.
We also hold an exclusive worldwide license for the intellectual property rights and research results of an autologous T-cell vaccine for RA from the Shanghai Institutes for Biological Sciences (SIBS), Chinese Academy of Sciences of the People's Republic of China.
Opexa’s RA T-cell vaccination (TCV) technology is conceptually similar to Tovaxin™. RA is an autoimmune T-cell-mediated disease in which pathogenic T-cells trigger an inflammatory autoimmune response of the synovial joints of the wrists, shoulders, knees, ankles and feet which causes pain, stiffness, and swelling around the joints and erosion into cartilage and bone. The RA TCV technology allows the isolation of these pathogenic T-cells from synovial fluid drawn from a patient. These T-cells will be grown to therapeutic levels and attenuated by gamma irradiation in our laboratory. The attenuated T-cells will be injected subcutaneously into patients thereby inducing an immune response directed at the pathogenic T-cells in the patient’s body. This immune response regulates the level of pathogenic T-cells and potentially allows the reduction of joint swelling in RA patients. Human trials that have been conducted in China show minimal side-effects and promising efficacy measured as a reduction of joint swelling following the T-cell vaccination.
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We also have an exclusive license from the University of Chicago, through its prime contractor relationship with Argonne National Laboratory, to a stem cell technology in which adult multipotent stem cells are derived from monocytes (white blood cells) obtained from the patient’s own blood. We are initially pursuing indications in diabetes mellitus with our stem cell therapy and are conducting preclinical animal studies.
The Company’s stem cell technology isolates novel multipotent stem cells derived from peripheral blood monocytes. In vitro experiments with monocyte-derived stem cells (MDSC) have shown their capacity to differentiate into a wide variety of cell types including pancreatic β cells. We have demonstrated that these pancreatic islets clusters derived from MDSCs are composed of three pancreatic cells types (a, b and d). These islet clusters are responsive to glucose and mimics the normal pulsatile pattern observed in human islets. The importance of these stem cells is the ability to easily isolate them from an individual’s circulating monocytes, expand them and administer them back into the same patient. This autologous approach provides a method to overcome any rejection issues and the need for immunosuppressant drugs which are often associated with current islet cell transplantations. This technology may lead to the formation of an unlimited source of pancreatic islet cells suitable for an autologous cell therapy for the treatment of diabetes mellitus.
Critical Accounting Policies
General
The Financial Statements and Notes to Financial Statements contain information that is pertinent to this management’s discussion and analysis. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of any contingent assets and liabilities. Management believes these accounting policies involve judgment due to the sensitivity of the methods, assumptions and estimates necessary in determining the related asset and liability amounts. Management believes it has exercised proper judgment in determining these estimates based on the facts and circumstances available to it at the time the estimates were made. The significant accounting policies are described in the Company's financial statements.
Accounting for Derivative Instruments
In December 2006, the FASB issued FASB Staff Position No. EITF 00-19-2, Accounting for Registration Payment Arrangements (EITF 00-19-2). EITF 00-19-2 addresses an issuer’s accounting for registration payment arrangements. It specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with FASB Statement No. 5, Accounting for Contingencies. The guidance in EITF 00-19-2 amends FASB Statements No. 133, Accounting for Derivative Instruments and Hedging Activities, and No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity , and FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, to include scope exceptions for registration payment arrangements. EITF 00-19-2 also requires additional disclosure regarding the nature of any registration payment arrangements, alternative settlement methods, the maximum potential amount of consideration and the current carrying amount of the liability, if any. This EITF is effective immediately for registration payment arrangements and the financial instruments subject to those arrangements that are entered into or modified subsequent to the date of issue of this EITF. For registration payment arrangements and financial instruments subject to those arrangements that were entered into prior to the issuance of this EITF, this is effective for financial statements issued for fiscal years beginning after December 15, 2006, and interim periods within those fiscal years. The impact of implementing EITF 00-19-2 in the first quarter 2007 resulted in a cumulative effect of a change in accounting principle with a debit to beginning retained earnings of $4,001,819 to reverse the income recognized in prior periods and a debit to the derivative liability account of $6,656,677 to reverse the remaining balance on the books at December 31, 2006 and a reversal of the total amount of $10,658,496 to the paid in capital account.
Results of Operations and Financial Condition
Three Months Ended March 31, 2007 Compared with the Three Months Ended March 31, 2006
Net Sales. We recorded no sales for the three months ended March 31, 2007 and 2006.
General and Administrative Expenses. Our general and administrative expense was $849,786 for the three months ended March 31, 2007, as compared to $1,075,882 for the three months ended March 31, 2006. The decrease in expenses is primarily due to a decrease in stock compensation expenses, professional service fees and overhead expenses. We anticipate increases in general and administrative expenses as we continue to develop and prepare for commercialization of our technology.
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Research and Development Expenses. Research and development expense was $3,247,466 for the three months ended March 31, 2007, compared to $863,450 for the three months ended March 31, 2006. The increase in expenses was primarily due to the costs of the Phase IIb clinical trial for Tovaxin and research and development in support of pre-clinical diabetes stem cell therapies. We have made and expect to continue to make substantial investments in research and development in order to develop and market our technology. We expense research and development costs as incurred. Acquired research and development that has no alternative future use is expensed when acquired. We expect our research and development expense to increase as we continue to invest in the development of our technology.
Interest Expense. Interest expense was $2,453 for the three months ended March 31, 2007, compared to $429 for the three months ended March 31, 2006. The increase in interest expense was primarily due to a loan payable consisting of an equipment line of up to $250,000 with Wells Fargo of which $159,371 was outstanding as of March 31, 2007.
Interest Income. Interest income was $178,823 for the three months ended March 31, 2007 compared to $19,621 for the three months ended March 31, 2006. The increase was due to the investment of the cash proceeds from a 2006 equity financing in short term and cash equivalent investments.
Net loss. We had a net loss for the three months ended March 31, 2007, of $3,969,713, or $0.59 per share (basic and diluted), compared with a net loss of $1,686,027, or $0.82 per share (basic and diluted), for the three months ended March 31, 2006. The increase in net loss is primarily due to the costs of the Phase IIb clinical trial for Tovaxin™.
Liquidity and Capital Resources
Changes in cash flow. Cash provided by operations for the three month period ended March 31, 2007 was $53,094, as compared to $1,408,181 used by operations for the three months ended March 31, 2006. The decrease in cash used in operations is primarily due to the maturity of approximately $2.9 million in marketable securities and its reclassification to cash and cash equivalents. Cash used in investing activities for the three month period ended March 31, 2007 was $61,218, as compared to $92,629 for the three months ended March 31, 2006. The decrease was primarily due to a decrease in equipment purchases. Cash provided from financing activities for the three month period ended March 31, 2007 was $49,049, as compared to $ -0- for the three months ended March 31, 2006. The increase was due to a draw against the equipment credit line.
Liquidity. Historically, the Company has financed its operations primarily from the sale of its debt and equity securities. As of March 31, 2007, the Company had cash, cash equivalents and marketable securities of approximately $12.1 million.
Our current burn rate is approximately $1,000,000 per month excluding capital expenditures. We will need to raise additional capital to fund our working capital needs beyond the first quarter of 2008. We must rely upon best efforts third-party debt or equity funding and we can provide no assurance that we will be successful in any funding effort. The failure to raise such funds will necessitate the curtailment of operations and impact the completion of the clinical trials.
Off-Balance Sheet Arrangements
As of March 31, 2007, we had no off-balance sheet arrangements.
Recent Accounting Pronouncements
Registration Payment Arrangements. In December 2006, the FASB issued FASB Staff Position (“FSP”) EITF 00-19-2 “Accounting for Registration Payment Arrangements” (“FSP EITF 00-19-2”) which specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement should be separately recognized and measured in accordance with SFAS No. 5, “Accounting for Contingencies.” Adoption of FSP EITF 00-19-02 is required for fiscal years beginning after December 15, 2006. The impact of implementing EITF 00-19-2 for the first quarter resulted in a cumulative effect of a change in accounting principle with a decrease in the derivative liability of $6,656,677 and a decrease to beginning retained earnings of $4,001,819 reversing gains posted to date and a reclassification of the original value of the warrants from liability to equity of $10,658,496.
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For the period ended March 31, 2007, there were no other changes to our critical accounting policies as identified in our annual report of Form 10-KSB for the year ended December 31, 2006.
Risk Factors
The following factors affect our business and the industry in which we operate. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known or which we currently consider immaterial may also have an adverse effect on our business. If any of the matters discussed in the following risk factors were to occur, our business, financial condition, results of operations, cash flows, or prospects could be materially adversely affected.
Our business is at an early stage of development.
Our business is at an early stage of development. We do not have any products in late-stage clinical trials or on the market. We are still in the early stages of identifying and conducting research on potential products. Only one of our products has progressed to the stage of being studied in human clinical trials in the U.S. Our potential products will require significant research and development and preclinical and clinical testing prior to regulatory approval in the United States and other countries. We may not be able to develop any products, to obtain regulatory approvals, to enter clinical trials for any of our product candidates, or to commercialize any products. Our product candidates may prove to have undesirable and unintended side effects or other characteristics adversely affecting their safety, efficacy or cost-effectiveness that could prevent or limit their use. Any product using any of our technology may fail to provide the intended therapeutic benefits, or achieve therapeutic benefits equal to or better than the standard of treatment at the time of testing or production.
We have a history of operating losses and do not expect to be profitable in the near future.
We have not generated any profits since our entry into the biotechnology business, have no source of revenues, and have incurred significant operating losses. We expect to incur additional operating losses for the foreseeable future and, as we increase our research and development activities, we expect our operating losses to increase significantly. We do not have any sources of revenues and may not have any in the foreseeable future.
We will need additional capital to conduct our operations and develop our products and our ability to obtain the necessary funding is uncertain.
We need to obtain significant additional capital resources from sources including equity and/or debt financings, license arrangements, grants and/or collaborative research arrangements in order to develop products and continue our business. As of March 31, 2007, we had cash, cash equivalents and marketable securities of approximately $12.1 million. Our current burn rate is approximately $1,000,000 per month excluding capital expenditures. We will need to raise additional capital to fund our working capital needs beyond first quarter 2008. We must rely upon best efforts third-party debt or equity funding and we can provide no assurance that we will be successful in any funding effort. The failure to raise such funds will necessitate the curtailment of operations and impact the completion of the clinical trials.
The timing and degree of any future capital requirements will depend on many factors, including:
| · | the accuracy of the assumptions underlying our estimates for capital needs in 2007 and beyond; |
| · | scientific progress in our research and development programs; |
| · | the magnitude and scope of our research and development programs; |
| · | our ability to establish, enforce and maintain strategic arrangements for research, development, clinical testing, manufacturing and marketing; |
| · | our progress with preclinical development and clinical trials; |
| · | the time and costs involved in obtaining regulatory approvals; |
| · | the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims; and |
| · | the number and type of product candidates that we pursue. |
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We do not have any committed sources of capital, although we have issued and outstanding warrants that, if exercised, would result in an equity capital raising transaction. Additional financing through strategic collaborations, public or private equity financings, capital lease transactions or other financing sources may not be available on acceptable terms, or at all. Additional equity financings could result in significant dilution to our stockholders. Further, if additional funds are obtained through arrangements with collaborative partners, these arrangements may require us to relinquish rights to some of our technologies, product candidates or products that we would otherwise seek to develop and commercialize ourselves. If sufficient capital is not available, we may be required to delay, reduce the scope of or eliminate one or more of our programs, any of which could have a material adverse effect on our financial condition or business prospects.
Clinical trials are subject to extensive regulatory requirements, very expensive, time-consuming and difficult to design and implement. Our products may fail to achieve necessary safety and efficacy endpoints during clinical trials.
Human clinical trials are very expensive and difficult to design and implement, in part because they are subject to rigorous regulatory requirements. The clinical trial process is also time consuming. We estimate that clinical trials of our product candidates will take at least several years to complete. Furthermore, failure can occur at any stage of the trials, and we could encounter problems that cause us to abandon or repeat clinical trials. The commencement and completion of clinical trials may be delayed by several factors, including:
| · | unforeseen safety issues; |
| · | determination of dosing issues; |
| · | lack of effectiveness during clinical trials; |
| · | slower than expected rates of patient recruitment; |
| · | inability to monitor patients adequately during or after treatment; and |
| · | inability or unwillingness of medical investigators to follow our clinical protocols. |
In addition, we or the FDA may suspend our clinical trials at any time if it appears that we are exposing participants to unacceptable health risks or if the FDA finds deficiencies in our IND submissions or the conduct of these trials.
We are dependent upon our management team and a small number of employees.
Our business strategy is dependent upon the skills and knowledge of our management team. We believe that the special knowledge of these individuals gives us a competitive advantage. If any critical employee leaves, we may be unable on a timely basis to hire suitable replacements to effectively operate our business. We also operate with a very small number of employees and thus have little or no backup capability for their activities. The loss of the services of any member of our management team or the loss of a number of other employees could have a material adverse effect on our business.
We are dependent on contract research organizations and other contractors for clinical testing and for certain research and development activities, thus the timing and adequacy of our clinical trials and such research activities are, to a certain extent, beyond our control.
The nature of clinical trials and our business strategy requires us to rely on contract research organizations, independent clinical investigators and other third party service providers to assist us with clinical testing and certain research and development activities. As a result, our success is dependent upon the success of these outside parties in performing their responsibilities. Although we believe our contractors are economically motivated to perform on their contractual obligations, we cannot directly control the adequacy and timeliness of the resources and expertise applied to these activities by our contractors. If our contractors do not perform their activities in an adequate or timely manner, the development and commercialization of our drug candidates could be delayed.
Our current research and manufacturing facility is not large enough to manufacture future stem cell and T-cell therapies.
We conduct our research and development in a 10,200 square foot facility in The Woodlands, Texas, which includes an approximately 800 square foot suite of three rooms for the manufacture of stem cell and T-cell therapies through Phase III trials. Our current facility is not large enough to conduct commercial-scale manufacturing operations. We will need to expand further our manufacturing staff and facility, obtain a new facility or contract with corporate collaborators or other third parties to assist with future drug production.
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In the event that we decide to establish a commercial-scale manufacturing facility, we will require substantial additional funds and will be required to hire and train significant numbers of employees and comply with applicable regulations, which are extensive. We do not have funds available for building a manufacturing facility, and we may not be able to build a manufacturing facility that both meets regulatory requirements and is sufficient for our commercial-scale manufacturing.
We may arrange with third parties for the manufacture of our future products. However, our third-party sourcing strategy may not result in a cost-effective means for manufacturing our future products. If we employ third-party manufacturers, we will not control many aspects of the manufacturing process, including compliance by these third parties with the FDA’s current Good Manufacturing Practices and other regulatory requirements. We further may not be able to obtain adequate supplies from third-party manufacturers in a timely fashion for development or commercialization purposes, and commercial quantities of products may not be available from contract manufacturers at acceptable costs.
Patents obtained by other persons may result in infringement claims against us that are costly to defend and which may limit our ability to use the disputed technologies and prevent us from pursuing research and development or commercialization of potential products.
A number of pharmaceutical, biotechnology and other companies, universities and research institutions have filed patent applications or have been issued patents relating to cell therapy, stem cells, T-cells, and other technologies potentially relevant to or required by our expected products. We cannot predict which, if any, of such applications will issue as patents or the claims that might be allowed. We are aware that a number of companies have filed applications relating to stem cells. We are also aware of a number of patent applications and patents claiming use of stem cells and other modified cells to treat disease, disorder or injury.
If third party patents or patent applications contain claims infringed by either our licensed technology or other technology required to make and use our potential products and such claims are ultimately determined to be valid, there can be no assurance that we would be able to obtain licenses to these patents at a reasonable cost, if at all, or be able to develop or obtain alternative technology. If we are unable to obtain such licenses at a reasonable cost, we may not be able to develop some products commercially. There can be no assurance that we will not be obliged to defend ourselves in court against allegations of infringement of third party patents. Patent litigation is very expensive and could consume substantial resources and create significant uncertainties. An adverse outcome in such a suit could subject us to significant liabilities to third parties, require disputed rights to be licensed from third parties, or require us to cease using such technology.
If we are unable to obtain future patents and other proprietary rights our operations will be significantly harmed.
Our ability to compete effectively is dependent in part upon obtaining patent protection relating to our technologies. The patent positions of pharmaceutical and biotechnology companies, including ours, are uncertain and involve complex and evolving legal and factual questions. The coverage sought in a patent application can be denied or significantly reduced before or after the patent is issued. Consequently, we do not know whether the patent applications for our technology will result in the issuance of patents, or if any future patents will provide significant protection or commercial advantage or will be circumvented by others. Since patent applications are secret until the applications are published (usually eighteen months after the earliest effective filing date), and since publication of discoveries in the scientific or patent literature often lags behind actual discoveries, we cannot be certain that the inventors of our licensed patents were the first to make the inventions covered by the patent applications or that the licensed patent applications were the first to be filed for such inventions. There can be no assurance that patents will issue from the patent applications or, if issued, that such patents will be of commercial benefit to us, afford us adequate protection from competing products, or not be challenged or declared invalid.
Our competition includes fully integrated biopharmaceutical and pharmaceutical companies that have significant advantages over us.
The markets for therapeutic stem cell products, multiple sclerosis products, and rheumatoid arthritis products are highly competitive. We expect that our most significant competitors are fully integrated pharmaceutical companies and more established biotechnology companies. These companies are developing stem cell-based products and they have significantly greater capital resources and expertise in research and development, manufacturing, testing, obtaining regulatory approvals, and marketing than we currently do. Many of these potential competitors are further along in the process of product development and also operate large, company-funded research and development programs. As a result, our competitors may develop more competitive or affordable products, or achieve earlier patent protection or product commercialization than we are able to achieve. Competitive products may render any products or product candidates that we develop obsolete.
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If we fail to meet our obligations under our license agreements, we may lose our rights to key technologies on which our business depends.
Our business depends on three licenses from third parties. These third party license agreements impose obligations on us, such as payment obligations and obligations to diligently pursue development of commercial products under the licensed patents. If a licensor believes that we have failed to meet our obligations under a license agreement, the licensor could seek to limit or terminate our license rights, which could lead to costly and time-consuming litigation and, potentially, a loss of the licensed rights. During the period of any such litigation, our ability to carry out the development and commercialization of potential products could be significantly and negatively affected. If our license rights were restricted or ultimately lost, our ability to continue our business based on the affected technology platform could be severely adversely affected.
Restrictive and extensive government regulation could slow or hinder our production of a cellular product.
The research and development of stem cell therapies is subject to and restricted by extensive regulation by governmental authorities in the United States and other countries. The process of obtaining U.S. Food and Drug Administration, or FDA, and other necessary regulatory approvals is lengthy, expensive and uncertain. We may fail to obtain the necessary approvals to continue our research and development, which would hinder our ability to manufacture or market any future product.
To be successful, our product candidates must be accepted by the health care community, which can be very slow to adopt or unreceptive to new technologies and products.
Our product candidates, if approved for marketing, may not achieve market acceptance since hospitals, physicians, patients or the medical community in general may decide to not accept and utilize these products. The product candidates that we are attempting to develop represent substantial departures from established treatment methods and will compete with a number of more conventional drugs and therapies manufactured and marketed by major pharmaceutical companies. The degree of market acceptance of any of our developed products will depend on a number of factors, including:
| · | our establishment and demonstration to the medical community of the clinical efficacy and safety of our product candidates; |
| · | our ability to create products that are superior to alternatives currently on the market; |
| · | our ability to establish in the medical community the potential advantage of our treatments over alternative treatment methods; and |
| · | reimbursement policies of government and third-party payers. |
If the health care community does not accept our products for any of the foregoing reasons, or for any other reason, our business would be materially harmed.
There is currently a limited market for our common stock, and any trading market that exists in our common stock may be highly illiquid and may not reflect the underlying value of the Company’s net assets or business prospects.
Although our common stock is traded on the Nasdaq Global Market, there is currently a limited market for our common stock and there can be no assurance that an improved market will ever develop. Investors are cautioned not to rely on the possibility that an active trading market may develop.
As our share price is volatile, we may be or become the target of securities litigation, which is costly and time-consuming to defend.
In the past, following periods of market volatility in the price of a company’s securities or the reporting of unfavorable news, security holders have often instituted class action litigation. If the market value of our common stock experiences adverse fluctuations and we become involved in this type of litigation, regardless of the outcome, we could incur substantial legal costs and our management’s attention could be diverted from the operation of our business, causing our business to suffer.
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Our "blank check" preferred stock could be issued to prevent a business combination not desired by management or our current majority shareholders.
Our articles of incorporation authorize the issuance of "blank check" preferred stock with such designations, rights and preferences as may be determined by our board of directors without shareholder approval. Our preferred stock could be utilized as a method of discouraging, delaying, or preventing a change in our control and as a method of preventing shareholders from receiving a premium for their shares in connection with a change of control.
Future sales of our common stock in the public market could lower our stock price.
We may sell additional shares of common stock in subsequent public or private offerings. We may also issue additional shares of common stock to finance future acquisitions. We cannot predict the size of future issuances of our common stock or the effect, if any, that future issuances and sales of shares of our common stock will have on the market price of our common stock. Sales of substantial amounts of our common stock (including shares issued in connection with an acquisition), or the perception that such sales could occur, may adversely affect prevailing market prices for our common stock.
We presently do not intend to pay cash dividends on our common stock.
We currently anticipate that no cash dividends will be paid on the common stock in the foreseeable future. While our dividend policy will be based on the operating results and capital needs of the business, it is anticipated that all earnings, if any, will be retained to finance the future expansion of the our business.
(a) Evaluation of Disclosure Controls and Procedures.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit to the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms, and that information is accumulated and communicated to our management, including our principal executive and principal financial officers (whom we refer to in this periodic report as our Certifying Officers), as appropriate to allow timely decisions regarding required disclosure. Our management evaluated, with the participation of our Certifying Officers, the effectiveness of our disclosure controls and procedures as of March 31, 2007, pursuant to Rule 13a-15(b) under the Securities Exchange Act. Based upon that evaluation, our Certifying Officers concluded that, as of March 31, 2007, our disclosure controls and procedures were not effective for the reason described below:
In connection with receiving comments from the Securities & Exchange Commission regarding our Annual Report on form 10-KSB filed March 16 2007, we reviewed the appropriateness of the capitalization of certain costs of acquiring various intellectual property rights versus treatment of such costs as a period expense for the period in which such rights were acquired. We identified deficiencies in our internal controls and disclosure controls related to the accounting for acquired research and development in accordance with Paragraph 11(c) of Statement of Financial Accounting Standards No. 2 (SFAS No. 2) and accounting guidance from Financial Accounting Standards Board Interpretation No. 4 “Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method” (FIN 4). We restated our consolidated financial statements for the year ended December 31, 2006 and for the interim periods ending March 31, 2007, June 30, 2007 and March 31, 2007, in order to correct the accounting in such financial statements with respect to acquired research and development that has no alternative future use. Since November 2007, we have undertaken improvements to our internal controls in an effort to remediate these deficiencies by improving supervision and training of our accounting staff to understand and implement the requirements of complex accounting issues. We have also adopted a policy whereby financial management, when dealing with the reporting of transactions that involve complex and unusual accounting matters, will formally research relevant accounting literature relating to the issues and, if necessary, retain the services of a qualified certified public accountant, other than our independent auditor, to assist us with respect to accounting for the transaction(s).
(b) Changes in Internal Control Over Financial Reporting.
There were changes in our internal control over financial reporting that occurred during our most recently completed fiscal year that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We will continue to evaluate the effectiveness of internal controls and procedures on an on-going basis.
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PART II
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
| Exhibit 10.1 | Fourth Amendment to the Amended and Restated License Agreement with the University of Chicago (1) |
| Exhibit 31.1 | Chief Executive Officer Certification Pursuant to Section 13a-14 of the Securities Exchange Act (2) |
| Exhibit 31.2 | Chief Financial Officer Certification Pursuant to Section 13a-14 of the Securities Exchange Act (2) |
| Exhibit 32.1 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes- Oxley Act of 2002 (2) |
| Exhibit 32.2 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes- Oxley Act of 2002 (2) |
(1) Filed previously.
(2) Filed herewith.
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In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| OPEXA THERAPEUTICS, INC. | |||
| By: | /s/ DAVID B. MCWILLIAMS | ||
| David B. McWilliams | |||
| President and Chief Executive Officer | |||
| By: | /s/ LYNNE HOHLFELD | ||
| Lynne Hohlfeld | |||
| Chief Financial Officer and Principal Accounting Officer | |||
| Date: November 29, 2007 |
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