UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended September 30, 2005
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________to____________
Commission File Number 000-26775
SAMARITAN PHARMACEUTICALS, INC.
(Exact name of registrant as specified in charter)
Nevada 88-0431538
------ ----------
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) identification No.)
101 Convention Center Drive, Suite 310
Las Vegas, Nevada 89109
----------------- -----
(Address of principal executive offices) (Zip)
702-735-7001
--------------
Issuer's telephone number, including area code
---------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year, if changed Since Last Report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes[x] No[ ]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes[x] No[ ]
The number of shares of common stock issued and outstanding as of November 14,
2005 was 136,028,761.
Transitional Small Business Disclosure Format (check one).
Yes[ ] No[x]
SAMARITAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
TABLE OF CONTENTS
Page
No.
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheet as of September 30, 2005.................2
Consolidated Statements of Operations for the period from
Inception (September 5, 1994) to September 30, 2005, and
for the Three (3) Months and Nine (9) Months Ended September
30, 2005 and 2004...................................................3
Consolidated Statements of Shareholders' Equity (Deficit) for
the period from Inception (September 5, 1994) to September 30,
2005................................................................4
Consolidated Statements of Cash Flows for the period from
Inception (September 5, 1994) to September 30, 2005 and for the
Nine (9) Months Ended September 30, 2005 and 2004...................5
Notes to Interim Financial Statements...............................6
Item 2. Management's Discussion and Analysis and Plan of Operation..........9
Item 3. Controls and Procedures............................................20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................20
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds........20
Item 4. Submission of Matters to a Vote of Security Holders................20
Item 5. Other Information..................................................20
Item 6. Exhibits ..........................................................21
SIGNATURES
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SAMARITAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
SEPTEMBER 30, 2005
ASSETS
CURRENT ASSETS:
Cash $ 850,095
Accounts receivable 5,661
Interest receivable 44,347
Prepaid expenses 25,732
Marketable securities 748,490
----------------
TOTAL CURRENT ASSETS 1,674,325
----------------
PROPERTY AND EQUIPMENT, net 203,898
----------------
OTHER ASSETS:
Patent registration costs 568,852
Purchased technology rights 22,707
Marketable securities 494,273
Note receivable 250,000
Deposits 2,779
----------------
TOTAL OTHER ASSETS 1,338,611
----------------
$ 3,216,834
================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 332,258
----------------
TOTAL CURRENT LIABILITIES 332,258
----------------
SHAREHOLDERS' EQUITY:
Preferred stock, 5,000,000 shares authorized,
0 issued and outstanding -
Common stock, 250,000,000 shares authorized at $.001
par value, 136,028,761 issued and outstanding 136,029
Additional paid-in capital 36,517,779
Deferred compensation (1,239,538)
Accumulated other comprehensive income (24,142)
Treasury stock (250,248)
Deficit accumulated during development stage (32,255,304)
----------------
TOTAL SHAREHOLDERS' EQUITY 2,884,576
----------------
$ 3,216,834
================
See accompanying notes to the consolidated financial statements (unaudited).
1
SAMARITAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FROM INCEPTION (SEPTEMBER 5, 1994), TO SEPTEMBER 30, 2005, AND FOR THE FOR THE
NINE MONTHS AND THE THREE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
From For the Nine For the Three
Inception Months Ended Months Ended
(September 5, 1994) September 30, September 30,
To ---------------------------------- -----------------------------
September 30, 2005 2005 2004 2005 2004
------------------- ----------------- ------------- ------------- -------------
REVENUES: $ 435,429 $ 135,429 $ - $ 120,179 $ -
------------------- ----------------- ------------- ------------- -------------
EXPENSES:
Research and development 8,648,573 2,365,103 896,321 824,204 475,432
Interest (34,602) (47,878) (19,378) (13,401) (13,347)
General and administrative 23,247,772 1,844,385 1,912,499 628,357 489,397
Forgiveness of debt (369,130) - - - -
Depreciation and amortization 1,198,120 50,286 21,151 25,534 7,690
------------------- ----------------- ------------- ------------- -------------
32,690,733 4,211,896 2,810,593 1,464,694 959,172
------------------- ----------------- ------------- ------------- -------------
NET INCOME (LOSS) (32,255,304) (4,076,467) (2,810,593) (1,344,515) (959,172)
Other Comprehensive Income
Unrealized loss on marketable securities (7,238) 9,342 - 3,647 -
Foreign currency translation adjustment (16,904) (16,904) - (1,528) -
------------------- ----------------- ------------- ------------- -------------
Total Comprehensive Income $ (32,279,446) $ (4,084,029) $ (2,810,593) $ (1,342,396) (959,172)
=================== ================= ============= ============= =============
Loss per share, basic and diluted: $ (0.81) $ (0.03) $ (0.02) $ (0.01) $ (0.01)
------------------- ----------------- ------------- ------------- -------------
Basic and diluted $ (0.81) $ (0.03) $ (0.02) $ (0.01) $ (0.01)
=================== ================= ============= ============= =============
Weighted average number of shares
outstanding:
Basic and diluted 39,811,783 134,034,155 122,420,653 135,767,894 130,749,005
=================== ================= ============= ============= =============
See accompanying notes to consolidated financial statements
2
SAMARITAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(UNAUDITED)
FROM INCEPTION (SEPTEMBER 5, 1994) TO September 30, 2005
Shares
Number Par Value Reserved Additional
of Common for Paid in
Shares Stock Conversion Capital Warrants
------------- ---------- ---------- ------------ -----------
Inception at September 5, 1994 - $ - $ - - $ -
Shares issued for cash, net of
offering costs 6,085,386 609 - 635,481 -
Warrants issued for cash - - - - 5,000
Shares issued as compensation
for services 714,500 71 - 1,428,929 -
Net loss - - - - -
------------- ---------- ---------- ------------ -----------
December 31, 1996 6,799,886 680 - 2,064,410 5,000
Issuance of stock, prior to
acquisition 206,350 21 - 371,134 -
Acquisition of subsidiary for
stock 1,503,000 150 - 46,545 -
Shares of parent redeemed, par
value $.0001 (8,509,236) (851) - 851 -
Shares of public subsidiary
issued, par value $.001 7,689,690 7,690 820 (8,510) -
Net loss - - - - -
------------- ---------- ---------- ------------ -----------
December 31, 1997 7,689,690 7,690 820 2,474,430 5,000
Conversion of parent's shares 696,022 696 (696) - -
Shares issued for cash, net of
offering costs 693,500 694 - 605,185 -
Shares issued in cancellation
of debt 525,000 525 - 524,475 -
Shares issued as compensation 400,000 400 - 349,600 -
Net loss - - - - -
------------- ---------- ---------- ------------ -----------
December 31, 1998 10,004,212 10,005 124 3,953,690 5,000
Conversion of parent's shares 13,000 13 (13) - -
Shares issued in cancellation
of debt 30,000 30 - 29,970 -
Shares issued for cash, net of
offering costs 45,000 45 - 41,367 -
Shares issued as compensation 3,569,250 3,569 - 462,113 -
Detachable warrants issued - - - - 152,125
Detachable warrants exercised 100,000 100 - 148,900 (149,000)
Debentures converted to stock 1,682,447 1,682 - 640,438 -
Net loss - - - - -
------------- ---------- ---------- ------------ -----------
December 31, 1999 15,443,909 15,444 111 5,276,478 8,125
Conversion of parent's shares 128,954 129 (111) (18) -
Shares issued for cash, net of
offering costs 1,575,192 1,575 - 858,460 -
Shares issued in cancellation
of debt 875,000 875 - 660,919 -
Shares issued in cancellation
of accounts payable 100,000 100 - 31,165 -
Shares issued as compensation 3,372,945 3,373 - 2,555,094 -
Warrants exercised 38,807 39 - 3,086 (3,125)
Warrants expired - - - 5,000 (5,000)
Net loss - - - - -
------------ --------- ---------- ------------ -----------
December 31, 2000 21,534,807 21,535 - 9,390,184 -
See accompanying notes to the consolidated financial statements
3
Shares issued for cash, net of
offering cost 6,497,088 6,497 - 1,257,758 -
Shares issued as compensation 9,162,197 9,162 - 1,558,599 -
Shares issued for previously
purchased shares 342,607 342 - 188,208 -
Shares issued in cancellation
of accounts payable 200,000 200 - 68,880 -
Amortization of deferred
compensation - - - - -
Stock options issued for
services - - - 439,544 -
Net loss - - - - -
------------ ---------- ---------- ------------ -----------
December 31, 2001 37,736,699 37,736 - 12,903,173 -
Shares issued for cash, net of
offering costs 18,657,500 18,658 - 2,077,641 -
Shares issued as compensation 3,840,525 3,841 - 1,044,185 -
Shares issued for previously
purchased shares 50,000 50 - 4,950 -
Shares issued in cancellation
of accounts payable 4,265,184 4,265 - 539,291 -
Amortization of deferred
compensation - - - - -
Shares issued in cancellation
of notes payable - - - - -
Stock options issued for
services - - - 225,000 -
Net loss - - - - -
------------ ---------- ---------- ------------ -----------
December 31, 2002 64,549,908 64,550 16,794,240
Shares issued for cash, net of
offering costs 17,493,664 17,493 - 2,392,296 -
Shares issued as compensation 4,062,833 4,063 - 549,779 -
Shares issued for previously
purchased shares 1,160,714 1,161 - 161,339 -
Shares issued in cancellation
of accounts payable and
accrued compensation 9,615,870 9,616 - 3,448,950 -
Shares issued in cancellation
of notes payable - - - - -
Shares issued in connection
with equity financing 3,125,000 3,125 (3,125) -
Exercise of stock options 7,770,892 7,771 - 1,112,077 -
Shares reacquired in settlement
of judgement (1,564,048) (1,564) - 251,812 -
Stock options issued for
services - - - 145,000 -
Net loss - - - - -
------------ ---------- ---------- ------------ -----------
December 31, 2003 106,214,833 106,215 - 24,852,368 -
Shares issued for cash, net
of offering costs 11,426,733 11,427 - 4,289,511 -
Shares issued as compensation,
expensed 2,081,249 2,081 - 1,788,397 -
Amortization of deferred
compensation - - - - -
Shares issued for previously
purchased shares 83,332 83 - 12,417 -
Exercise of stock options 16,950,468 16,951 - 4,841,869 -
Exercise of warrants 635,000 635 - 449,365 -
Shares issued in connection
with equity financing 8,758,240 8,758 - 3,091,243 -
Stock retired in settlement of
subscriptions receivable (13,869,656) (13,870) - (5,964,798) -
Shares reacquired in settlement
of judgement (250,000) (250) - (231,100) -
Stock options issued for services - - - 567,771 -
Other comprehensive income (loss) - - - - -
Net loss - - -
------------ ---------- ---------- ------------ -----------
December 31, 2004 132,030,199 132,030 - 33,697,043 -
Shares issued as compensation 1,948,900 1,949 - 1,357,735 -
Amortization of deferred
compensation - - - - -
Shares issued in connection
with equity financing 2,049,662 2,050 - 1,397,949 -
Stock options issued for services - - - 65,052 -
Other comprehensive income (loss) - - - - -
Net loss - - - - -
------------ ---------- ---------- ------------ -----------
September 30, 2005 136,028,761 $ 136,029 $ - $36,517,779 $ -
============ ========== ========== ============ ===========
See accompanying notes to the consolidated financial statements
3
SAMARITAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STATE COMPANY)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FROM INCEPTION (SEPTEMBER 5, 1994) TO September 30, 2005
Accumulated
Other Stock Total
Deferred Comprehensive Subscriptions Treasury Accumulated Shareholders'
Compensation Income Receivable Shares Deficit (Deficit)
------------- ------------ ------------ ----------- ------------- ---------------
Inception at September 5, 1994 $ - - $ - $ - $ - $ -
Shares issued for cash, net of
offering costs - - - - - 636,090
Warrants issued for cash - - - - - 5,000
Shares issued as compensation
for services - - - - - 1,429,000
Net loss - - - - (2,152,843) (2,152,843)
------------ ------------- ------------ ----------- ------------- ---------------
December 31, 1996 - - - - (2,152,843) (82,753)
Issuance of stock, prior to
acquisition - - - - - 371,155
Acquisition of subsidiary
for stock - - - - - 46,695
Shares of parent redeemed,
par value $.0001 - - - - - -
Shares of public subsidiary
issued, par value $.001 - - - - - -
Net loss - - - - (979,635) (979,635)
------------ ------------- ------------ ----------- ------------- ---------------
December 31, 1997 - - - - (3,132,478) (644,538)
Conversion of parent's shares - - - - - -
Shares issued for cash, net
of offering costs - - - - - 605,879
Shares issued in cancellation
of debt - - - - - 525,000
Shares issued as compensation - - - - - 350,000
Net loss - - - - (1,009,945) (1,009,945)
------------ ------------- ------------ ----------- ------------- ---------------
December 31, 1998 - - - - (4,142,423) (173,604)
Conversion of parent's shares - - - - - -
Shares issued in cancellation
of debt - - - - - 30,000
Shares issued for cash, net of
offering costs - - - - - 41,412
Shares issued as compensation - - - - - 465,682
Detachable warrants issued - - - - - 152,125
Detachable warrants exercised - - - - - -
Debentures converted to stock - - - - - 642,120
Net loss - - - - (1,671,255) (1,671,255)
------------ ------------- ------------ ----------- ------------- ---------------
December 31, 1999 - - - - (5,813,678) (513,520)
Conversion of parent's shares - - - - - -
Shares issued for cash, net of
offering costs - - - - - 860,035
Shares issued in cancellation
of debt - - - - - 661,794
Shares issued in cancellation
of accounts payable - - - - - 31,265
Shares issued as compensation (759,560) - - - - 1,798,907
Warrants exercised - - - - - -
Warrants expired - - - - - -
Net loss - - - - (3,843,308) (3,843,308)
------------ ------------- ------------ ----------- ------------- ---------------
December 31, 2000 (759,560) - - - (9,656,986) (1,004,827)
See accompanying notes to the consolidated financial statements
3
Shares issued for cash, net
of offering costs - - - - - 1,264,255
Shares issued as compensation (230,512) - - - - 1,337,249
Shares issued for previously
purchased shares - - - - - 188,550
Shares issued in cancellation
of accounts payable - - - - - 69,080
Amortization of deferred
compensation 495,036 - - - - 495,036
Stock options issued for
services - - - - - 439,544
Net loss - - - - (4,079,806) (4,079,806)
----------- ------------- ------------ ----------- ------------- ---------------
December 31, 2001 (495,036) - - - (13,736,792) (1,290,919)
Shares issued for cash, net
of offering costs - - - - - 2,096,299
Shares issued as compensation - - - - - 1,048,026
Shares issued for previously
purchased shares - - - - - 5,000
Shares issued in cancellation
of accounts payable - - - - - 543,556
Amortization of deferred
compensation 495,036 - - - - 495,036
Shares issued in cancellation
of notes payable - - - - - -
Stock options issued for
services - - - - - 225,000
Net loss - - - - (4,057,153) (4,057,153)
----------- ------------- ------------ ----------- ------------- ---------------
December 31, 2002 - - - - (17,793,945) (935,155)
Shares issued for cash, net of
offering costs - - - - - 2,409,789
Shares issued as compensation - - - - - 553,842
Shares issued for previously
purchased shares - - - - - 162,500
Shares issued in cancellation
of accounts payable and
accrued compensation - - - - - 3,458,566
Shares issued in cancellation
of notes payable - - -
Shares issued in connection
with equity financing - - - - - -
Exercise of stock options - - (1,119,848) - - -
Shares reacquired in settlement
of judgement - - - (250,248) - -
Stock options issued for
services - - - - - 145,000
Net loss - - - - (5,520,531) (5,520,531)
----------- ------------- ------------ ----------- ------------- ---------------
December 31, 2003 - - (1,119,848) (250,248) (23,314,476) 274,011
Shares issued for cash, net
of offering costs - - - - - 4,300,938
Shares issued as compensation,
expensed (544,416) - - - - 1,246,062
Amortization of deferred
compensation 240,000 - - - - 240,000
Shares issued for previously
purchased shares - - - - - 12,500
Exercise of stock options - - (4,858,820) - - -
Exercise of warrants - - - - - 450,000
Shares issued in connection
with equity financing - - - - - 3,100,001
Stock retired in settlement of
subscriptions receivable - - 5,978,668 - - -
Shares reacquired in settlement
of judgement - - - - (231,350)
Stock options issued for services - - - - 567,771
Other comprehensive income (loss) - (16,580) - - (16,580)
Net loss - - - - (4,864,361) (4,864,361)
------------ ------------- ----------- ---------- ------------ ----------------
December 31, 2004 (304,416) (16,580) 0 (250,248) (28,178,837) 5,078,992
Shares issued as compensation (1,352,034) - - - - 7,650
Amortization of deferred
compensation 416,912 - - - - 416,912
Shares issued in connection with
equity financing - - - - - 1,399,999
Stock options issued for services - - - - - 65,052
Other comprehensive income (loss) - (7,562) - - - (7,562)
Net loss - - - - (4,076,467) (4,076,467)
------------ ------------- ----------- ---------- ------------ ----------------
September 30, 2005 $(1,239,538) $ (24,142) $ - $(250,248) $(32,255,304) $ 2,884,576
============ ============= =========== ========== ============ ================
See accompanying notes to the consolidated financial statements
3
SAMARITAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FROM INCEPTION (SEPTEMBER 5, 1994) TO SEPTEMBER 30,2005 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2005 AND 2004
From For the Nine Months
Inception Ended
(September 5, 1994) September 30,
To ----------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES: June 30, 2005 2005 2004
-------------------- --------------- ----------------
Net loss $ (32,255,304) $ (4,076,467) $ (2,810,593)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,198,120 50,286 21,151
Stock based compensation 9,597,780 7,650 195,706
Stock options issued for services 1,442,367 65,052 503,269
Amortization of deferred compensation 1,646,984 416,912 -
Foreign currency loss (16,904) (16,904) -
Other income (231,350) - -
Change in assets:
Accounts receivable (5,661) (5,661) 13,007
Interest receivable and prepaids (83,319) 6,270 (91,232)
Deposits 12,941 - -
Change in liabilities: - - -
Accounts payable and accrued expenses 2,193,071 162,091 24,024
-------------------- --------------- ----------------
NET CASH USED IN OPERATING ACTIVITIES (16,501,275) (3,390,771) (2,144,668)
-------------------- --------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in note receivable (250,000) - -
Purchase of technology (108,969) - -
Purchase of furniture and equipment (324,754) (208,791) (17,316)
Redemption of marketable securities (1,250,000) 750,000 (2,250,000)
Patent registration costs (578,272) (138,793) (124,861)
-------------------- --------------- ----------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (2,511,995) 402,416 (2,392,177)
-------------------- --------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from warrants 607,125 - 450,000
Proceeds from debentures 642,120 - -
Proceeds from stock issued for cash 12,583,570 - 4,290,939
Proceeds from equity financing 4,500,000 1,399,999 3,100,000
Common stock to be issued 206,050 - 5,000
Short-term loan repayments (288,422) - -
Short-term loan proceeds 1,612,922 - -
-------------------- --------------- ----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 19,863,365 1,399,999 7,845,939
-------------------- --------------- ----------------
CHANGE IN CASH 850,095 (1,588,356) 3,309,094
CASH AT BEGINNING OF PERIOD - 2,438,451 370,585
-------------------- --------------- ----------------
CASH AT END OF PERIOD $ 850,095 $ 850,095 $ 3,679,679
==================== =============== ================
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ - $ 468 $ -
NON-CASH FINANCING & INVESTING ACTIVITIES:
Purchase of net, non-cash assets of subsidiary
for stock $ 195 $ - $ -
Short-term debt retired through issuance
of stock $ 1,890,695 $ - $ -
Issuance of common stock, previously subscribed $ 180,000 $ - $ 12,500
Treasury stock acquired through settlement
of judgement $ 250,248 $ - $ -
Stock subscriptions receivable $ 1,119,848 $ - $ -
Stock received in settlement $ (231,350) $ -
Stock as compensation for services $ 6,527,826 $ 1,352,034 $ -
Stock issued in cancellation of accounts payable $ 4,248,938 $ - $ -
Exercise of stock options $ 4,858,820 $ - $ -
Stock retired in settlement of subscriptions
receivable $ (5,978,668) $ - $ (1,440,787)
See accompanying notes to the consolidated financial statements (unaudited)
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2005
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial statements and with the instructions to Form 10-QSB and Article 10 of
Regulation S-X. Accordingly, they do not include all the information and
disclosures required for annual financial statements. These consolidated
financial statements should be read in conjunction with the consolidated
financial statements and related footnotes for the year ended December 31, 2004,
included in the Form 10-KSB for the year then ended.
In the opinion of the Company's management, all adjustments (consisting of
normal recurring accruals) necessary to present fairly the Company's financial
position as of September 30, 2005, and the results of operations and cash flows
for the nine (9) month period ending September 30, 2005 have been included. The
results of operations for the nine (9) month period ended September 30, 2005 are
not necessarily indicative of the results to be expected for the full year. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Form 10-KSB as filed with the U.S.
Securities and Exchange Commission on April 15, 2005 for the year ended December
31, 2004.
Note 2. Summary of Significant Accounting Policies
General
Samaritan Pharmaceuticals, Inc. trades on the American Stock Exchange under the
symbol LIV and its principal executive office is located in Las Vegas, Nevada.
Samaritan Pharmaceuticals, Inc. is working to ensure a longer and better life
for patients suffering with AIDS, Alzheimer's, Cancer and Cardiovascular
disease. Samaritan is a pipeline-driven biopharmaceutical company with a clear
focus on advancing early stage innovative drugs through clinical development
with our ultimate goal of bringing our novel therapeutics and diagnostic
products to market.
Basis of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary. All intercompany balances and
transactions have been eliminated in consolidation.
Cash Equivalents
The Company considers all highly liquid temporary cash investments with an
original maturity of three (3) months or less to be cash equivalents.
Revenue Recognition
During the quarter ended September 30, 2005, the Company incurred research
expenditures pursuant to a grant received from the US Department of Health and
Human Services. The Company recognized grant revenue of $120,179, the extent of
such qualifying expenditures.
5
Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided using the
straight line method over the estimated useful lives of the assets.
Intangibles
1) Legal fees associated with filing patents are recorded at cost. Amortization,
once the patent is approved, will be calculated using the straight-line method,
over the estimated useful lives of the patents.
The Company has been issued one (1) U.S. patent and has seventeen (17) pending
licensed patent applications in the U.S. to protect its proprietary methods and
processes. The Company also has several licenses corresponding to foreign patent
applications for some of these U.S. patent applications. As of September 30,
2005, the Company patent portfolio outside the U.S. comprised of two (2)
licensed issued patents and seventeen (17) licensed pending patent applications.
The issued U.S. patent and pending patent applications relate to Alzheimer's,
Cancer, Cardiovascular and HIV indications.
Certain U.S. patents may be eligible for patent term extensions under the
Hatch-Waxman Act for the lost opportunity to market and sell the invention
during the regulatory review process.
The Company reviews patent costs for impairment by comparing the carrying value
of the patents with the fair value. Fair value is estimated using the present
value of expected future cash flows. The Company believes it will recover the
full amount of the patent costs based on forecasts of sales of the products
related to the patents.
2) Purchased technology rights are recorded at cost and are being amortized
using the straight line method over the estimated useful life of the technology.
Loss Per Share
The Company reports loss per common share in accordance with Statement of
Financial Accounting Standards ("SFAS") no. 128, "Earnings Per Share." The per
share effects of potential common shares such as warrants, options, convertible
debt and convertible preferred stock have not been included, as the effect would
be antidilutive. The Company had 24,076,018 options outstanding at September 30,
2005, which were not included.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Income Taxes
Pursuant to Statement of Financial Accounting Standards No. 109 ("SFAS 109")
"Accounting for Income Taxes", the Company accounts for income taxes under the
liability method. Under the liability method, a deferred tax asset or liability
is determined based upon the tax effect of the differences between the financial
statement and tax basis of assets and liabilities as measured by the enacted
rates, which will be in effect when these differences reverse.
6
Research and Development Costs
Research and development costs are expensed when incurred. Research and
development costs for the three (3) and nine (9) months ended September 30,
2005, were $824,204 and $2,365,103, respectively. Research and development costs
for the three months and nine months ended September 30, 2004, were $475,432 and
$896,321, respectively.
Impairment of Long-Lived Assets
The Company reviews long-lived assets and certain identifiable assets related to
those on a quarterly basis for impairment whenever circumstances and situations
change such that there is an indication that the carrying amounts may not be
recovered.
Fair Value of Financial Instruments
Statement of Financial Accounting Standard No. 107 "Disclosures about Fair Value
of Financial Instruments" ("SFAS 107") requires the disclosure of fair value
information about financial instruments whether or not recognized on the balance
sheet, for which it is practicable to estimate the value. Where quoted market
prices are not readily available, fair values are based on quoted market prices
of comparable instruments. The carrying amount of cash, accounts receivable,
accounts payable and accrued expenses approximates fair value because of the
short maturity of those instruments.
Marketable Securities
At September 30, 2005, the Company held two (2) brokered Certificates of Deposit
with a total market value of $1,242,763. Unrealized gains and losses, determined
by the difference between historical purchase price and the market value at each
balance sheet date, are recorded as a component of Accumulated Other
Comprehensive loss in Shareholder's Equity. Realized gains and losses will be
determined by the difference between historical purchase price and gross
proceeds received when the marketable securities are sold.
Note 3. Stock Based Compensation
In December 2004, the FASB finalized SFAS No. 123R "Share-Based Payment" ("SFAS
123R"), amending SFAS No. 123, effective December 15, 2005. SFAS 123R will
require the Company to expense stock options based on grant date fair value in
its financial statements. Further, adoption of SFAS No. 123R will require
additional accounting related to income tax effects and additional disclosure
regarding cash flow effects resulting from share-based payments arrangements.
The adoption of SFAS 123R will not affect the Company's cash flows or financial
position, but may have an adverse impact on results of operations if options are
granted in the future. In December 2004, the FASB issued SFAS No. 153,
"Exchanges of Nonmonetary Assets - an amendment for APB Opinion No. 29". This
statement amends APB Opinion No. 29 to eliminate the exception for nonmonetary
exchanges of similar productive assets and replaces it with a general exception
for exchanges of nonmonetary assets that do not have commercial substance. A
nonmonetary exchange has commercial substance if future cash flows of the entity
are expected to change significantly as a result of the exchange. The provisions
of SFAS No. 153 are effective for the Company's year ended December 31, 2006.
Management is currently evaluating the impact of the adoption of SFAS No. 153 on
the Company's consolidated financial position, liquidity, or results of
operations.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), encourages, but does not require, companies to
record compensation cost for stock-based employee compensation plans at fair
value. The Company has chosen to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and related Interpretations.
[Accordingly, compensation cost for the Company's stock at the date of the grant
over the amount of an employee must pay to acquire the stock.] The Company has
adopted the "disclosure only" alternative described in SFAS 123 and SFAS 148,
which require pro forma disclosures of net income and earnings per share as if
the fair value method of accounting had been applied.
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under SFAS No. 123, "Accounting for Stock-Based
Compensation", the Company's net loss would have been reported as follows:
7
Nine (9) Nine (9) Three (3) Three (3)
Months Ended Months Ended Months Ended Months Ended
September 30, September 30, September 30, September 30,
2005 2004 2005 2004
-------------- -------------- -------------- -------------
Net Loss:
As reported $(4,076,467) $(2,810,593) $(1,344,515) $(959,172)
Pro Forma $(5,406,298) $(3,910,593) $(1,344,515) $(959,172)
Basic and diluted loss per common share:
As reported $ (0.03) $ (0.02) $ (0.01) $ (0.01)
Pro Forma $ (0.04) $ (0.02) $ (0.01) $ (0.01)
The Company utilizes the Black-Scholes option-pricing model to calculate the
fair value of each individual issuance of options with the following assumptions
used for grants during the three months and nine months ended September 30,
2005. The per-share weighted average fair value of stock options granted during
the three months and nine months ended September 30, 2005 was $0.15 and $0.43,
respectively. On the date of grant using the Black-Scholes pricing model and the
following assumptions were used for the three (3) and nine (9) months ended
September 30, 2005:
Three (3) Nine (9)
Months Months
--------- --------
Expected dividend yield 0% 0%
Risk-free interest rate 5% 5%
Annualized volatility 46% 44%
At September 30, 2005, the range of exercise price for all of the Company's
outstanding stock options was $0.10 to $1.26, with an average remaining life of
five (5) years and an average exercise price of $0.60.
Note 4. Stockholders' Equity
Stock As Compensation And Settlement Of Debt
The Company issues stock as compensation for services valuing such issues
premised upon the fair market value of the stock.
During the three (3) months ended September 30, 2005, the Company issued 15,000
shares of common stock in consideration of services rendered or to be rendered
to the Company. Such shares were valued at an aggregate of $7,650 at $0.51 per
share, representing the fair value of the shares issued. The issuances were
recorded as non-cash compensation expense.
During the three (3) months ended September 30, 2005, the Company also issued
298,040 shares in connection with the common stock purchase agreement with
Fusion Capital. The gross proceeds for these shares was $150,000.
Authorized Capital Stock
The Company has 250,000,000 authorized shares of common stock and 5,000,000
authorized shares of preferred stock.
Stock Options
The following table summarizes the Company's stock options outstanding at
September 30, 2005:
Weighted
average
Shares exercise price
---------- --------------
Outstanding and exercisable at December 31, 2004 20,924,930 $ 0.56
Granted 3,201,088 0.88
Exercised - -
Expired (50,000) (1.00)
---------- --------------
Outstanding and exercisable at September 30, 2005 24,076,018 $ 0.60
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION
Introduction - Forward Looking Statements
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"), Samaritan Pharmaceuticals,
Inc. (the "Company" or "Samaritan") is hereby providing cautionary statements
identifying important factors that could cause the Company's actual results to
differ materially from those projected in forward-looking statements made
herein. Any statements that express, or involve discussions as to, expectations,
beliefs, plans, objectives, assumptions of future events or performance are not
statements of historical facts and may be forward-looking. These forward-looking
statements are based largely on Samaritan's expectations and are subject to a
number of risks and uncertainties, including but not limited to, economic,
competitive, regulatory, growth strategies, available financing and other
factors discussed elsewhere in this report and in documents filed by Samaritan
with the U.S. Securities and Exchange Commission ("SEC"). Many of these factors
are beyond Samaritan's control. Actual results could differ materially from the
forward-looking statements made. In light of these risks and uncertainties,
there can be no assurance that the results anticipated in the forward-looking
information contained in this report will, in fact, occur.
Any forward-looking statement speaks only as of the date on which such
statement is made, and Samaritan undertakes no obligation to update any
forward-looking statement or statements to reflect events or circumstances after
the date on which such statement is made or to reflect the occurrence of
unanticipated events. New factors emerge from time to time and it is not
possible for management to predict all of such factors, nor can it assess the
impact of each such factor on the business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements.
General
The following discussion and analysis should be read in conjunction
with the Consolidated Financial Statements (unaudited) and the Notes thereto
included herein. The information contained below includes statements of
Samaritan's or management's beliefs, expectations, hopes, goals and plans that,
if not historical, are forward-looking statements subject to certain risks and
uncertainties that could cause actual results to differ materially from those
anticipated in the forward-looking statements.
Overview
We are a small cap biopharmaceutical company focused on the development
of novel therapeutic and diagnostic products. We have devoted substantially all
of our resources to undertaking our drug discovery and development programs.
The majority of our resources have been expended in the pursuit of FDA
required preclinical studies and Phase II/III clinical trials for Samaritan's
HIV drug SP-01A (Sphirewall), an oral entry inhibitor. In a previous Phase I/II
study, SP-01A was observed to significantly lower the amount of HIV in blood,
improve quality of life (how well subjects have felt), have a favorable safety
profile (minimal side effects) and be well-tolerated. Moreover, in vitro testing
of SP-01A: (a) demonstrated comparable or greater efficacy than currently
approved anti-HIV drugs in preventing HIV virus replication; (b) was observed to
have minimal toxic effect on human cells; and (c) demonstrated significant
efficacy in preventing virus replication of HIV virus strains that resist
currently approved anti-HIV treatments. The goal of our SP-01A monotherapy
study, which is currently recruiting patients, is to look further at the dose
response, efficacy and safety of SP-01A as monotherapy, given as a capsule to be
swallowed, in the treatment of HIV-infected subjects.
In addition, and at the same time, Samaritan has devoted major
resources to its Alzheimer's technology, which features: (a) three (3)
therapeutics: SP-04, SP-08 and SP-233; (b) two (2) stem cell, neuron
differentiation therapies: SP-sc4 and SP-sc7; (c) a predictive Alzheimer's
diagnostic; and (d) an Alzheimer's animal model. Samaritan has also devoted
resources to its cancer drug SP-C007, a breast cancer diagnostic and its
cholesterol recognition peptide, which plays a role in transforming and binding
LDL cholesterol while subsequently raising HDL.
Samaritan has established its European headquarters in Athens, Greece,
which we believe will allow access to the markets of East Europe, Asia and
Africa, regions with a high proportion of HIV patients, a target population for
our most advanced drug SP-01A. Samaritan Pharmaceuticals Europe is currently
seeking to build a sales and marketing infrastructure through distribution
agreements for niche high valued products from other companies in the fields of
HIV/Infectious diseases, CNS, Cancer/Oncology and Cardiovascular diseases for
the normally undeveloped regions of Greece, Bulgaria, Romania, Croatia, Serbia,
Bosnia and Slovenia. Samaritan Pharmaceuticals Europe: (a) has established a
manufacturing arm in Ireland with Pharmaplaz, LTD, (b) plans to develop its
pipeline of drugs through clinical trials in preparation for European approval,
(c) plans to increase its university research collaborations and (d) plans to
apply for applicable European grants.
9
Plan And Results Of Operations
We have used the proceeds from private placements of our capital stock
primarily to expand our preclinical and clinical efforts as well as for general
working capital. At this time, we are beginning to commit additional resources
to the development of SP-01A as well as for the development of our other drugs.
Additional details regarding the human trials and INDs that the Company
plans to file may be found in the section entitled "Description of Business" in
the Company's Annual Report on Form 10-KSB as filed with the SEC on April 15,
2005 for the fiscal year ended December 31, 2004.
Results of Operations For The Three (3) Months Ended September 30, 2005
As Compared To The Three (3) Months Ended September 30, 2004
During the quarter ended September 30, 2005, we incurred research
expenditures pursuant to a grant we received from the U.S. Department of Health
and Human Services. We recognized grant revenue of $120,179, the extent of such
qualifying expenditures.
We incurred research and development expenses of $824,204 for the
quarter ended September 30, 2005, as compared to $475,432 for the quarter ended
September 30, 2004. This increase of $348,772, or seventy-three percent (73%),
was primarily attributable to (a) the continuation of our Phase IIb HIV clinical
trial, (b) our increase in financial commitment with Georgetown University, (c)
additional expenses incurred for development of SP-01A, including payments to
Pharmaplaz, LTD for the manufacturing of SP-01A and (d) for performing the work
necessary to complete the chemistry, manufacturing and controls (CMC) section of
New Drug Application for the FDA, which will be submitted with studies conducted
under the IND for SP-01A. We expect that research and development expenditures
relating to drug discovery and development will increase during the last quarter
of 2005 and into subsequent years due to FDA clinical trials which include the
continuation and expansion of clinical trials (i) for our HIV drug program, (ii)
our Alzheimer's drug program, (iii) the initiation of trials for other potential
indications and (iv) additional study expenditures for potential pharmaceutical
candidates. Research and development expenses may fluctuate from period to
period depending upon the stage of certain projects and the level of
pre-clinical testing and clinical trial-related activities. In conjunction with
the additional research and development activities we expect to conduct, we
anticipate adding two (2) administrative staff members and four (4) research and
development support personnel over the next twelve (12) months. On June 1, 2004,
we also hired a Chief Drug Development Officer at an annual salary of $300,000,
plus benefits, pursuant to that certain employment agreement set forth as
Exhibit 10.6 herein and incorporated by reference hereto.
General and administrative expenses increased to $628,357 for the
quarter ended September 30, 2005, as compared to $489,397 for the quarter ended
September 30, 2004. This increase of $138,960 (28%), was primarily attributable
to an increase in amortization of fees with third party agreements, in
particular on May 12, 2005, we entered into a new common stock purchase
agreement with Fusion Capital, the issuance of committed shares was recorded as
deferred compensation and will be charged against additional paid-in capital
over the term of the agreement.
Depreciation and amortization amounted to $25,534 for the quarter ended
September 30, 2005, as compared to $7,690 for the quarter ended September 30,
2004. This increase of $17,844 (232%), was primarily attributable to research
equipment purchases during the second quarter of 2005.
Net interest expense amounted to $(13,401) and $(13,347) for the three
(3) months ended September 30, 2005 and 2004, respectively. The credit balance
in the interest expense account is attributable to offsetting interest earned
from holding our cash in marketable securities and certificates of deposits.
Interest income was $14,348 and $13,437, for the three months ended September
30, 2005 and 2004, respectively. Interest expense was $947 and $0, for the three
months ended September 30, 2005 and 2004, respectively.
We had a net loss of $1,344,515 for the quarter ended September 30,
2005, as compared to $959,172 for the quarter ended September 30, 2004. The loss
per share for both quarterly periods was $0.01 per share. The increased net loss
of $385,343 relates primarily to increased expenses as described above, offset
by grant income of $120,179.
10
Results Of Operations For The Nine (9) months Ended September 30, 2005
As Compared To The Nine (9) Months Ended September 30, 2004
We incurred research and development expenses of $2,365,103 for the
nine (9) months ended September 30, 2005, as compared to $896,321 for the nine
(9) months ended September 30, 2004. This increase of $1,468,782, or one hundred
sixty-four percent (164%), was primarily attributable to (a) the initiation and
continuation of our Phase IIb HIV clinical trial, (b) our increase in financial
commitment with Georgetown University, (c) additional expenses relating to the
development of SP-01A, including payments to Pharmaplaz, LTD for the
manufacturing of SP-01A and (d) performing the work necessary to complete the
chemistry, manufacturing and controls (CMC) section of New Drug Application for
the FDA, which will be submitted with studies conducted under the IND for
SP-01A. We expect that research and development expenditures relating to drug
discovery and development will increase during the last quarter of 2005 and
subsequent years due to FDA clinical trials which include the continuation and
expansion of clinical trials for (i) our HIV drug program, (ii) our Alzheimer's
drug program, (iii) the initiation of trials for other potential indications and
(iv) additional study expenditures for potential pharmaceutical candidates.
Research and development expenses may fluctuate from period to period depending
upon the stage of certain projects and the level of pre-clinical testing and
clinical trial-related activities. In conjunction with the additional research
and development activities we expect to conduct, we anticipate adding two (2)
administrative staff members and four (4) research and development support
personnel over the next twelve (12) months. On June 1, 2004, we also hired a
Chief Drug Development Officer at an annual salary of $300,000, plus benefits,
pursuant to that certain employment agreement set forth as Exhibit 10.6 herein
and incorporated by reference hereto.
General and administrative expenses decreased to $1,844,385 for the
nine (9) months ended September 30, 2005, from $1,912,499 for the quarter ended
September 30, 2004. This decrease of $68,114, or four percent (4%), was
primarily attributable to a reduction in stock-based consulting and compensation
costs, offset by increases in other General and administrative items.
Depreciation and amortization amounted to $50,286 for the nine (9)
months ended September 30, 2005, as compared to $21,151 for the nine (9) months
ended September 30, 2004. This increase of $29,135, or one hundred thirty-eight
percent (138%), was primarily due to research equipment purchases during the
second quarter of 2005.
Net interest expense amounted to $(47,878) and $(19,378) for nine (9)
months ended September 30, 2005 and 2004, respectively. The credit balance in
the interest expense account is attributable to offsetting interest earned from
holding our cash in marketable securities and certificates of deposits. Interest
income was $49,294 and $19,378, for the nine months ended September 30, 2005 and
2004, respectively. Interest expense was $1,416 and $0, for the nine months
ended September 30, 2005 and 2004, respectively. Most of the initial investment
in marketable securities was made during the quarter ended September 30, 2004.
Therefore, 2004 lacks the first six (6) months of earnings reflected in 2005.
We had a net loss of $4,076,467 for the nine (9) months ended September
30, 2005, as compared to $2,810,593 for the nine (9) months ended September 30,
2004. The loss per share for the nine (9) month period ending September 30, 2005
was $0.03 as compared to $0.02 for the nine (9) month period ended September 30,
2004. The year-to-date loss increase ($1,440,218) reflects the increase in
research expenses but it is offset somewhat by the decline in G & A expense.
The net loss since our inception on September 5, 1994 through September
30, 2005 was $32,255,304. We expect losses to continue for the near future, and
such losses will likely increase as human clinical trials are undertaken in the
United States. Future profitability will be dependent upon our ability to
complete the development of our pharmaceutical products, obtain necessary
regulatory approvals and effectively market such products. In addition, future
profitability will require that the Company establish agreements with other
parties for the clinical testing, manufacturing, commercialization and sale of
its products.
As of September 30, 2005, the Company's cash position was $850,095 and
the Company had $1,242,763 of marketable securities. We are continuing efforts
to raise additional capital and to execute our research and development plans.
Even if we are successful in raising sufficient money to carry out these plans,
additional clinical development is necessary to bring our products to market,
which will require a significant amount of additional capital.
Liquidity And Capital Resources
Cash used in operating activities during the nine (9) month period
ended September 30, 2005 was $(3,390,771), as compared to $(2,144,668) for the
nine (9) month period ended September 30, 2004. This increase is primarily
attributable to (a) additional expenses related to development of SP-01A and (b)
the initiation of our clinical trial, including payments to Pharmaplaz, LTD for
performing work to complete the chemistry and manufacturing and controls (CMC)
information that will be submitted for studies conducted under the IND for
SP-01A.
11
Cash provided by investing activities was $402,416 for the nine (9)
month period ended September 30, 2005, as compared to $(2,392,177) for the nine
(9) month period ended September 30, 2004. During the quarter ended September
30, 2004, we invested $2,250,000 in proceeds from an offering of our common
stock into marketable securities until such time as the money was needed. The
current period's activity includes redemption of one such marketable security
offset by investments in equipment and patent registration costs.
Cash provided by financing activities was $1,399,999 for the nine (9)
month period ended September 30, 2005, as compared to $7,845,939 for the nine
(9) month period ended September 30, 2004, a decrease of $6,445,940 or
eighty-two percent (82%). Last year's results include proceeds from a private
placement, which is not the case for the same period 2005 when no private
placements were conducted.
Current assets as of September 30, 2005 were $1,674,325 as compared to
$3,759,819 as of September 30, 2004. This decrease of $2,085,494, or fifty-five
percent (55%), is primarily attributable to the use of proceeds from the 2004
private placement to fund development stage activities. This is offset somewhat
by proceeds received through our equity financing arrangement with Fusion
Capital. Current liabilities as of September 30, 2005 were $332,258 as compared
to $417,333 as of September 30, 2004, a decrease of $85,075 or twenty percent
(20%).
On April 22, 2003, we entered into a common stock purchase agreement
("Purchase Agreement I") with Fusion Capital Fund II, LLC ("Fusion Capital"),
pursuant to which Fusion Capital agreed to purchase our common stock from time
to time at our option up to an aggregate amount of $10,000,000. The SEC declared
the Company's registration statement on Form SB-2 effective on October 9, 2003
(Commission Registration No. 333-105818). The number of registered, yet
unissued, shares remaining under this registration statement as of September 30,
2005 was 969,893.
On May 12, 2005, we entered into a second common stock purchase
agreement ("Purchase Agreement II") with Fusion Capital pursuant to which Fusion
Capital has agreed to purchase our common stock from time to time at our option
up to an aggregate amount of $40,000,000 over fifty (50) months from the date
the SEC declares effective a registration statement covering the shares of
common stock to be purchased by Fusion Capital pursuant to such Purchase
Agreement II. Purchase Agreement II is subject to the declaration of
effectiveness by the SEC of a registration statement covering the shares of
common stock to be purchased by Fusion Capital and such shares will be priced
based on the market price of our shares at the time of sale to Fusion Capital.
In general, we have the right to sell to Fusion Capital up to $40,000 of our
common stock on each business day and may increase that amount to as much as
$1,000,000 in any one (1) day depending on the market price of our shares. We
have the right to control timing and the amount of shares we sell to Fusion
Capital.
The Company's dependence on raising additional capital will continue at
least until the Company is able to commercially market one of its products at
significant sales level. Depending on profit margins and other factors, the
Company may still need additional funding to continue research and development
efforts. The Company's future capital requirements and the adequacy of its
financing depend upon numerous factors, including the successful
commercialization of the Company's drug candidates, progress in its product
development efforts, progress with preclinical studies and clinical trials, the
cost and timing of production arrangements, the development of effective sales
and marketing activities, the cost of filing, prosecuting, defending and
enforcing intellectual property rights, competing technological and market
developments, and the development of strategic alliances for the marketing of
its products.
We do not believe that debt financing from financial institutions will
be available until at least the time that one of our products is approved for
commercial production. To date, none of our proprietary products has reached a
commercial stage, and hence, we do not have, nor do we anticipate revenue in the
near future. We have been unprofitable since our inception and have incurred
significant losses. We will continue to have significant general and
administrative expenses, including expenses related to clinical studies, our
Research Collaboration with Georgetown University and patent registration costs.
We have funded our operations through a series of private placements and through
our purchase agreements with Fusion Capital, which we believe will assist the
Company in meetings its cash needs. Except for Purchase Agreement I and Purchase
Agreement II, no commitment exists for continued investments, or for any
underwriting.
Even with our financing arrangements with Fusion Capital (as discussed
above), we may require substantial additional funds to sustain our operations
and to grow our business. The amount of which will depend, among other things,
on (i) the rate of progress and the cost of our research and product development
programs and clinical trial activities, (ii) the cost of preparing, filing,
prosecuting, maintaining and enforcing patent claims and other intellectual
property rights and (iii) the cost of developing manufacturing and marketing
12
capabilities, if we decide to undertake those activities. The clinical
development of a therapeutic product is a very expensive and lengthy process and
may be expected to utilize $5 million to $20 million over a three (3) to six (6)
year development cycle. Although we believe we could license the manufacturing
and marketing rights to our products in return for up-front licensing and other
fees and royalties on any sales, there can be no assurance that we will be able
to do so in the event we seek to do so. We need to obtain additional funds to
develop our therapeutic products and our future access to capital is uncertain.
The allocation of limited resources is an ongoing issue for us as we move from
research activities into the more costly clinical investigations required to
bring therapeutic products to market.
The extent to which we rely on Fusion Capital as a source of funding
will depend on a number of factors, including the prevailing market price of our
common stock and the extent to which we are able to secure working capital from
other sources. Even if we are able to access the full amounts under Purchase
Agreement I and Purchase Agreement II, we may still need additional capital to
fully implement our business, operating and development plans. If we are unable
to obtain additional financing, we might be required to delay, scale back or
eliminate certain of our research and product development programs or clinical
trials, or be required to license third parties to commercialize products or
technologies that we would otherwise undertake ourselves, or cease certain
operations all together, any of which might have a material adverse effect upon
us. If we raise additional funds by issuing equity securities, dilution to
stockholders may result, and new investors could have rights superior to
existing holders of shares. Should the financing we require to sustain our
working capital needs be unavailable or prohibitively expensive when we require
it, the consequences would be a material adverse effect on our business,
operating results, financial condition and prospects.
We have been able to meet our cash needs during the past twelve (12)
months through a combination of funds received through private placements and
funds received under Purchase Agreement I. We intend to continue to explore
avenues to obtain the capital needed for our operations through private
placements and by sale of our shares to Fusion Capital.
Quantitative And Qualitative Information About Market Risk
We do not engage in trading market-risk sensitive instruments and do
not purchase hedging instruments or "other than trading" instruments that are
likely to expose us to market risk, whether interest rate, foreign currency
exchange, commodity price or equity price risk. We have no outstanding debt
instruments, have not entered into any forward or future contracts, and have
purchased no options and entered into no swaps. We have no credit lines or other
borrowing facilities, and do not view ourselves as subject to interest rate
fluctuation risk at the present time.
Recently Issued Accounting Standards
In December 2004, the FASB finalized SFAS No. 123R "Share-Based Payment" ("SFAS
123R"), amending SFAS No. 123, effective December 15, 2005. SFAS 123R will
require the Company to expense stock options based on grant date fair value in
its financial statements. Further, adoption of SFAS No. 123R will require
additional accounting related to income tax effects and additional disclosure
regarding cash flow effects resulting from share-based payments arrangements.
The adoption of SFAS 123R will not affect the Company's cash flows or financial
position, but may have an adverse impact on results of operations if options are
granted in the future. In December 2004, the FASB issued SFAS No. 153,
"Exchanges of Nonmonetary Assets - an amendment for APB Opinion No. 29". This
statement amends APB Opinion No. 29 to eliminate the exception for nonmonetary
exchanges of similar productive assets and replaces it with a general exception
for exchanges of nonmonetary assets that do not have commercial substance. A
nonmonetary exchange has commercial substance if future cash flows of the entity
are expected to change significantly as a result of the exchange. The provisions
of SFAS No. 153 are effective for the Company's year ended December 31, 2006.
Management is currently evaluating the impact of the adoption of SFAS No. 153 on
the Company's consolidated financial position, liquidity, or results of
operations.
In April 2005, the Securities and Exchange Commission's Office of the Chief
Accountant and its Division of Corporation Finance released Staff Accounting
Bulletin (SAB) No.107 to provide guidance regarding the application of FASB
Statement No.123 (revised 2004), Share-Based Payment. Statement No. 123(R)
covers a wide range of share-based compensation arrangements including share
options, restricted share plans, performance-based awards, share appreciation
rights, and employee share purchase plans. SAB 107 provides interpretative
guidance related to the interaction between Statement No. 123R and certain SEC
rules and regulations, as well as the staff's views regarding the valuation of
share-based payment arrangements for public companies. SAB 107 also reminds
public companies of the importance of including disclosures within filings made
with the SEC relating to the accounting for share-based payment transactions,
particularly during the transition to Statement No. 123R.
13
In May 2005, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 154, "Accounting Changes and Error
Corrections-a replacement of APB Opinion No. 20 and FASB Statement No. 3" ("SFAS
154"). This Statement replaces APB Opinion No. 20, Accounting Changes, and FASB
Statement No. 3, Reporting Accounting Changes in Interim Financial Statements,
and changes the requirements for the accounting for and reporting of a change in
accounting principle. This Statement applies to all voluntary changes in
accounting principle. It also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include
specific transition provisions. When a pronouncement includes specific
transition provisions, those provisions should be followed.
Opinion 20 previously required that most voluntary changes in accounting
principle be recognized by including in net income of the period of the change
the cumulative effect of changing to the new accounting principle. This
Statement requires retrospective application to prior periods' financial
statements of changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. When it is impracticable to determine the period-specific effects of an
accounting change on one or more individual prior periods presented, this
Statement requires that the new accounting principle be applied to the balances
of assets and liabilities as of the beginning of the earliest period for which
retrospective application is practicable and that a corresponding adjustment be
made to the opening balance of retained earnings (or other appropriate
components of equity or net assets in the statement of financial position) for
that period rather than being reported in an income statement. When it is
impracticable to determine the cumulative effect of applying a change in
accounting principle to all prior periods, this Statement requires that the new
accounting principle be applied as if it were adopted prospectively from the
earliest date practicable. This Statement shall be effective for accounting
changes and corrections of errors made in fiscal years beginning after December
15, 2005. The Company does not believe that the adoption of SFAS 154 will have a
significant effect on its financial statements.
Other accounting standards that have been issued or proposed by the FASB or
other standards-setting bodies that do not require adoption until a future date
are not expected to have a material impact on the consolidated financial
statements upon adoption.
Risk Factors
You should carefully consider the risks described below before making
an investment decision. The risks described below are not the only ones facing
our Company. Additional risks not presently known to us or that we currently
deem immaterial may also impair our business operations.
Our business, financial condition or results of operations could be
adversely affected by any of these risks. The trading price of our common stock
could decline due to any of these risks, and you may lose all or part of your
investment.
We Have A Substantial Accumulated Deficit And Limited Working Capital
The Company had an accumulated deficit of $32,255,304 as of September
30, 2005. Since the Company presently has no source of revenues and is committed
to continuing its product research and development program, significant
expenditures and losses will continue until development of new products is
completed and such products have been clinically tested, approved by the FDA and
successfully marketed. In addition, the Company has funded its operations
primarily through the sale of Company securities, and has had limited working
capital for its product development and other activities. We do not believe that
debt financing from financial institutions will be available until at least the
time that one of our products is approved for commercial production.
We Have No Current Product Sales Revenues Or Profits
The Company has devoted its resources to developing a new generation of
therapeutic drug products, but such products cannot be marketed until clinical
testing is completed and governmental approvals have been obtained. Accordingly,
there is no current source of revenues, much less profits, to sustain the
Company's present activities, and no revenues will likely be available until,
and unless the new products are clinically tested, approved by the FDA and
successfully marketed, either by the Company or a marketing partner, an outcome
which the Company is not able to guarantee.
14
It Is Uncertain That The Company Will Have Access To Future Capital Or
Government Grants
It is not expected that the Company will generate positive cash flow
from operations for at least the next several years. As a result, substantial
additional equity or debt financing or the receipt of one or more government
grants for research and development and/or clinical development will be required
to fund our activities. We cannot be certain that we will be able to consummate
any such financing on favorable terms, if at all, or receive any such government
grants or that such financing or government grants will be adequate to meet our
capital requirements. Any additional equity financing could result in
substantial dilution to shareholders, and debt financing, if available, will
most likely involve restrictive covenants which preclude the Company from making
distributions to shareholders and taking other actions beneficial to
shareholders. If adequate funds are not available, the Company may be required
to delay or reduce the scope of its drug development program or attempt to
continue development by entering into arrangements with collaborative partners
or others that may require the Company to relinquish some or all of its rights
to proprietary drugs. The inability to fund its capital requirements would have
a material adverse effect on the Company.
The Company Is Not Certain That It Will Be Successful In The
Development Of Its Drug Candidates
The successful development of any new drug is highly uncertain and is
subject to a number of significant risks. Our drug candidates, all of which are
in a development stage, require significant, time-consuming and costly
development, testing and regulatory clearance. This process typically takes
several years and can require substantially more time. Risks include, among
others, the possibility that a drug candidate will (a) be found to be
ineffective or unacceptably toxic, (b) have unacceptable side effects, (c) fail
to receive necessary regulatory clearances, (d) not achieve broad market
acceptance, (e) be subject to competition from third parties who may market
equivalent or superior products or (f) be affected by third parties holding
proprietary rights that will preclude the Company from marketing a drug product.
There can be no assurance that the development of drug candidates will
demonstrate the efficacy and safety of a drug candidate as a therapeutic drug,
or, even if demonstrated, that there will be sufficient advantages to its use
over other drugs or treatments so as to render the drug product commercially
viable. In the event that the Company is not successful in developing and
commercializing one or more drug candidates, investors are likely to realize a
loss of their entire investment.
Positive Results In Preclinical And Early Clinical Trials Do Not Ensure
That Future Clinical Trials Will Be Successful Or That Drug Candidates
Will Receive Any Necessary Regulatory Approvals For The Marketing,
Distribution Or Sale Of Such Drug Candidates
Success in preclinical and early clinical trials does not ensure that
large-scale clinical trials will be successful. Clinical results are frequently
susceptible to varying interpretations that may delay, limit or prevent
regulatory approvals. The length of time necessary to complete clinical trials
and to submit an application for marketing approval for a final decision by a
regulatory authority varies significantly and may be difficult to predict.
The Company Will Face Intense Competition From Other Companies In The
Pharmaceutical Industry
The Company is engaged in a segment of the pharmaceutical industry that
is highly competitive and rapidly changing. If successfully developed and
approved, any of the Company's drug candidates will likely compete with several
existing therapies. In addition, other companies are pursuing the development of
pharmaceuticals that target the same diseases as are targeted by the drugs being
developed by the Company. The Company anticipates that it will face intense and
increasing competition in the future as new products enter the market and
advanced technologies become available. We cannot assure that existing products
or new products developed by competitors will not be more effective, or more
effectively marketed and sold than those by the Company. Competitive products
may render the Company's drugs obsolete or noncompetitive prior to the Company's
recovery of development and commercialization expenses.
Many of the Company's competitors will also have significantly greater
financial, technical and human resources and will likely be better equipped to
develop, manufacture and market products. In addition, many of these competitors
have extensive experience in preclinical testing and clinical trials, obtaining
FDA and other regulatory approvals and manufacturing and marketing
pharmaceutical products. A number of these competitors also have products that
have been approved or are in late-stage development and operate large,
well-funded research and development programs. Smaller companies may also prove
to be significant competitors, particularly through collaborative arrangements
with large pharmaceutical and biotechnology companies. Furthermore, academic
institutions, government agencies and other public and private research
organizations are becoming increasingly aware of the commercial value of their
inventions and are actively seeking to commercialize the technology they have
developed. Accordingly, competitors may succeed in commercializing products more
rapidly or effectively than the Company, which would have a material adverse
effect on the Company.
15
There Is No Assurance That The Company's Products Will Have Market
Acceptance
The success of the Company will depend in substantial part on the
extent to which a drug product, once approved, achieves market acceptance. The
degree of market acceptance will depend upon a number of factors, including (a)
the receipt and scope of regulatory approvals, (b) the establishment and
demonstration in the medical community of the safety and efficacy of a drug
product, (c) the product's potential advantages over existing treatment methods
and (d) reimbursement policies of government and third party payors. We cannot
predict or guarantee that physicians, patients, healthcare insurers or
maintenance organizations, or the medical community in general, will accept or
utilize any drug product of the Company.
The unavailability of health care reimbursement for any of our products
will likely adversely impact our ability to market effectively such products and
whether health care reimbursement will be available for any of our products is
uncertain.
The Company's ability to commercialize its technology successfully will
depend in part on the extent to which reimbursement for the costs of such
products and related treatments will be available from government health
administration authorities, private health insurers and other third-party
payors. Significant uncertainty exists as to the reimbursement status of
newly-approved medical products. The Company cannot guarantee that adequate
third-party insurance coverage will be available for the Company to establish
and maintain price levels sufficient for realization of an appropriate return on
its investments in developing new therapies. Government, private health
insurers, and other third-party payors are increasingly attempting to contain
health care costs by limiting both coverage and the level of reimbursement for
new therapeutic products approved for marketing by the FDA. Accordingly, even if
coverage and reimbursement were provided by government, private health insurers,
and third-party payors for uses of the Company's products, the market acceptance
of these products would be adversely affected if the amount of reimbursement
available for the use of the Company's therapies proved to be unprofitable for
health care providers.
Uncertainties Related To Health Care Reform Measures May Affect The
Company's Success
There have been a number of federal and state proposals during the last
few years to subject the pricing of health care goods and services, including
prescription drugs, to government control and to make other changes to the U.S.
health care system. It is uncertain which legislative proposals will be adopted
or what actions federal, state, or private payors for health care treatment and
services may take in response to any health care reform proposals or
legislation. The Company cannot predict the effect health care reforms may have
on its business, and there is no guarantee that any such reforms will not have a
material adverse effect on the Company.
Further Testing Of Our Drug Candidates Will Be Required And There Is No
Assurance Of FDA Approval
The FDA and comparable agencies in foreign countries impose substantial
requirements upon the introduction of medical products, through lengthy and
detailed laboratory and clinical testing procedures, sampling activities and
other costly and time-consuming procedures. Satisfaction of these requirements
typically takes several years or more and varies substantially based upon the
type, complexity, and novelty of the product.
The effect of government regulation and the need for FDA approval will
delay marketing of new products for a considerable period of time, impose costly
procedures upon the Company's activities, and provide an advantage to larger
companies that compete with the Company. There can be no assurance that FDA or
other regulatory approval for any products developed by the Company will be
granted on a timely basis or at all. Any such delay in obtaining, or failure to
obtain, such approvals would materially and adversely affect the marketing of
any contemplated products and the ability to earn product revenue. Further,
regulation of manufacturing facilities by state, local, and other authorities is
subject to change. Any additional regulation could result in limitations or
restrictions on the Company's ability to utilize any of its technologies,
thereby adversely affecting the Company's operations.
Human pharmaceutical products are subject to rigorous preclinical
testing, clinical trials, and other approval procedures mandated by the FDA and
foreign regulatory authorities. Various federal and foreign statutes and
regulations also govern or influence the manufacturing, safety, labeling,
storage, record keeping and marketing of pharmaceutical products. The process of
obtaining these approvals and the subsequent compliance with appropriate U.S.
and foreign statutes and regulations are time-consuming and require the
expenditure of substantial resources. In addition, these requirements and
processes vary widely from country to country.
16
Among the uncertainties and risks of the FDA approval process are the
following: (a) the possibility that studies and clinical trials will fail to
prove the safety and efficacy of the drug, or that any demonstrated efficacy
will be so limited as to significantly reduce or altogether eliminate the
acceptability of the drug in the marketplace, (b) the possibility that the costs
of development, which can far exceed the best of estimates, may render
commercialization of the drug marginally profitable or altogether unprofitable
and (c) the possibility that the amount of time required for FDA approval of a
drug may extend for years beyond that which is originally estimated. In
addition, the FDA or similar foreign regulatory authorities may require
additional clinical trials, which could result in increased costs and
significant development delays. Delays or rejections may also be encountered
based upon changes in FDA policy and the establishment of additional regulations
during the period of product development and FDA review. Similar delays or
rejections may be encountered in other countries.
The Company's Success Will Be Dependent On Licenses And Proprietary
Rights It Receives From Other Parties, And On Any Patents It May Obtain
Our success will depend in large part on the ability of the Company and
its licensors to (a) maintain license and patent protection with respect to
their drug products, (b) defend patents and licenses once obtained, (c) maintain
trade secrets, (d) operate without infringing upon the patents and proprietary
rights of others and (e) obtain appropriate licenses to patents or proprietary
rights held by third parties if infringement would otherwise occur, both in the
United States and in foreign countries. The Company has obtained licenses to
patents and other proprietary rights from Georgetown University.
The patent positions of pharmaceutical companies, including those of
the Company, are uncertain and involve complex legal and factual questions.
There is no guarantee that the Company or its licensors have or will develop or
obtain the rights to products or processes that are patentable, that patents
will issue from any of the pending applications or that claims allowed will be
sufficient to protect the technology licensed to the Company. In addition, we
cannot be certain that any patents issued to or licensed by the Company will not
be challenged, invalidated, infringed or circumvented, or that the rights
granted thereunder will provide competitive disadvantages to the Company.
Litigation, which could result in substantial cost, may also be
necessary to enforce any patents to which the Company has rights, or to
determine the scope, validity and unenforceability of other parties' proprietary
rights, which may affect the rights of the Company. U.S. patents carry a
presumption of validity and generally can be invalidated only through clear and
convincing evidence. There can be no assurance that the Company's licensed
patents would be held valid by a court or administrative body or that an alleged
infringer would be found to be infringing. The mere uncertainty resulting from
the institution and continuation of any technology-related litigation or
interference proceeding could have a material adverse effect on the Company
pending resolution of the disputed matters.
The Company may also rely on unpatented trade secrets and expertise to
maintain its competitive position, which it seeks to protect, in part, by
confidentiality agreements with employees, consultants and others. There can be
no assurance that these agreements will not be breached or terminated, that the
Company will have adequate remedies for any breach or that trade secrets will
not otherwise become known or be independently discovered by competitors.
The Company's License Agreements May Be Terminated In The Event Of A
Breach
The license agreements pursuant to which the Company has licensed its
core technologies for its potential drug products permit the licensors,
respectively Georgetown University, to terminate such agreements under certain
circumstances, such as the failure by the licensee to use its reasonable best
efforts to commercialize the subject drug or the occurrence of any uncured
material breach by the licensee. The license agreements also provide that the
licensor is primarily responsible for obtaining patent protection for the
licensed technology, and the licensee is required to reimburse the licensor for
costs it incurs in performing these activities. The license agreements also
require the payment of specified royalties. Any inability or failure to observe
these terms or pay these costs or royalties may result in the termination of the
applicable license agreement in certain cases. The termination of any license
agreement would have a material adverse effect on the Company.
Protecting Our Proprietary Rights Is Difficult And Costly
The patent positions of pharmaceutical and biotechnology companies can
be highly uncertain and involve complex legal and factual questions.
Accordingly, we cannot predict the breadth of claims allowed in these companies'
patents or whether the Company may infringe or be infringing these claims.
Patent disputes are common and could preclude the commercialization of our
products. Patent litigation is costly in its own right and could subject us to
significant liabilities to third parties. In addition, an adverse decision could
force us to either obtain third-party licenses at a material cost or cease using
the technology or product in dispute.
17
The Company's Success Is Dependent On Its Key Personnel
The Company is dependent on a small management group and on independent
researchers, some of whom are inventors of the patents licensed to the Company
for core technologies and drugs developed at Georgetown University. Scientific
personnel may from time to time serve as consultants to the Company and may
devote a portion of their time to the Company's business, as well as continue to
devote substantial time to the furtherance of the Company's sponsored research
at Georgetown University and at other affiliated institutions as may be agreed
to in the future, but such personnel are not employees of the Company and are
not bound under written employment agreements. The services of such persons are
important to the Company, and the loss of any of these services may adversely
affect the Company.
Our success is dependent upon the continued services and performance of
Dr. Janet Greeson, our Chief Executive Officer, President and Chairman of the
Board of Directors and Dr. Vassilios Papadopoulos, a Key Consultant. We do not
maintain key man insurance on either of these individuals. We have a five (5)
year employment agreement with Dr. Greeson that expires in 2006. The loss of
their services could delay our product development programs and our research and
development efforts at Georgetown University. In addition, the loss of Dr.
Greeson is grounds for our Georgetown University collaboration to terminate. In
addition, competition for qualified employees among companies in the
biotechnology and biopharmaceutical industry is intense and we cannot assure you
that we would be able to recruit qualified personnel on commercially acceptable
terms, or at all, to replace them.
We May Be Unable To Retain Skilled Personnel And To Maintain Key
Relationships
The success of our business depends, in large part, on our ability to
attract and retain highly qualified management, scientific and other personnel,
and on our ability to develop and maintain important relationships with leading
research institutions, consultants and advisors. Competition for these types of
personnel and relationships is intense from numerous pharmaceutical and
biotechnology companies, universities and other research institutions. There can
be no assurance that the Company will be able to attract and retain such
individuals on commercially acceptable terms or at all, and the failure to do so
would have a material adverse effect on the Company.
We Currently Have No Sales Or Marketing Capability
The Company does not have marketing or sales personnel. The Company
will have to develop a sales force, or rely on marketing partners or other
arrangements with third parties for the marketing, distribution and sale of any
drug product that is ready for distribution. There is no guarantee that the
Company will be able to establish marketing, distribution or sales capabilities
or arrange with third parties to perform those activities on terms satisfactory
to the Company, or that any internal capabilities or third party arrangements
will be cost-effective.
In addition, any third parties with which the Company may establish
marketing, distribution or sales arrangements may have significant control over
important aspects of the commercialization of a drug product, including market
identification, marketing methods, pricing, composition of sales force and
promotional activities. There can be no assurance that the Company will be able
to control the amount and timing of resources that any third party may devote to
the products of the Company or prevent any third party from pursuing alternative
technologies or products that could result in the development of products that
compete with, and/or the withdrawal of support for, the products of the Company.
The Company Does Not Have Internal Manufacturing Capabilities And May
Not Be Able To Develop Efficient Manufacturing Capabilities Or Contract
For Such Services From Third Parties Such As Pharmaplaz, LTD On
Commercially Acceptable Terms
The Company will not have any manufacturing capacity. When required,
the Company will seek to establish relationships with third-party manufacturers
for the manufacture of clinical trial material and the commercial production of
a drug product just as it has with Pharmaplaz, LTD in Ireland. There can be no
assurance that the Company will be able to establish relationships with
third-party manufacturers on commercially acceptable terms or that third-party
manufacturers will be able to manufacture a drug product on a cost-effective
basis in commercial quantities under good manufacturing practices mandated by
the FDA.
The dependence upon third parties for the manufacture of products may
adversely affect future costs and the ability to develop and commercialize a
drug product on a timely and competitive basis. Further, there can be no
assurance that manufacturing or quality control problems will not arise in
connection with the manufacture of the drug product or that third party
manufacturers will be able to maintain the necessary governmental licenses and
approvals to continue manufacturing such products. Any failure to establish
relationships with third parties for its manufacturing requirements on
commercially acceptable terms would have a material adverse effect on the
Company.
18
The Company Does Not Have Its Own Research Facilities And Will Be
Dependent On Third Parties For Drug Development
The Company does not have its own research and development facilities
and engages consultants and independent contract research organizations to
design and conduct clinical trials in connection with the development of a drug.
As a result, these important aspects of a drug's development will be outside the
direct control of the Company. In addition, there can be no assurance that such
third parties will perform all of their obligations under arrangements with the
Company or will perform those obligations satisfactorily.
In the future, we anticipate that we will need to obtain additional or
increased product liability insurance coverage and it is uncertain that such
increased or additional insurance coverage can be obtained on commercially
reasonable terms.
The business of the Company will expose us to potential product
liability risks that are inherent in the testing, manufacturing and marketing of
pharmaceutical products. There can be no assurance that product liability claims
will not be asserted against the Company. The Company intends to obtain
additional limited product liability insurance for its clinical trials, directly
or through its marketing development partners or CRO (contract research
organization) partners, when they begin in the U.S. and to expand its insurance
coverage if and when the Company begins marketing commercial products. However,
there can be no assurance that the Company will be able to obtain product
liability insurance on commercially acceptable terms or that the Company will be
able to maintain such insurance at a reasonable cost or in sufficient amounts to
protect against potential losses. A successful product liability claim or series
of claims brought against the Company could have a material adverse effect on
the Company.
Insurance Coverage Is Increasingly More Difficult To Obtain Or Maintain
Obtaining insurance for our business, property and products is
increasingly more costly and narrower in scope, and we may be required to assume
more risk in the future. If we are subject to third-party claims or suffer a
loss or damage in excess of our insurance coverage, we may be required to share
that risk in excess of our insurance limits. Furthermore, any first- or
third-party claims made on any of our insurance policies may impact our ability
to obtain or maintain insurance coverage at reasonable costs or at all in the
future.
The Market Price Of Our Shares, Like That Of Many Biotechnology
Companies, Is Highly Volatile
Market prices for our Common Stock and the securities of other medical
and biomedical technology companies have been highly volatile and may continue
to be highly volatile in the future. Factors such as announcements of
technological innovations or new products by the Company or its competitors,
government regulatory action, litigation, patent or proprietary rights
developments and market conditions for medical and high technology stocks in
general can have a significant impact on any future market for our Common Stock.
We Are Not Paying Dividends On Our Common Stock
The Company has never paid cash dividends on its Common Stock, and does
not intend to do so in the foreseeable future.
The Issuance Of More Common Shares Or Our Preferred Stock May Adversely
Affect Our Common Stock
The Board of Directors is authorized to issue additional shares of
Common Stock and to designate one (1) or more series of preferred stock and to
fix the rights, preferences, privileges and restrictions thereof, without any
action by the shareholders. The designation and issuance of such shares of our
preferred stock may adversely affect the Common Stock if the rights, preferences
and privileges of such preferred stock (a) restrict the declaration or payment
of dividends on our Common Stock, (b) dilute the voting power of our Common
Stock, (c) impair the liquidation rights of our Common Stock or (d) delay or
prevent a change in control of the Company from occurring, among other
possibilities.
Under Provisions Of The Company's Articles Of Incorporation, Bylaws And
Nevada Law, The Company's Management May Be Able To Block Or Impede A
Change In Control
The issuance of preferred stock may make it more difficult for a third
party to acquire, or may discourage a third party from acquiring, a majority of
our voting stock. These and other provisions in our Articles of Incorporation
(as amended and restated) and in our Bylaws, as well as certain provisions of
Nevada law, could delay or impede the removal of incumbent Directors and could
make it more difficult to effect a merger, tender offer or proxy contest
involving a change of control of the Company, even if such events could be
beneficial to the interest of the shareholders as a whole. Such provisions could
limit the price that certain investors might be willing to pay in the future for
our Common Stock.
19
Officers' And Directors' Liabilities Are Limited Under Nevada Law
Pursuant to the Company's Articles of Incorporation (as amended and
restated) and Bylaws, as authorized under applicable Nevada law, Directors are
not liable for monetary damages for breach of fiduciary duty, except in
connection with a breach of the duty of loyalty for (a) acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (b) for dividend payments or stock repurchases illegal under Nevada law or
(c) any transaction in which a Director has derived an improper personal
benefit. The Company's Articles of Incorporation (as amended and restated) and
Bylaws provide that the Company must indemnify its officers and Directors to the
fullest extent permitted by Nevada law for all expenses incurred in the
settlement of any actions against such persons in connection with their having
served as officers or Directors.
ITEM 3. CONTROLS AND PROCEDURES
(A) Evaluation Of Disclosure Controls And Procedures
As of the end of the period covered by this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's Principal Executive Officer and Principal Accounting and Financial
Officer of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. The Company's disclosure controls and
procedures are designed to provide a reasonable level of assurance of achieving
the Company's disclosure control objectives. The Company's Principal Executive
Officer and Principal Accounting and Financial Officer have concluded that the
Company's disclosure controls and procedures are, in fact, effective at this
reasonable assurance level as of the period covered. In addition, the Company
reviewed its internal controls, and there have been no significant changes in
its internal controls or in other factors that could significantly affect those
controls subsequent to the date of their last evaluation or from the end of the
reporting period to the date of this Form 10-KSB.
(B) Changes In Internal Controls Over Financial Reporting
In connection with the evaluation of the Company's internal controls
during the Company's last fiscal quarter covered by this report, the Company's
Principal Executive Officer and Principal Financial Officer have determined that
there are no changes to the Company's internal controls over financial reporting
that has materially affected, or is reasonably likely to materially effect, the
Company's internal controls over financial reporting.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are, from time to time, involved in various legal proceedings in the
ordinary course of our business. While it is impossible to predict accurately or
to determine the eventual outcome of these matters, the Company believes that
the outcome of these proceedings will not have a material adverse effect on the
financial statements of the Company.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
The Company has formed, by the determination of the Board of Directors,
an Audit Committee with Independent Director Mr. H. Thomas Winn as Chairman. Mr.
Winn is a "qualified financial expert" as such term is used in Item 7(d)(3)(iv)
of Schedule 14A (240.14a-101 of this chapter) under the Exchange Act. The
Company has also formed a Compensation and Governance Committee, with
Independent Director Ms. Cynthia C. Thompson as Chairman; a Nomination Committee
with Independent Director Mr. Welter Holden as Chairman; and a Science and
Technology Advisory Committee with Dr. Papadopoulos as Chief Scientist and Key
Consultant to the Board of Directors. It should also be noted that no Director
or executive officer, key employee or key consultant of the Company has any
family relationships with any other Director, executive officer, key employee or
key consultant of the Company, except that Mr. Boyle is the son of Dr. Greeson.
20
ITEM 6. EXHIBITS AND CURRENT REPORTS ON FORM 8-K
A. Exhibits:
EXHIBIT NO. DESCRIPTION LOCATION
----------- -------------------------------------------------- ------------------------------------------------
2.1 Agreement and Plan of Reorganization Incorporated by reference to Exhibit 2.1 to the
Company's Form 10-SB12G as filed with the U.S.
Securities and Exchange Commission on July 21,
1999
3.1 Articles of Incorporation, restated as last Incorporated by reference to Exhibit 3.1 to the
amended June 10, 2005 Company's Current Report on Form 8-K as filed
with the U.S. Securities and Exchange Commission
on July 8, 2005
3.2 Bylaws, restated as last amended April 18, 2005 Incorporated by reference to Exhibit 3.2 to the
Company's Current Report on Form 8-K as filed
with the U.S. Securities and Exchange Commission
on July 8, 2005
4.1 Form of Common Stock Certificate Incorporated by reference to Exhibit 4.1 to the
Company's Current Report Form 10-SB12G as filed
with the U.S. Securities and Exchange Commission
on July 21, 1999
4.2 Amended Samaritan Pharmaceuticals, Inc. 2001 Incorporated by reference to Exhibit 4.2 to the
Stock Option Plan Company's Quarterly Report on Form 10-QSB as
filed with the U.S. Securities and Exchange
Commission on August 16, 2004
4.3 Samaritan Pharmaceuticals, Inc. 2005 Stock Option Incorporated by reference to the Schedule 14-A
Plan Information Statement filed with the U.S.
Securities and Exchange Commission on April 29,
2005 and approved by the shareholders on June
10, 2005
10.1 Assignment of Invention, dated September 6, 2000, Incorporated by reference to Exhibit 10.1 to the
by and between Linda Johnson and the Company Company's Quarterly Report on Form 10-QSB as
filed with the U.S. Securities and Exchange
Commission on August 14, 2002
10.2 Assignment of Invention, dated May 14, 2999, by Incorporated by reference to Exhibit 10.2 to the
and between Linda Johnson and Spectrum Company's Quarterly Report on Form 10-QSB as
Pharmaceuticals Corporation filed with the U.S. Securities and Exchange
Commission on August 14, 2002
10.3 Assignment of Invention, dated May 22, 1990, by Incorporated by reference to Exhibit 10.3 to the
and between Alfred T. Sapse and Spectrum Company's Quarterly Report on Form 10-QSB as
Pharmaceutical Corporation filed with the U.S. Securities and Exchange
Commission on August 14, 2002
10.4 Common Stock Purchase Agreement, dated April 22, Incorporated by reference to Exhibit 10.1 to the
2003, by and between the Company and Fusion Company's Current Report on Form 8-K as filed
Capital Fund II, LLC with the U.S. Securities and Exchange Commission
on April 25, 2003
10.5 Registration Rights Agreement, dated April 22, Incorporated by reference to Exhibit 10.2 to the
2003, by and between the Company and Fusion Company's Current Report on Form 8-K as filed
Capital Fund II, LLC with the U.S. Securities and Exchange Commission
on April 25, 2003
21
EXHIBIT NO. DESCRIPTION LOCATION
----------- -------------------------------------------------- ------------------------------------------------
10.6 Employment Agreement, dated as of January 1, Incorporated by reference to Exhibit 10.6 to the
2001, by and between Samaritan Pharmaceuticals, Company's Quarterly Report on Form 10-QSB as
Inc. and Mr. Thomas Lang filed with the U.S. Securities and Exchange
Commission on August 16, 2004
10.7 Form of Trust Under Samaritan Pharmaceuticals, Incorporated by reference to Exhibit 10.10 to
Inc. Deferred Compensation Plan the Company's Quarterly Report on Form 10-QSB as
filed with the U.S. Securities and Exchange
Commission on August 14, 2002
10.8 Employment Agreement, dated as of June 1, 2004, Incorporated by reference to Exhibit 10.8 to the
by and between Samaritan Pharmaceuticals, Inc. Company's Quarterly Report on Form 10-QSB as
and Eugene Boyle filed with the U.S. Securities and Exchange
Commission on August 14, 2002
10.9 Employment Agreement, dated as of January 1, Incorporated by reference to Exhibit 10.9 to the
2001, by and between Samaritan Pharmaceuticals, Company's Quarterly Report on Form 10-QSB as
Inc. and Janet Greeson filed with the U.S. Securities and Exchange
Commission on August 14, 2002
10.10 Master Clinical Trial and Full Scale Incorporated by reference to Exhibit 10.10 to
Manufacturing Agreement, dated October 5, 2004, the Company's Quarterly Report on Form 10-QSB as
by and between the Company and Pharmaplaz, LTD filed with the U.S. Securities and Exchange
Commission on November 15, 2004
10.11 Common Stock Purchase Agreement, dated May 12, Incorporated by reference to Exhibit 10.11 to
2005, by and between the Company and Fusion the Company's Quarterly Report on Form 10-QSB as
Capital Fund II, LLC filed with the U.S. Securities and Exchange
Commission on May 13, 2005
10.12 Registration Rights Agreement, dated May 12, Incorporated by reference to Exhibit 10.12 to
2005, by and between the Company and Fusion the Company's Quarterly Report on Form 10-QSB as
Capital Fund II, LLC filed with the U.S. Securities and Exchange
Commission on May 13, 2005
10.13 Norbrook Supply Agreement Incorporated by reference to Exhibit 1 to the
Company's Current Report on Form 8-K as filed
with the U.S. Securities and Exchange Commission
on September 27, 2005
10.14 Research Collaboration and Licensing Agreement, Incorporated by reference to Exhibit 10.10 to
dated June 8, 2001, by and between Georgetown Amendment No. 1 to the Company's Registration
University and Samaritan Pharmaceuticals, Inc. Statement on Form SB-2 as filed with the U.S.
Securities and Exchange Commission on July 30,
2003
13.1 Samaritan Pharmaceuticals, Inc.'s Annual Report Filed on Form 10-KSB on April 15, 2005 and
on Form 10-KSB for the fiscal year ended December incorporated herein by reference
31, 2004
14.1 The Samaritan Pharmaceuticals, Inc. Code of Incorporated by reference to Exhibit 14.1 to the
Conduct Company's Form 10-KSB as filed with the U.S.
Securities and Exchange Commission on April 15,
2003
22
EXHIBIT NO. DESCRIPTION LOCATION
----------- -------------------------------------------------- ------------------------------------------------
16.1 Letter Regarding Change in Certifying Accountant Incorporated by reference to Exhibit 16.1 to the
Company's Current Report on Form 8-K as filed
with the U.S. Securities and Exchange Commission
on September 27, 2002
21 List of Subsidiaries Incorporated by reference to Exhibit 21 to the
Company's Quarterly Report on Form 10-QSB as
filed with the U.S. Securities and Exchange
Commission on August 15, 2005
31.1 Certification of Chief Executive Officer Provided herewith
31.2 Certification of Chief Financial Officer Provided herewith
32.1 Certification re: Section 906 Provided herewith
32.2 Certification re: Section 906 Provided herewith
B. Current Reports On Form 8-K During The Quarter Ended September 30, 2005:
(1) On July 8, 2005, the Company filed a Current Report on Form 8-K
concerning (a) an amendment to the Company's Bylaws decreasing the number of
Board members and (b) certain actions taken by the Company's shareholders at the
June 10, 2005 Annual Meeting of the Shareholders.
(2) On September 26, 2005, the Company filed a Current Report on Form
8-K concerning a Supply Agreement entered into by and among the Company,
Samaritan Pharmaceuticals Ireland Limited, Pharmaplaz, LTD and Norbrook S.R.O.
pursuant to which Norbrook S.R.O. shall supply raw materials towards the
production of SP-01A, subject to regulatory approvals to market SP-01A.
23
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
SAMARITAN PHARMACEUTICALS, INC.
Dated: November 14, 2005 By: /s/ Eugene Boyle
----------------
Name: Eugene Boyle
Title: Chief Operating Officer,
Chief Financial Officer
and Director