U. S. SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Fiscal
year ended December 31, 2009
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission File Number 1-16695
RADIENT PHARMACEUTICALS
CORPORATION
(Exact name of registrant as
specified in its charter)
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Delaware
(State or other jurisdiction
of
incorporation or organization)
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33-0413161
(IRS Employer
Identification No.)
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2492 Walnut Avenue, Suite 100
Tustin, California
92780-7039
(Address of principal
executive offices)
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(714) 505-4460
(Registrants
telephone
number, including area
code)
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Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, $.001 par value
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NYSE Alternext US
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Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, $.001 par value
(Title of class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such files)
. Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting
company þ
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in Exchange Act Rule
12b-2). Yes o No þ
As of April 14, 2010, 27,251,069 shares of common
stock were outstanding. The aggregate market value of the voting
and non-voting common equity held by non-affiliates of the
registrant as of the last business day of the registrants
most recently completed second fiscal quarter, based upon the
closing sale price of the registrants common stock on
June 30, 2009 (the last trading day in the second calendar
quarter of 2009) as reported by the NYSE Alternext US
Exchange) $11,156,627 (based upon the closing price of the
common stock on such date as reported. For purposes of this
calculation, we have excluded the market value of all common
stock beneficially owned by all executive officers and directors
of the Company.
Documents
Incorporated by Reference
None.
Cautionary Statement under the Private Securities Litigation
Reform Act of 1995:
This Annual Report on
Form 10-K
and the documents incorporated by reference herein contain
forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, which
include information relating to future events, future financial
performance, strategies, expectations, competitive environment,
regulation and availability of resources. From time to time, we
also provide forward-looking statements in other materials we
release to the public as well as verbal forward-looking
statements. These forward-looking statements include, without
limitation, statements regarding: regulatory approval for our
products; market demand for our products and competition; our
dependence on licensees, distributors and management; impact of
technological changes on our products; results of operations or
liquidity; statements concerning projections, predictions,
expectations, estimates or forecasts as to our business,
financial and operational results and future economic
performance; and statements of managements goals and
objectives and other similar expressions. Such statements give
our current expectations or forecasts of future events; they do
not relate strictly to historical or current facts. Given these
uncertainties, readers are cautioned not to place undue reliance
on such forward-looking statements. Words such as
may, will, should,
could, would, predicts,
potential, continue,
expects, anticipates,
future, intends, plans,
believes, estimates, and similar
expressions, as well as statements in future tense, identify
forward-looking statements.
We cannot guarantee that any forward-looking statement will
be realized, although we believe we have been prudent in our
plans and assumptions. Achievement of future results is subject
to risks, uncertainties and potentially inaccurate assumptions.
Many events beyond our control may determine whether results we
anticipate will be achieved. Should known or unknown risks or
uncertainties materialize, or should underlying assumptions
prove inaccurate, actual results could differ materially from
past results and those anticipated, estimated or projected. You
should bear this in mind as you consider forward-looking
statements.
We undertake no obligation to publicly update or revise
forward-looking statements, whether as a result of new
information, future events or otherwise. You are advised,
however, to consult any further disclosures we make on related
subjects in our
Form 10-Q
and 8-K
reports to the SEC. Also note that we provide the following
cautionary discussion of risks, uncertainties and possibly
inaccurate assumptions relevant to our business. These factors
individually or in the aggregate, we think could cause our
actual results to differ materially from expected and historical
results. You should understand that it is not possible to
predict or identify all such factors. Our actual results may
differ materially from those currently anticipated and expressed
in such forward-looking statements as a result of a number of
factors, including those we discuss under Risk
Factors and elsewhere in this Annual Report on
Form 10-K.
1
PART I
We recently refocused our business on the development,
manufacture and marketing of advanced, pioneering medical
diagnostic products, including our
ONKO-SUREtm,
a proprietary In-Vitro Diagnostic (IVD) Cancer Test.
During the third and fourth quarter of 2009, we repositioned
various business segments that we believe will enable us to
monetize the value of some of our assets through either new
partnerships, separate potential IPOs or possible sales.
These special assets include: (i) our 98% ownership in
China-based pharmaceuticals business, Jade Pharmaceuticals Inc.
(JPI); (ii) our 100% ownership of a proprietary cancer
vaccine therapy technology: Combined Immunogene Therapy
(CIT); and (iii) 100% ownership of the Elleuxe
brand of advanced skin care produces with proprietary
formulations that include human placenta extract ingredients
sourced from the China operations of JPI.
Until September 2009, we operated in China through our wholly
owned subsidiary, JPI. JPI engages in the manufacture and
distribution of generic and homeopathic pharmaceutical products
and supplements, as well as cosmetic products. JPI manufactures
and distributes its products through two wholly-owned Chinese
subsidiaries, Jiangxi Jiezhong Bio-Chemical Pharmacy Company
Limited (JJB) and Yangbian Yiqiao Bio-Chemical
Pharmacy Company Limited (YYB). However, JPI sold
its interest in YYB during June 2009 and during the quarter
ended September 30, 2009, we deconsolidated JPI due to the
inability to exercise significant influence of its operations
(See Discontinued Operations and
Deconsolidation below). In connection with
the deconsolidation, we reclassified our China pharmaceutical
manufacturing and distribution business (conducted through our
JPI subsidiary) as a business investment, rather than a
consolidated operating subsidiary.
On September 25, 2009, we changed our corporate name from
AMDL, Inc. to Radient Pharmaceuticals
Corporation, because we believe Radient Pharmaceuticals as
a brand name has considerable market appeal and reflects our new
corporate direction and branding statements.
We are now actively engaged in the research, development,
manufacturing, sale and marketing of our
ONKO-SUREtm,
a proprietary IVD Cancer Test in the United States, Canada,
Chile, Europe, India, Korea, Taiwan, Vietnam and other markets
throughout the world. Virtually all of our sales are to
distributors.
We manufacture and distribute our proprietary
ONKO-SUREtm
cancer test kits at our licensed manufacturing facility located
at 2492 Walnut Avenue, Suite 100, in Tustin, California. We
are a United States Food and Drug Administration
(USFDA), GMP approved manufacturing facility. We
maintain a current Device Manufacturing License issued by the
State of California, Department of Health Services, Food and
Drug Branch.
Discontinued
Operations and Dispositions
On January 22, 2009, our board of directors authorized
management to sell the operations of YYB and it was sold in June
2009. Proceeds from the sale of YYB consist of a note receivable
in the amount of 16 million RMB (approximately
U.S. $2,337,541), which was paid directly to a bank, that
JPI owed approximately 18,250,000 RMB (approximately
U.S. $2,668,000) at the date of sale. In connection with
the sale, JPI transferred rights to certain land and land use
rights upon sale. JPI remains liable under the debt obligation
with the bank, as such obligation did not pass to the buyer.
Deconsolidation
During the third quarter of 2009, it became apparent to our
management that our working relationship with management of our
operations in China was becoming increasingly strained.
Accordingly, we deemed it appropriate to seek alternative means
of monetizing our investment. There were several issues that
caused us to conclude accordingly, including, but not limited to:
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Non responsiveness by the management in China to our requests
for financial information;
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Non responsiveness by management in China to our requests to
transfer our funds to bank accounts under corporate control;
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Lack of timely communication with their corporate management
concerning significant decisions made by management in China
concerning the disposal of the YYB subsidiary; and
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Lack of timely communication with corporate officers concerning
operations in China.
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Effective September 29, 2009, based on unanimous consent of
our board of directors and an executed binding agreement (the
Agreement) between us and certain individual
stockholders in China, we deconsolidated all activity of JPI.
Based on the Agreement and in accordance with current accounting
guidelines, we deconsolidated JPI as of the date we ceased to
have a controlling financial interest, which was effective
September 29, 2009. In accordance with the Agreement, we
exchanged our shares of JPI for non-voting shares of preferred
stock, relinquished all rights to past and future profits,
surrendered our management positions and agreed to a
non-authoritative minority role on the board of directors.
Despite the on-going deconsolidation of JPI and JJB started on
September 29, 2009, we still believe JPI and JJB have a
promising future. We hope that we will be able to sell off a
portion or all of our ownership in JPI and JJB during the next
24 months; alternatively we will seek an exit from our
investment at or after any public listing. We may also retain
all or a portion of our remaining equity stake in JPI and JJB,
if ownership continues to look promising. The goal is to gain
the best valuation possible for this strategic asset.
Additionally, we believe that JPI/JJBs business and brand
recognition make it a potential buyout target.
Elleuxe
Brand of Premium Anti-Aging Skin Care Products
We now intend to license or sell off our Elleuxe brand of
cosmetic products that were originally developed by JPI in 2008,
based upon their HPE anti-aging therapeutic products. We have
reformulated these products for international markets under the
brand name Elleuxe. The Elleuxe family of products is a
therapeutic, high-end skin care product line based on the active
ingredient Elleuxe Protein our
proprietary active ingredient that offers cell renewing
properties designed to minimize the appearance of aging.
The initial Elleuxe product line includes:
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Hydrating Firming Cream
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Renergie Hydrating Cleanser
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Intense Hydrating Cleanser
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Visable Renewing Hydrating Softener
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Smoothing Renewing Eye Moisturizer
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IVD
DIAGNOSTICS DIVISION
IVD
Industry and Market
The receipt of USFDA approval for marketing our proprietary
ONKO-SUREtm
cancer test kit in July 2008, has given us significant
visibility in the in-vitro diagnostics (IVD)
industry. The growth of the IVD marketplace has been driven by
an increase in the incidence of cancer, other chronic and
infectious diseases, emerging technologies and increasing
patient awareness. The world market for IVD tests for cancer is
expected to grow at nearly 11% annually and could reach nearly
$8 billion by the end of 2012. (Kalorama Research Group:
2008)
ONKO-SUREtm
We are the developer and worldwide marketer of
ONKO-SUREtm,
non-invasive cancer blood test kit. On July 8, 2009, we
changed the brand name of our in-vitro diagnostic cancer
test from
DR-70tm
to the more consumer friendly, trademarked brand name
ONKO-SUREtm,
which we believe communicates it as a high quality, innovative
consumer cancer test. We also installed a new tag
line The Power of Knowing
which
3
communicates to cancer patients and their physicians that the
test is effective in assessing whether a patients cancer
is progressing during treatment or is in remission. In clinical
trials, the
ONKO-SUREtm
test kit has demonstrated its ability to detect the presence of
certain cancers in humans 84 percent of the time overall.
ONKO-SUREtm
is a simple, non-invasive blood test used for the detection
and/or
monitoring of 14 different types of cancer including: lung,
breast, stomach, liver, colon, rectal, ovarian, esophageal,
cervical, trophoblastic, thyroid, malignant lymphoma, and
pancreatic.
ONKO-SUREtm
can be a valuable diagnostic tool in the worldwide battle
against cancer, the second leading cause of death worldwide.
ONKO-SUREtm
serves the IVD cancer/oncology market which, according to
Bio-Medicine.org, is growing at an 11% compounded annual growth
rate.
The
ONKO-SUREtm
test kit is a tumor-marker, which is a biochemical substance
indicative of neoplasia, potentially specific, sensitive, and
proportional to tumor load, used to screen, diagnose, assess
prognosis, follow response to treatment, and monitor for
recurrence. As
ONKO-SUREtm
test kit is a non-invasive blood test, there are no side effects
of the administration of the test. As with other cancer
diagnostic products, false positive and false negative test
results could pose a small risk to patient health if their
physician is not vigilant in following up on the
ONKO-SUREtm
test kit results with other clinically relevant diagnostic
modalities. While the
ONKO-SUREtm
test kit is helpful in diagnosing whether a patient has cancer,
the attending physician needs to use other testing methods to
determine and confirm the type and kind of cancer involved.
The
ONKO-SUREtm
test kit can be added easily and inexpensively to the
pre-existing line of ELISA-based diagnostics performed routinely
by clinical laboratories throughout the world. Furthermore, the
ONKO-SUREtm
test kit can be used in place of more costly and time
consuming diagnostic tests. In clinical trialsin China, Germany,
Taiwan and Turkey,
ONKO-SUREtm
has been used as a screen for multiple cancers while only
needing a single blood sample. A positive
ONKO-SUREtm
value is then followed with other diagnostic tests to determine
the specific type of cancer.
We developed the next generation version of the
ONKO-SUREtm
test kit, and in 2009, we entered into a collaborative agreement
with the Mayo Clinic to conduct a clinical study to determine
whether the new version of the kit can lead to improved accuracy
in the detection of early-stage cancer.
The Companys
ONKO-SUREtm
cancer test kits are currently sold in the form of a
96 well test plate, which, after standards are applied, 43
individual tests can be run in duplicate. These tests are
typically run in a reference laboratory with test results
determined by using a micro-titer reading analyzer. Results are
sent to the attending physician who then relays those results to
the patient. Typically, a patient can receive results within
3-5 days from the blood draw date.
Because the
ONKO-SUREtm
test kit is a non-invasive blood test, there are no side effects
of the administration of the test. As with other cancer
diagnostic products, false positive and false negative test
results could pose a small risk to patient health if the
physician is not vigilant in following up on the
ONKO-SUREtm
test kit results with other clinically relevant diagnostic
modalities. While the
ONKO-SUREtm
test kit can be helpful in diagnosing whether a patient has
cancer, the attending physician needs to use other testing
methods to determine and confirm the type and kind of cancer
involved.
ONKO-SUREtm
Test Kit Sales and Licensing Strategy
We are seeking to engage additional distributors who will sell
to reference and clinical laboratories in the U.S. and
other countries to make the
ONKO-SUREtm
test kit available to physicians and patients. Our objectives
regarding the development, marketing and distribution of our
ONKO-SUREtm
test kit are to:
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obtain international approvals;
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develop new distribution channels in new markets;
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distribute greater quantities of kits in approved markets;
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fully utilize our GMP manufacturing facilities in the
U.S. to foster worldwide sales;
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automate the
ONKO-SUREtm
test kit; and
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eventually create a rapid test format of
ONKO-SUREtm
test kit to extend sales into rural areas and POL (physician
owned labs).
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We adopted a licensing strategy for the commercialization of
ONKO-SUREtm
test kit. Our licensing strategy is common in the diagnostics
industry as it maximizes market penetration on the installed
base of instruments of one or more partners and facilitates
quick market uptake and higher peak sales due to potential joint
marketing efforts.
During 2009, we entered into the following distribution
agreements:
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Exclusive five-year distribution agreement with Grifols USA,
LLC. This distribution agreement allows Grifols USA, LLC to
market and sell
ONKO-SUREtm
for the monitoring of colorectal cancer to hospitals, clinical
laboratories, clinics and other health care organizations.
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Exclusive two-year distribution agreement with Tarom Applied
Technologies Ltd for the marketing and sales of
ONKO-SUREtm
in Israel.
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Two distinct exclusive five year distribution agreement with
GenWay Biotech, Inc. This distribution agreement allows Genway
Biotech, Inc, to market and see
Onko-Suretm
for uses other than colorectal cancer to CLIA-certified
laboratories in the US and as a lung cancer screen to
laboratories in Canada.
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In addition,
ONKO-SUREtm
testkits are currently being sold to one diagnostic reference
laboratory in the U.S. Foreign distributors have the
potential for transferring the tests onto their respective
diagnostics platform(s), develop test kits that can be shipped
to diagnostics laboratories to perform the test, run any
additional clinical trials and seek additional regulatory
approval for the new combination of the test kits and the
instrument. At this time, through our distributors we have had
only limited sales of these test kits outside the United States.
There may be factors that prevent us from further developing and
marketing the
ONKO-SUREtm
test kit. We cannot guarantee that the
ONKO-SUREtm
test kit will be commercially successful in either the
U.S. or internationally. Clinical trials results are
frequently susceptible to varying interpretations by scientists,
medical personnel, regulatory personnel, statisticians and
others, which may delay, limit or prevent further clinical
development or regulatory approvals of a product candidate.
Also, the length of time that it would take for us to complete
clinical trials and obtain regulatory approval for product
marketing may vary by product and by the intended use of a
product. We cannot predict the length of time it would take to
complete necessary clinical trials and obtain regulatory
approval in any other country.
ONKO-SUREtm
Test Kit Competition
We have only had limited sales of
ONKO-SUREtm
test kit to our distributors outside the United States. We are
dependent on our distributors financial ability to
advertise and market the
ONKO-SUREtm
test kit in those countries where we have distributors. A number
of domestic and international companies are in indirect
competition with us in all of these markets. Most of these
companies are larger, more firmly established, have significant
marketing and development budgets and have greater capital
resources than us or our distributors. Therefore, there can be
no assurance that we will be able to achieve and maintain a
competitive position in the diagnostic test industry.
Many major medical device manufacturers, including Abbott
Diagnostics, Baxter Healthcare Corp., Beckman Diagnostics,
Boehringer Mannheim, Centocor, Diagnostic Products Corporation,
Bio-Rad Laboratories, Roche Diagnostic Systems, Sigma
Diagnostics and others, are manufacturers or marketers of other
diagnostic products. We are not aware of any efforts currently
being devoted to development of products such as
ONKO-SUREtm
test kit; however, there can be no assurance that such efforts
are not being undertaken without our knowledge. We believe that
most of the diagnostic products currently manufactured by other
companies are complementary to
ONKO-SUREtm
test kit. Moreover, such companies could develop products
similar to our products and they may be more successful than we
may be in marketing and manufacturing their products. In
addition, there are a number of new technologies in various
stages of development at the National Institute of Health,
university research centers and at other companies for the
detection of various types of cancers, e.g., identification of
proteomic patterns in blood serum that distinguishes benign from
cancerous conditions, which may compete with our product.
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U.S.
based
ONKO-SUREtm
Test Kit Manufacturing
We manufacture our
ONKO-SUREtm
test kit at our licensed manufacturing facility located at 2492
Walnut Avenue, Suite 100, in Tustin, California.
In December 2003, our facilities in Tustin, California became CE
compliant. Our
ONKO-SUREtm
test kit conforms to the essential requirements of the CE Mark,
which is required to sell our product in the European Union
(EU). The CE Mark is recognized around the world as
an indication of quality practices and is referred to as the
Trade Passport to Europe for non-EU products. As of
January 2004 we became EN ISO 1345 compliant, which is important
for sales internationally.
In July 2008, the USFDA inspected our facilities and found no
deficiencies. We were found to be compliant with USFDA
Regulations. All of our OEM products are Class I (GMP not
required) or Class II (GMP required, as defined by the
USFDA guidelines) devices and our facilities meet the GMP
requirements for each of our OEM products. We are also licensed
to manufacture our proprietary products and to repackage our OEM
products at our Tustin location.
Regulatory
Approval and Clinical Trials of the
ONKO-SUREtm
Test Kit
The
ONKO-SUREtm
test kit is subject to specific USFDA rules applicable to IVD
products. Prior to marketing
ONKO-SUREtm
test kit in the U.S., we were required to make a pre-market
application to prove the safety and efficacy of the products and
to comply with specified labeling requirements for IVD products
for human use. We received a determination letter on
July 3, 2008 from the USFDA approving our application to
market
ONKO-SUREtm
test kit as an immunology and microbiology device to monitor
colorectal cancer under the category Tumor Associated
Antigens Immunological Test System as a Class II IVD
device. USFDA clearance to market was based upon data showing
that the
ONKO-SUREtm
test kit has the ability to monitor the progression of
colorectal cancer post-surgery in patients who are biopsy
confirmed with this disease. This announcement marks the first
clearance to market a colorectal monitoring product that the
USFDA has granted since January 14, 1982 when
Carcinoembryonic Antigen (CEA) was approved. Until now, the CEA
test has been the only accepted method cleared in the
U.S. Thus,
ONKO-SUREtm
test kit offers a new test that can monitor colorectal tumors
post-surgery.
We must abide by the listing rules of the USFDA. We have
established our Quality System Regulation in accordance with
applicable regulations and were most recently inspected in July
2008. Our Quality System Regulation program contains applicable
complaint provisions that we believe meet the USFDAs
requirements for Medical Device Reporting, and we have
experienced no incidents or complaints to date. We also have
implemented procedures for preventive and corrective action and
changed our packing and shipping method once in 2002 to improve
protection of our product.
Although we received USFDA approval to market
ONKO-SUREtm
test kit in the U.S., we have a limited supply of the
horseradish peroxidase (HRP)-conjugated anti-fibrin
and fibrinogen degradation (FDP) antibody component
currently used for the approved
ONKO-SUREtm
test kit. Because of the limited supply of the current antibody,
we have determined it is in our best interest to change to a
HRP-conjugated anti-FDP antibody. We are currently screening six
commercially available conjugated antibodies to substitute into
the current
ONKO-SUREtmtest
kit and one that we have produced and conjugated ourselves. The
anti-FDP antibody that we produced ourselves has performed well
in pilot studies and will likely be used in our next generation
ONKO-SUREtm
test kit. In addition, our next generation
ONKO-SUREtm
test kit will be automated using the Dynex DS2 open
platform ELISA system for ease of commercialization. If the
antibody substitution significantly improves
ONKO-SUREtmtest
kit performance, we will be required to change the reported
sensitivity and specificity of the
ONKO-SUREtm
test kit. Because of these changes and modifications, we will
likely have to submit a new 510(k) premarket notification
application, but can continue to sell the existing kit until our
current antibody supply is exhausted. If the new antibody does
not significantly affect the clinical performance of the test,
we can likely substitute it into the currently approved kit
without filing a new 510k.
In addition to the USFDA regulation and approval process, each
foreign jurisdiction may have separate and different approval
requirements and processes. We previously applied for approval
of the
ONKO-SUREtm
test kit in China, however, in June 2007, the Chinese approval
process fundamentally changed. Under the new guidelines, the
SFDA is unlikely to approve the marketing of the
ONKO-SUREtm
test kit without the following: approval by the USFDA (obtained
July 2008) and sufficient clinical trial data in China. We
engaged Jyton & Emergo Medical
6
Technology, Inc. (Beijing, China), an international regulatory
affairs and clinical research consulting group, to assist with
the
ONKO-SUREtm
test kit clinical trials in China and with filing the
SFDA application for the
ONKO-SUREtm
test kit. Along with Jyton & Emergo, we completed a
Chinese-language
application to support the
ONKO-SUREtm
test kit, and we met with the Director of Medical Device
Evaluation for the SFDA to define our clinical trial
requirements. We need to perform clinical testing of the
ONKO-SUREtm
test kit test for 1,000 patients in China at SFDA
approved hospitals. Clinical trials in China are likely to begin
in the third quarter of 2009 and we estimate that they will be
completed in two years, although we cannot accurately predict
when clinical trials will be completed.
Our distribution agreements require our distributors to obtain
the requisite approval and clearance in each jurisdiction in
which they sell products. In our experience, once a foreign
approval is obtained, it is generally renewed on a periodic
basis, annually or otherwise. In certain territories,
distributors can sell under limited circumstances prior to
approval and in other territories no formal approval is
required. On December 20, 2000, the Medical Devices Agency
of United Kingdom Department of Health issued a letter of no
objection to the exportation of our
ONKO-SUREtm
test kit from the U.S. to the United Kingdom, allowing
ONKO-SUREtm
test kit to be sold in the United Kingdom. In late 2006, Mercy
Bio Technology Co., Ltd., our distributor in Taiwan, received
Department of Health approval to market the
ONKO-SUREtm
test kit in Taiwan. We have also received regulatory approval to
market the
ONKO-SUREtm
test kit in South Korea and import and market the
ONKO-SUREtm
test kit in Australia. In Canada,
ONKO-SUREtm
test kit is approved as a screening device for lung cancer only.
ONKO-SUREtm
test kit also has the CE mark from the European Union for sale
in Europe as a general cancer screen.
Obtaining regulatory approval in the U.S. for our
ONKO-SUREtm
test kit was costly, and it remains costly to maintain. The
USFDA and foreign regulatory agencies have substantial
discretion to terminate clinical trials, require additional
testing, delay or withhold registration and marketing approval
and mandate product withdrawals. In addition, later discovery of
unknown problems with our products or manufacturing processes
could result in restrictions on such products and manufacturing
processes, including potential withdrawal of the products from
the market. If regulatory authorities determine that we have
violated regulations or if they restrict, suspend or revoke our
prior approvals, they could prohibit us from manufacturing or
selling our products until we comply, or indefinitely.
Collaboration
with Mayo Clinic
We entered into a collaborative agreement with the Mayo Clinic
to conduct a clinical study for the validation of our next
generation version of its USFDA-approved
ONKO-SUREtm
test kit. Through the validation study, the Mayo Clinic and our
company will perform clinical diagnostic testing to compare our
USFDA-approved
ONKO-SUREtm
test kit with a newly developed, next generation test. The
primary goal of the study is to determine whether our next
generation
ONKO-SUREtm
test kit serves as a higher-performing test to its existing
predicate test and can lead to improved accuracy in the
detection of early-stage cancers. For USFDA regulatory approval,
we intend to perform an additional study to demonstrate the
safety and effectiveness of the next generation of
ONKO-SUREtm
test kit for monitoring colorectal cancer. The validation study
will run for three months and final results are expected in the
second or third quarter of 2009.
ONKO-SUREtm
Test Kit Research and Development
During the years ended December 31, 2009 and 2008, we spent
$563,690 and $194,693, respectively, on research and development
costs related to the USFDA and SFDA applications for approval of
our
ONKO-SUREtm
test kit.
Reimbursability
of Our IVD Products
We recognize that health care cost reimbursement under private
and government medical insurance programs is critical to gaining
market share in any of the markets where we intend to sell our
IVD products. Thus, we are currently seeking approval for
reimbursement in the U.S., Korea and Taiwan for our
ONKO-SUREtm
test kit. In the future, we plan to also seek reimbursement
approval in other countries for our
ONKO-SUREtm
test kit and any other products we may acquire or develop in the
future.
7
CHINA-BASED
INTEGRATED PHARMACEUTICALS
Through JPI, we formally manufactured and distributed generic
and homeopathic pharmaceutical products and supplements as well
as cosmetic products. JPI acquired the businesses currently
conducted by JJB and YYB in 2005 along with certain assets and
liabilities of a predecessor to JJB (Jiangxi Shangrao KangDa
Biochemical Pharmacy Co. Ltd).
We sold YYB in mid 2009. The decision was based on a variety of
factors, including the expiration of YYBs GMP
certification in March 2009, our estimates of the capital
investment required to obtain recertification of the facility,
our desire to redeploy amounts invested in the YYB facility into
higher growth
and/or
potentially more profitable opportunities, and our desire to
consolidate manufacturing in Jiangxi province, China.
JJB is wholly-foreign owned enterprise (WFOE). WFOEs
are limited liability companies established under Chinese
Company Law that are exclusively owned by foreign investors.
WFOEs are used to, among other things: enable local China based
entities to carry on business in China, rather than operate in a
representative capacity; acquire land use certificates to own
and operate facilities in China; employ persons in China; hold
intellectual property rights; protect intellectual property and
proprietary technology; and issue invoices to their customers in
Yuan Renminbi (RMB) and record revenues in RMB, but
convert the profits into U.S. dollars for distribution to
their parent company outside China. There are also potential
disadvantages of operating as a WFOE, including, but not limited
to, unlimited liability claims arising from the operations in
China and potentially less favorable treatment from governmental
agencies than would be afforded to those entities operating with
a Chinese partner.
Overview
of JPIs Business
Historically, JJB has primarily been a manufacturer and
distributor of large and small volume injectible fluids as well
as other products for external use. YYB, on the other hand, used
to manufacture tablets, capsules and other
over-the-counter
pharmaceutical products, but is no longer manufacturing any of
these products.
During 2008, we conducted a significant marketing campaign for
our Goodnak/Nalefen Skin Care Human Placental Extract
(HPE) products. HPE Solution was our largest selling
product in 2008. We are now preparing to market HPE-based
cosmetics in various formulations under the product name
ELLEUXE. We hired a US-based cosmetics laboratory to
adapt the Chinese cosmetic formulations for the US-market.
Safety and effectiveness testing will be performed by a US-based
laboratory with GMP and Good Laboratory Practice approvals, such
that all required regulatory approvals can be obtained. We
believe these products offer a significant opportunity both in
China and the United States, as well as other markets. We now
anticipate licensing or selling off the Elleuxe brand of skin
care products.
JPIs
Product Lines
JJB currently manufactures ten unique therapeutic and cosmetic
HPE-based anti-aging products in China including:
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HPE Solutions
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Domperidone Tablets
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Compound Benzoic Acid and Camphor Solution
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Diavitamin, Calcium and Lysine Tablets
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Levofloxacin Lactate Injection
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Guyanling Tablets
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GS Solution
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GNS Solution
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NaCL Solution
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8
JPIs
China Business Strategy
General
JPI is attempting to establish distribution agreements with
large pharmaceutical distributors in the larger cities and
provinces in China. JPI is also developing new products for
distribution in China. JPI expects that sale of Goodnak (after
GMP recertification is received for JJBs facility) and
other anti-aging and skin care products through existing
distribution channels will significantly boost sales and profit
margins in 2010. The market for
over-the-counter
pharmaceuticals in China is estimated to be growing at a rate of
30% each year and with Chinas large population base, China
is believed to be one of the fastest growing markets in the
world for pharmaceuticals and health care products.
JPI sells in approximately 36 markets, utilizing approximately
50 third-party distributors. In those 36 markets, each had
approximately 1.5 distributors per market on average. In those
markets, distributors have preferred
and/or
exclusive distribution relationships for select products that
JPI provides.
Currently, distributors are distributed geographically as
follows:
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Geographic
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Location China
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Southeastern
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38
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%
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Northeastern
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31
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%
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Central
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14
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%
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Southwestern
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13
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%
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North
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4
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%
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Marketing
and Sales of JJB and YYB Products
JJB and YYB together had established a marketing program
consisting of approximately forty sales managers and a network
of distributors who market JJBs and YYBs products.
Both JJB and YYB sell directly to hospitals and retail stores
and indirectly to other customers through distributors. One
primary distributor has 29 retail outlets throughout China. Both
JJB and YYB are developing educational programs for hospitals,
doctors, clinics and distributors with respect to JJB and
YYBs product lines. These educational programs are
intended to improve sales and promotion of JJB and YYBs
products.
Most of JPIs revenues were derived from JJBs
products. For the years ended December 31, 2009 and 2008,
sales to one customer comprised approximately 20% of JJBs
net revenues, respectively.
Manufacturing
of JPI Products
JPI utilizes the services of more than 200 small suppliers. No
raw materials are imported for their pharmaceutical
manufacturing operations and no finished products are currently
exported out of China. All raw materials are stored at the
facilities and JPI has not experienced any difficulty in
obtaining raw materials for their manufacturing operations. The
average cost to manufacture JPIs products in 2009 was
approximately 48%, but the gross margins vary slightly from
product to product.
JPIs
Competition
JPI competes with different companies in different therapeutic
categories. For example, with regard to large and small volume
injection fluids, JJB primarily competes with Jiangxi Zhuhu
Pharmaceutical Company and Jiangxi Pharmaceutical Company, which
are both located in the Jiangxi Province. They manufacture large
and small volume injection fluids, tablets and tinctures and
related product include generics,
over-the-counter
and supplement pharmacy products. There are at least
70 companies in China approved by the SFDA to manufacture
large and small volume injection fluids. JJB competes with
numerous companies with respect to its tablet products, as these
are common over the counter pharmaceuticals. Most of these
companies are larger, more established and have significant
marketing and development budgets and have greater capital
resources than JJB. Therefore, there can be no assurance that
JJB will be able to achieve and maintain a competitive position
in this market.
9
JPIs
Research and Development
In the past, JJB and YYB entered into joint research and
development agreements with outside research institutes, but all
of the prior joint research agreements have expired. Also, JJB
and YYB generally required the licensor of new products provide
all of the research and development for new products that they
licensed.
JJB has historically introduced new products by acquiring
generic drug production technical information to be used in
JJBs SFDA generic drug applications to manufacture the new
products. This information is acquired from third party
specialty pharmaceutical product development companies, such as
Jiangxi YiBo Medicine Technology Development, Ltd.
(YiBo). In the past, JJB has purchased technical
specifications from YiBo for approximately 10 new products
through installment purchase transfer contracts (New
Medicine Transfer Contracts or MTCs). In
exchange for specified payments, these MTCs typically provide
for one or more of the following: (a) transfer of any
technical information related to the production of a new
product, (b) product formulations, (c) a products
manufacturing process, and (d) clinical data collection. In
the event that JJB approval to manufacture the product, YiBo
will provide an alternate product formulation such that JJB can
again apply for manufacturing rights with the SFDA.
JJB records payments made on MTCs as Deposits until
a permit is issued by the SFDA to manufacture the new product.
Once the permit to manufacture is issued, the amounts paid are
then reclassified as intangible assets with defined lives
subject to amortization. For intangible assets with definite
lives, tests for impairment are performed if conditions exist
that indicate the carrying value may not be recoverable or if no
production of the product has taken place after a reasonable
period of time.
JJB believes that it had no significant impairments of the
amounts included in intangible assets for new products,
individually or in the aggregate. However, it is possible that
we may experience impairments of some of its intangible assets
in the future, which would require JJB to recognize impairment
charges and ultimately impair our investment in JPI.
JPIs
Product Development
JPI currently has applied with the SFDA for manufacturing rights
to produce a number of generic drug products. JPI has
necessarily put several of the applications on hold while it
attempts to gain GMP re-certification of JJBs small
injectible manufacturing line. We continue to search for new
products to ensure a pipeline of products for future growth.
Many of the following products for which JPI has made
applications are expected to gain SFDA approval within the next
12-36 months.
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Pidotimod Tablets (an anti-aging product)
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Epinastine Tablets (allergy product)
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Paclitaxel (a cancer medication)
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Creatine Phosphate Sodium Injections (a heart medicine)
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Drotaverrine Hydrochloric (a chemotherapy therapeutic product)
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Diammonium Glycyrrhizinate (a chemotherapy therapeutic product)
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Additionally, YiBo is developing an HPE Capsule (anti-aging
product) on JPIs behalf. JJB has not yet applied to the
SFDA or other regulatory agencies for required approvals or
licenses to manufacture this product.
Chinese
Pharmaceutical Regulations
Pursuant to Article 9 of the Law of China on Pharmaceutical
Administration (China Law), pharmaceutical
manufacturing enterprises must organize production according to
the statutory administrative criteria on quality of
pharmaceuticals formulated by the supervisory and administrative
departments in charge of pharmaceuticals of the State Council.
The supervisory and administrative departments issue GMP
certificates to enterprises that meet the requirements of the
China Law. JJBs facility has been issued GMP certificates
necessary to conduct current operations except for the
production line that manufactures small volume parenteral
solution injections, for which the GMP certificate expired in
February 2008. JJB has ceased operations of its small volume
parenteral solution
10
injection production line while modifications are being made to
bring its operations in compliance. The cost of these
modifications was $1.5 million dollars and resumption of
operations is currently estimated by the second quarter of 2009.
In addition, under Article 31 of China Law, each entity
manufacturing pharmaceuticals must receive the approval of the
supervisory and administrative departments in charge of
pharmaceuticals of the State Council and receive a serial
approval number to manufacture a specific pharmaceutical. JJB
has product licenses to manufacture all of the products they
currently manufacture. JJB is also subject to the Food
Sanitation Law providing standards in sanitation for the
consumption or injection of foods.
JJB operates in two locations, which together total
approximately 200,000 square feet of manufacturing
facilities in Shangrao, Jiangxi Province, China.
The China State Food and Drug Administration (SFDA)
requires that all facilities engaged in the manufacture of
pharmaceutical products obtain Good Manufacturing Practices
(GMP) certification. In February 2008, JJBs
GMP certification expired for the small volume parenteral
solutions injection plant lines that were engaged in
manufacturing Goodnak and all other small volume parenteral
solutions. JJB ceased small volume parenteral solutions
operations at this facility while undertaking $1.5 million
in modifications necessary to bring the facility and its
operations into compliance. The renovations are almost complete
and JJB expects to resume operation of the parenteral small
injectible lines in the second quarter of 2009.
JJB was notified by the Chinese Military Department of its
intent to annex one of JJBs plants that is located near a
military installation. The proposed area to be annexed contains
the facilities that are used to manufacture large and small
volume parenteral solutions, including the production lines for
which the Company is attempting to obtain GMP certification.
Discussions regarding annexation are proceeding and we expect
that JJB will be compensated fairly for the facility upon
annexation. JJB intends to find a new single center site in
Jiangxi Province, China to relocate its operations and combine
them with operations related to any product lines retained from
YYBs manufacturing, sales and distribution operations
after the sale of YYB. We may have to spend significant time and
resources finding, building and equipping the new location and
restarting those operations. In addition, such new facilities
will need to obtain GMP certification for all manufacturing
operations.
CANCER
THERAPEUTICS
Combination
Immunogene Therapy
In August 2001, we acquired a combination immunogene therapy
technology (CIT) that may be effective in building a
cancer patients immune system and could eventually lead to
a vaccine to protect patients known to be at risk because of a
family history for certain types of cancer. CIT is intended to
build the bodys immune system and destroy cancer cells.
This technology involves injecting the cancer patients
tumor with a vector carrying both a granulocyte-macrophage
colony stimulating factor and a t-cell co-stimulating factor,
thereby activating an immune response against the cancer cells.
We are actively seeking a pharmaceutical or biotechnology
strategic partners with whom to form a joint venture or
otherwise license our CIT technology.
Preliminary tests in Canada conducted on mice injected with
human skin and brain cancers indicated that the CIT technology
can be effective. Additionally, Phase 1 clinical trials have
been completed in Canada. We funded a study conducted by
Dr. Lung-Ji Chang at the University of Florida to target
breast cancer with a goal of ultimately developing a vaccine
using the CIT technology. We believe the technology may have
potential for fighting several types of cancer by enhancing
ones immune system, thereby increasing the number of cells
that naturally destroy cancer. We also acquired from
Dr. Chang other technology relating to a humanized mouse
model for the evaluation of anti-human tumor immunity and the
identification of immuno-modulating genes. We are not currently
conducting any trials using our CIT technology. No assurances
can be given that any of these activities will lead to the
development of any commercial products or vaccines or that USFDA
approval will be obtained for any use of CIT technology.
On February 22, 2002, AcuVector Group, Inc.
(AcuVector) filed a Statement of Claim in the Court
of Queens Bench of Alberta, Judicial District of Edmonton,
Canada relating to our CIT technology acquired from
11
Dr. Chang in August 2001. AcuVector, a former licensee of
Dr. Chang, claims that the terminated license agreement is
still in effect. AcuVector is seeking substantial damages and
injunctive relief against Dr. Chang and CDN$20,000,000 in
damages against us for alleged interference with the
relationship between Dr. Chang and AcuVector. The claim for
injunctive relief seeks to establish that the AcuVector license
agreement with Dr. Chang is still in effect. We performed
sufficient due diligence at the time we acquired the technology
to permit us to conclude that AcuVector had no interest in the
technology when we acquired it. Although the case is still in
the early stages of discovery, we believe that AcuVectors
claims are without merit and that we will receive a favorable
judgment.
We are also defending a companion case filed in the same court
by the Governors of the University of Alberta against us and
Dr. Chang. The University of Alberta claims, among other
things, that Dr. Chang failed to remit the payment of the
Universitys portion of the monies we paid to
Dr. Chang for the CIT technology we purchased from
Dr. Chang in 2001. In addition to other claims against
Dr. Chang relating to other technologies developed by him
while at the University, the University also claims that we
conspired with Dr. Chang and interfered with the
Universitys contractual relations under certain agreements
with Dr. Chang, thereby damaging the University in an
amount which is unknown to the University at this time. The
University has not claimed that we are not the owner of the CIT
technology, just that the University has an equitable interest
therein or the revenues there from.
Accordingly, if either AcuVector or the University is successful
in their claims, we may be liable for substantial damages, our
rights to the technology will be adversely affected, and our
future prospects for exploiting or licensing the CIT technology
will be significantly impaired.
In February 2009, we submitted a Response to Final Office Action
in support of USPTO Application number 10/785,577 entitled
Combination Immunogene Therapy that was filed
February 23, 2004. We remain optimistic about the
likelihood of patent approval.
On April 1, 2010 we entered into an exclusive
5-year
collaboration agreement with Jaiva Technologies, Inc.
(JTI). Under the terms of the agreement, JTI will
collaborate with clinical laboratories, hospitals and physicians
in India to conduct clinical trials for RPCs CIT
technology. Additionally, Jaiva will support RPC in securing
Indian government approval for the use of the CIT technology as
a cancer therapy and vaccine throughout the country. JTI is a
US-based multinational biotechnology company focused on the
research and development, distribution, marketing and sales of
promising third-party healthcare technology products, including
RPCs CIT cancer therapy and vaccine. JTI has agreed to
underwrite any and all costs associated with its undertakings in
India to commercialize our CIT technology. These cost could well
exceed US$1.4 million. Both parties understand that JTI may
raise additional capital from third parties to underwrite a
portion or all of these costs. Although JTI anticipates being
able to underwrite any and all costs directly or by raising
capital from various third parties, no guarantee to this
provision is provided by JTI. Both parties agree that any net
profits derived by JTI or any of its partners or affiliates, as
a result of any commercialization of our CIT technology, will be
equally split between the parties.
OUR
ONKO-SUREtm
AND CIT PATENTS
Success in each of our three business divisions depends, in
part, on our ability to obtain U.S. and foreign patent
protection for our products, preserve our trade secrets, and
operate without infringing upon the proprietary rights of third
parties.
The U.S. Patent and Trademark Office has issued to us two
patents which describe methods for measuring ring-shaped
particles in extra-cellular fluid as a means for detecting
cancer. Our patent for a method of detecting the tumors using
ring shaped particles as a tumor marker was issued on
October 17, 1995 and expires on October 17, 2012. Our
patent for a method for detecting the presence of ring shaped
particles as tumor markers was issued on June 3, 1997 and
expires on June 3, 2014. We have three additional patent
applications pending in the U.S. with respect to our
methodology for the
ONKO-SUREtm
tumor-markers as reliable indicators of the presence of cancer.
In addition, we have one patent based on our methodology for the
ONKO-SUREtm
tumor marker pending in Europe.
In August 2001, we acquired intellectual property rights and an
assignment of a U.S. patent application covering CIT
technology for $2,000,000. The technology was purchased from
Dr. Lung-Ji Chang, who developed it while at the University
of Alberta, Edmonton, Canada. A U.S. patent was issued on
May 4, 2004, expires on April 9,
12
2017, and claims a vector composition comprising a gene encoding
the B7-2 protein in combination with an additional modulating
protein, GMCSF. In 2004, we also filed a continuation patent
application on the CIT methodology. In February 2009, we
submitted a Response to Final Office Action in support of USPTO
application number 10/785,577 entitled Combination
Immunogene Therapy that was filed February 23, 2004.
We abandoned this continuation patent application in early 2009.
On November 21, 2001, Singapore granted our patent
containing claims to the CIT technology. Singapore is a
registration only jurisdiction, which means that
patent applications are not substantively reviewed prior to
grant. However, the patent is enforceable in Singapore, but the
validity of such patents is determined by their courts. In
November 2006, we were issued a patent in Australia on our CIT
technology claims covering the gene therapy method for treating
cancer using an expression vector comprising a gene encoding the
B7-2 protein in combination with an additional modulating
protein.
In early 2003, Australia granted us a patent for our humanized
mouse model technology acquired from Dr. Chang. This
technology is a research tool suitable for the evaluation of
anti-human tumor immunity and the identification of
immuno-modulating genes. In March 2007, Israel granted us a
patent for our humanized mouse model. Patents that are based on
the humanized mouse model are pending in the following
countries: Canada, Europe, Japan, and Singapore.
On June 19, 2001, a U.S. patent was issued on a
technology for evaluation of vaccines in animals which was also
acquired from Dr. Chang. This patent expires on
December 25, 2017.
There can be no assurance however, that any additional patents
will be issued to us, or that, if issued, the breadth or degree
of protection of these patents will be adequate to protect our
interests. In addition, there can be no assurance that others
will not independently develop substantially equivalent
proprietary information or obtain access to our know-how.
Further, there can be no assurance that others will not be
issued patents which may prevent the sale of our test kits or
require licensing and the payment of significant fees or
royalties by us in order for us to be able to carry on our
business. Finally, there can be no guarantee that any patents
issued to or licensed by us will not be infringed by the
products of others. Defense and prosecution of patent claims can
be expensive and time consuming, even in those instances in
which the outcome is favorable to us. If the outcome is adverse,
it could subject us to significant liabilities to third parties,
require us to obtain licenses from third parties or require us
to cease research and development activities or sales.
EMPLOYEES
As of April 10, 2009, we had 7 full-time employees in
the U.S. We supplement our permanent staff with temporary
personnel. Our employees are neither represented by a union nor
subject to a collective bargaining agreement, and we consider
our relations with our employees to be favorable. We have
entered into certain agreements with our employees regarding
their services. We utilize the services of consultants for
safety testing, regulatory and legal compliance, and other
services.
EXECUTIVE
OFFICES
Our executive offices are located at 2492 Walnut Avenue,
Suite 100, Tustin, California 92780, telephone number
(714) 505-4460.
In September 2001, we registered our common stock under the
Securities Exchange Act of 1934 and listed on the NYSE Amex
exchange under the symbol RPC. You may review any of our public
reports or information on file with the SEC at the SECs
Public Reference Room at 100 F Street N.E.,
Room 1580, Washington, D.C., 20549. You may obtain
information on the operation of the Public Reference Room by
calling the SEC at
1-800-SEC-0330
or review our reports at
http://www.sec.gov.
Information located on, or accessible through, our website is
not incorporated into this unless this filing specifically
indicates otherwise.
13
Our business involves significant risks which are described
below.
Limited
product development activities; our product development efforts
may not result in commercial products.
We intend to continue to pursue SFDA approval of the
ONKO-SUREtm
test kit and licensing of our CIT technology. Due to
limited cash resources, we are limited in the number of
additional products we can develop at this time. Successful
cancer detection and treatment product development is highly
uncertain, and very few research and development projects
produce a commercial product. Product candidates like the
ONKO-SUREtm
test kit or the CIT technology that appear promising in the
early phases of development, such as in early animal or human
clinical trials, may fail to reach the market for a number of
reasons, such as:
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the product candidate did not demonstrate acceptable clinical
trial results even though it demonstrated positive preclinical
trial results;
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the product candidate was not effective in treating a specified
condition or illness;
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the product candidate had harmful side effects on humans;
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the necessary regulatory bodies, such as the SFDA, did not
approve our product candidate for an intended use;
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the product candidate was not economical for us to manufacture
and commercialize; and
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the product candidate is not cost effective in light of existing
therapeutics.
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Of course, there may be other factors that prevent us from
marketing a product including, but not limited to, our limited
cash resources. We cannot guarantee we will be able to produce
commercially successful products. Further, clinical trial
results are frequently susceptible to varying interpretations by
scientists, medical personnel, regulatory personnel,
statisticians and others, which may delay, limit or prevent
further clinical development or regulatory approvals of a
product candidate. Also, the length of time that it takes for us
to complete clinical trials and obtain regulatory approval in
multiple jurisdictions for a product varies by jurisdiction and
by product. We cannot predict the length of time to complete
necessary clinical trials and obtain regulatory approval.
Our
operations in China involve significant risk.
JPIs operations in China are conducted as WFOEs in China.
Risks associated with operating as a WFOE include unlimited
liability for claims arising from operations in China and
potentially less favorable treatment from governmental agencies
in China than if operated through a joint venture with a Chinese
partner.
JPIs Chinese operations are subject to the Pharmaceutical
Administrative Law, which governs the licensing, manufacture,
marketing and distribution of pharmaceutical products in China
and sets penalty provisions for violations of provisions of the
Pharmaceutical Administrative Law. Compliance with changes in
law may require JPI to incur additional expenditures or could
impose additional regulation on the prices charged for our
pharmaceutical products, which could have a material impact on
JPIs consolidated financial position, results of
operations and cash flows and ultimately impair our investment
in JPI.
As in the case of JJB, the Chinese government has the right to
annex or take facilities it deems necessary. Currently, a
portion of JJBs facility that produces large and small
volume parenteral solutions has been identified for annexation
by the Chinese Military Department. The outcome of this event
cannot be predicted at this time, but
14
if the Chinese government takes this facility, although JPI
expects that JJB will be compensated fairly for the facility,
JJB will have to spend significant time and resources finding
another location and restarting those operations in another
area. JPI intends to consolidate JJB and any operations related
to product lines retained after the sale of YYB in a single
facility in a new location. Such new location will need to
obtain GMP certification. Such annexation, or the threat of such
annexation, may negatively impact JPIs results of
operation and financial condition and ultimately impair our
investment in JPI.
The value of the RMB fluctuates and is subject to changes in
Chinas political and economic conditions. Historically,
the Chinese government has benchmarked the RMB exchange ratio
against the U.S. dollar, thereby mitigating the associated
foreign currency exchange rate fluctuation risk; however, no
assurances can be given that the risks related to currency
deviations of the RMB will not increase in the future.
Additionally, the RMB is not freely convertible into foreign
currency and all foreign exchange transactions must take place
through authorized institutions.
We may
not be able to continue to operate our business if we are unable
to attract additional operating capital.
The current level of our revenues is not sufficient to finance
all of our operations on a long-term basis. In the past, we
managed our cash generated from operations in China and
transferred funds previously advanced to JPI to meet our
U.S. operating cash needs. Due to the deconsolidation, now
more than ever we continue to attempt to raise additional debt
or equity financing as our operations do not produce sufficient
cash to offset the cash drain of growth in pharmaceutical sales
and our general operating and administrative expenses.
Accordingly, our business and operations are substantially
dependent on our ability to raise additional capital to:
(i) supply working capital for the expansion of sales and
the costs of marketing of our ONKO
SUREtm
cancer test; and (ii) fund ongoing selling, general and
administrative expenses of our business. If we do not receive
additional financing, the Company will have to restrict or
discontinue certain operations in the U.S. No assurances
can be given that we will be able to close a financing on
favorable terms, or at all.
At April 14, 2010, we had cash on hand in the U.S. of
approximately $6.4 million. Our US operations require
approximately $300,000 per month to fund the costs associated
with our financing activities; SEC and NYSE reporting; legal and
accounting expenses of being a public company; other general
administrative expenses; research and development, regulatory
compliance, and distribution activities related to
ONKO-SUREtm
test kit; the operation of a USFDA approved pharmaceutical
manufacturing facility; the development of international
distribution of the Companys planned HPE-based cosmetics
product line; and compensation of executive management in the US.
Our
independent registered public accounting firm has included a
going concern paragraph in their report on our financial
statements.
While our independent registered public accounting firm
expressed an unqualified opinion on our consolidated financial
statements, our independent registered public accounting firm
did include an explanatory paragraph indicating that there is
substantial doubt about our ability to continue as a going
concern due to our significant operating loss in 2009, our
negative cash flows from operations through December 31,
2009 and our accumulated deficit at December 31, 2009. Our
ability to continue as an operating entity currently depends, in
large measure, upon our ability to generate additional capital
resources. In light of this situation, it is not likely that we
will be able to raise equity. While we seek ways to continue to
operate by securing additional financing resources or alliances
or other partnership agreements, we do not at this time have any
commitments or agreements that provide for additional capital
resources. Our financial condition and the going concern
emphasis paragraph may also make it more difficult for us to
maintain existing customer relationships and to initiate and
secure new customer relationships.
Our
current products cannot be sold in certain countries if we do
not obtain and maintain regulatory approval.
We manufacture, distribute and market our products for their
approved indications. These activities are subject to extensive
regulation by numerous state and federal governmental
authorities in the U.S., such as the USFDA and
15
the Centers for Medicare and Medicaid Services (formerly Health
Care Financing Administration) and the SFDA in China as well as
by certain foreign countries, including some in the European
Union. Currently, we (or our distributors) are required in the
U.S. and in foreign countries to obtain approval from those
countries regulatory authorities before we can market and
sell our products in those countries. Obtaining regulatory
approval is costly and may take many years, and after it is
obtained, it remains costly to maintain. The USFDA and foreign
regulatory agencies have substantial discretion to terminate any
clinical trials, require additional testing, delay or withhold
registration and marketing approval and mandate product
withdrawals. In addition, later discovery of unknown problems
with our products or manufacturing processes could result in
restrictions on such products and manufacturing processes,
including potential withdrawal of the products from the market.
If regulatory authorities determine that we have violated
regulations or if they restrict, suspend or revoke our prior
approvals, they could prohibit us from manufacturing or selling
our products until we comply, or indefinitely.
Our
future prospects will be negatively impacted if we are
unsuccessful in pending litigation over the CIT
technology.
As noted above, we are engaged in litigation with AcuVector and
with the Governors of the University of Alberta over our CIT
technology. We believe they both actions are without merit. We
believe that we will be able to settle this case during the
second quarter of 2010. Yet, if either AcuVector or the
University is successful in their claims, we may be liable for
substantial damages, our rights to the technology will be
adversely affected, and our future prospects for exploiting or
licensing the CIT technology will be significantly impaired.
The
value of intangible assets may not be equal to their carrying
values.
One of our intangible assets includes the CIT technology, which
we acquired from Dr. Chang in August 2001. Whenever events
or changes in circumstances indicate that the carrying amount
may not be recoverable, we are required to evaluate the carrying
value of such intangibles, including the related amortization
periods. Whenever events or changes in circumstances indicate
that the carrying value of an intangible asset may not be
recoverable, we determine whether there has been impairment by
comparing the anticipated undiscounted cash flows from the
operation and eventual disposition of the product line with its
carrying value. If the undiscounted cash flows are less than the
carrying value, the amount of the impairment, if any, will be
determined by comparing the carrying value of each intangible
asset with its fair value. Fair value is generally based on
either a discounted cash flows analysis or market analysis.
Future operating income is based on various assumptions,
including regulatory approvals, patents being granted, and the
type and nature of competing products.
Patent approval for eight original claims related to the CIT
technology was obtained in May 2004 and a continuation patent
application was filed in 2004 for a number of additional claims.
No regulatory approval has been requested for our CIT technology
and we may not have the funds to conduct the clinical trials
which would be required to obtain regulatory approval for our
CIT technology. Accordingly, we entered into a five year
collaboration agreement to create one or more clinical trials.
That would lead to gaining governmental approval in the country
of India. If our CIT technology is unable to pass the clinical
trials required to obtain regulatory approval, or if regulatory
approvals or patents are not obtained or are substantially
delayed, or other competing technologies are developed and
obtain general market acceptance, or market conditions otherwise
change, our CIT technology and other intangible technology may
have a substantially reduced value, which could be material. As
intangible assets represent a substantial portion of assets in
our consolidated balance sheet, any substantial deterioration of
value would significantly impact our reported consolidated
financial position and our reported consolidated operating
results.
If our
intellectual property positions are challenged, invalidated or
circumvented, or if we fail to prevail in future intellectual
property litigation, our business could be adversely
affected.
The patent positions of pharmaceutical and biotechnology
companies can be highly uncertain and often involve complex
legal, scientific and factual questions. To date, there has
emerged no consistent policy regarding breadth of claims allowed
in such companies patents. Third parties may challenge,
invalidate or circumvent our patents and patent applications
relating to our products, product candidates and technologies.
In addition, our patent positions might not protect us against
competitors with similar products or technologies because
competing products or technologies may not infringe our patents.
16
We
face substantial competition, and others may discover, develop,
acquire or commercialize products before or more successfully
than we do.
We operate in a highly competitive environment. Our products
compete with other products or treatments for diseases for which
our products may be indicated. Additionally, some of our
competitors market products or are actively engaged in research
and development in areas where we are developing product
candidates. Large pharmaceutical corporations have greater
clinical, research, regulatory and marketing resources than we
do. In addition, some of our competitors may have technical or
competitive advantages over us for the development of
technologies and processes. These resources may make it
difficult for us to compete with them to successfully discover,
develop and market new products.
We
have limited sales of the
ONKO-SUREtm
test kit and are reliant on our distributors for sales of
our products.
Prior to the acquisition of JPI, virtually all of our operating
revenues came from sales to two distributors in of the
ONKO-SUREtm
test kits in foreign countries and from sales to a few domestic
customers of certain OEM products. For the year ended
December 31, 2009, virtually all of our revenues in the
U.S. were derived from sales of
ONKO-SUREtm
test kits. Historically, we have not received any substantial
orders from any of our customers or distributors of
ONKO-SUREtm
test kits. Moreover, none of our distributors or customers is
contractually required to buy any specific number of
ONKO-SUREtm
test kits from us. Accordingly, historical sales, any projection
of future orders or sales of
ONKO-SUREtm
test kits is unreliable. In addition, the amount of
ONKO-SUREtm
test kits purchased by our distributors or customers can be
adversely affected by a number of factors, including their
budget cycles and the amount of funds available to them for
product promotion and marketing.
We
have a significant amount of relatively short term indebtedness
that is in default and we may be unable to satisfy our
obligations to pay interest and principal thereon when
due.
As of April 14, 2010, we have the following approximate
amounts of outstanding short term indebtedness:
(i) JJB has $2.7 million in a secured loan with
Chinese Industrial Bank of Commerce bearing interest at
5.3%-9.5% per annum which is due on or before December 31,
2009, which indebtedness is secured by a mortgage on one of the
JJB factories in Shangro, China. Radient Pharma has no direct
liability related to this debt;
(ii) $83,000 unsecured bridge loan bearing interest at 12%
per annum due October 9, 2009 and obligations under a
consulting agreement aggregating $144,000 due to Cantone
Research, Inc. and Cantone Asset Management, LLC
(iii) Approximately $2.56 million in unsecured
convertible notes bearing interest at 10% per annum due
September 15, 2010;
(iv) Approximately $3.6 million senior unsecured
promissory notes bearing interest at 18% interest, payable
quarterly in cash, portions of which principal are due in
December 2010 and the balance of the principal is due at varying
dates in early 2011;
(v) Approximately $10.4 million represented by a
series of 12% Convertible Notes which are due in March and
April through 2012;
We are attempting to obtain stockholder approval to restructure
and convert a significant portion of the indebtedness referred
to in (ii), (iii) and (iv) above; however, there can
be no assurance that such indebtedness will be restructured,
converted into equity or that the requisite approvals therefor
can be obtained. Absent approval of our stockholders and the
NYSE Amex to restructure these obligations or the receipt of a
new financing or series of financings, our current operations do
not generate sufficient cash to pay the interest and principal
on these obligations when they become due. Accordingly, there
can be no assurance that we will be able to pay these or other
obligations which we may incur in the future.
17
We are
subject to risks associated with our foreign
distributors.
Our business strategy includes the continued dependence on
foreign distributors for our
ONKO-SUREtm
test kits. To date, we have not been successful in generating a
significant increase in sales for
ONKO-SUREtm
test kits through distribution channels in existing markets or
in developing distribution channels in new markets. We are also
subject to the risks associated with our distributors
operations, including: (i) fluctuations in currency
exchange rates; (ii) compliance with local laws and other
regulatory requirements; (iii) restrictions on the
repatriation of funds; (iv) inflationary conditions;
(v) political and economic instability; (vi) war or
other hostilities; (vii) overlap of tax structures; and
(viii) expropriation or nationalization of assets. The
inability to manage these and other risks effectively could
adversely affect our business.
We do
not intend to pay dividends on our common stock in the
foreseeable future.
We currently intend to retain any earnings to support our growth
strategy and do not anticipate paying dividends in the
foreseeable future.
If we
fail to comply with the rules under the Sarbanes-Oxley Act
related to accounting controls and procedures or if the material
weaknesses or other deficiencies in our internal accounting
procedures are not remediated, our stock price could decline
significantly.
Section 404 of the Sarbanes-Oxley Act required annual
management assessments of the effectiveness of our internal
controls over financial reporting commencing December 31,
2007.
Our management has concluded that the consolidated financial
statements included in our Annual Report on
Form 10-K
as of December 31, 2009 and 2008 and for the two years
ended December 31, 2009, fairly present in all material
respects our consolidated financial condition, results of
operations and cash flows in conformity with accounting
principles generally accepted in the U.S.
Our management has evaluated the effectiveness of our internal
control over financial reporting as of December 31, 2009
and 2008 based on the control criteria established in a report
entitled Internal Control Integrated Framework,
issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this evaluation, our management
has concluded that our internal control over financial reporting
was not effective as of December 31, 2009 and 2008. During
its evaluation, as of December 31, 2009 our management
identified material weaknesses in our internal control over
financial reporting and other deficiencies as described in
Item 9A. As a result, our investors could lose confidence
in us, which could result in a decline in our stock price.
18
We are taking steps to remediate our material weaknesses, as
described in Item 9A. If we fail to achieve and maintain
the adequacy of our internal controls, we may not be able to
ensure that we can conclude in the future that we have effective
internal controls over financial reporting in accordance with
Section 404 of the Sarbanes-Oxley Act. Moreover, effective
internal controls, particularly those related to revenue
recognition, are necessary for us to produce reliable financial
reports and are important to helping prevent financial fraud. If
we cannot provide reliable financial reports or prevent fraud,
our business and operating results could be harmed, investors
could lose confidence in our reported financial information, and
the trading price of our stock could decline significantly. In
addition, we cannot be certain that additional material
weaknesses or other significant deficiencies in our internal
controls will not be discovered in the future.
Our
stock price is volatile, which could adversely affect your
investment.
Our stock price, like that of other international bio-pharma
and/or
cancer diagnostic and treatment companies, is highly volatile.
Our stock price may be affected by such factors as:
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clinical trial results;
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product development announcements by us or our competitors;
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regulatory matters;
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announcements in the scientific and research community;
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intellectual property and legal matters;
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broader industry and market trends unrelated to our performance;
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economic markets in Asia; and
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competition in local Chinese markets where JPI sells its
product.
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In addition, if our revenues or operating results in any period
fail to meet the investment communitys expectations, there
could be an immediate adverse impact on our stock price.
Our
stock price and financing may be adversely affected by
outstanding warrants and convertible securities.
We have a significant number of warrants outstanding and a large
amount of convertible notes which over hang the
market for the Companys common stock. As of April 14,
2010, we had warrants outstanding that are currently exercisable
for up to an aggregate of approximately 17,600,000 shares
at a weighted average of $0.66 per share; approximately
43,985,700 shares of common stock potentially issuable on
conversion of our 10% convertible notes at $1.20 per share and
our various issues of 12% convertible notes exercisable and
varying fixed prices and formula prices. The existence of,
and/or
exercise of all or a portion of these securities, create a
negative and potentially depressive effect on our stock price
because investors recognize that they over hang the
market at this time.
We
have limited product liability insurance.
We currently produce products for clinical studies and for
investigational purposes. We are producing our products in
commercial sale quantities, which will increase as we receive
various regulatory approvals in the future. There can be no
assurance, however, that users will not claim that effects other
than those intended may result from our products, including, but
not limited to claims alleged to be related to incorrect
diagnoses leading to improper or lack of treatment in reliance
on test results. In the event that liability claims arise out of
allegations of defects in the design or manufacture of our
products, one or more claims for damages may require the
expenditure of funds in defense of such claims or one or more
substantial awards of damages against us, and may have a
material adverse effect on us by reason of our inability to
defend against or pay such claims. We carry product liability
insurance for any such claims, but only in an amount equal to
$2,000,000 per occurrence, and $2,000,000 aggregate liability,
which may be insufficient to cover all claims that may be made
against us.
19
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Item 1B.
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Unresolved
Staff Comments
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Although we are a smaller reporting company, we are voluntarily
disclosing that we received SEC comments regarding the
preliminary proxy statement we filed on February 1, 2010.
Although we are compiling our responses thereto, we cannot file
and clear the definitive proxy statement until we file this Form
10-K and the SEC confirms that they will not submit any comments
to us regarding this Form 10-K; we anticipate filing our
response as soon as possible thereafter.
Our office in the U.S. consists of research laboratory and
manufacturing facilities which occupy 4,395 square feet and
are located at 2492 Walnut Avenue, Suite 100, Tustin,
California. We are renting these facilities at a monthly rate of
$6,900 per month, including property taxes, insurance and
maintenance through December 1, 2010. Relations with the
landlord are good and we do not expect to have to relocate our
executive offices.
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Item 3.
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Legal
Proceedings
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On February 22, 2002, AcuVector Group, Inc.
(AcuVector) filed a Statement of Claim in the Court
of Queens Bench of Alberta, Judicial District of Edmonton
relating to the Companys CIT technology acquired from
Dr. Chang in August 2001. The claim alleges damages of $CDN
20 million and seeks injunctive relief against
Dr. Chang for, among other things, breach of contract and
breach of fiduciary duty, and against the Company for
interference with the alleged relationship between
Dr. Chang and AcuVector. The claim for injunctive relief
seeks to establish that the AcuVector license agreement with
Dr. Chang is still in effect. The Company has performed
extensive due diligence to determine that AcuVector had no
interest in the technology when the Company acquired it. The
Company has recently initiated action to commence discovery in
this case, and AcuVector has taken no action to advance the
proceedings since filing the complaint in 2002. The Company is
confident that AcuVectors claims are without merit and
that the Company will receive a favorable judgment. As the final
outcome is not determinable, no accrual or loss relating to this
action is reflected in the accompanying consolidated financial
statements.
We are also defending a companion case filed in the same court
by the Governors of the University of Alberta against us and
Dr. Chang. The University of Alberta claims, among other
things, that Dr. Chang failed to remit the payment of the
Universitys portion of the monies paid by us to
Dr. Chang for the CIT technology purchased by us from
Dr. Chang in 2001. In addition to other claims against
Dr. Chang relating to other technologies developed by him
while at the University, the University also claims that the
Company conspired with Dr. Chang and interfered with the
Universitys contractual relations under certain agreements
with Dr. Chang, thereby damaging the University in an
amount which is unknown to the University at this time. The
University has not claimed that we are not the owner of the CIT
technology, just that the University has an equitable interest
therein for the revenues there from. As the final outcome is not
determinable, no accrual or loss relating to this action is
reflected in the accompanying consolidated financial statements.
No significant discovery has as yet been conducted in the case.
Accordingly, if either AcuVector
and/or the
University is successful in their claims, we may be liable for
substantial damages, our rights to the technology will be
adversely affected, and our future prospects for exploiting or
licensing the CIT technology will be significantly impaired.
20
Other than the above mentioned litigation matters, neither we
nor any of our direct or indirect subsidiaries is a party to,
nor is any of our property the subject of, any legal proceedings
other than ordinary routine litigation incidental to their
respective businesses. There are no proceedings pending in which
any of our officers, directors or 5% shareholders are adverse to
us or any of our subsidiaries or in which they are taking a
position or have a material interest that is adverse to us or
any of our subsidiaries.
Neither we nor any of our subsidiaries is a party to any
administrative or judicial proceeding arising under federal,
state or local environmental laws or their Chinese counterparts.
From time to time, we may be involved in litigation relating to
claims arising out of our operations in the normal course of
business.
EXECUTIVE
OFFICERS OF THE REGISTRANT
The following sets forth information regarding the executive
officers and certain significant employees of the Company as of
April 14, 2010:
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Name
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Age
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Position(s)
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Douglas C. MacLellan
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54
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Executive Chairman and Chief Executive Officer
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Akio Ariura
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52
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Chief Financial Officer and Secretary
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Mr. MacLellan transitioned into his role as Chairman
and CEO after nearly 17 years on our Board. He was
appointed to the Board in 1992 and became Chairman of the Audit
and Governance committees in 2001. In September 2008 he assumed
the role of non-executive Chairman serving as an advisor and
lead Company spokesperson for Radient and in November 2008, he
assumed the additional role of CEO. Mr. MacLellan is also
currently President and CEO of MacLellan Group, Inc., a
privately held business incubator and financial advisory firm
since May 1992. Since November 2009 to the present,
Mr. Maclellan is also a director and Chairman of the Audit
Committee for China Online Holdings, Inc. (AMEX: CNET) From
August 2005 to May 2009, Mr. MacLellan was a member of the
Board of Directors of Edgewater Foods, International, Inc.
Mr. MacLellan was, until September 2005, formally
vice-chairman of the Board of Directors of AXM Pharma, Inc.
(AXMP.PK) and its predecessors. AXM is a China based
bio-pharmaceutical company. From January 1996 through August
1996, Mr. MacLellan was also the Vice-Chairman of Asia
American Telecommunications (now Metromedia China Corporation),
a majority owned subsidiary of Metromedia International Group,
Inc. From November 1996 until March 1998, Mr. MacLellan was
co-Chairman and investment committee member of the Strategic
East European Fund. From November 1995 until March 1998,
Mr. MacLellan was President, Chief Executive Officer and a
director of PortaCom Wireless, Inc., a company engaged as a
developer and operator of cellular and wireless
telecommunications ventures in selected developing world
markets. Mr. MacLellan is a former member of the Board of
Directors and co-founder of FirstCom Corporation, an
international telecommunications company that operates a
competitive access fiber and satellite network in Latin America,
which became AT&T Latin America, Inc. in August 2000. From
1993 to 1995, Mr. MacLellan was a principal and co-founder
of Maroon Bells Capital Partners, Inc., a U.S. based
merchant bank, which specializes in providing corporate finance
services to companies in the international and domestic
telecommunications and media industries. Mr. MacLellan was
educated at the University of Southern California in economics
and finance, with advanced training in classical economic theory.
Mr. Ariura was appointed as our Chief Financial
Officer as of August 21, 2006. Mr. Ariura is a
Certified Public Accountant. From September 2004 until joining
the Company, Mr. Ariura was employed by Resources Global
Professionals, providing both public and private companies with
consulting services on Sarbanes-Oxley compliance, SEC filings
and special project financial and management services in
connection with preparation of financial statements, tax
reporting and mergers and acquisitions. From January 2001 to
December 2003, Mr. Ariura was Vice President of Sunvest
Industries, LLC in charge of preparation of financial
statements, budgets and other financial reports. Mr. Ariura
received a B.S. in Business Administration from University of
Southern California in 1980. Mr. Ariura has had no prior
affiliation or relationship with the Company.
21
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Item 4.
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(Removed
and Reserved)
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PART II
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Item 5.
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Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
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Our common stock is listed on the NYSE Amex under the symbol
RPC
Our stock price, like that of some other cancer diagnostic and
pharmaceutical companies, is highly volatile. Our stock price
may be affected by such factors as:
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clinical trial results;
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product development announcements by us or our competitors;
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regulatory matters;
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announcements in the scientific and research community;
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intellectual property and legal matters;
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broader industry and market trends unrelated to our
performance; and
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economic markets in Asia.
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In addition, if our revenues or earnings in any period fail to
meet the investment communitys expectations, there could
be an immediate adverse impact on our stock price.
Market Information Our common shares are currently
listed on the NYSE Amex under the symbol RPC. On
April 14, 2010, the closing price of our common shares on
NYSE Amex was $1.30.
Set forth in the following table are the high and low closing
prices for the years ended December 31, 2008 and 2009 for
our common stock.
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Quarter Ended
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High
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Low
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March 31, 2008
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$
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4.18
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$
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2.93
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June 30, 2008
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$
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3.89
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$
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2.78
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September 30, 2008
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$
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3.05
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$
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1.26
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December 31, 2008
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$
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2.00
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$
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0.69
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Quarter Ended
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High
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Low
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March 31, 2009
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$
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1.38
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$
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0.70
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June 30, 2009
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$
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1.35
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$
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0.75
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September 30, 2009
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$
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1.01
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$
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0.55
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December 31, 2009
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$
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0.60
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$
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0.22
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Record Holders. As of April 9, 2010,
there were approximately 843 record holders of our common stock.
Dividend Policy. We have not paid any cash
dividends since our inception and do not contemplate paying
dividends in the foreseeable future. We anticipate that
earnings, if any, will be retained for the operation of our
business.
22
Securities Authorized for Issuance Under Equity Compensation
Plans. This information is included under
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters.
Purchases
of Securities by the Company
None.
Recent
Sales of Unregistered Securities
During the past three years, we effected the following
transactions in reliance upon exemptions from registration under
the Securities Act as amended. Unless stated otherwise;
(i) that each of the persons who received these
unregistered securities had knowledge and experience in
financial and business matters which allowed them to evaluate
the merits and risk of the receipt of these securities, and that
they were knowledgeable about our operations and financial
condition; (ii) no underwriter participated in, nor did we
pay any commissions or fees to any underwriter in connection
with the transactions; (iii) the transactions did not
involve a public offerings; and (iv) each certificate
issued for these unregistered securities contained a legend
stating that the securities have not been registered under the
Act and setting forth the restrictions on the transferability
and the sale of the securities.
The Company has funded its operations primarily through a series
of Regulation S and Regulation D companion offerings
(the Offerings), as described below. The Offerings
have consisted of units of one share of common stock and
warrants to purchase a number of shares of common stock equal to
one-half the number of shares of common stock included in the
units (Units) and units of one share of common stock
and a warrant to purchase one share of common stock (Full
Units). The Units and Full Units are priced at a discount
of 25% from the average closing prices of the Companys
common stock for the five consecutive trading days prior to the
close of the offering, as quoted on the NYSE Amex exchange, and
the exercise price of the warrants is set at 115% of the average
closing price. Unless otherwise noted below, the warrants issued
in the Offerings are exercisable at the date of issuance and
expire three years from issuance.
For all of the Offerings, the Company utilized the placement
agent services of Galileo Asset Management, S.A.
(Galileo), a Swiss corporation for sales to
non-U.S. persons.
In the United States, the Company has utilized the placement
agent services of FINRA (formerly NASD) member broker-dealers
Havkit Corporation (Havkit), Securities Network, LLC
(Network) and Spencer Clarke, LLC (Spencer
Clarke), and licensed sub agents working under Spencer
Clarke. In addition to commissions and expenses paid to the
Companys placement agents for each of the Offerings, as
described below, the Company has agreed to pay cash commission
of 6% upon exercise of the warrants by the purchasers.
April
2007 Offering
In April through June of 2007, the Company conducted two
closings of a private placement (the April 2007
Offering) of Units. The Company received $5,330,378 in
aggregate gross proceeds from the sale of 2,030,620 Units in the
April 2007 Offering. The Units were sold at $2.625 per Unit and
the warrants are exercisable at $3.68 per share. Each warrant
became exercisable on October 31, 2007 and remains
exercisable until October 31, 2010.
23
In connection with the April 2007 Offering, the Company utilized
the services of Galileo and Network. For their services, Galileo
and Network received commissions in an aggregate of $553,539 and
warrants to purchase an aggregate of 203,062 shares of the
Companys stock. The Company also paid Galileo a
non-accountable expense allowance of $160,000. In addition, the
Company incurred legal and other costs totaling $44,333 in
connection with the April 2007 Offering. Total costs associated
with the April 2007 Offering were $757,872, which costs have
been netted against the proceeds received.
After the closing of the April 2007 Offering, the Company filed
a registration statement with the Securities and Exchange
Commission to register the shares of the Companys common
stock, shares issuable upon exercise of the related investor
warrants, and shares issuable upon exercise of the warrants
issued to the placement agents. The registration statement was
declared effective on June 29, 2007.
December
2007 Offering
In December, 2007, the Company conducted the closing of a
private placement (December 2007 Offering) of Units.
The Company received approximately $6,203,200 in aggregate gross
proceeds from the sale of 2,007,508 Units in the December 2007
Offering. The Units were sold at $3.09 per Unit. The exercise
price of the four-year warrants issued as part of the December
2007 Offering was $4.74 per share.
In connection with the December 2007 Offering, we utilized the
placement services of Galileo and Spencer Clarke. For their
services, Galileo and Spencer Clarke received commissions and
due diligence fees of an aggregate of $619,158 and warrants to
purchase 200,751 shares of our common stock. The Company
also paid the placement agents a non-accountable expense
allowance of $150,000 and incurred $16,750 in other costs in
connection with the December 2007 Offering. Total costs
associated with the December 2007 Offering were $785,908, which
costs have been netted against the proceeds received.
On March 5, 2008 the Company conducted the second closing
of the December 2007 Offering. In the second closing the Company
received $1,000,000 in aggregate gross proceeds from the sale of
a total of 323,813 Units at $3.09 per Unit and issued warrants
to purchase 161,813 shares at an exercise price of $4.74
per share. The Company did not utilize the services of a
placement agent, however, in connection with the second closing
of the December 2007 Offering, the Company paid a finders
fee of $100,000, and incurred $39,584 in other costs. Total
costs associated with the second closing of the December 2007
Offering were $139,584, which costs have been netted against the
proceeds received.
After the closing of the December 2007 Offering, the Company
filed a registration statement with the Securities and Exchange
Commission to register the shares of the Companys common
stock, shares issuable upon exercise of the related investor
warrants, and shares issuable upon exercise of the warrants
issued to the placement agents. The registration statement was
declared effective on April 22, 2008.
10%
Convertible Note Financing
On September 15, 2008, we conducted the closing of a
combined private offering of 10% Convertible Notes (the
10% Convertible Note Offering) under
Regulation D and Regulation S of $2,510,000 of
10% Convertible Promissory Notes (the
10% Convertible Notes), maturing at the earlier
of (i) upon the closing of a Qualified Public Offering of
our common stock (as defined below), if not mandatorily
converted at the closing, or (ii) September 15, 2010
(the Maturity Date). For purposes thereof,
Qualified Public Offering shall mean an equity
offering of not less than $25 million in gross proceeds.
The 10% Convertible Notes bear interest at the annual rate
of ten percent (10%) which shall accrue and be payable on the
Maturity Date. If all of the principal amount of a
10% Convertible Note has not been voluntarily converted by
the holder or a Qualified Public Offering causing a mandatory
conversion shall not have occurred prior to the Maturity Date,
the note holder shall receive additional interest (Bonus
Interest) equal to fifty percent (50%) of the remaining
principal amount of the 10% Convertible Note on the
Maturity Date. Any unpaid Bonus Interest shall accrue interest
thereafter at the rate of ten percent (10%) per annum thereon
until paid.
The holders of the 10% Convertible Notes have the right to
convert the entire principal and accrued interest of the
10% Convertible Notes into the common stock of the company
at any time prior to the Maturity Date at $1.20
24
per share. Upon conversion of the 10% Convertible Notes
into common stock of the Company, the Company shall issue
warrants to purchase common stock (Investor
Warrants) to the converting investors in the amount equal
to fifty percent (50%) of the number of shares of common stock
into which the 10% Convertible Notes were converted. The
Investor Warrants have a term of five (5) years from the
date of issuance and shall be exercisable at a price equal to
120% of the Companys stock price on the date of
conversion; however, in no case will the exercise price be less
than $2.80.
The shares of common stock issuable upon a voluntary conversion
of the 10% Convertible Notes carry so-called
piggy-back registration rights should the Company
file a registration statement in the future. In the event of a
forced conversion into common shares in the event of a Public
Offering, holders of the 10% Convertible Notes will be
subject to a
lock-up on
any remaining shares not sold in the offering for ninety
(90) days after the Public Offering.
In connection with the offer and sale of the Notes in the
10% Convertible Note Offering, we relied on the exemption
under Section 4(2) of the Securities Act of 1933, as
amended (the Securities Act), Regulation S and
Regulation D, Rule 506 promulgated thereunder. We
believe that all of the purchasers of Convertible Notes are
accredited investors, as such term is defined in
Rule 501(a) under the Securities Act.
In connection with the sale of 10% Convertible Notes, we
utilized the services of Jesup & Lamont Securities
Corporation and Dawson James Securities, Inc., FINRA (NASD)
member broker-dealers (the Placement Agents). For
their services, the Placement Agents received commissions of 10%
of the amount of the notes sold and the Placement Agents
received an aggregate of $313,750 (2.5%) as due diligence and
non-accountable expenses. We incurred an additional $111,849 in
legal and other expenses related to the issuance of the
Convertible Notes. The Placement Agents and their assigns also
received five year warrants (Placement Agent
Warrants) to purchase up to 209,166 shares of the
Companys common stock exercisable at $2.69, representing
115% of the five day volume-weighted average price of the
Companys common stock up through and including
September 12, 2008. The terms of these warrants require
that we issue additional warrants in the case of certain
dilutive issuances of our common stock through the first quarter
of 2009. The number of additional warrants to be issued is based
on the percentage decrease in share price of the dilutive
issuance compared to the exercise price of the warrants.
12%
Senior Note Financing
On December 5, 2008, we conducted a first closing (the
First Closing) of a private offering under
Regulation D for the sale to accredited investors of units
consisting of $1,077,500 principal amount of 12% Senior
Notes (Senior Notes) and five year warrants to
purchase a total of 862,000 shares of our common stock at
$1.00 per share (the Warrant Shares). We received
$1,077,500 in gross proceeds in the First Closing.
On January 30, 2009, we conducted the second and final
closing (the Final Closing) of the 12% Senior
Note offering whereby we sold an additional $680,000 principal
amount of 12% Senior Notes and five year warrants to
purchase a total of 544,000 shares of our common stock at
$1.13 per share.
Accordingly, a total of $1,757,500 in 12% Senior Notes and
Warrants to purchase 1,406,000 shares of common stock in
the 12% Senior Note Offering were sold.
We may receive additional gross proceeds of approximately
$862,000 from the exercise of the warrants issued in the First
Closing and $614,720 from exercise of warrants issued in the
Final Closing, exclusive of any proceeds from the exercise of
placement agent warrants issued in the 12% Senior Note
offering. No assurances can be given that any of the warrants
will be exercised.
In connection with the 12% Senior Note offering, we agreed
to file a registration statement by July 31, 2009 with the
Securities and Exchange Commission on
Form S-3
covering the secondary offering and resale of the Warrant Shares
sold in the offering.
Our exclusive placement agent was Cantone Research, Inc., a
FINRA member broker-dealer. Cantone Research, Inc. received
sales commissions of $175,750 and $60,225 non-accountable
expenses for services in connection with the offering. We
incurred an additional $90,711 in legal and other expenses
related to the issuance of the Senior Notes. In addition, we
issued placement agent warrants to purchase a total of
140,600 shares, of which Cantone Research, Inc. received
placement agent warrants to purchase 122,140 shares,
Galileo Asset Management,
25
S. A. received warrants to purchase 16,100 shares and
Security Research Associates, Inc. received placement agent
warrants to purchase 2,000 shares.
In connection with the 12% Senior Note offering, we relied
on the exemption from registration provided by Section 4(2)
of the Securities Act of 1933, as amended (the Securities
Act), and Rule 506 promulgated thereunder. We believe
that all of the purchasers are accredited investors,
as such term is defined in Rule 501(a) promulgated under
the Securities Act.
In September, 2009, we entered into a Note and Warrant Purchase
with St. George Investments, LLC pursuant to which we issued and
sold: (1) a 12% promissory note in the principal amount of
$555,555.56 that is convertible into the Companys common
stock at 80% of the five day volume weighted average of the
closing price of our common stock, subject to a floor price of
no less than $0.64 and on the terms and the conditions specified
in the Note; and (2) a warrant to purchase
500,000 shares of the Companys common stock,
$0.001 par value per share, at a exercise price of $0.65
per share, subject to certain anti-dilution adjustments. We
relied on the exemption from registration provided by
Section 4(2) of the Securities Act of 1933, as amended (the
Securities Act), and Rule 506 promulgated
thereunder. We believe that all of the purchasers are
accredited investors, as such term is defined in
Rule 501(a) promulgated under the Securities Act.
On September 10, 2009, we entered into a Bridge Loan
Agreement with Cantone Research, Inc. whereby the Lender agreed
to provide a Bridge Loan for $58,000. Pursuant to the Bridge
Loan Agreement, against receipt of the Bridge Loan, we shall
issue to the Lender a two-year warrant to purchase
116,000 shares of the Companys Common Stock
Exercisable at US $0.60 per share. We relied on the exemption
from registration provided by Section 4(2) of the
Securities Act of 1933, as amended (the Securities
Act), and Rule 506 promulgated thereunder. We believe
that all of the purchasers are accredited investors,
as such term is defined in Rule 501(a) promulgated under
the Securities Act.
On November 30, 2009, we entered into a Securities Purchase
Agreement with two institutional investors. Pursuant to the
Securities Purchase Agreement, we sold an aggregate of
3,289,285 shares of our common stock and warrants to
purchase up to an additional 1,644,643 shares of our common
stock to such investors for gross proceeds of $921,000. The
Shares and Warrants were sold in units, with each unit
consisting of two Shares and a Warrant to purchase one share of
common stock. The purchase price is $0.28 per Share. The
Warrants have an initial exercise price of $1.25 per share, and
may be exercised at any time and from time to time on or after
the six month anniversary of the date of delivery of the
Warrants through and including the six and one-half-year
anniversary thereof. The exercise price of the Warrants is
subject to adjustment in the case of stock splits, stock
dividends, combinations of shares and similar recapitalization
transactions. We relied on the exemption from registration
provided by Section 4(2) of the Securities Act of 1933, as
amended (the Securities Act), and Rule 506
promulgated thereunder. We believe that all of the purchasers
are accredited investors, as such term is defined in
Rule 501(a) promulgated under the Securities Act.
On March 22, 2010, we entered into a Note and Warrant
Purchase Agreement with one accredited investor. Pursuant to the
Agreement, we issued the Lender a Convertible Promissory Note in
the principal amount of $925,000.00 and a five year warrant to
purchase up to 1,100,000 shares of our Common Stock. The
Warrant is initially exercisable at the higher of: (i) 105%
of the average VWAP for the five trading days immediately
preceding the date we issued the Warrant; and (ii) the
Floor Price (the same as in the Notes) in effect on the date the
Warrant is exercised. The Note carries a 20% original issue
discount. In addition, we agreed to pay $200,000 to the Lender
to cover their transaction costs incurred in connection with
this transaction; such amount was withheld from the loan at the
closing of the transaction. As a result, the total net proceeds
we received were $540,000.00. We relied on the exemption from
registration provided by Section 4(2) of the Securities Act
of 1933, as amended (the Securities Act), and
Rule 506 promulgated thereunder. We believe that all of the
purchasers are accredited investors, as such term is
defined in Rule 501(a) promulgated under the Securities Act.
Note and
Warrant Purchase Agreements- March and April 2010
After the year ended December 31, 2009, the Company sought
additional financing for its continuing operations. On
March 22, 2010, the Board of Directors authorized the
Company to enter into a Note and Warrant Purchase Agreement
(Purchase Agreement) with one accredited investor
(Lender) pursuant which the
26
Company issued the Lender a Convertible Promissory Note in the
principal amount of $925,000 bearing interest at a rate of 12%,
increasing to 18% upon the occurrence of an event of certain
triggering events. The Purchase Agreement includes a warrant to
purchase up to 1,100,000 shares of the Companys
Common Stock. The Note carries a 20% original issue discount and
matures on March 22, 2011. In addition, the Company agreed
to pay $200,000 to the Lender to cover their transaction costs
incurred in connection with this transaction; such amount was
withheld from the loan at the closing of the transaction. As a
result, the total net proceeds the Company received were
$540,000, exclusive of finders fees paid in connection
with the transaction. The Lender may convert the Note, in whole
or in part into shares of the Companys Common Stock. The
Conversion Price is equal to 80% of the volume-weighted average
price for the 5 trading days ending on the business day
immediately preceding the applicable date the conversion is
sought but will be at least $0.28 per share, subject to
adjustment upon the occurrence of certain events.
The transaction with the Lender was the First
Closing f a series of similar transactions, which together
are hereinafter referred to as March-April 2010
12% Convertible Note Financing. On April 8,
2009, the Board of Directors authorized the Company to enter
into additional Purchase Agreements to issue up to an additional
$7,500,000 of 12% Convertible notes and to issue warrants
to issue up to an additional 15,000,000 shares of the
Companys Common Stock pursuant to the March-April 2010
12% Convertible Note Financing.
On April 8, 2010, in the Second Closing of the
Lender and 24 other accredited investors, purchased an aggregate
of $5,524,425 of additional 12% Convertible Notes and
issued additional warrants to purchase 6,569,585 shares of
the Companys Common Stock on terms substantially the same
as described above in the First Closing with the Lender. The net
proceeds from the Second Closing were $3,225,000, exclusive of
any finders fees paid in the Second Closing.
On April 13, 2010, in the Third Closing of the
March-April 2010 12% Convertible Note Financing, Lender and
other accredited investors, purchased an aggregate of $3,957,030
of additional 12% Convertible Notes and issued additional
warrants to purchase 4,705,657 shares of the Companys
Common Stock exercisable on terms substantially the same as
described above in the First Closing and Second Closing.. The
net proceeds from the Third Closing were $2,310,000, exclusive
of any finders fees paid in the Second Closing.
The Company applied for listing of all of the shares of the
Common Stock issuable on conversion of the 12% Convertible
Note and upon exercise of the warrant issued to the Lender in
the First Closing with the NYSE Amex, but has not yet received
approval for listing. Any shares of Common Stock issuable in
excess of NYSE Amex Rule 713 so-called 19.99%
Cap will require stockholder approval. No stockholder
approval has been solicited or obtained as of the date hereof.
The Company intends to file an additional listing application
with the NYSE Amex to list all of the shares of the
Companys Common Stock issuable on conversion of the
12% Convertible Notes and on exercise of the warrants
issued in the Second Closing and the Third Closing. The Company
also intends to seek stockholder approval for a waiver of the
19.99% Cap on such shares.
Non-Cash
Financing Activities
On March 2, 2007, the Board of Directors authorized the
issuance of 190,000 shares of common stock to Boston
Financial Partners, Inc. pursuant to an amendment to the
consulting agreement dated September 16, 2003, as
consideration for financial advisory services to be provided
from March 1, 2007 through September 1, 2007. The
shares were valued at $558,600 based on the trading price of the
common stock on the measurement date. During the year ended
December 31, 2007, the Company recorded selling, general
and administrative expense of $558,600 related to the agreement.
Also on March 2, 2007, the Board of Directors authorized
the issuance of 150,000 shares of common stock to First
International pursuant to an amendment to the consulting
agreement dated July 22, 2005, as consideration for
financial advisory services to be provided from March 22,
2007 through September 22, 2007. The shares were valued at
$517,500 based on the trading price of the common stock on the
measurement date. During the year ended December, 2007, the
Company recorded selling, general and administrative expense of
$517,500.
On April 24, 2007, the Board of Directors authorized the
issuance of warrants to purchase 25,000 shares of common
stock to Brook street Securities Corporation, a consultant, as
consideration for financial advisory services.
27
The common shares issuable on exercise of the warrants are
exercisable at $3.68 per share. The warrants were valued at
$35,000 using the Black-Scholes option pricing model with the
following assumptions: (i) no dividend yield,
(ii) weighted-average volatility of 123%
(iii) weighted-average risk-free interest rate of 4.88%,
and (iv) weighted-average expected life of 1 year. The
amount was charged to general and administrative expense in the
year ended December 31, 2007.
On September 14, 2007, the Board of Directors authorized
the issuance of 250,000 shares of common stock to First
International pursuant to an amendment to the consulting
agreement dated July 22, 2005, for financial advisory
services to be provided from September 22, 2007 through
September 22, 2008. The shares were valued at $817,500
based on the trading price of the common stock on the
measurement date. The Shares were issued pursuant to an
exemption under Section 4(2) of the Securities Act. No
underwriter was involved in this issuance. During the years
ended December 31, 2008 and 2007, the Company recorded
selling, general and administrative expense of $592,687 and
$224,813, respectively, related to the agreement.
The Company issued 10,000 options to a consultant and an
investor during the year ended December 31, 2007 which
resulted in compensation expense of $35,300 which is included in
selling, general and administrative expense. In pricing these
options, the Company used the Black-Scholes pricing model with
the following weighted-average assumptions: expected volatility
of 353%; risk-free interest rate of 4.92%; expected term of five
years; and dividend yield of 0%.
On November 27, 2007, the Board of Directors authorized the
issuance of 75,000 shares of common stock to Boston
Financial Partners Inc. pursuant to an amendment to the
consulting agreement dated September 16, 2003, for
financial advisory services to be provided from November 1,
2007 through October 31, 2008. The shares were valued at
$336,000 based on the trading price of the common stock on the
measurement date. During the years ended December 31, 2008
and 2007, the Company recorded selling, general and
administrative expense of $280,000 and $56,000, respectively,
related to the agreement.
On November 27, 2007, the Board of Directors authorized the
issuance of up to 300,000 shares of common stock, to be
earned at the rate of 25,000 shares per month to Madden
Consulting, Inc. for financial advisory services to be provided
from December 26, 2007 through December 26, 2008. The
first 25,000 shares were valued at $104,250 based on the
trading price of the common stock on the measurement date.
During the year ended December 31, 2007, the Company
recorded selling, general and administrative expense of $104,250
related to the agreement and the issuance of the first
25,000 shares. A second 25,000 shares was earned in
2008, resulting in expense of $104,250, and the agreement
terminated on January 28, 2008.
On February 5, 2008, the Board of Directors authorized the
issuance of 300,000 shares of common stock to LWP1 pursuant
to a consulting agreement dated February 3, 2008 for
financial advisory services to be provided from February 3,
2008 through May 3, 2009. The shares are issuable in two
increments of 150,000. The shares vest over a fifteen month
period and are being valued monthly as the shares are earned
based on the trading price of the common stock on the monthly
anniversary date. In accordance with FASB
ASC 505-50-30,
Equity-Based Payments to Non-Employees, (ASC
505-50-30),
the shares issued will be periodically valued through the
vesting period. During the year ended December 31, 2008,
the Company recorded general and administrative expense of
$527,801 related to the agreement.
On April 30, 2008, the Company extended the term of
warrants to purchase 18,750 shares of common stock at $3.68
per share to October 31, 2009. The warrants were held by an
investor/service provider. The Company recorded $18,375 in
compensation expense related to the term extension, calculated
using the Black-Scholes option valuation model with the
following assumptions: expected volatility of 79%; risk-free
interest rate of 2.37%; expected term of 1.5 years; and
dividend yield of 0%.
On May 16, 2008, the Company settled litigation related to
the termination of an agreement regarding a proposed private
placement. In connection with the settlement, the Company paid
$12,500 in cash, and issued 25,000 shares of unregistered
common stock with a deemed value of $75,000, based on the
ten-day
volume weighted-average price of the Companys common stock
through May 8, 2008. The value of the cash and shares
issued in the settlement is included in general and
administrative expense in the consolidated statement of
operations for the year ended December 31, 2008.
28
On June 17, 2008, the Company entered into an agreement for
financial consulting services. In connection with the agreement,
the Company granted warrants to purchase 150,000 shares of
common stock at an exercise price of $3.50. The warrants, which
were approved by the Companys board of directors, were
granted in partial consideration for financial consulting
services, vest over a twelve month period, and expire in five
years. The warrants were initially valued at $315,000, based on
the application of the Black Scholes option valuation model with
the following assumptions: expected volatility of 95%; average
risk-free interest rate of 3.66%; expected term of 5 years;
and dividend yield of 0%. In accordance with
ASC 505-50-30,
the warrants will be periodically revalued through the vesting
period. The value of the warrants is being expensed over the
36 month term of the consulting contract. The Company
recognized $19,478 of expense in the year ended
December 31, 2008 with respect to the warrants.
Additionally, $68,773 related to vested warrants which have not
been expensed based on the 36 month term of the consulting
agreement is included in prepaid consulting at December 31,
2008.
On January 22, 2009, we entered into an agreement with
B&D Consulting for investor relations services through
July 7, 2010. We granted B&D Consulting
400,000 shares of our common stock in exchange for
services, subject to the approval for listing of the shares by
the NYSE Alternate US. NYSE Amex approval was received on
March 26, 2009 and the shares were issued on March 31,
2009. The value of the shares will be expensed during the
periods in which services are provided in exchange for the
share-based compensation.
On February 2, 2009, our Board of Directors authorized the
issuance of 12,500 shares of our common stock to an
investor relations consultant for services under a consulting
agreement, subject to the approval for listing of the shares by
the NYSE Amex. NYSE Amex approval was received on March 26,
2009 and the shares were issued on March 31, 2009. The
value of the shares will be expensed during the periods in which
services are provided in exchange for the share-based
compensation.
On September 10, 2009, we entered into a Consulting
Agreement with Cantone Asset Management, LLC whereby the
Consultant shall provide guidance and advice related to
negotiating the terms of the Companys outstanding
Series 1 and Series 2 Senior Notes and continue
services to assist the Company to coordinate with the holders of
the Series 1 and Series 2 Senior Notes. In
consideration of the Consultants service, we agreed to pay
monthly consulting fees of US $12,000 per month for a period of
twelve (12) months and issue to the Consultant a five-year
warrant to purchase 200,000 shares of the Companys
common stock at an exercise price of US$0.60 per share. The
warrants were initially valued at $88,000, based on the
application of the Black Scholes option valuation model with the
following assumptions: expected volatility of 97.27%; average
risk-free interest rate of 238%; expected term of 5 years;
and dividend yield of 0. In accordance with
ASC 505-50-30,
the warrants will be periodically revalued through the vesting
period. The value of the warrants is being expensed over the
term of the consulting contract. The Company recognized $25,666
of expense in the year ended December 31, 2009 with respect
to the warrants. Additionally, $62,334 related to vested
warrants which have not been expensed based on the 12 month
term of the consulting agreement is included in prepaid
consulting at December 31, 2009.
In January 2010 we issued 2,100,000 shares of our common
stock to two consultants under consulting services agreements.
The value of these issuances was recorded at fair market value
based upon the then current fair market value of the stock.
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Item 6.
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Selected
Financial Data
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Not applicable.
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Item 7.
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Managements
Discussion and Analysis of Financial Condition and Results of
Operations
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The
Company
Radient Pharmaceuticals Corporation is a vertically integrated
pharmaceutical company with the following distinct business
divisions or units:
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Manufacturer and Distributor of
Onko-Suretm
a Proprietary In-Vitro Diagnostic (IVD) Cancer Test;
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Distribution of Elleuxe brand of Anti-Aging Skin Care Products;
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A Cancer Therapeutics Technology.
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29
The
Companys Revised Strategic Focus
Until recently, the Company was focused on the production and
distribution of pharmaceutical products through the
Companys subsidiaries located in the Peoples
Republic of China. The Company has recently refocused the
Companys core business strategy and market focus to the
international commercialization of
Onko-Suretm
and Elleuxe products. On September 25, 2009, the Company
changed the name from AMDL, Inc. to Radient
Pharmaceuticals Corporation. The Company believe Radient
Pharmaceuticals as a brand name has considerable market appeal
and reflects the Companys new corporate direction and
branding statements.
The Company is now actively engaged in the research,
development, manufacturing, sale and marketing of in IVD and
high-end skin care products. The Company has focused the
business strategy on the international commercialization and
next generation product development for both of these products.
All of these business units focus on the development,
manufacturing, distribution and sales of high-quality medical
diagnostic products, generic pharmaceuticals, nutritional
supplements, and cosmetics in the United States, Canada, China,
Chile, Europe, India, Korea, Taiwan, Vietnam and other markets
throughout the world.
For 2009, the Company has generated approximately $158,000 in
the sales of the Companys
Onko-Suretm
IVD cancer diagnostic test kits, which is an increase of
approximately 98% in sales of this product over the same period
for 2008. Depending on receiving additional funding, it is also
anticipated that we will begin commercialized sales of the
Companys Elleuxe brand of skin care products by the end of
the fourth quarter of 2010. These two business segments are
anticipated to be the Companys largest revenue producing
products in the near future. The Company believes, that subject
to receipt of adequate financing, revenues from these products
will significantly increase in 2010 due to the creation of
distribution agreements that are anticipated to move the IVD
cancer diagnostic test kits and the Elleuxe brand of skin care
products into broad commercial channels in markets throughout
the world. However, the success of the Companys
distribution strategy for these products in 2010 is dependent
upon a number of factors including the Company obtaining
adequate financing in 2010. If the Company is unable to raise
sufficient funds, the Companys distribution strategy may
not be able to be implemented at the rate the Company
anticipates which will have a material adverse effect on
anticipated 2010 revenues.
In connection with the deconsolidation, the Company has
reclassified China pharmaceutical manufacturing and distribution
business (conducted through JPI subsidiary) as a business
investment, rather than a consolidated operating subsidiary of
the Company.
IV
Diagnostics
IVD
Cancer Diagnostics
Onko-Suretm
Kit
The product is manufactured at the Companys Tustin,
California based facilities and is sold to third party
distributors, who then sell directly to Clinical Laboratory
Improvement Amendments certified reference laboratories in the
United States as well as clinical reference labs, hospital
laboratories and physician operated laboratories in the
international market. The Companys test kits are currently
being sold to one diagnostic reference laboratory in the United
States. During the 2009, the Company entered into the following
distribution agreements:
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Exclusive five year distribution agreement with Grifols USA,
LLC. This distribution agreement allows Grifols USA, LLC to
market and sell
Onko-Suretm
for the monitoring of colorectal cancer to hospitals, clinical
laboratories, clinics and other health care organizations.
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Exclusive two year distribution agreement with Tarom Applied
Technologies Ltd for the marketing and sales of
Onko-Suretm
in Israel.
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Two distinct exclusive five year distribution agreement with
GenWay Biotech, Inc. This distribution agreement allows Genway
Biotech, Inc, to market and see
Onko-Suretm
for uses other than colorectal cancer to CLIA-certified
laboratories in the US and as a lung cancer screen to
laboratories in Canada
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The majority of sales were outside of the U.S. with,
limited sales of test kits within the U.S. The Company has
developed the next generation version of the
Onko-Suretm
test kit, and in 2009, the Company entered into a collaborative
agreement with the Mayo Clinic to conduct a clinical study to
determine whether the new version of
30
the kit can lead to improved accuracy in the detection of
early-stage cancer The Companys
Onko-Suretm
in- vitro diagnostic test enables physicians and their
patients to effectively monitor
and/or
detect solid tumor cancers by measuring the accumulation of
specific breakdown products in the blood called Fibrin and
Fibrinogen Degradation Products (FDP).
Onko-Suretm
is a simple, non-invasive blood test used for the detection
and/or
monitoring of 14 different types of cancer including: lung,
breast, stomach, liver, colon, rectal, ovarian, esophageal,
cervical, trophoblastic, thyroid, malignant lymphoma, and
pancreatic.
Onko-Suretm
can be a valuable diagnostic tool in the worldwide battle
against cancer, the second leading cause of death worldwide.
Onko-Suretm
serves the IVD cancer/oncology market which, according to
Bio-Medicine.org, is growing at an 11% compounded annual growth
rate.
Onko-Suretm
is sold as a blood test for cancer in Europe (CE Mark
certified), India, Taiwan, Korea, Vietnam, and in Chile
(research use); approved in the U.S. for the monitoring of
colorectal cancer (CRC); approved in Canada (by Health Canada)
for lung cancer detection and lung cancer treatment monitoring;
and in many key markets, has the significant potential to be
used as a general cancer screening test.
Because the
Onko-Suretm
test kit is a non-invasive blood test, there are no side effects
of the administration of the test. As with other cancer
diagnostic products, false positive and false negative test
results could pose a small risk to patient health if the
physician is not vigilant in following up on the
Onko-Suretm
test kit results with other clinically relevant diagnostic
modalities. While the
Onko-Suretm
test kit is helpful in diagnosing whether a patient has cancer,
the attending physician needs to use other testing methods to
determine and confirm the type and kind of cancer involved.
On July 8, 2009, the Company changed the brand name of
their in-vitro diagnostic cancer test from DR-70
to the more consumer friendly, trademarked brand name
Onko-Suretm,
which we believe communicates it as a high quality, innovative
consumer cancer test. The Company is also installing a new tag
line The Power of Knowing
which communicates to cancer patients and their physicians that
the test is effective in assessing whether a patients
cancer is progressing during treatment or is in remission.
Elleuxe
Brand of Premium Anti-Aging Skin Care Products
The Company intends to produce and market a variety of cosmetic
products that were originally developed by JPI in 2008, based
upon their HPE anti-aging therapeutic products. We have
reformulated these products for international markets under the
brand name Elleuxe. The Company currently anticipate the launch
of sales of these U.S. manufactured skin care products
during mid-2010. Elleuxe, a therapeutic, high-end skin care
product line based on the active ingredient Elleuxe
Protein the Companys proprietary active
ingredient that offers cell renewing properties designed to
minimize the appearance of aging. The initial Elleuxe product
line includes:
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Hydrating Firming Cream
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Renergie Hydrating Cleanser
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Intense Hydrating Cleanser
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Visable Renewing Hydrating Softener
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Smoothing Renewing Eye Moisturizer
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The Company now expects to launch this product in mid-2010. The
Company also expect to offer a vegetable-based product line in
mid 2010 and a mens product line in late 2010. In total
there will be eight separate product formulations. Elleuxe is
anticipated to be sold directly to high-end retail stores,
high-end beauty spas and medical day spas. The Company
anticipates that we will sell the product sets (grouped based on
skin types) at between $500 and $650 per set and the individual
products in the set at $100-$350 per ounce in eight separate
product formulations. The Company anticipates that we will
growing at a 7%-8% compounded annual growth rate. According to
Euromonitor, the global luxury skin care market is expected to
reach $22.1 billion by 2013.
31
IVD
Cancer Research and Development
During the twelve months ended December 31, 2009, we spent
$563,690 on research and development related to the Onko-Sure
tm,
as compared to $194,693 for the same period in 2008. These
expenditures were incurred as part of the Companys efforts
to improve the existing Onko-Sure
tm
and develop the next generation Onko-Sure
tm.
The Company expects expenditures for research and development to
grow in the 2010 due to additional staff and consultants needed
to support an agreement with Mayo Clinic to conduct a clinical
study for the validation of the Companys next generation
version of its United States Food and Drug
Administration(USFDA) approved Onko-Sure
tm
test kit and additional development costs associated with entry
into new markets. Through this validation study, the Company and
Mayo Clinic will perform clinical diagnostic testing to compare
to the Companys Onko-Sure
tm
test kit with a newly developed, next generation test. The
primary goal of the study is to determine whether the
Companys next generation Onko-Sure
tm
test kit serves as a higher-performing test to its existing
predicate test and can lead to improved accuracy in the
detection of early-stage cancers.
For USFDA regulatory approval on the new test, the Company
intends to perform an additional study to demonstrate the safety
and effectiveness of the next generation test for monitoring
colorectal cancer. The validation study will run for three
months and final results are expected in the third or fourth
quarter of 2010. In addition, additional expenses will be
incurred for consultants and laboratories for the reformulation
of the HPE-based cosmetics as well as laboratories involved in
testing the safety and effectiveness of the product.
New
Corporate Name
On August 22, 2009, the Company, received shareholder
approval in order to change its name to Radient Pharmaceuticals
Corporation (Radient Pharma). the Companys
name was changed on September 25, 2009 and shortly
thereafter the Company posted a new corporate website under the
new name at www.radient-pharma.com
China-based
Integrated Pharmaceuticals
China
Pharmaceutical Manufacturing and Distribution; Discontinued
Operations and Dispositions
The Companys previously operated China-based
pharmaceutical manufacturing and distribution business is
engaged in the manufacture and distribution of generic and
homeopathic pharmaceutical products and supplements, as well as
cosmetic products. RPC operated this business division through
its wholly-owned subsidiary, JPI, which in turn, operates
through a wholly-owned Chinese subsidiary, Jiangxi Jiezhong
Bio-Chemical Pharmacy Company Limited (JJB). On
January 22, 2009, the Companys board of directors
authorized management to sell the operations of Yangbian Yiqiao
Bio-Chemical Pharmacy Company Limited (YYB) YYB. The
Company classified the assets, liabilities, operations and cash
flows of YYB as discontinued operations for all periods
presented.
The sale of YYB was completed in June 2009. Shares in YYB along
with rights to certain land and land use rights were transferred
to the buyer (an individual) in consideration of:
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The forgiveness of amounts owed to YYB from JJB; and
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The buyer of YYB has contractually agreed to pay off the balance
of the 16 million RMB obligation secured by a mortgage on
certain land owned by JJB.
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(YYB). YYB has been accounted for as discontinued
operations and in connection with the sale of YYB JPI
transferred certain of JJBs land use rights to the buyer
of YYB, in which the bank has a secured interest. JPI originally
acquired YYB and JJB in 2005 along with certain assets and
liabilities of a predecessor to JJB (JiangXi Shangrao KangDa
Biochemical Pharmacy Co. Ltd). YYB was sold to a Chinese
national for 16 million RMB (or $2,337,541
U.S. Dollars) in the form of an agreement whereby the buyer
of YYB will pay this amount to Chinese International Bank of
Commerce in order to partially satisfy outstanding bank loans at
JJB.
During the second quarter of 2009, the Companys management
became aware of internal management disputes in China that
resulted in a deterioration of both operational and financial
controls by JPIs management over the operating entity JJB.
The management of both JPI and JJB have indicated that they
believe the most prudent
32
path to raising additional capital for the Companys
Chinese operating division is for JJB to complete one or more
private placements of equity during the fourth quarter of 2009.
They also indicated that they believe the best path for the
Company to monetize the Companys investments in JPI and
JJB would be for JJB to seek a public listing on the Growth
Enterprise Market (GEM) located in Hong Kong or a
similar Asia based market by the third quarter of 2012. The
Companys executive management and board of directors are
in agreement with JPI and JJBs management on this
spin-off strategy and are working with JPI and JJB
to seek to complete their plans that are currently under
development and designed to provide a path for a potential
financial return for the Company in the future from this
business unit.
During the third quarter of 2009, it became apparent to the
Companys management that the working relationship with
management of its operations in China was becoming increasingly
strained. Accordingly, the Company deemed it appropriate to seek
alternative means of monetizing its investment. There were
several issues that caused the Company to conclude accordingly,
including, but not limited to:
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Non responsiveness by the management in China to requests by
Company management for financial information;
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Non responsiveness by management in China to requests for
transfer of Company funds to bank accounts under corporate
control;
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Lack of timely communication with Corporate management
concerning significant decisions made by management in China
concerning the disposal of the YYB subsidiary; and
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Lack of timely communication with corporate officers concerning
operations in China.
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Effective September 29, 2009, based on unanimous consent of
the Companys board of directors and an executed binding
agreement (the Agreement) between the Company and
Henry Jia, Frank Zheng and Yuan Da Xia (collectively, the
JPI Shareholders), the Company deconsolidated all
activity of JPI.
Based on the Agreement and in accordance with current accounting
guidelines, the Company deconsolidated JPI as of the date the
Company ceased to have a controlling financial interest, which
was effective September 29, 2009. In accordance with the
Agreement, the Company exchanged its shares of JPI for
non-voting shares of preferred stock, relinquished all rights to
past and future profits, surrendered its management positions
and agreed to non-authoritative minority role on its board of
directors.
Based on the Companys evaluation of current accounting
guidance, it was determined that the Company did not maintain
significant influence over the investee and, accordingly, has
recorded such investment in accordance with the cost method.
Although, the Company maintains significant economic ownership
in JPI, based on its evaluation of its lack of ability to
influence, lack of a role in policy and decision making, no
significant planned intercompany activity, among other things,
the Company concluded that it would not be appropriate to
account for such investment in consolidation or under the equity
method of accounting.
The deconsolidation process of JPI and JJB materially and
adversely affected the Companys 2009 earnings and sales.
There can be no assurance that we will ever realize any
significant value from the Companys equity interest in JPI
and JJB.
Despite the on-going deconsolidation of JPI and JJB started on
September 29, 2009, the Company still believes JPI and JJB
have a promising future. The Company anticipates that they may
be able to sell off a portion or all of their ownership in JPI
and JJB during the next 24 months; alternatively the
Company would seek an exit from their
33
investment at or after any public listing. The Company also
could retain all or a portion of the Companys remaining
equity stake in JPI and JJB, if ownership continues to look
promising. The goal is to gain the best valuation possible for
this strategic asset. Additionally, the Company also believes
that JPI/JJBs business and brand recognition make it a
potential buyout target.
On September 29, 2009, the Company entered into an
agreement which outlines the Companys limited role in
JPIs future operations. As such, the Company has
classified JPI on the condensed consolidated balance sheets as
Investment in JPI and included results from
JJBs operations for the period ended September 29,
2009 on the consolidated statements of operations and
comprehensive income (loss).
Operations
of JJB
JJB manufactures and markets numerous diagnostic,
pharmaceutical, nutritional supplement and cosmetic products.
JJB is acquiring production rights for other pharmaceutical
products which will require the approval of the SFDA.
Historically, the top selling products in China are HPE-based
Solutions (anti-aging cosmecutical), Domperidone (anti-emetic),
Levofloxacin Lactate Injections (IV antibiotics) and Glucose
solutions (pharmaceutical).
Facilities
The SFDA requires that all facilities engaged in the manufacture
of pharmaceutical products obtain GMP certification. In February
2008, JJBs GMP certification expired for the small volume
parenteral solutions injection plant lines that were engaged in
manufacturing the Companys HPE injectible product,
Goodnak, and all other small volume parenteral solutions. JJB
ceased small volume parenteral solutions operations at this
facility while undertaking $1.5 million in modifications
necessary to bring the facility and its operations into
compliance. The renovations are complete and JJB resumed
operation of the parenteral small injectible lines in the second
quarter of 2009.
The Company was notified by the Chinese Military Department of
its intent to annex one of JJBs plants that is located
near a military installation. The proposed area to be annexed
contains the facilities that are used to manufacture large and
small volume parenteral solutions, including the production
lines for which the Company is attempting to obtain GMP
certification. Discussions regarding annexation are proceeding
and we expect that JJB will be compensated fairly for the
transfer of the facility upon annexation. JJB intends to find a
new single center site in Jiangxi Province, China to relocate
its operations.
For purposes of reporting the results of discontinued
operations, the Company have assumed that all products
previously manufactured and sold by YYB were sold with the
business. The Company may have to spend significant time and
resources finding, building and equipping the new location and
restarting the relocated operations. In addition, such new
facilities will need to obtain GMP certification for all
manufacturing operations.
Marketing
and Distribution
JJB has established a marketing program consisting of
approximately forty sales managers and a network of distributors
who market JJBs products.
34
JJB sells directly to hospitals and retail stores and indirectly
to other customers through distributors. One primary distributor
has 29 retail outlets throughout China. JJB is developing
educational programs for hospitals, doctors, clinics and
distributors with respect to JJBs product lines. These
educational programs are intended to improve sales and promotion
of JJBs products.
New
Beauty Formulations of the HPE-Based Anti-Aging
Product
During 2008, JJB finalized the formulations of the following
HPE-based cosmetic products. These new products consist of
capsules and an
easy-to-apply
lotion version and are marketed under the trade name
Nalefen Skin Care. These new products complement
JJBs existing high quality injectible and extract
formulations. Additionally, JJB has contracted with YiBo to
develop a capsule version of the Goodnak product. JJB plans to
sell both products through both new and existing distribution
channels within the Henan, Sichuan, Guizhou, Shanxi, Xinjiang,
Gansu, Hunan, Zhejiang, Fujian, Liaoning and Heilongjiang
Provinces of China. Together these regions have a combined
population of more than 376 million people.
Distribution
Channels for Beauty Product Lines
Distribution contracts which were in place during 2008 for the
sale of HPE products have expired and JJB has not renewed the
agreements. As a result, revenue in 2009 was adversely impacted.
At this time, JJB does not anticipate the new lotion
formulations will also be sold through these same distributors.
JPIs management has indicated that they have developed
various new distribution relationships with more reliable
distributors that will be selling their HPE solutions in the
future.
However, in addition to China, JJB believes that some of the
beauty products will be good candidates for export to the North
American and South American markets. JJB has completed the
reformulation of the China based formula and will submit to a US
laboratory to be tested for safety and effectiveness. In
conjunction with the testing, RPC is collaborating with an
industry specialist to develop a unique packaging scheme for the
market. It is estimated that this process will be completed in
2010.
The
Current Chinese Economic and Market Environment
The Company operates in a challenging economic and regulatory
environment that has undergone significant changes in technology
and in patterns of global trade. The current economic and market
environment in China is uncertain. In addition, Chinas
health care spending is projected to increase by nearly 40% to
$17.3 billion, with a government proposal to bring
universal healthcare to 90% of its 1.3 billion citizens by
2011, as reported by the American Free Press. While this data
appears promising, the proposal, however, could result in
additional controls over the pricing of certain drugs which
could, in turn, negatively impact JJBs business prospects
in China and the carrying amount of production rights acquired
from YiBo.
Cancer
Therapeutics
In 2001, the Company acquired the CIT technology, which forms
the basis for a proprietary cancer vaccine. The Companys
CIT technology is a U.S. patented technology (patent issued
May 25, 2004). The Cancer Therapeutics division is engaged
in commercializing the CIT technology.
Critical
Accounting Policies
Our consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the
United States of America. The preparation of these consolidated
financial statements requires us to make estimates and judgments
that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent
assets and liabilities. We base our estimates on historical
experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form
the basis of making judgments about the carrying values of
assets and liabilities that are not readily apparent from other
sources.
35
Actual results may differ from these estimates under different
assumptions or conditions and the differences could be material.
We believe the following critical accounting policies, among
others, affect our more significant judgments and estimates used
in the preparation of our consolidated financial statements:
Inventories. Major components of inventories
are raw materials, packaging materials, direct labor and
production overhead. The Companys inventories consist
primarily of raw materials and related materials, and are stated
at the lower of cost or market with cost determined on a
first-in,
first-out (FIFO) basis. The Company regularly
monitors inventories for excess or obsolete items and makes any
valuation corrections when such adjustments are needed. Once
established, write-downs are considered permanent adjustments to
the cost basis of the obsolete or excess inventories. The
Company writes down inventories for estimated obsolescence or
unmarketable inventory equal to the difference between the cost
of inventories and the estimated market value based upon
assumptions about future demand, future pricing and market
conditions. If actual future demand, future pricing or market
conditions are less favorable than those projected by
management, additional write-downs may be required and the
differences could be material. Such differences might
significantly impact cash flows from operating activities.
Sales Allowances. A portion of the
Companys business is to sell products to distributors who
resell the products to end customers. In certain instances,
these distributors obtain discounts based on the contractual
terms of these arrangements. Sales discounts are usually based
upon the volume of purchases or by reference to a specific price
in the related distribution agreement. The Company recognizes
the amount of these discounts at the time the sale is
recognized. Additionally, sales returns allowances are estimated
based on historical return data, and recorded at the time of
sale. If the quality or efficacy of the Companys products
deteriorates or market conditions otherwise change, actual
discounts and returns could be significantly higher than
estimated, resulting in potentially material differences in cash
flows from operating activities.
Allowance for Doubtful Accounts. We maintain
allowances for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments.
The allowance for doubtful accounts is based on specific
identification of customer accounts and our best estimate of the
likelihood of potential loss, taking into account such factors
as the financial condition and payment history of major
customers. We evaluate the collectibility of our receivables at
least quarterly. If the financial condition of our customers
were to deteriorate, resulting in an impairment of their ability
to make payments, additional allowances may be required. The
differences could be material and could significantly impact
cash flows from operating activities.
Valuation of Intangible Assets. The Company
evaluates the carrying value of its long-lived assets for
impairment whenever events or changes in circumstances indicate
that such carrying values may not be recoverable. The Company
uses its best judgment based on the current facts and
circumstances relating to its business when determining whether
any significant impairment factors exist. The Company considers
the following factors or conditions, among others, that could
indicate the need for an impairment review:
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significant under performance relative to expected historical or
projected future operating results;
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market projections for cancer research technology;
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its ability to obtain patents, including continuation patents,
on technology;
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significant changes in its strategic business objectives and
utilization of the assets;
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significant negative industry or economic trends, including
legal factors;
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potential for strategic partnerships for the development of its
patented technology; and
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changing or implementation of rules regarding sale of
pharmaceuticals in China.
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If the Company determines that the carrying values of long-lived
assets may not be recoverable based upon the existence of one or
more of the above indicators of impairment, the Companys
management performs an undiscounted cash flow analysis to
determine if impairment exists. If impairment exists, the
Company measures the impairment based on the difference between
the assets carrying amount and its fair value, and the
impairment is
36
charged to operations in the period in which the long-lived
asset impairment is determined by management. Based on its
analysis, the Company believes that no indicators of impairment
of the carrying value of its long-lived assets existed at
December 31, 2009. There can be no assurance, however, that
market conditions will not change or demand for the
Companys products will continue or allow the Company to
realize the value of its technologies and prevent future
long-lived asset impairment.
Revenue Recognition. Revenues from the
wholesale sales of over-the counter and prescription
pharmaceuticals are recognized when persuasive evidence of an
arrangement exists, title and risk of loss have passed to the
buyer, the price is fixed or readily determinable and collection
is reasonably assured.
In conjunction with the launch of the Companys Nalefen
Skin Care HPE products, distributors of the products were
offered limited-time discounts to allow for promotional expenses
incurred in the distribution channel. Distributors are not
required to submit proof of the promotional expenses incurred.
These promotional discounts are netted against revenues in the
condensed consolidated statements of operations and
comprehensive income (loss). Accounts receivable presented in
the accompanying condensed consolidated balance have been
reduced by the promotional discounts, as customers are permitted
by the terms of the distribution contracts to net the discounts
against payments on the related invoices.
Any provision for sales promotion discounts and estimated
returns are accounted for in the period the related sales are
recorded. Buyers generally have limited rights of return and the
Company provides for estimated returns at the time of sale based
on historical experience. Returns from customers historically
have not been material. Actual returns and claims in any future
period may differ from the Companys estimates.
Deferred Taxes. The Company records a
valuation allowance to reduce the deferred tax assets to the
amount that is more likely than not to be realized. The Company
has considered estimated future taxable income and ongoing tax
planning strategies in assessing the amount needed for the
valuation allowance. Based on these estimates, all of the
Companys deferred tax assets have been reserved. If actual
results differ favorably from those estimates used, the Company
may be able to realize all or part of the Companys net
deferred tax assets. Such realization could positively impact
the Companys consolidated operating results and cash flows
from operating activities.
Litigation. The Company accounts for
litigation losses in accordance with GAAP, loss contingency
provisions are recorded for probable losses at managements
best estimate of a loss, or when a best estimate cannot be made,
a minimum loss contingency amount is recorded. These estimates
are often initially developed substantially earlier than when
the ultimate loss is known, and the estimates are refined each
accounting period, as additional information is known.
Accordingly, the Company is often initially unable to develop a
best estimate of loss; therefore, the minimum amount, which
could be zero, is recorded. As information becomes known, either
the minimum loss amount is increased or a best estimate can be
made, resulting in additional loss provisions. Occasionally, a
best estimate amount is changed to a lower amount when events
result in an expectation of a more favorable outcome than
previously expected. Due to the nature of current litigation
matters, the factors that could lead to changes in loss reserves
might change quickly and the range of actual losses could be
significant, which could materially impact the Companys
consolidated results of operations and comprehensive loss and
cash flows from operating activities.
Stock-Based Compensation Expense. All
issuances of the Companys common stock for non-cash
consideration have been assigned a per share amount equaling
either the market value of the shares issued or the value of
consideration received, whichever is more readily determinable.
The majority of non-cash consideration received pertains to
services rendered by consultants and others and has been valued
at the market value of the shares on the measurement date.
The Company accounts for equity instruments issued to
consultants and vendors in exchange for goods and services in
accordance with GAAP. The measurement date for the fair value of
the equity instruments issued is determined at the earlier of
(i) the date at which a commitment for performance by the
consultant or vendor is reached or (ii) the date at which
the consultant or vendors performance is complete. In the
case of equity instruments issued to consultants, the fair value
of the equity instrument is recognized over the term of the
consulting agreement.
37
The Company accounts for equity awards issued to employees as
follows. GAAP requires a public entity to measure the cost of
employee services received in exchange for an award of equity
instruments, including stock options, based on the grant-date
fair value of the award and to recognize the portion expected to
vest as compensation expense over the period the employee is
required to provide service in exchange for the award, usually
the vesting period.
Derivative Financial Instruments. Derivatives
are recorded on the balance sheet at fair value. The Company
issued convertible debt in September 2008, and recorded a
derivative asset related to the limitation on bonus interest
rights held by convertible debt holders in the event of a change
in control or bankruptcy. During the nine months ended
September 30, 2009, we issued a note and warrant purchase
agreement and recorded derivative liabilities related to the
conversion feature of debt and reset provision of the exercise
price of the warrants.
Wholesale Sales. Revenues from the wholesale
sales of over-the counter and prescription pharmaceuticals are
recognized when persuasive evidence of an arrangement exists,
title and risk of loss have passed to the buyer, the price is
fixed or readily determinable and collection is reasonably
assured.
In conjunction with the launch of the Companys
Goodnak/Nalefen cosmetic line, distributors of the products were
offered limited-time discounts to allow for promotional expenses
incurred in the distribution channel. Distributors are not
required to submit proof of the promotional expenses incurred.
The Company accounts for the promotional expenses in accordance
with
ASC 605-50-25
Vendors Accounting for Consideration Given to a
Customer. Accordingly, the promotional discounts have been
netted against revenue in the accompanying consolidated
statements of operations. Accounts receivable have also been
reduced by the promotional discounts, as customers are permitted
by the terms of the distribution contracts to net the discounts
against payments on the related invoices.
Any provision for sales promotion discounts and estimated
returns are accounted for in the period the related sales are
recorded. Buyers generally have limited rights of return, and
the Company provides for estimated returns at the time of sale
based on historical experience. Returns from customers
historically have not been material. Actual returns and claims
in any future period may differ from the Companys
estimates. In accordance with FASB
ASC 605-45-50,
Taxes Collected from Customers and Remitted to Governmental
Authorities, JPIs revenues are reported net of value
added taxes (VAT) collected.
38
Results
of Operations
Year
Ended December 31, 2009 Compared to Year Ended
December 31, 2008
Net Revenues. During the twelve months ended
December 31, 2009, the Companys aggregate net
revenues from product sales decreased 63% to $8,627,667 from
$23,774,900 for the same period in 2008.
Corporate
Net revenues for the year ended December 31, 2009 for the
Company was $158,017 compared to $80,222 for the same period in
2008. This increase is due to increased orders for the
Onko-Suretm
test kits.
With USFDA approval of
Onko-Suretm
test kit, the Companys goal is to enter additional
exclusive or non-exclusive distribution agreements for various
regions, and due to the Companys overall commercialization
efforts, we expect sales to increase in 2010.
The Company has agreements in the negotiation stage which would
grant distributor an exclusive/non-exclusive right to distribute
the
Onko-Suretm
test kit within Vietnam, Russia, Greece and Latin America. It is
anticipated that one or more of the aforementioned distribution
agreements will be in place by the end of the first quarter 2010.
The statement concerning future sales is a forward-looking
statement that involves certain risks and uncertainties which
could result in sales below those achieved for the year ended
December 31, 2009. Sales of
Onko-Suretm
test kits in 2010 could be negatively impacted by potential
competing products, lack of adequate supply and overall market
acceptance of the Companys products.
The Company has a limited supply of one of the key components of
the
Onko-Suretm
test kit. The anti-fibrinogen-HRP is limited in supply and
additional quantities cannot be purchased. The Company currently
has two lots remaining which are estimated to produce
approximately 31,000 kits. Based on the Companys current
and anticipated orders, this supply is adequate to fill all
orders. Although the Company is working on replacing this
component so that they are in a position to have an unlimited
supply of Onko-Sure in the future. The Company cannot assure
that this anti-fibrinogen-HRP replacement will be completed.
An integral part of the Companys research and development
through 2010 is the testing and development of an improved
version of the
Onko-Suretm
test kit. The Company is reviewing various alternatives and
believes that a replacement anti-fibrinogen-HRP will be
identified, tested and USFDA approved before the current supply
is exhausted.
Pilot studies show that the new version could be superior to the
current version. It is anticipated that this version will be
submitted to the USFDA in the latter half of 2010.
China-Wholesale
China net revenues were $8,469,652 for the twelve months ended
December 31, 2009 as compared to $23,694,678 for the same
period in 2008. This decrease was primarily due to:
|
|
|
|
|
Management conflicts between JPI and its subsidiary JJB;
|
|
|
|
The sale of YYB; and
|
|
|
|
The lack of sales of HPE solutions due to the mandatory
5-year cGMP
recertification by the SFDA of JJBs small injectible line
and the expiration of contracts with beauty distributors that
sell topical HPE solution. Although, the small injectible line
received GMP recertification in the second quarter of 2009, the
lack of qualified distributors is hampered sales of the product.
|
The Companys China operations began experiencing various
conflicts and cohesive management issues during the second
quarter of 2009.
39
The Companys management incurred extraordinary expenses
for attorney fees in China and the US, international travel
expenses for the Companys management and efforts made by
members of the board of directors in attempting to resolve these
internal conflict and issues without success.
Gross Profit. The Companys gross profit
for the year ended December 31, 2009 was $3,267,456 as
compared to $12,244,509 for the year ended December 31,
2008.
Corporate
Gross profit increased approximately 102% to $120,345 for the
year ended December 31, 2009 from $59,605 for the year
ended December 31, 2008 due to increased sales volume of
the
ONKO-SUREtm
test kit.
China-
China gross profit was $3,147,110 for the year ended
December 31, 2009, a 74% decrease over the same period in
2008 where gross profit was $12,184,904. Gross profit as
compared to sales decreased from 52% for the year ended
December 31, 2008 to 37% for the year ended
December 31, 2009. This decrease can be attributed to a
change in the product mix as products shifted away from products
reliant on the small injectible manufacturing line to other less
profitable products as well as an increase in the cost of raw
materials and an increase in manufacturing overhead.
The major components of cost of sales include raw materials,
wages and salary and production overhead. Production overhead is
comprised of depreciation of building, land use rights, and
manufacturing equipment, amortization of production rights,
utilities and repairs and maintenance.
Research and Development. In the past, JJB and
YYB entered into joint research and development agreements with
outside research institutes, but all of the prior joint research
agreements have expired.
All research and development costs incurred during the year
ended December 31, 2009 were incurred by Radient in the
U.S. These costs comprised of funding the necessary research and
development of the
ONKO-SUREtm
test kit for the USFDA, and preparing for submission of
ONKO-SUREtm
test kit to the SFDA. During the year ended December 31,
2009, we spent $563,690 on research and development related to
the
ONKO-SUREtm
test kit, compared to $194,693 for the same period in 2008.
We expect research and development expenditures to increase
during of 2010 due to:
|
|
|
|
|
Additional expenditures for research and development is needed
in China for SFDA approval of
ONKO-SUREtm
test kit and the need for clinical trials in China for SFDA
approval of
ONKO-SUREtm
test kit;
|
|
|
|
The need for research and development for an updated version of
the
ONKO-SUREtm
test kit in the US, clinical trials for such tests and funds for
ultimate USFDA approval; and
|
|
|
|
Research and development for the HPE-based cosmetic product.
|
Selling, General and Administrative
Expenses. Selling, general and
administrative expenses for the Company were $10,936,789 for the
year ended December 31, 2009 as compared to $10,962,058 for
the year ended December 31, 2008.
Corporate
We incurred selling, general and administrative expenses of
$7,311,242 in 2009 as compared to $9,674,934 in 2008. Corporate
selling, general and administrative expenses consist primarily
of consulting (including financial consulting) and legal
expenses, director and commitment fees, regulatory compliance,
professional fees related to patent protection, payroll, payroll
taxes, investor and public relations, professional fees, and
stock exchange and shareholder services expenses. Also included
in selling, general and administrative expenses were non-cash
expenses incurred during the year ended December 31, 2009
of approximately $520,000 for common stock, options and warrants
issued to consultants for services and approximately $822,000
for options issued to employees and directors and approximately
$1,900,000 in bad debt expense. The decrease in selling, general
and administrative expense incurred is primarily a result of a
reduction in professional fees and payroll related costs of
$1,300,000 and
40
$1,100,000, respectively. Additionally, executive management
salaries for China-Wholesale were paid by Corporate in 2008.
The table below details the major components of selling, general
and administrative expenses incurred at Corporate:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Investor relations (including value of warrants/options)
|
|
$
|
864,905
|
|
|
$
|
1,851,033
|
|
Salary and wages (including value of options)
|
|
$
|
2,701,530
|
|
|
$
|
3,859,506
|
|
Directors fees (including value of options)
|
|
$
|
378,521
|
|
|
$
|
721,874
|
|
Consulting fees
|
|
$
|
192,692
|
|
|
$
|
104,040
|
|
Accounting and other professional fees
|
|
$
|
735,618
|
|
|
$
|
972,141
|
|
Legal
|
|
$
|
825,727
|
|
|
$
|
630,939
|
|
China-Wholesale
China-Wholesale incurred selling, general and administrative
expenses of $3,625,547 for the year ended December 31, 2009
as compared to $1,287,124 for the same period as in 2008. Major
components were advertising, amortization, payroll and related
taxes, transportation charges, meals and entertainment and
insurance. Selling, general and administrative expenses
increased 182% in 2009 when compared to 2008 expenses. The
increase is primarily due to expenses for advertising of
approximately $1,098,000 incurred during the third quarter of
2009. Advertising expense are for the promotion and advertising
of the HPE based products which were in prior periods assumed by
the distributors.
Additionally, JPIs executive salaries were paid by
Corporate in 2008.
Interest Expense. Interest expense for the
years ended December 31, 2009 and 2008 was $2,596,606 and
$468,531, respectively.
Corporate
Interest expense increased to $2,568,155 for the year ended
December 31, 2009 from $100,561 for the year ended
December 31, 2008 as a result of the issuance of the
issuance of debt instruments and the amortization of the related
debt discounts, debt issuance costs, and derivative liabilities
2008 and 2009.
China-Wholesale
JPI incurred interest expense of $28,451 and $367,970 for the
years ended December 31, 2009 and 2008, respectively. These
expenses represent interest paid to financial institutions in
connection with debt obligations.
Results
of Discontinued Operations
Summarized operating results of discontinued operations for the
years ended December 31, 2009 and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
December 31
|
|
|
2009
|
|
2008
|
|
Revenue
|
|
$
|
594,839
|
|
|
$
|
3,967,643
|
|
Income (loss) before income taxes
|
|
$
|
277,743
|
|
|
$
|
1,081,021
|
|
Included in income (loss) from discontinued operations, net are
income tax expenses of $30,717 and 5,213 for the years ended
December 31, 2009 and 2008, respectively. YYBs tax
rate is 15% through 2010 in accordance with the Western
Region Development Concession Policy of the PRC government.
Income (loss) before discontinued
operations. As a result of the factors described
above, for the twelve months ended December 31, 2009 the
Companys loss before discontinued operations was
$12,482,018 or $0.75 per
41
share compared to the year ended December 31, 2008 when the
Companys loss before discontinued operations was $712,948,
or $0.05 per share.
Liquidity
and Capital Resources
For the year ended December 31, 2009, the Companys
cash and cash equivalents decreased by $2,275,138, compared to a
net decrease in cash and cash equivalents of $3,870,210 for the
same period in 2008. We lost approximately $900,000 of cash due
to the disposition of YYB and deconsolidation of JPI. In
addition, we continue to attempt to raise additional debt or
equity financing as the Companys operations historically
have not produced sufficient cash to offset the cash drain of
growth in the Companys pharmaceutical business and general
operating and administrative expenses. The Companys US
operations require approximately $300,000 per month, including
interest. To the extent that funds are not available to meet the
Companys U.S operating needs, the Companys will have
to restrict or discontinue operations.
Operating activities. The Company used
$3,464,468 from continuing operating activities in the year
ended December 31, 2009, compared with cash used in
continuing operating activities of $6,230,880 for the same
period in 2008. This decrease was due in part to the collection
of accounts receivable offset by an increase in prepaid
advertising, consulting and other expenses.
The Company generated $101,457 in cash from discontinued
operating activities from changes in operating assets and
liabilities in the year ended December 31, 2009, as
compared to generating $1,559,721 for the same period in 2008.
Without additional debt or equity financing we will not be able
to fund the costs of additional capital expenditures, our
working capital needs or additional or new research and
development activities. There is no assurance we will be able to
generate sufficient funds internally or sell any debt or equity
securities to generate sufficient funds for these activities, or
whether such funds, if available, will be obtained on terms
satisfactory to us. The Company may need to discontinue or delay
its capital expenditures, research activities and working
capital investment if funds are not available to support
managements operational plans.
Investing activities. We used $1,797,723 in
investing activities in the year ended December 31, 2009
compared with $1,310,280 for the same period in 2008. The
primary reason for the change the Company purchase more
equipment in 2009 compared to 2008. For the twelve months ended
December 31, 2009 and 2008, JJB made capital improvements
to their facilities and purchased equipment in an effort to
regain JJBs GMP certification for JJBs small
injectible manufacturing lines. Renovations necessary for GMP
recertification of the facility at JJB are complete and
recertification was received in the second quarter of 2009. In
2009, we also acquired lab and office equipment for the
Companys U.S. facility to support the Companys
Onko-Suretm
test kit initiatives.
Net cash provided by financing activities was $3,464,468 for the
year ended December 31, 2009, primarily consisting of the
net proceeds of $520,556 from the issuance of convertible debt,
and net proceeds of $2,088,592 from the issuance of senior debt,
net proceeds of $812,320 from the issuance of common stock. Net
cash provided by financing activities was $2,162,272, for the
issuance of notes payable of approximately $2,800,000 and
issuance of common stock of $1,400,000.
Future
Capital Needs
The Company expects to incur additional capital expenditures at
the Companys U.S. facilities in 2009 in the form of
upgrading the Companys information technology systems,
collaboration with the Mayo Clinic, further development of the
Onko-Suretm
product and upgrading manufacturing lines in Tustin. It is
anticipated that these projects will be funded primarily through
additional debt or equity financing.
42
There is no assurance we will be able to generate sufficient
funds internally or sell any debt or equity securities to
generate sufficient funds for these activities, or whether such
funds, if available, will be obtained on terms satisfactory to
us. The Company may need to discontinue or delay its capital
expenditures, research activities and other investments if funds
are not available to support managements operational plans.
China
Credit Facilities
When JPI acquired JJB and YYB, KangDa Pharmaceutical Company, a
predecessor of JJB, had a credit facility and bank loan from
Industrial and Commercial Bank of China (ICBC) of
approximately RMB 38 million, or $4.7 million, (the
KangDa Credit Facility), which was assumed by JPI
through agreement with KangDa. The assumption of the loan was
not formalized with the bank, however, the bank made a verbal
agreement to allow the Company to continue under the original
terms of the credit agreement. The loan from ICBC is secured by
a pledge of the real property on which the Companys
Chinese manufacturing facilities are located. Currently,
approximately $3.1 million is due and payable on the KangDa
Credit Facility. JPI is currently in default, but the bank is
cooperating with JPIs management to resolve this issue. As
part of the resolution, the purchaser of YYB has directly
negotiated with the bank, wherein approximately
$2.3 million from the sale of YYB was remitted to pay down
principal and interest. Based on this commitment, the bank will
extend the remaining portion of the note and interest until
December 31, 2009. The remaining $0.6 million debt,
owed primarily by YYB, is due and payable.
Issuance
of Securities for Services
Due to our limited cash resources, we have in the past and
recently issues securities for services in lieu of cash to
consultants and other providers.
On January 22, 2009, we entered into an agreement with
B&D Consulting for investor relations services through
July 7, 2010. We granted B&D Consulting
400,000 shares of our common stock in exchange for
services, subject to the approval for listing of the shares by
the NYSE Alternate US. NYSE Alternext US approval was received
on March 26, 2009 and the shares were issued on
March 31, 2009. The value of the shares will be expensed
during the periods in which services are provided in exchange
for the share-based compensation.
On February 2, 2009, our Board of Directors authorized the
issuance of 12,500 shares of our common stock to an
investor relations consultant for services under a consulting
agreement, subject to the approval for listing of the shares by
the NYSE Alternext US. NYSE Alternext US approval was received
on March 26, 2009 and the shares were issued on
March 31, 2009. The value of the shares will be expensed
during the periods in which services are provided in exchange
for the share-based compensation.
On September 22, 2009, we entered into an agreement with
Lyons Capital, LLC for investor relations services for a twelve
month period. We granted 200,000 shares, in exchange for
services. The value of the shares will be expensed during the
periods in which service are provided in exchange for the
share-based compensation.
On November 24, 2009, we entered into an agreement with
First International Capital Group, Ltd, for investor relations
services for a six month period. We granted 900,000 shares,
which will be expensed during the periods in which service are
provided in exchange for the share-based compensation.
On September 29, 2009 the company issued 67,800 shares
of common stock to a vendor as settlement for the amount owed
them. The shares were valued at $0.29 per share and as a result
of the settlement the Company recorded the gain of $26,442.
Off-Balance
Sheet Arrangements
We are not party to any off-balance sheet arrangements, however,
we have executed certain contractual indemnities and guarantees,
under which we may be required to make payments to a guaranteed
or indemnified party. We have agreed to indemnify our directors,
officers, employees and agents to the maximum extent permitted
under the laws of the State of Delaware. In connection with a
certain facility lease, we have indemnified our lessor for
certain claims arising from the use of the facilities. Pursuant
to the Sale and Purchase Agreement, we have
43
indemnified the holders of registrable securities for any claims
or losses resulting from any untrue, allegedly untrue or
misleading statement made in a registration statement,
prospectus or similar document. Additionally, we have agreed to
indemnify the former owners of JPI against losses up to a
maximum of $2,500,000 for damages resulting from breach of
representations or warranties in connection with the JPI
acquisition. The duration of the guarantees and indemnities
varies, and in many cases is indefinite. These guarantees and
indemnities do not provide for any limitation of the maximum
potential future payments we could be obligated to make.
Historically, we have not been obligated to make any payments
for these obligations and no liabilities have been recorded for
these indemnities and guarantees in the accompanying
consolidated balance sheets.
Going
Concern
The condensed consolidated financial statements have been
prepared assuming we will continue as a going concern, which
contemplates, the realization of assets and satisfaction of
liabilities in the normal course of business. We incurred losses
before discontinued operations of $12,482,903 and $712,948 for
the twelve months ended December 31, 2009 and 2008,
respectively, and had an accumulated deficit of $52,438,553 at
December 31, 2009. In addition, we used cash from operating
activities of continuing operations of $3,176,278 for the twelve
months ended December 31, 2009.
During the second quarter 2009 the Companys corporate
management became aware of certain internal disputes in China
between the management of JJB and JPI. These disputes have
effectively resulted in difficulties in managing the operations
of JJB and also receiving financial information from them. As a
result of this loss of control, the Company is of the opinion
that it is in the best interest of the Company to divest itself
of JJB.
On April 15, 2010 the Company had cash on hand of
approximately $6.4 million. Cash in China was not included as we
are unable to verify deposits and the ability to repatriate such
funds is not possible given the deconsolidation and the effect
of discontinued operations. The Companys
U.S. operations currently require approximately $300,000
per month exclusive of interest payments, to fund the cost
associated with the Companys general U.S. corporate
operations, and the expenses related to the further development
of the
Onko-Suretm
kit.
The monthly cash requirement of $300,000 does not include any
extraordinary items or expenditures, including payments to the
Mayo Clinic on clinical trials for the Companys
Onko-Suretm
kit or expenditures related to further development of the
Companys CIT technology, as no significant expenditures
are anticipated other than recurring legal fees incurred in
furtherance of patent protection for the CIT technology.
The Companys near and long-term operating strategies focus
on (i) obtaining SFDA approval for the
Onko-Suretm
kit, (ii) further developing and marketing of
Onko-Suretm,
(iii) seeking a large pharmaceutical partner for the
Companys CIT technology, (iv) selling different
formulations of HPE-based products in the U.S. and
internationally and (v) introduction of new products.
Management recognizes that ability to achieve any of these
objectives is dependent upon obtaining significant additional
financing to sustain operations to enable it to continue as a
going concern. Managements plans include seeking
financing, alliances or other partnership agreements with
entities interested in the Companys technologies, or other
business transactions that would generate sufficient resources
to assure continuation of the Companys operations and
research and development programs.
There are significant risks and uncertainties which could
negatively affect the Companys operations. These are
principally related to (i) the absence of substantive
distribution network for the Companys
Onko-Suretm
kits, (ii) the early stage of development of the
Companys CIT technology and the need to enter into a
strategic relationship with a larger company capable of
completing the development of any ultimate product line
including the subsequent marketing of such product,
(iii) the absence of any commitments or firm orders from
the Companys distributors, (iv) possible defaults in
existing indebtedness and (v) failure to meet operational
covenants in existing financing agreements which would trigger
additional defaults or penalties. The Companys limited
sales to date for the
Onko-Suretm
kit and the lack of any purchase requirements in the existing
distribution agreements make it impossible to identify any
trends in the Companys business prospects. Moreover, if
either AcuVector
and/or the
University of Alberta is successful in their claims, we may be
liable for substantial damages, the Companys rights
44
to the CIT technology will be adversely affected, and the
Companys future prospects for licensing the CIT technology
will be significantly impaired.
The Companys only sources of additional funds to meet
continuing operating expenses, fund additional research and
development and fund additional working capital are through the
sale of securities,
and/or debt
instruments. The Company is actively seeking additional debt or
equity financing, but no assurances can be given that such
financing will be obtained or what the terms thereof will be.
The Company may need to discontinue a portion or all of its
operations if we are unsuccessful in generating positive cash
flow or financing for the Companys operations through the
issuance of securities.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Foreign
Currency Exchange Risk
Our primary customers are located in the Peoples Republic of
China. As such, all of our transactions with our customers and
vendors are denominated in RMB. Since July 2005, the Chinese
central bank has benchmarked the RMB against a basket of
currencies. As of December 31, 2009, the functional
currency of JPI is the RMB and Radient is the U.S. Dollar.
In the past, the value of the RMB fluctuates and is subject to
changes in Chinas political and economic conditions.
Historically, the Chinese government benchmarked the RMB
exchange ratio against the United States dollar, thereby
mitigating the associated foreign currency exchange rate
fluctuation risk.
45
|
|
Item 8.
|
Financial
Statements
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Radient Pharmaceuticals Corporation
We have audited the accompanying consolidated balance sheets of
Radient Pharmaceuticals Corporation and subsidiaries (the
Company) as of December 31, 2009 and 2008, and
the related consolidated statements of operations and
comprehensive income (loss), stockholders equity and cash
flows for the years then ended. These consolidated financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial
statements are free of material misstatement. The Company was
not required to have, nor were we engaged to perform, an audit
of its internal control over financial reporting. Our audit
included consideration of internal control over financial
reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Companys
internal control over financial reporting. Accordingly, we
express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Radient Pharmaceuticals
Corporation and subsidiaries as of December 31, 2009 and
2008, and the results of their operations and their cash flows
for the years then ended in conformity with accounting
principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been
prepared assuming the Company will continue as a going concern.
As more fully described in Note 1 to the consolidated
financial statements, the Company has incurred a significant
operating loss in 2009 and negative cash flows from operations
in 2009 and has an a working capital deficit of approximately
$4.2 million at December 31, 2009. These items, raise
substantial doubt about the Companys ability to continue
as a going concern. Managements plans in regard to these
matters are also described in Note 1. The consolidated
financial statements do not include any adjustments relating to
the recoverability and classification of asset carrying amounts
or the amount and classification of liabilities that might
result should the Company be unable to continue as a going
concern.
/s/ KMJ | Corbin & Company LLP
Costa Mesa, California
April 15, 2010
46
RADIENT
PHARMACEUTICALS CORPORATION
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
12,145
|
|
|
$
|
2,287,283
|
|
Accounts receivable, net
|
|
|
|
|
|
|
13,575,534
|
|
Inventories
|
|
|
79,255
|
|
|
|
1,563,991
|
|
Prepaid expenses and other current assets
|
|
|
57,778
|
|
|
|
1,006,960
|
|
Prepaid consulting
|
|
|
358,667
|
|
|
|
1,435,021
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
507,845
|
|
|
|
19,868,789
|
|
Property and equipment, net
|
|
|
83,547
|
|
|
|
11,709,508
|
|
Intangible assets, net
|
|
|
1,158,333
|
|
|
|
5,311,568
|
|
Receivable from JPI, net
|
|
|
2,675,000
|
|
|
|
|
|
Investment in JPI
|
|
|
20,500,000
|
|
|
|
|
|
Other assets
|
|
|
1,394,361
|
|
|
|
4,072,432
|
|
Noncurrent assets of discontinued operations
|
|
|
|
|
|
|
1,789,934
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
26,319,086
|
|
|
$
|
42,752,231
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
1,975,311
|
|
|
$
|
1,675,539
|
|
Accrued salaries and wages
|
|
|
738,331
|
|
|
|
822,201
|
|
Derivative liabilities
|
|
|
354,758
|
|
|
|
|
|
Income taxes payable
|
|
|
|
|
|
|
472,860
|
|
Deferred revenue
|
|
|
103,128
|
|
|
|
87,538
|
|
Convertible note, net of discount of $2,000,649
|
|
|
240,482
|
|
|
|
|
|
Current portion of notes payable
|
|
|
1,316,667
|
|
|
|
2,662,610
|
|
Current liabilities of discontinued operations
|
|
|
|
|
|
|
1,151,515
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
4,728,677
|
|
|
|
6,872,263
|
|
Other long-term liabilities
|
|
|
295,830
|
|
|
|
353,811
|
|
Notes payable, net of current portion and debt discount of
$1,701,402
|
|
|
601,819
|
|
|
|
581,305
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
5,626,326
|
|
|
|
7,807,379
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value; 25,000,000 shares
authorized; none issued and outstanding
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value; 100,000,000 shares
authorized; 22,682,116 and 16,006,074 shares issued at
December 31, 2009 and 2008, respectively; 22,265,441 and
15,826,074 shares outstanding at December 31, 2009 and
2008, respectively
|
|
|
22,265
|
|
|
|
15,826
|
|
Additional paid-in capital
|
|
|
73,109,048
|
|
|
|
68,192,411
|
|
Accumulated other comprehensive income
|
|
|
|
|
|
|
2,443,452
|
|
Accumulated deficit
|
|
|
(52,438,553
|
)
|
|
|
(35,706,837
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
20,692,760
|
|
|
|
34,944,852
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
26,319,086
|
|
|
$
|
42,752,231
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
47
RADIENT
PHARMACEUTICALS CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(LOSS)
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Net revenues
|
|
$
|
8,627,669
|
|
|
$
|
23,774,900
|
|
Cost of sales
|
|
|
5,360,213
|
|
|
|
11,530,391
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
3,267,456
|
|
|
|
12,244,509
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
563,690
|
|
|
|
194,693
|
|
Selling, general and administrative
|
|
|
10,936,789
|
|
|
|
10,962,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,500,479
|
|
|
|
11,156,751
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
(8,233,023
|
)
|
|
|
1,087,758
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Interest and other income (expense), net
|
|
|
(328,071
|
)
|
|
|
(24,210
|
)
|
Change in fair value of derivative liabilities
|
|
|
648,313
|
|
|
|
|
|
Loss on deconsolidation
|
|
|
(1,953,516
|
)
|
|
|
|
|
Interest expense
|
|
|
(2,596,606
|
)
|
|
|
(468,531
|
)
|
|
|
|
|
|
|
|
|
|
Total other expense, net
|
|
|
(4,229,880
|
)
|
|
|
(492,741
|
)
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before provision for
income taxes
|
|
|
(12,462,903
|
)
|
|
|
595,017
|
|
Provision for income taxes
|
|
|
19,115
|
|
|
|
1,307,965
|
|
|
|
|
|
|
|
|
|
|
Loss before from continuing operations
|
|
|
(12,482,018
|
)
|
|
|
(712,948
|
)
|
Income (loss) from discontinued operations, net
|
|
|
(4,139,037
|
)
|
|
|
1,893,008
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(16,621,055
|
)
|
|
|
1,180,060
|
|
Other comprehensive gain:
|
|
|
|
|
|
|
|
|
Foreign currency translation gain
|
|
|
|
|
|
|
1,375,023
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
(16,621,055
|
)
|
|
$
|
2,555,083
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per common share
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(0.75
|
)
|
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations
|
|
$
|
(0.25
|
)
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(1.00
|
)
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per common share
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(0.75
|
)
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations
|
|
$
|
(0.25
|
)
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(1.00
|
)
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic
|
|
|
16,680,946
|
|
|
|
15,608,697
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding diluted
|
|
|
16,680,946
|
|
|
|
18,337,162
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
48
RADIENT
PHARMACEUTICALS CORPORATION
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
For The
Years Ended December 31, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Preferred Stock
|
|
|
Paid-in
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Income (Loss)
|
|
|
Deficit
|
|
|
Equity
|
|
|
Balance, January 1, 2008
|
|
|
14,979,528
|
|
|
$
|
14,980
|
|
|
|
|
|
|
$
|
|
|
|
$
|
61,525,001
|
|
|
$
|
1,068,429
|
|
|
$
|
(36,886,897
|
)
|
|
$
|
25,721,513
|
|
Beneficial conversion feature related to Convertible Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,635,000
|
|
|
|
|
|
|
|
|
|
|
|
2,635,000
|
|
Common stock issued for cash, net of issuance costs of $142,410
|
|
|
323,626
|
|
|
|
323
|
|
|
|
|
|
|
|
|
|
|
|
856,948
|
|
|
|
|
|
|
|
|
|
|
|
857,271
|
|
Exercise of warrants
|
|
|
252,733
|
|
|
|
253
|
|
|
|
|
|
|
|
|
|
|
|
559,277
|
|
|
|
|
|
|
|
|
|
|
|
559,530
|
|
Common stock issued for consulting services
|
|
|
270,187
|
|
|
|
270
|
|
|
|
|
|
|
|
|
|
|
|
706,780
|
|
|
|
|
|
|
|
|
|
|
|
707,050
|
|
Stock-based employee and director compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,034,175
|
|
|
|
|
|
|
|
|
|
|
|
1,034,175
|
|
Estimated fair value of warrants issued to brokers for debt
issuances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
768,604
|
|
|
|
|
|
|
|
|
|
|
|
768,604
|
|
Estimated fair value of warrants and options issued to third
parties for services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106,626
|
|
|
|
|
|
|
|
|
|
|
|
106,626
|
|
Translation gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,375,023
|
|
|
|
|
|
|
|
1,375,023
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,180,060
|
|
|
|
1,180,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
15,826,074
|
|
|
|
15,826
|
|
|
|
|
|
|
|
|
|
|
|
68,192,411
|
|
|
|
2,443,452
|
|
|
|
(35,706,837
|
)
|
|
|
34,944,852
|
|
Common stock issued for consulting services
|
|
|
1,437,126
|
|
|
|
1,438
|
|
|
|
|
|
|
|
|
|
|
|
650,390
|
|
|
|
|
|
|
|
|
|
|
|
651,828
|
|
Stock-based employee and director compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
666,623
|
|
|
|
|
|
|
|
|
|
|
|
666,623
|
|
Estimated fair value of warrants issued to brokers for debt
issuances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,975,920
|
|
|
|
|
|
|
|
|
|
|
|
1,975,920
|
|
Estimated fair value of warrants and options issued to third
parties for services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,625
|
|
|
|
|
|
|
|
|
|
|
|
35,625
|
|
Common stock granted as compensation to members of the
Companys Board of Directors
|
|
|
120,000
|
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
|
71,880
|
|
|
|
|
|
|
|
|
|
|
|
72,000
|
|
Stock option modification
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
129,360
|
|
|
|
|
|
|
|
|
|
|
|
129,360
|
|
Voluntary conversion of debt
|
|
|
1,342,956
|
|
|
|
1,342
|
|
|
|
|
|
|
|
|
|
|
|
1,090,447
|
|
|
|
|
|
|
|
|
|
|
|
1,091,789
|
|
Common stock sold for cash
|
|
|
3,289,285
|
|
|
|
3,289
|
|
|
|
|
|
|
|
|
|
|
|
809,031
|
|
|
|
|
|
|
|
|
|
|
|
812,320
|
|
Derivative liability in connection with stock offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(509,839
|
)
|
|
|
|
|
|
|
|
|
|
|
(509,839
|
)
|
Common stock issued to note holder due to default
|
|
|
250,000
|
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
|
72,500
|
|
|
|
|
|
|
|
|
|
|
|
72,750
|
|
Adoption of change in accounting principal related to derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(209,166
|
)
|
|
|
(110,661
|
)
|
|
|
(319,827
|
)
|
Reclassification of derivative liability upon expiration of
share adjustment terms
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
133,866
|
|
|
|
|
|
|
|
|
|
|
|
133,866
|
|
Reclassification adjustment of accumulated translation gains in
connection with deconsolidation and sale of YYB
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,443,452
|
)
|
|
|
|
|
|
|
(2,443,452
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,621,055
|
)
|
|
|
(16,621,055
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
|
22,265,441
|
|
|
$
|
22,265
|
|
|
|
|
|
|
$
|
|
|
|
$
|
73,109,048
|
|
|
$
|
|
|
|
$
|
(52,438,553
|
)
|
|
$
|
20,692,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
49
RADIENT
PHARMACEUTICALS CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(16,621,055
|
)
|
|
$
|
1,180,060
|
|
Less: (loss) income from discontinued operations
|
|
|
(4,139,037
|
)
|
|
|
1,893,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,482,018
|
)
|
|
|
(712,948
|
)
|
Adjustments to reconcile net income (loss) to net cash used in
operating activities
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,095,771
|
|
|
|
1,343,677
|
|
Amortization of debt issuance costs
|
|
|
1,770,377
|
|
|
|
12,386
|
|
Fair market value of common stock options granted to employees
and directors for services
|
|
|
795,983
|
|
|
|
1,034,175
|
|
Fair market value of common stock, warrants and options granted
for services
|
|
|
593,279
|
|
|
|
1,617,592
|
|
Fair market value of warrants accounted for as derivative
liabilities
|
|
|
35,558
|
|
|
|
|
|
Change in fair value of derivative liabilities
|
|
|
(648,313
|
)
|
|
|
|
|
Penalties on Cantone Debt
|
|
|
192,131
|
|
|
|
|
|
Provision for bad debts
|
|
|
1,890,762
|
|
|
|
|
|
Loss on deconsolidation
|
|
|
1,953,516
|
|
|
|
|
|
Gain on the settlement of accounts payable
|
|
|
(47,251
|
)
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
4,489,789
|
|
|
|
(11,656,294
|
)
|
Related party account with Jade Capital
|
|
|
|
|
|
|
880,927
|
|
Inventories
|
|
|
122,670
|
|
|
|
(1,313,331
|
)
|
Prepaid consulting, expenses and other assets
|
|
|
(3,890,720
|
)
|
|
|
261,059
|
|
Accounts payable, accrued expenses, accrued salaries and wages
and other long-term liabilities
|
|
|
1,228,486
|
|
|
|
1,679,871
|
|
Income taxes payable
|
|
|
(320,398
|
)
|
|
|
794,411
|
|
Deferred revenue
|
|
|
15,393
|
|
|
|
(172,405
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities of continuing operations
|
|
|
(3,204,985
|
)
|
|
|
(6,230,880
|
)
|
Net cash provided by operating activities of discontinued
operations
|
|
|
101,457
|
|
|
|
1,559,721
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(3,103,528
|
)
|
|
|
(4,671,159
|
)
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(1,744,065
|
)
|
|
|
(1,490,224
|
)
|
Cash balance divested from deconsolidation of subsidiary
|
|
|
(53,658
|
)
|
|
|
|
|
Funds advanced to KangDa
|
|
|
|
|
|
|
(635,386
|
)
|
Repayment of funds from KangDa
|
|
|
|
|
|
|
655,471
|
|
Payments received from notes receivable
|
|
|
|
|
|
|
159,859
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(1,797,723
|
)
|
|
|
(1,310,280
|
)
|
Net cash used in investing activities of discontinued operations
|
|
|
(852,955
|
)
|
|
|
(17,252
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(2,650,678
|
)
|
|
|
(1,327,532
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of bridgenote, net of issuance costs
|
|
|
43,000
|
|
|
|
|
|
Payments on notes payable
|
|
|
|
|
|
|
(2,195,644
|
)
|
Proceeds from issuance of convertible debt, net of cash offering
costs
|
|
|
520,556
|
|
|
|
2,084,401
|
|
Proceeds from issuance of senior notes, net of cash offering
costs
|
|
|
2,088,592
|
|
|
|
856,714
|
|
Proceeds from issuance of common stock, net of cash offering
costs
|
|
|
812,320
|
|
|
|
857,271
|
|
Proceeds from the exercise of warrants and options, net of
commission and expenses
|
|
|
|
|
|
|
559,530
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities of continuing
operations
|
|
|
3,464,468
|
|
|
|
2,162,272
|
|
Net cash used in financing activities of discontinued operations
|
|
|
|
|
|
|
(86,758
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
3,464,468
|
|
|
|
2,075,514
|
|
Effect of exchange rates on cash and cash equivalents
|
|
|
14,600
|
|
|
|
52,967
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
(2,275,138
|
)
|
|
|
(3,870,210
|
)
|
Cash and cash equivalents, beginning of year
|
|
|
2,287,283
|
|
|
|
6,157,493
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
12,145
|
|
|
$
|
2,287,283
|
|
|
|
|
|
|
|
|
|
|
See Note 1 to consolidated financial statements for
supplemental cash flow information and non-cash investing and
financing activities.
See accompanying notes to consolidated financial statements.
50
|
|
NOTE 1
|
ORGANIZATION
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Nature
of Business
Since inception, Radient Pharmaceuticals Corporation (the
Company, or Radient, We, or
Our) has been engaged in:
|
|
|
|
|
commercial development of, and obtaining various governmental
regulatory approvals for its proprietary diagnostic tumor-marker
test kit,
Onko-Suretm
(formally
ONKO-SUREtm®),
which detects the presence of multiple types of cancer, and
|
|
|
|
the international commercialization of its
Elleuxetm
branded Skin Care products.
|
Prior to September 2009, the Company manufactured and
distributed generic and homeopathic pharmaceutical products and
supplements as well as cosmetic products in China through a
wholly owned subsidiary Jade Pharmaceutical Inc.,
(JPI) and JPIs two wholly owned subsidiaries,
Jiangxi Jiezhong Bio-Chemical Pharmacy Company Limited
(JJB) and Yangbian Yiqiao Bio-Chemical Pharmacy
Company Limited (YYB). YYB was sold by JPI in June
2009.
Due to several factors including deterioration in its
relationship with local management of JPI, the Company
relinquished control over JPI and converted its interest in JPI
to that of an investment to be accounted for under the cost
method, effective September 29, 2009. Accordingly, since
September 29, 2009, the accounts and transactions of JPI
have been deconsolidated from the financial statements of
Radient.
Deconsolidation
During the third quarter of 2009, it became apparent to the
Companys management that the working relationship with
management of its operations in China was becoming increasingly
strained. Accordingly, the Company deemed it appropriate to seek
alternative means of monetizing its investment. There were
several issues that caused the Company to conclude accordingly,
including, but not limited to:
|
|
|
|
|
Lack of timely responses by the management in China to requests
by Company management for financial information;
|
|
|
|
Non responsiveness by management in China to requests for
transfer of Company funds to bank accounts under corporate
control;
|
|
|
|
Lack of timely communication with Corporate management
concerning significant decisions made by management in China
concerning the disposal of the YYB subsidiary; and
|
|
|
|
Lack of timely communication with corporate officers concerning
operations in China.
|
Effective September 29, 2009 (the Effective
Date), based on unanimous consent of the Companys
board of directors and an executed binding agreement (the
Agreement) between the Company and Henry Jia, Frank
Zheng and Yuan Da Xia (collectively, the JPI
Shareholders), the Company deconsolidated all activity of
JPI.
Based on the Agreement and in accordance with current accounting
guidelines, the Company deconsolidated JPI as of the date the
Company ceased to have a controlling financial interest, which
was effective September 29, 2009. In accordance with the
Agreement, the Company exchanged its shares of JPI
for
non-voting shares of preferred stock, which represents 100%
outstanding preferred shares, relinquished all rights to past
and future profits, surrendered its management positions and
agreed to non-authoritative minority role on its board of
directors.
Based on the Companys evaluation of current accounting
guidance, it was determined that the Company did not maintain
significant influence over the investee and, accordingly, has
recorded such investment in accordance with the cost method.
Although, the Company maintains significant economic ownership
in JPI, based on its evaluation of its lack of ability to
influence, lack of a role in policy and decision making, no
significant planned intercompany activity, among other things,
the Company concluded that it would not be appropriate to
account for such investment in consolidation or under the equity
method of accounting.
51
In accordance with current accounting guidance, the Company has
recorded the investment in JPI at its fair value as of the date
of deconsolidation and recorded a loss in the statement of
operations based on the difference between the fair value of the
consideration received, the fair value of the retained
noncontrolling interest and the carrying amount of JPIs
assets and liabilities at such date (as detailed below):
|
|
|
|
|
Consideration Received
|
|
$
|
3,405,946
|
(1)
|
Fair value of noncontrolling interest
|
|
|
20,500,000
|
(2)
|
|
|
|
|
|
|
|
|
23,905,946
|
|
Net assets of JPI
|
|
|
(25,859,462
|
)(3)
|
|
|
|
|
|
Loss on deconsolidation
|
|
$
|
(1,953,516
|
)
|
|
|
|
|
|
|
|
|
(1) |
|
Consideration consisted of the following: |
|
|
|
a. |
|
Note receivable of $5,350,000, which the Company recorded a
reserve of $2,675,000 based on its evaluation of collectibility,
including historical and expected repayment patterns. The note
receivable bears interest at 12%, which the Company is currently
not accruing. Final repayment terms are being negotiated. |
|
b. |
|
$730,946 of salaries and related interest which were accrued by
the Company and will be exchanged for 730,946 shares of JPI
common stock. |
|
|
|
(2) |
|
The fair value assigned to the investment was based on estimates
and assumptions determined by management, including, but not
limited to: |
|
|
|
|
|
Sales growth based on managements expectations
and historical analysis
|
|
|
|
Cost of sales/Gross Margin Based on historical
analysis and management expectations
|
|
|
|
Selling, General and Administrative Expenses Based
on historical analysis and management expectations
|
|
|
|
Comparable Public Companies Based on same or similar
line of business as the Company and those that possessed similar
to those of the Company.
|
|
|
|
Discounts The Company evaluated discounts related to
the following:
|
|
|
|
|
|
Lack of control
|
|
|
|
Lack of marketability
|
|
|
|
(3) |
|
The net assets of JPI consisted of the following: |
|
|
|
|
|
Cash
|
|
$
|
53,658
|
|
Other current assets
|
|
|
18,920,177
|
|
Property and equipment
|
|
|
9,381,118
|
|
Other long term assets
|
|
|
3,464,715
|
|
|
|
|
|
|
Total assets
|
|
$
|
31,819,668
|
|
Current portion of notes payable
|
|
$
|
(2,673,154
|
)
|
Other current liabilities
|
|
|
(1,122,936
|
)
|
Other comprehensive income
|
|
|
(2,164,116
|
)
|
|
|
|
|
|
Total liabilities
|
|
$
|
(5,960,206
|
)
|
|
|
|
|
|
Net Assets
|
|
$
|
25,859,462
|
|
|
|
|
|
|
Discontinued
Operations and Dispositions
On January 22, 2009, the Companys board of directors
authorized management to sell the operations of YYB. The Company
has classified the assets, liabilities, operations and cash
flows of YYB as discontinued operations for all periods
presented prior to the sale. The Company sold YYB in June 2009.
52
Proceeds from the sale of YYB consist of a note receivable in
the amount of 16 million RMB (approximately
U.S. $2,337,541), which was paid directly to a bank. JPI
owed this bank approximately 18,250,000 RMB (approximately
U.S. $2,668,000) at the date of sale. In connection with
the sale, JPI transferred rights to certain land and land use
rights upon sale. JPI remains liable under the debt obligation
with the bank, as such obligation did not pass to the buyer.
Accordingly, JPI recorded a note receivable of
$ on its books, which is due
through 2010. The loss on the sale of YYB is summarized as
follows (in U.S. dollars):
|
|
|
|
|
Sales price
|
|
$
|
2,337,541
|
|
Carrying value of net assets
|
|
|
6,723,605
|
|
|
|
|
|
|
Loss on sale
|
|
$
|
(4,386,064
|
)
|
|
|
|
|
|
Summarized operating results of discontinued operations through
the date of the sale and for the year ended December 31,
2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
Revenue
|
|
$
|
594,839
|
|
|
$
|
3,967,643
|
|
Income before income taxes
|
|
$
|
277,743
|
|
|
$
|
1,081,021
|
|
Included in income (loss) from discontinued operations, net are
income tax expenses of $30,717 and $5,213 for the years ended
December 31, 2009 and 2008, respectively. YYBs tax
rate is 15% through 2010 in accordance with the Western
Region Development Concession Policy of the PRC
government. The following table summarizes the carrying amount
at December 31, 2009 (through date of sale) and
December 31, 2008 of the major classes of assets and
liabilities of the Companys business classified as
discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2008
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
|
1,044,550
|
|
|
|
|
|
Accounts receivable, net
|
|
|
1,094,399
|
|
|
$
|
930,769
|
|
Inventories
|
|
|
584,886
|
|
|
|
423,842
|
|
Other current assets
|
|
|
3,975
|
|
|
|
80,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,727,810
|
|
|
$
|
1,435,021
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
2,097,076
|
|
|
$
|
1,742,739
|
|
Other
|
|
|
3,040,406
|
|
|
|
47,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,137,482
|
|
|
$
|
1,789,934
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
569,188
|
|
|
$
|
685,360
|
|
Debt
|
|
|
572,500
|
|
|
|
466,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,141,687
|
|
|
$
|
1,151,515
|
|
|
|
|
|
|
|
|
|
|
Going
Concern
The consolidated financial statements have been prepared
assuming the Company will continue as a going concern, which
contemplates, the realization of assets and satisfaction of
liabilities in the normal course of business. The Company
incurred losses before discontinued operations of $12,482,018
and $712,948 for the years ended December 31, 2009 and
2008, respectively, and had an accumulated deficit of
$52,438,553 at December 31, 2009. In addition, the Company
used cash from operating activities of continuing operations of
$3,204,985.
53
During the second quarter 2009 the Companys corporate
management became aware of certain internal disputes in China
between the management of JJB and JPI. These disputes have
effectively resulted in difficulties in managing the operations
of JJB and also receiving financial information from them. As a
result of this loss of control, the Company entered into the
Agreement to deconsolidate JPI (see above).
On April 14, 2010 the Company had cash on hand of
approximately $6.4 million. The Companys operations
currently require approximately $300,000 per month exclusive of
interest payments.
The monthly cash requirement of $300,000 does not include any
extraordinary items or expenditures, including payments to the
Mayo Clinic on clinical trials for the Companys
Onko-Suretm
kit or expenditures related to further development of the CIT
technology, as no significant expenditures are anticipated other
than recurring legal fees incurred in furtherance to of patent
protection for the CIT technology.
From January 1, 2010 through April 13, 2010, the
Company raised gross proceeds of approximately $6,000,000 from
the issuance of additional
12th
Convertible promissory notes payable and $512,000 from the
exercise of warrants to purchase 400,000 shares. Additionally,
in 2010, the Company entered into a
5-year
collaboration agreement with a third party to commercialize the
Companys CIT technology in India, resulting in a potential
revenue sharing arrangement. The Company is actively securing
additional distribution agreements that include potential
revenue sharing arrangements in 2010.
The Companys near and long-term operating strategies focus
on (i) obtaining SFDA approval for the
Onko-Suretm
kit, (ii) further developing and marketing of
Onko-Suretm,
(iii) seeking a large pharmaceutical partner for the
Companys CIT technology in other locaitons,
(iv) selling different formulations of HPE-based products
in the U.S. and internationally and (v) introduction
of new products. Management recognizes that ability to achieve
any of these objectives is dependent upon obtaining significant
additional financing to sustain operations to enable it to
continue as a going concern. Managements plans include
seeking financing, alliances or other partnership agreements
with entities interested in the Companys technologies, or
other business transactions that would generate sufficient
resources to assure continuation of the Companys
operations and research and development programs.
There are significant risks and uncertainties which could
negatively affect the Company operations. These are principally
related to (i) the absence of substantive distribution
network for the Companys
Onko-Suretm
kits, (ii) the early stage of development of the
Companys CIT technology and the need to enter into
additional strategic relationships with larger companies capable
of completing the development of any ultimate product line
including the subsequent marketing of such product,
(iii) the absence of any commitments or firm orders from
the Companys distributors, (iv) possible defaults in
existing indebtedness and (v) failure to meet operational
covenants in existing financing agreements which would trigger
additional defaults or penalties. The Companys limited
sales to date for the
Onko-Suretm
kit and the lack of any purchase requirements in the existing
distribution agreements make it impossible to identify any
trends in the Companys business prospects. Moreover, if
either AcuVector
and/or the
University of Alberta is successful in their claims, we may be
liable for substantial damages, the Companys rights to the
CIT technology will be adversely affected, and the
Companys future prospects for licensing the CIT technology
will be significantly impaired.
The Companys only sources of additional funds to meet
continuing operating expenses, fund additional research and
development and fund additional working capital are through the
sale of securities,
and/or debt
instruments. We are actively seeking additional debt or equity
financing, but no assurances can be given that such financing
will be obtained or what the terms thereof will be. We may need
to discontinue a portion or all of its operations if the Company
is unsuccessful in generating positive cash flow or financing
for the Companys operations through the issuance of
securities.
Principles
of Consolidation
As of September 29, 2009, the Company deconsolidated JPI,
but for the period of January 1, 2009 through
September 29, 2009 the operations of JPI have been
consolidated in the statements of operations and comprehensive
54
income (loss) and statement of cash flows. Intercompany
transactions for the period ended September 29, 2009 have
been eliminated in consolidation. In addition, the Company
consolidated the operations of YYB through June 26, 2009
(the date of sale), which have been classified as discontinued
operations at December 31, 2008 and forth years ended December
31, 2009 and 2008.
Reclassifications
Reclassifications have been made to prior year consolidated
financial statements in order to conform the presentation to the
statements as of and for the year ended December 31, 2009.
Revenue
Recognition
The Company generates revenues primarily from wholesale sales of
over-the-counter
and prescription pharmaceuticals and cosmetic products.
Wholesale
Sales
Revenues from the wholesale sales of over-the counter and
prescription pharmaceuticals are recognized when persuasive
evidence of an arrangement exists, title and risk of loss have
passed to the buyer, the price is fixed or readily determinable
and collection is reasonably assured, as noted in the
appropriate accounting guidance.
During the third and fourth quarters of 2009, the Company
entered into several distribution agreements for various
geographic locations with a third party. Under the terms of the
agreements, the Company sells product to the distributor at a
base price that is the greater of a fixed amount (as defined in
each agreement) or 50% of the distributors invoiced Net
Sales price (as defined) to its customers. The distributor is
required to provide the Company quarterly reconciliations of the
distributors actual invoiced prices at which time the
price becomes fixed and determinable by the Company. Until the
price is fixed and determinable, the Company defers the
recognition of revenues under these arrangements. As of
December 31, 2009, the Company had $103,128 of deferred
revenue related to these arrangements recorded in the
accompanying consolidated balance sheet.
In conjunction with the launch of the Companys Goodnak
facial creams, distributors of the products were offered
limited-time discounts to allow for promotional expenses
incurred in the distribution channel. Distributors are not
required to submit proof of the promotional expenses incurred.
The Company accounts for the promotional expenses in accordance
with FASB
ASC 815-30-35
Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendors Products),
(ASC
815-30-35).
Accordingly, the promotional discounts have been netted against
revenue in the accompanying consolidated statements of
operations and comprehensive income (loss). Accounts receivable
have also been reduced by the promotional discounts, as
customers are permitted by the terms of the distribution
contracts to net the discounts against payments on the related
invoices.
Any provision for sales promotion discounts and estimated
returns are accounted for in the period the related sales are
recorded. Buyers generally have limited rights of return, and
the Company provides for estimated returns at the time of sale
based on historical experience. Returns from customers
historically have not been material. Actual returns and claims
in any future period may differ from the Companys
estimates.
In accordance with FASB
ASC 605-45-50-3,
Taxes Collected from Customers and Remitted to Governmental
Authorities, (ASC
605-45-50-3),
JPIs revenues are reported net of value added taxes
(VAT) collected.
Accounting
for Shipping and Handling Revenue, Fees and Costs
The Company classifies amounts billed for shipping and handling
as revenue in accordance with FASB ASC
605-45-50-2,
Shipping and Handling Fees and Costs (ASC
605-45-50-2).
Shipping and handling fees and costs are included in cost of
sales.
Other
Comprehensive Income and Foreign Currency
Translation
FASB
ASC 220-10-05,
Comprehensive Income, establishes standards for the
reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements.
Comprehensive
55
income is defined to include all changes in equity except those
resulting from investments by owners and distributions to owners.
The accompanying consolidated financial statements are presented
in United States dollars. The functional currency of JPI is the
Yuan Renminbi (RMB). For 2008, the balance sheet
accounts of JPI were translated into United States dollars from
RMB at year end exchange rates and for the year ended
December 31, 2008 and the period ended September 29,
2009, all revenues and expenses are translated into United
States dollars at average exchange rates prevailing during the
periods in which these items arise. For 2008, capital accounts
were translated at their historical exchange rates when the
capital transactions occurred. Translation gain $1,375,023 for
2008 is recorded as accumulated other comprehensive income
(loss), a component of stockholders equity.
The RMB is not freely convertible into foreign currency and all
foreign exchange transactions must take place through authorized
institutions. No representation is made that the RMB amounts
could have been, or could be, converted into United States
dollars at the rates used in translation.
Research
and Development
Internal research and development costs are expensed as
incurred. Non-refundable third party research and development
costs are expensed when the contracted work has been performed.
Cash
Equivalents
The Company considers all highly liquid investments with
original maturities of three months or less when purchased to be
cash equivalents.
Inventories
JPI recorded inventories at the lower of weighted-average cost
(which approximates cost on a first-in first-out basis) or net
realizable value. Major components of inventories were raw
materials, packaging materials, direct labor and production
overhead. Radients inventories consist primarily of raw
materials and related materials, are stated at the lower of cost
or market with cost determined on a
first-in,
first-out (FIFO) basis. The Company regularly
monitors inventories for excess or obsolete items and makes any
valuation corrections when such adjustments are needed. From
time to time, provisions are made to reduce excess or obsolete
inventories to their estimated net realizable value. Once
established, write-downs are considered permanent adjustments to
the cost basis of the obsolete or excess inventories.
Property
and Equipment
Property and equipment is stated at cost. Depreciation is
computed using the straight-line method over estimated useful
lives as follows:
|
|
|
Machinery and equipment, including lab equipment
|
|
5 to 15 years
|
Office equipment
|
|
3 to 5 years
|
Maintenance and repairs are charged to expense as incurred.
Renewals and improvements of a major nature are capitalized. At
the time of retirement or other disposition of property and
equipment, the cost and accumulated depreciation are removed
from the accounts and any resulting gains or losses are
reflected in the consolidated statement of operations.
Intangible
Assets
The Company owns intellectual property rights and an assignment
of a US patent application for its CIT technology. The
technology was purchased from Dr. Lung-Ji Chang, who
developed it while at the University of Alberta, Edmonton,
Canada. The purchase price is being amortized over the expected
useful life of the technology, which the Company determined to
be 20 years, based upon an estimate of three years to
perfect the patent plus 17 years of patent life.
56
Impairment
of Long-Lived Assets
In accordance with FASB
ASC 360-10-5,
Accounting for the Impairment or Disposal of Long-Lived
Assets, the Company evaluates the carrying value of its
long-lived assets for impairment whenever events or changes in
circumstances indicate that such carrying values may not be
recoverable. The Company uses its best judgment based on the
current facts and circumstances relating to its business when
determining whether any significant impairment factors exist.
The Company considers the following factors or conditions, among
others, that could indicate the need for an impairment review:
|
|
|
|
|
significant under performance relative to expected historical or
projected future operating results;
|
|
|
|
market projections for cancer research technology;
|
|
|
|
its ability to obtain patents, including continuation patents,
on technology;
|
|
|
|
significant changes in its strategic business objectives and
utilization of the assets;
|
|
|
|
significant negative industry or economic trends, including
legal factors;
|
|
|
|
potential for strategic partnerships for the development of its
patented technology;
|
|
|
|
changing or implementation of rules regarding manufacture or
sale of pharmaceuticals in China; and
|
|
|
|
ability to maintain Good Manufacturing Process (GMP)
certifications.
|
If the Company determines that the carrying values of long-lived
assets may not be recoverable based upon the existence of one or
more of the above indicators of impairment, the Companys
management performs an undiscounted cash flow analysis to
determine if impairment exists. If impairment exists, the
Company measures the impairment based on the difference between
the assets carrying amount and its fair value, and the
impairment is charged to operations in the period in which the
long-lived asset impairment is determined by management. During
the quarter ended September 30, 2009, the Company recorded
an entry of $161,057 to remove capitalized accounting software
associated with the deconsolidation of JPI on September 29,
2009. Based on its analysis, the Company believes that no
further indicators of impairment of the carrying value of its
long-lived assets existed at December 31, 2009. There can
be no assurance, however, that market conditions will not change
or demand for the Companys products will continue or allow
the Company to realize the value of its long-lived assets and
prevent future impairment.
Risks
and Uncertainties
The Companys proprietary test kit is deemed a medical
device or biologic, and as such is governed by the Federal Food
and Drug and Cosmetics Act and by the regulations of state
agencies and various foreign government agencies. Prior to
July 3, 2008, the Company was not permitted to sell the
Onko-Suretm
test kit in the U.S. except on a research use
only basis, as regulated by the U.S. Food and Drug
Administration (USFDA). The Company has received
regulatory approval from various foreign governments to sell its
products and is in the process of obtaining regulatory approval
in other foreign markets. There can be no assurance that the
Company will maintain the regulatory approvals required to
market its
Onko-Suretm
test kit or that they will not be withdrawn.
Prior to May 2002, the Companys focus was on obtaining
foreign distributors for its
Onko-Suretm
test kit. In May 2002, the Company decided to begin the USFDA
process under Section 510(k) of the Food, Drug and Cosmetic
Act for approval of its intent to market the
Onko-Suretm
test kit as an aid in monitoring patients with colorectal
cancer. On July 3, 2008, the Company received a letter of
determination from the USFDA that the
Onko-Suretm
test kit was substantially equivalent to the
existing predicate device being marketed. The letter grants the
Company the right to market the
Onko-Suretm
test kit as a device to monitor patients who have been
previously diagnosed with colorectal cancer.
Although the Company has obtained approval from the USFDA to
market the then current formulation of the
Onko-Suretm
test kit, it has been determined that one of the key components
of the
Onko-Suretm
test kit, the anti-fibrinogen-HRP is limited in supply and
additional quantities cannot be purchased. There are currently
enough
Onko-Suretm
test kit components to perform approximately 1.2 million
individual tests (31,000 test kits) over the
57
next
12-18 months.
Based on current and anticipated orders, this supply is adequate
to fill all orders. The Company now anticipates that it will
attempt to locate a substitute anti-fibrinogen-HRP and perform
additional quality assurance testing in order to create a
significant supply of the current version of the
Onko-Suretm
test kit.
Part of the Companys research and development efforts
through 2010 will include the testing and development of an
enhanced and improved version of the
Onko-Suretm
test kit. Pilot studies show that the new version could be
superior to the current version. The Company is currently
working with a third party to take the lead on necessary
clinical studies. It is anticipated that this version will be
submitted to the USFDA in the latter half of 2010.
In June 2007, the Chinese approval process fundamentally
changed. Under the new SFDA guidelines, the SFDA is unlikely to
approve the marketing of the
ONKO-SUREtm
test kit without one of the following: approval by the USFDA,
sufficient clinical trials in China, or product approval from a
country where the
ONKO-SUREtm
test kit is registered and approved for marketing and export.
JPI intends to proceed with all of these options in an attempt
to meet the new SFDA guidelines, but even though USFDA approval
of a limited supply formulation of the
ONKO-SUREtm
test kit has been received, there can be no assurances that JPI
will obtain approval for marketing the
ONKO-SUREtm
test kit in China or what the timing thereof may be. The
estimated time to complete the SFDA approval process is a year
and a half to two years.
In order to comply with the new SFDA guidelines, in September of
2008, the Company retained Jyton & Emergo Medical
Technology, a China based company to:
|
|
|
|
|
Compile technical file and prepare clinical protocol;
|
|
|
|
Clinical trial preparation and design;
|
|
|
|
Clinical trial supervision and monitoring;
|
|
|
|
When appropriate, apply for SFDA approval.
|
The Company is subject to the risk of failure in maintaining its
existing regulatory approvals, in obtaining other regulatory
approval, as well as the delays until receipt of such approval,
if obtained. Therefore, the Company is subject to substantial
business risks and uncertainties inherent in such an entity,
including the potential of business failure.
Risks
and Uncertainties
There are significant risks and uncertainties which could
negatively affect the Companys operations. These are
principally related to (i) the absence of substantive
distribution network for the Companys
Onko-Suretm
kits, (ii) the early stage of development of the
Companys CIT technology and the need yet to be developed
to enter into a strategic relationship with a larger company
capable of completing the development of any ultimate product
line including the subsequent marketing of such product and
(iii) the absence of any commitments or firm orders from
the Companys distributors. The Companys limited
sales to date for the
Onko-Suretm
kit and the lack of any purchase requirements in the existing
distribution agreements make it impossible to identify any
trends in the Companys business prospects. Moreover, if
either AcuVector
and/or the
University of Alberta is successful in their claims, the Company
may be liable for substantial damages, the Companys rights
to the CIT technology will be adversely affected, and the
Companys future prospects for licensing the CIT technology
will be significantly impaired.
Share-Based
Compensation
All issuances of the Companys common stock for non-cash
consideration have been assigned a per share amount equaling
either the market value of the shares issued or the value of
consideration received, whichever is more readily determinable.
The majority of non-cash consideration received pertains to
services rendered by consultants and others and has been valued
at the market value of the shares on the measurement date.
The Company accounts for equity instruments issued to
consultants and vendors in exchange for goods and services in
accordance with the provisions of FASB
ASC 505-50-30,
Equity-Based Payments to Non-Employees, (ASC
505-50-30)
the measurement date for the fair value of the equity
instruments issued is determined at the
58
earlier of (i) the date at which a commitment for
performance by the consultant or vendor is reached or
(ii) the date at which the consultant or vendors
performance is complete. In the case of equity instruments
issued to consultants, the fair value of the equity instrument
is recognized over the term of the consulting agreement.
Under the relevant accounting guidance, assets acquired in
exchange for the issuance of fully vested, non-forfeitable
equity instruments should not be presented or classified as an
offset to equity on the grantors balance sheet once the
equity instrument is granted for accounting purposes.
Accordingly, the Company records the fair value of the fully
vested, non-forfeitable common stock issued for future
consulting services as prepaid expense in its consolidated
balance sheet.
We have employee compensation plans under which various types of
stock-based instruments are granted. We account for our
share-based payments in accordance with FASB
ASC 718-10,
Stock Compensation (ASC
718-10).
This statement requires all share-based payments to employees,
including grants of employee stock options, to be measured based
upon their grant date fair value, and be recognized in the
statements of operations as compensation expense (based on their
estimated fair values) generally over the vesting period of the
awards.
Basic
and Diluted Income (Loss) Per Share
Basic income (loss) per common share is computed based on the
weighted-average number of shares outstanding for the period.
Diluted income (loss) per share includes the effect of potential
shares outstanding, including dilutive stock options and
warrants, using the treasury stock method, and shares issuable
upon conversion of debt. In periods of losses, basic and diluted
loss per share are the same as the effect of stock options,
warrants and shares issuable upon conversion of debt on loss per
share is anti-dilutive. However, the impact under the treasury
stock method of dilutive stock options and warrants would have
increased diluted weighted - average shares by 1,287,539 shares
for the year ended December 31, 2009.
The following table sets for the calculation of basic and
diluted earnings per share for the year ended December 31,
2008:
|
|
|
|
|
|
|
2008
|
|
Numerator:
|
|
|
|
|
Net income
|
|
$
|
1,180,060
|
|
Numerator for basic per share amounts income
available to common stockholders
|
|
$
|
1,180,060
|
|
Interest on Convertible Debt
|
|
|
73,581
|
|
|
|
|
|
|
Numerator for diluted per share amounts
|
|
$
|
1,253,641
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
Denominator for basic per share amounts
weighted-average shares
|
|
|
15,608,697
|
|
Effect of dilutive securities:
|
|
|
|
|
Options and warrants dilutive potential common
shares calculated using the treasury stock method
|
|
|
573,593
|
|
Incremental shares from assumed conversion
convertible debt
|
|
|
2,154,872
|
|
|
|
|
|
|
Denominator for diluted per share amounts
|
|
|
18,337,162
|
|
|
|
|
|
|
Basic income per common share
|
|
$
|
0.08
|
|
|
|
|
|
|
Diluted income per common share
|
|
$
|
0.07
|
|
|
|
|
|
|
Diluted income per share excludes the impact of 7,436,107
options and warrants because the exercise price per share for
those options and warrants exceeds the average market price of
the Companys common stock during the year ended
December 31, 2008.
The conversion price of the Companys debt assumed in the
calculation of diluted earnings per share for the years ended
December 31, 2008 is $1.20 per share, based on the
conversion price that would have been in effect and the interest
accrued through the year then ended. The potentially dilutive
effect of 1,077,436 options and warrants
59
issuable upon conversion of the debt is considered in the
calculation of earnings per share using the treasury stock
method, based on the exercise price that would have been in
effect had the warrants been issued on December 31, 2008.
All such warrants have been excluded from the calculation
because the minimum exercise price of such warrants exceeds the
average market price of the Companys common stock during
the years ended December 31, 2008.
Income
Taxes
The Company accounts for income taxes under FASB ASC
740-10,
Income Taxes (ASC
740-10).
Under ASC
740-10,
deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. A valuation
allowance is provided for significant deferred tax assets when
it is more likely than not that such assets will not be
recovered.
When tax returns are filed, it is highly certain that some
positions taken would be sustained upon examination by the
taxing authorities, while others are subject to uncertainty
about the merits of the position taken or the amount of the
position that would be ultimately sustained. The benefit of a
tax position is recognized in the financial statements in the
period during which, based on all available evidence, management
believes it is more likely than not that the position will be
sustained upon examination, including the resolution of appeals
or litigation processes, if any. Tax positions taken are not
offset or aggregated with other positions. Tax positions that
meet the more-likely-than-not recognition threshold are measured
as the largest amount of tax benefit that is more than
50 percent likely of being realized upon settlement with
the applicable taxing authority. The portion of the benefits
associated with tax positions taken that exceeds the amount
measured as described above is reflected as a liability for
unrecognized tax benefits in the accompanying consolidated
balance sheet along with any associated interest and penalties
that would be payable to the taxing authorities upon examination.
At December 31, 2009 and 2008, the Company has accrued zero
for the payment of tax related interest and there was no tax
interest or penalties recognized in the consolidated statements
of operations.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the
U.S. requires management to make certain estimates and
assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Significant estimates made by management are, among
others, realizability of inventories, recoverability of
long-lived assets, valuation and useful lives of intangible
assets, note receivable from JPI, valuation of derivative
liabilities, valuation of investment in JPI, and valuation of
common stock options, warrants and deferred tax assets. Actual
results could differ from those estimates.
Fair
Value of Financial Instruments
The carrying amounts of the Companys cash and cash
equivalents, accounts payable and accrued expenses approximate
their estimated fair values due to the short-term maturities of
those financial instruments. The Company believes the carrying
amount of its notes payable approximates its fair value based on
rates and other terms currently available to the Company for
similar debt instruments.
Derivative
Financial Instruments
The Company applies the provisions of FASB
ASC 815-10,
Derivatives and Hedging (ASC
815-10).
Derivatives within the scope of
ASC 815-10
must be recorded on the balance sheet at fair value. The Company
issued convertible debt in September 2008, and recorded a
derivative asset related to the limitation on bonus interest
rights held by convertible debt holders in the event of a change
in control or bankruptcy. The fair value of the derivative asset
was $125,000 at December 31, 2008. During 2009, certain
convertible debt holders converted the principal and accrued
interest which resulted in a decrease of the derivative asset to
$80,913 at December 31, 2009.
60
During 2009, the Company issued convertible debt with warrants
and recorded derivative liabilities related to the beneficial
conversion feature of the convertible debt and a reset provision
associated with the exercise price of the warrants. The fair
value on the grant date was $510,417 as computed using the
Black-Scholes option pricing model. In accordance with the
accounting guidance associated with derivative instruments, the
Company re-measured their values as of the end of the quarter.
During 2009, the Company recorded a decrease of $363,873 to the
derivative liabilities related to the decrease in fair value
during the period ended December 31, 2009.
On November 30, 2009, the Company entered into a securities
purchase agreement with Alpha Capital Group and Whalehaven
Capital funds. The Company issued 1,860,714 and
1,428,571 shares of the Companys common stock to
Alpha Capital Group and Whalehaven Capital Funds, respectively.
The stock price of the common shares issued was valued at $0.28
per share with aggregate proceeds of $812,320, which is net of
direct offering costs of $108,680. In connection with the
securities purchase agreement, the Company also issued
6.5 year warrants, which represents 50% of the common stock
issuances. As a result, the Company issued warrants to purchase
930,357 and 714,286 of the Companys common stock,
$0.001 par value per share, at an exercise price of $1.25
per share to Alpha Capital Group and Whalehaven Capital Funds,
respectively, subject to certain anti-dilution adjustments. The
terms associated with the reset of the exercise price of the
warrants resulted in classifying these warrants as derivative
liabilities. On the date of issuance, the Company recorded a
derivative liability of $509,839. The derivative was revalued at
December 31, 2009, which resulted in a change in fair value
of the derivative liability. In connection with the revaluation,
the Company recorded a gain of $197,357 in the interest income
(expense), net of the accompanying statement of operations and
comprehensive income (loss).
Fair
Value Measurements
The Company determines the fair value of its derivative
instruments using a three-level hierarchy for fair value
measurements which these assets and liabilities must be grouped,
based on significant levels of observable or unobservable
inputs. Observable inputs reflect market data obtained from
independent sources, while unobservable inputs reflect the
Companys market assumptions. This hierarchy requires the
use of observable market data when available. These two types of
inputs have created the following fair-value hierarchy:
Level 1 Valuation based on unadjusted
quoted market prices in active markets for identical securities.
Currently, the Company does not have any items as Level 1.
Level 2 Valuations based on observable
inputs (other than Level 1 prices), such as quoted prices
for similar assets at the measurement date; quoted prices in
markets that are not active; or other inputs that are
observable, either directly or indirectly. Currently, the
Company does not have any items classified as Level 2.
Level 3 Valuations based on inputs that
are unobservable and significant to the overall fair value
measurement, and involve management judgment. The Company used a
Black-Scholes option pricing model to determine the fair value
of the instruments.
If the inputs used to measure fair value fall in different
levels of the fair value hierarchy, a financial securitys
hierarchy level is based upon the lowest level of input that is
significant to the fair value measurement.
The following table presents the Companys warrants and
embedded conversion features measured at fair value on a
recurring basis as of December 31, 2009 classified using
the valuation hierarchy:
|
|
|
|
|
|
|
Level 3
|
|
|
|
Carrying
|
|
|
|
Value
|
|
|
|
December 31,
|
|
|
|
2009
|
|
Embedded conversion options
|
|
$
|
269,758
|
|
|
|
|
85,000
|
|
|
|
|
|
|
Warrants
|
|
$
|
354,758
|
|
|
|
|
|
|
Decrease in fair value included in other income (expense)
|
|
$
|
648,313
|
|
|
|
|
|
|
61
The following table provides a reconciliation of the beginning
and ending balances for the Companys derivative
liabilities measured at fair value using Level 3 inputs:
|
|
|
|
|
Balance at January 1, 2009
|
|
$
|
|
|
Derivative liabilities added warrants
|
|
|
250,000
|
|
Derivative liabilities added conversion options
|
|
|
770,256
|
|
Amount converted to additional paid-in capital for the
conversion of debt
|
|
|
(17,185
|
)
|
Change in fair value
|
|
|
(648,313
|
)
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
354,758
|
|
|
|
|
|
|
Advertising
Costs
Advertising costs are expensed as incurred. Advertising costs
were approximately $14,000 and $27,900 for the years ended
December 31, 2009 and 2008, respectively.
Concentrations
of Credit Risk
Cash
From time to time, the Company maintains cash balances at
certain institutions in excess of the FDIC limit. As of
December 31, 2009, the Company had no cash balances in
excess of this limit.
Customers
In the United States, the Companys ability to collect
receivables is affected by economic fluctuations in the
geographic areas and the industry served by the Company. A
reserve for uncollectible amounts and estimated sales returns is
provided based on historical experience and a specific analysis
of the accounts which management believes is sufficient.
Accounts receivable is net of a reserve for doubtful accounts
and sales returns of $73,446 at December 31, 2008. There
are no accounts receivable balances as of December 31, 2009.
As of December 31, 2008, amounts due from six customers,
each with receivables in excess of 10% of accounts receivable,
comprised 19%, 14%, 13%, 13%, 12% and 12% of outstanding
accounts receivable. For the year ended December 31, 2009,
one customer comprised 11% of net revenues. For the year ended
December 31, 2008, one customer comprised more than 17% of
net revenues. All of the related concentrations were in the
Companys JPI subsidiary, which was deconsolidated in
September 2009 (see above).
62
Supplemental
Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest
|
|
$
|
323,201
|
|
|
$
|
332,233
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for taxes
|
|
$
|
695,322
|
|
|
$
|
2,562,485
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash activities:
|
|
|
|
|
|
|
|
|
Warrants issued to brokers, included in prepaid consulting
|
|
$
|
88.000
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued in connection with senior notes and bridge loan
included in debt discount
|
|
$
|
1,887,920
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of amounts recorded to additional paid-in
capital to warrant liability, including $110,858 recorded to
retained earnings, representing the change in value of the
warrants from date of issuance to January 1, 2009
|
|
$
|
209,166
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of derivative liability related to warrants to
additional paid-in capital upon expiration of share adjustment
terms
|
|
$
|
133,866
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of warrants to common stock
|
|
$
|
38
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Voluntary conversion of convertible debt and accrued interest
|
|
$
|
1,074,605
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of accounts payable to stock
|
|
$
|
102,193
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Broker warrants issued in connection with convertible debt
|
|
$
|
|
|
|
$
|
209,166
|
|
|
|
|
|
|
|
|
|
|
Broker warrants issued in connection with senior debt
|
|
$
|
|
|
|
$
|
559,438
|
|
|
|
|
|
|
|
|
|
|
Receipt of machines as partial settlement of note receivable
|
|
$
|
|
|
|
$
|
472,451
|
|
|
|
|
|
|
|
|
|
|
Derivative asset recorded in issuance of convertible debt
|
|
$
|
|
|
|
$
|
125,000
|
|
|
|
|
|
|
|
|
|
|
Fair value of common stock recorded as prepaid consulting
|
|
$
|
|
|
|
$
|
527,801
|
|
|
|
|
|
|
|
|
|
|
Fair value of warrants issued for services, included in prepaid
expense
|
|
$
|
283,951
|
|
|
$
|
83,875
|
|
|
|
|
|
|
|
|
|
|
Carrying value of net assets of JPI before deconsolidation
|
|
$
|
25,698,405
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of derivative liabilities
|
|
$
|
1,020,256
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of accrued salaries to ownership of JPI
|
|
$
|
730,496
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Recent
Accounting Pronouncements
In August 2009, the FASB issued ASU
No. 2009-05,
Measuring Liabilities at Fair Value, which provides
additional guidance on how companies should measure liabilities
at fair value under ASC 820. The ASU clarifies that the
quoted price for an identical liability should be used. However,
if such information is not available, an entity may use, the
quoted price of an identical liability when traded as an asset,
quoted prices for similar liabilities or similar liabilities
traded as assets, or another valuation technique (such as the
market or income approach). The ASU also indicates that the fair
value of a liability is not adjusted to reflect the impact of
contractual restrictions that prevent its transfer and indicates
circumstances in which quoted prices for an identical liability
or quoted price for an identical liability traded as an asset
may be considered level 1 fair value measurements. This ASU
is effective October 1, 2009. During 2009, the Company
adopted this standard, but it did not have a material impact on
the consolidated financial statements.
In October 2009, the FASB issued ASU
No. 2009-15,
Accounting for Own-Share Lending Arrangements in
Contemplation of Convertible Debt Issuance, to provide
guidance on share-lending arrangements entered into on an
63
entities own shares. The Company does not expect it to have a
material impact on the consolidated financial statements.
Other new pronouncements issued but not effective until after
December 31, 2009, are not expected to have a significant
effect on our consolidated financial statements.
We have evaluated subsequent events through the filing date of
this Form 10-K, and determined that no subsequent events have
occurred that would require recognition in the consolidated
financial statements or disclosure in the notes thereto other
than as disclosed in the accompanying notes.
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Raw materials
|
|
|
48,852
|
|
|
$
|
719,389
|
|
Work-in-process
|
|
|
3,265
|
|
|
|
11,808
|
|
Finished goods
|
|
|
27,138
|
|
|
|
832,794
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
79,255
|
|
|
$
|
1,563,991
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 3
|
PROPERTY
AND EQUIPMENT
|
Property and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Building and improvements
|
|
$
|
|
|
|
$
|
7,774,591
|
|
Machinery and equipment
|
|
|
|
|
|
|
4,233,129
|
|
Office equipment
|
|
|
120,019
|
|
|
|
431,049
|
|
Lab equipment
|
|
|
71,755
|
|
|
|
12,372
|
|
Construction in progress
|
|
|
|
|
|
|
1,229,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
191,774
|
|
|
|
13,680,460
|
|
Less accumulated depreciation
|
|
|
(108,227
|
)
|
|
|
(1,970,872
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
83,547
|
|
|
$
|
11,709,588
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was $686,197 and $962,075 for the years
ended December 31, 2009 and 2008, respectively.
|
|
NOTE 4
|
INTANGIBLE
ASSETS
|
Intangible assets consist of the following at December 31,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
Accumulated
|
|
|
|
Amortization
|
|
|
Value
|
|
Amortization
|
|
Net
|
|
(in years)
|
|
Assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intellectual property
|
|
$
|
2,000,000
|
|
|
$
|
(841,667
|
)
|
|
$
|
1,158,333
|
|
|
|
20
|
|
64
Intangible assets consist of the following at December 31,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Currency
|
|
|
|
|
|
Amortization
|
|
|
|
Value
|
|
|
Amortization
|
|
|
Translation
|
|
|
Net
|
|
|
(in years)
|
|
|
Assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intellectual property
|
|
$
|
2,000,000
|
|
|
$
|
(741,667
|
)
|
|
|
|
|
|
$
|
1,258,333
|
|
|
|
20
|
|
Production rights
|
|
|
1,916,622
|
|
|
|
(318,986
|
)
|
|
|
154,007
|
|
|
|
1,751,643
|
|
|
|
10
|
|
Land use rights
|
|
|
1,354,765
|
|
|
|
(99,094
|
)
|
|
|
209,839
|
|
|
|
1,465,510
|
|
|
|
33
|
|
Non-compete agreements
|
|
|
324,415
|
|
|
|
(163,652
|
)
|
|
|
32,483
|
|
|
|
193,246
|
|
|
|
5
|
|
Customer relationships
|
|
|
214,328
|
|
|
|
(77,904
|
)
|
|
|
26,569
|
|
|
|
162,993
|
|
|
|
7
|
|
Trade name and logo
|
|
|
530,829
|
|
|
|
(129,041
|
)
|
|
|
78,055
|
|
|
|
479,843
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,340,959
|
|
|
$
|
(1,530,344
|
)
|
|
$
|
500,953
|
|
|
$
|
5,311,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the year ended December 31, 2009, gross intangible
assets of approximately $4,330,000 and related accumulated
amortization related to JPI and subsidiary were removed from the
Companys books as a result of the deconsolidation of JPI.
In August 2001, the Company acquired intellectual property
rights and an assignment of a US patent application for
combination immunogene therapy (CIT) technology for
$2,000,000. The technology was purchased from Dr. Lung-Ji
Chang, who developed it while at the University of Alberta,
Edmonton, Canada. During 2003, two lawsuits were filed
challenging the Companys ownership of this intellectual
property. The value of the intellectual property will be
diminished if either of the lawsuits is successful (see
Note 9).
As part of the acquisition of the CIT technology, the Company
agreed to pay Dr. Chang a 5% royalty on net sales of
combination gene therapy products. The Company has not paid any
royalties to Dr. Chang to date as there have been no sales
of combination gene therapy products.
During the years ended December 31, 2009 and 2008,
amortization expense totaled $409,574 and $528,340 respectively.
Assuming (1) no future impairment to the Companys
intellectual property and (2) no future acquisitions of
intangible assets, amortization expense is expected to be
$100,000 per year or the next five years.
|
|
NOTE 5
|
PREPAID
EXPENSES, OTHER CURRENT ASSETS, AND OTHER ASSETS
|
Prepaid expenses and other current assets consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Material deposits
|
|
$
|
|
|
|
$
|
627,390
|
|
Due from officers and directors
|
|
|
|
|
|
|
9,693
|
|
Current deferred tax asset
|
|
|
|
|
|
|
92,798
|
|
Prepaid Insurance
|
|
|
52,703
|
|
|
|
143,566
|
|
Other
|
|
|
5,075
|
|
|
|
133,513
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
57,778
|
|
|
$
|
1,006,960
|
|
|
|
|
|
|
|
|
|
|
Other assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Deposits, primarily product licenses
|
|
$
|
|
|
|
$
|
3,000,354
|
|
Debt issuance costs (Note 7)
|
|
|
1,288,910
|
|
|
|
906,408
|
|
Convertible Debt derivative (Note 7)
|
|
|
80,913
|
|
|
|
125,000
|
|
Refundable deposits
|
|
|
24,538
|
|
|
|
40,670
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,394,361
|
|
|
$
|
4,072,432
|
|
|
|
|
|
|
|
|
|
|
65
Related to the $3,000,354 deposit for product licenses noted
above in 2008 for JPI, revenues had not yet been generated from
the product licenses included in other assets. At the time
commercial sales of the product were to begin, the product
licenses were to be reclassified to intangible assets and
amortized to cost of goods sold using the straight-line method
over the estimated useful life of the related product.
Radient Pharmaceuticals Corporation and subsidiaries are
included in a consolidated Federal income tax return. The
Companys international subsidiaries file various income
tax returns in their tax jurisdictions. The provision for income
taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(2,000
|
)
|
|
$
|
|
|
State
|
|
|
1,000
|
|
|
|
1,000
|
|
Foreign
|
|
|
|
|
|
|
1,815,000
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
(1,000
|
)
|
|
|
1,816,000
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
(92,000
|
)
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
(1,000
|
)
|
|
$
|
1,724,000
|
|
|
|
|
|
|
|
|
|
|
The Companys income (loss) before income tax provision was
subject to taxes in the following jurisdictions for the
following periods:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
United States
|
|
$
|
(11,748,766
|
)
|
|
$
|
(9,794,491
|
)
|
Foreign
|
|
|
(5,225,636
|
)
|
|
|
12,698,064
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(16,974,202
|
)
|
|
$
|
2,903,573
|
|
|
|
|
|
|
|
|
|
|
The income tax expense for 2008 relates to payments made to
foreign tax jurisdictions and state minimum fees. The
Companys Chinese operations were deconsolidated in the
third quarter of the year. See note 1 for details.
The provision (benefit) for income taxes differs from the amount
computed by applying the U.S. Federal income tax rate of
34% to loss before income taxes as a result of the following for
the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Computed tax benefit at federal statutory rate
|
|
$
|
(5,772,000
|
)
|
|
$
|
987,000
|
|
State income tax benefit, net of federal benefit
|
|
|
1,000
|
|
|
|
1,000
|
|
Nondeductible Interest Expense
|
|
|
731,000
|
|
|
|
|
|
Deferred Gain on JPI
|
|
|
5,518,000
|
|
|
|
|
|
Foreign earnings taxed at different rates
|
|
|
1,776,000
|
|
|
|
(2,609,000
|
)
|
Stock issuances
|
|
|
481,000
|
|
|
|
640,000
|
|
Expired Net Operating Losses
|
|
|
546,000
|
|
|
|
|
|
Valuation allowance on federal tax benefit
|
|
|
(3,285,000
|
)
|
|
|
2,685,000
|
|
Other
|
|
|
3,000
|
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1,000
|
)
|
|
$
|
1,724,000
|
|
|
|
|
|
|
|
|
|
|
66
The components of the Companys deferred tax assets and
liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Deferred tax asset:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
15,529,000
|
|
|
$
|
13,288,000
|
|
Expenses recognized for granting of options and warrants
|
|
|
1,727,000
|
|
|
|
2,036,000
|
|
Tax credit carryforwards
|
|
|
245,000
|
|
|
|
216,000
|
|
Depreciation
|
|
|
3,000
|
|
|
|
|
|
Other temporary differences
|
|
|
309,000
|
|
|
|
408,000
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax asset
|
|
|
17,813,000
|
|
|
|
15,948,000
|
|
Valuation allowance
|
|
|
(11,698,000
|
)
|
|
|
(15,663,000
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
|
6,115,000
|
|
|
|
285,000
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Deferred Gain on JPI
|
|
|
(6,115,000
|
)
|
|
|
|
|
Depreciation
|
|
|
|
|
|
|
(193,000
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(6,115,000
|
)
|
|
|
(193,000
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
|
|
|
$
|
92,000
|
|
|
|
|
|
|
|
|
|
|
The Company records a valuation allowance to reduce the carrying
value of the net deferred tax assets to an amount that is more
likely than not to be realized. The valuation allowance
decreased by approximately $2,027,000 during the year ended
December 31, 2009.
At December 31, 2008, the Company has net operating loss
carryforwards of approximately $38.1 million and
$29.1 million available to reduce federal and state taxable
income, respectively. The Company had $1.6 million of
federal net operating losses expire during the year. The federal
and state net operating loss carryforward expire on various
dates through 2023, unless previously utilized. The Company does
not have any net operating losses that are attributable to
excess stock option deductions which would be recorded as an
increase in additional paid in-capital. The Company has research
and development tax credit carryforwards of approximately
$113,000 and $132,000 to reduce federal and state income tax,
respectively. The federal research and development tax credits
will begin to expire in 2022, unless previously utilized. The
Companys California research and development tax credit
carryforwards do not expire and will carryforward indefinitely
until utilized. Any net operating loss or credit carryforwards
that will expire prior to utilization will be removed from
deferred tax assets with a corresponding reduction of the
valuation allowance.
Utilization of the net operating loss and research and
development credit carryforwards may be subject to a substantial
annual limitation due to ownership change limitations that have
occurred previously or that could occur in the future as
provided by Sections 382 and 383 of the Internal Revenue
Code of 1986, as well as similar state and foreign provisions.
These ownership changes may limit the amount of net operating
loss and research and development credit carryforwards than can
be utilized annually to offset future taxable income and tax,
respectively. In general, an ownership change, as defined by
Section 382, results from transactions increasing the
ownership of certain shareholders or public groups in the stock
of a corporation by more than 50 percentage points over a
three-year period. Since the Companys formation, the
Company has raised capital through the issuance of capital stock
on several occasions which, combined with dispositions of
shares, may have resulted in a change of control, or could
result in a change of control when combined with future
transactions. The Company has not currently completed a study to
assess whether a change or changes in control have occurred due
to the significant complexity and cost associated with such a
study. Any limitation may result in expiration of a portion of
the net operating loss or research and development credit
carryforwards before utilization.
On January 1, 2007 the Company adopted the provisions of
FIN 48. As a result of applying the provisions of
FIN 48, the Company increased its liability for
unrecognized tax benefits by approximately $123,000, offsetting
the valuation allowance on net deferred tax assets. Interest or
penalties have not been accrued at December 31, 2009 or
67
2008. If tax benefits are ultimately recognized, there will be
no impact to the Companys effective tax rate as a result
of the Companys valuation allowance. The Company does not
anticipate any significant increases or decreases to its
liability for unrecognized tax benefits within the next
12 month period.
A reconciliation of the beginning and ending amount of
unrecognized tax benefits (which are not recorded as a liability
because they are offset by net operating loss carryforwards)
follows:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Unrecognized Tax Benefits:
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
52,000
|
|
|
$
|
123,000
|
|
Increase/(Decrease) for tax positions taken during the current
period
|
|
|
|
|
|
|
10,000
|
|
Increase/(Decrease) for tax positions taken in prior years, net
|
|
|
1,000
|
|
|
|
(81,000
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
53,000
|
|
|
$
|
52,000
|
|
|
|
|
|
|
|
|
|
|
The Company is no longer subject to U.S. federal and state
income tax examinations for years before 2005 and 2004,
respectively. However, to the extent allowed by law, the tax
authorities may have the right to examine prior periods where
net operating losses or tax credits were generated and carried
forward, and make adjustments up to the amount of the net
operating loss or credit carryforward amount. The Company is not
currently under Internal Revenue Service or state tax
examinations.
Notes payable consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Convertible Debt, net of unamortized discount, inclusive of
bonus interest, of $2,000,649 and $3,765,000 at
December 31, 2009 and 2008, respectively
|
|
$
|
240,482
|
|
|
$
|
|
|
Senior Notes payable, net of unamortized discount of $1,701,398
and $496,195 at December 31, 2009 and 2008, respectively
|
|
|
1,918,486
|
|
|
|
581,305
|
|
Bank debt
|
|
|
|
|
|
|
3,128,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,158,968
|
|
|
|
3,710,070
|
|
Less: Bank debt associated with discontinued operations of YYB
|
|
|
|
|
|
|
(466,155
|
)
|
Less: Current portion of long-term debt
|
|
|
(1,316,667
|
)
|
|
|
(2,662,610
|
)
|
Less: Current portion of convertible note
|
|
|
(240,482
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
601,819
|
|
|
$
|
581,305
|
|
|
|
|
|
|
|
|
|
|
Convertible
Debt
In September 2008, the Company issued $2,510,000 of Convertible
Debt securities (the Convertible Debt). The
Convertible Debt bears interest at a coupon rate of 10%, and is
due in September 2010 or upon a change in control of the Company
or certain other events of default, as defined. However, if the
Convertible Debt has not been converted to common stock at the
maturity date, the holder will be entitled to receive bonus
interest equal to 50% of the face value of the note, in addition
to the coupon rate of interest. In the event of a change of
control or bankruptcy, interest due is limited to the 10% coupon
rate. Interest is payable at maturity. The Convertible Debt is
unsecured and is junior in priority to the Senior Notes.
The terms of conversion allow that if the Company completes a
registered public offering of at least $25 million (a
Qualified Financing), all principal and accrued
interest will automatically be converted into the Companys
common stock at a conversion price of $1.20, provided that the
conversion shares to which the Convertible Debt holders shall be
entitled to receive shall either have been registered for sale
or salable under provisions of the Securities Act. If the
Convertible Debt is not mandatorily converted upon a Qualified
Financing,
68
the maturity date of the notes will be accelerated to the
closing date of the Qualified Financing. In the event of a
forced conversion into common shares resulting from a Qualified
Financing, holders of the Convertible Debt will be subject to a
lock-up on
any remaining shares not sold in the offering for ninety
(90) days after the public offering. Upon conversion, the
holders will be entitled to receive five year warrants to
purchase a number of common shares equal to 50% of the shares
issued upon conversion, with an exercise price of 120% of
Companys common share price on the conversion date,
however, in no case will the exercise price be less than $2.80.
Holders of Convertible Debt may voluntarily convert any or all
of the principal and interest due under the same terms noted
above, with the exception that the shares may have resale
restrictions. The shares of common stock issuable upon a
voluntary conversion of the Convertible Debt carry so-called
piggy-back registration rights should the Company
file a registration statement in the future.
The Company has the right to call the Convertible Debt if the
market value of the Companys common stock exceeds $6.18
for five consecutive days, provided that the note holders have
the right to convert the debt to common shares within a stated
period after notice of the Companys intent to repay the
debt has been delivered.
In accordance with FASB
ASC 815-10,
the Company established a debt premium and derivative asset
relative to the limitations on bonus interest that will occur
upon a change in control or bankruptcy. The initial fair value
of the derivative asset of $125,000 was based on a probability
assessment of the payment alternatives. The derivative asset is
included in other assets in the consolidated balance sheet at
December 31, 2008.
In accordance with FASB
ASC 320-10,
Investments-Debt and Equity Securities (ASC
320-10)
and
ASC 470-20,
Debt with Conversion and Other Options, the Company also
established a debt discount and a related credit to additional
paid-in capital in the amount of $2,635,000, representing the
value of the beneficial conversion feature inherent in the
Convertible Debt, as limited to the face amount of the debt and
the premium related to the derivative asset. Accordingly, the
carrying value of the Convertible Debt, after allocation of the
beneficial conversion feature to additional paid in capital, was
$0. The net debt discount is being accreted over the life of the
debt using the effective-interest method, such that the carrying
value of the debt at maturity will include bonus interest
payable. The accretion was immaterial for the year ended
December 31, 2008. For the year ended December 31,
2009, the Company recorded accretion of $178,015. The Company
incurred debt issuance costs of $634,765 in association with the
Convertible Debt, including $209,167 related to the issuance of
209,167 warrants issued to brokers. These warrants were valued
using the Black-Scholes option pricing model, using the
following assumptions: (i) no dividend yield,
(ii) weighted-average volatility of 95%
(iii) weighted-average risk-free interest rate of 2.59%,
and (iv) weighted-average expected life of 5 years.
Those costs are included in other assets in the consolidated
balance sheet at December 31, 2009 and 2008, and are being
amortized over the life of the debt using the effective interest
method. Amortization of debt costs was immaterial for the year
ended December 31, 2009 and 2008.
During the third quarter of 2009 some debt holders elected to
convert debt and accrued interest totaling $924,605 under the
terms of the agreement into stock and warrants. In accordance
with FASB ASC
470-20-40-1,
the remaining unamortized discount of approximately $885,000
related to the principal converted was recognized as interest
expense. The remaining balance of debt issuance costs of
approximately $224,000 was recognized as interest expense. This
conversion resulted in the issuance of 807,243 shares and
403,621 warrants with an exercise price of $0.66.
The
Convertible Note and Warrant Purchase Agreement
On September 15, 2009, the Company entered into a Note and
Warrant Purchase Agreement with St. George Investments, LLC,
(the Investor; collectively with registered assigns,
the Holder) (the Purchase Agreement).
The Company issued and sold to the Investor (1) a 12%
promissory note in the principal amount of five hundred
fifty-five thousand five hundred fifty-five and
56/100
dollars ($555,556) (the Note) which is convertible
into the Companys common stock at 80% of the five day
volume weighted average of the closing price of the
Companys common stock, subject to a floor price of no less
than $0.64 and on the terms and the conditions specified in the
Note; and (2) a warrant to purchase 500,000 shares of
the Companys common stock, $0.001 par value per
share, at a exercise price of $0.65 per share , subject to
certain anti-dilution adjustments. The note matures on
September 15, 2010. The terms associated with the
conversion feature and the reset of the exercise price of the
warrants resulted in
69
classifying these instruments as derivative liabilities (see
Note 1). The Company also entered into a Registration
Rights Agreement with the Investor pursuant to which the Company
filed a registration statement for the sale of the common stock
issuable to the Investor under the Note and the Warrant on
October 5, 2009 which was declared effective on
October 6, 2009. In connection with the financing, the
Company was obligated to pay a fee of $25,000 to Galileo Asset
Management, S.A which was recorded as debt issuance cost and
will be amortized to interest expense over the life of the debt.
For the year ended December 31, 2009, the Company amortized
$7,292 related to debt issuance costs and $161,875 related to
amortization of the estimated fair value of the embedded
conversion option and warrants that were recorded as debt
discounts. During the fourth quarter of 2009, St. George
converted $150,000 of principal to 535,714 shares of common
stock. As a result of triggering provision and default
situation, the Company increased the principal amount of the
note by $210,834 with the off-set to interest expense.
The
Bridge Loan Agreement
On September 10, 2009, the Company entered into a Bridge
Loan Agreement (the Bridge Loan Agreement) with
Cantone Research, Inc. (the Lender) whereby the
Lender agreed to provide a Bridge Loan for $58,000 (the
Bridge Loan) and the Company agreed that the
proceeds of the Bridge Loan would be used exclusively to pay
interest due on currently outstanding 12% Senior
Notes. Interest under the Bridge Loan was set at 12% per
annum. However, because the Company did not repay the Bridge
Loan as scheduled on or before October 9, 2009, the
interest rate was increased to 18% per annum, retroactive to
September 10, 2009. The additional amounts due under this
arrangement, including accrued interest (the the Cantone
Penalty) were approximately $86,032 as of
December 31, 2009. Pursuant to the Bridge Loan Agreement,
against receipt of the Bridge Loan, the Company issued to the
Lender a two-year warrant to purchase 116,000 shares of the
Companys common stock exercisable at $0.60 per share (the
Two-Year Warrant). This warrant was valued at
$34,800 using the Black-Scholes model with a discount rate of
0.93% and a volatility of 0.9308% on the date of the Bridge Loan
Agreement. Under the appropriate accounting guidance, the
Company recorded the value of the warrants at its relative fair
value and recorded the relative fair value of the warrants as a
debt discount which will be amortized to interest expense over
the term of the bridge loan. The Company paid cash fees
associated with this debt of $15,000, which was recorded as debt
issuance costs. For the period ended December 31, 2009 the
Company recorded interest expense of approximately $2,000
related to the debt discount and debt issuance costs.
Consulting
Agreement
On September 10, 2009, the Company entered into a
Consulting Agreement (the Consulting Agreement) with
Cantone Asset Management, LLC (the Consultant)
whereby the Consultant shall provide guidance and advice related
to negotiating the terms of the Companys outstanding
Series 1 and Series 2 Senior Notes and continued
services to assist the Company to coordinate with the holders of
the Series 1 and Series 2 Senior Notes. In
consideration of the Consultants service, the Company
agreed to pay monthly consulting fees of $12,000 per month for a
period of twelve (12) months and issue to the Consultant a
five-year warrant to purchase 200,000 shares of the
Companys common stock at an exercise price of $0.60 per
share (the Five-Year Warrant). This warrant was
valued at $88,000 using the black-scholes model with a discount
rate of 2.38% and a volatility of 0.9727% and recorded as a
prepaid asset. During the year ended December 31, 2009 the
Company recorded amortization expense of $29,333 related to this
agreement, which has been included in selling, general and
administrative expenses in the accompanying consolidated
statements of operations and comprehensive income (loss). At
December 31, 2009 the unamortized balance of $58,667 is
included in prepaid consulting.
Senior
Notes Payable
In December 2008, in the first closing of the 12% Senior
Note offering, the Company issued units consisting of $1,077,500
principal amount of 12% Senior Promissory Notes
(Senior Notes) and five year warrants to purchase a
total of 862,000 shares of the Companys common stock
at $1.00 per share. The Senior Notes bear interest at a rate of
12% per annum, payable semi-annually on June 1st and
December 1st of each year after issuance. The Senior
Notes mature on the earlier of December 8, 2010 or upon the
completion of the closing of a credit facility or loans by the
Company or its subsidiaries with a financial institution or bank
of not less than $8 million in a transaction or series of
transactions. Certain events accelerate the maturity of the
Senior Notes, including a change in control,
70
bankruptcy or legal judgment. The Senior Notes are unsecured,
and are senior to the Convertible Debt. The Company is not
permitted to issue additional notes or evidence of indebtedness
that are senior in priority to the Senior Notes, however, the
Company was permitted to issue notes up to an aggregate
principal amount of $2,500,000 which are of equal priority with
the Senior Notes.
The Company incurred debt issuance costs of $271,644 and debt
discounts of $508,580 in association with the Senior Notes,
including $50,858 and $508,580, respectively, related to the
issuance of 948,200 warrants for the purchase of the
Companys common stock at $1 per share, issued to Senior
Note holders and to brokers. These warrants were valued using
the Black-Scholes option pricing model, using the following
assumptions: (i) no dividend yield,
(ii) weighted-average volatility of 97%
(iii) weighted-average risk-free interest rate of 2.10%,
and (iv) weighted-average expected life of 5 years.
Those debt issuance costs are included in other assets in the
consolidated balance sheet at December 31, 2008. Debt
issuance costs and debt discount are being amortized over the
life of the debt using the effective interest method.
Amortization of debt discount was $178,015 and $12,385 for the
years ended December 31, 2009 and 2008, respectively.
Amortization of debt issuance costs was $101,698 and $0 for the
years ended December 31, 2009 and 2008, respectively.
On January 30, 2009, the Company conducted the second and
final closing (the Final Closing) of the 12%
Series 1 Senior Note offering whereby the Company sold an
additional $680,000 principal amount of 12% Senior Notes
and five year warrants to purchase a total of
544,000 shares of common stock at $1.13 per share.
Accordingly, a total of $1,757,500 in 12% Senior Notes and
Warrants to purchase 1,406,000 shares of common stock in
the 12% Senior Note Offering were sold in 2008 and 2009.
The Senior Notes issued in January 2009 mature on the earlier of
the second anniversary of the closing date or upon the
completion of the closing of a credit facility or loans by the
Company or its subsidiaries with a financial institution or bank
of not less than $8 million in a transaction or series of
transactions.
In connection with the 12% Series 1 Senior Note offering,
the Company agreed to file a registration statement with the SEC
on
Form S-3
by July 31, 2009 (which was filed on July 2, 2009),
covering the secondary offering and resale of the Warrant Shares
sold in the 12% Senior Note offering.
The Company incurred debt issuance costs of $156,376 and debt
discounts of $429,760 in association with the Final Closing of
the Series 1 Senior Note including $42,976 and $429,760,
respectively, related to the issuance of 54,400 and 544,000
warrants for the purchase of the Companys common stock at
$1.13 per share, issued to brokers and Series 1 Senior Note
holders, respectively. These warrants were valued using the
Black-Scholes option pricing model, using the following
assumptions: (i) no dividend yield,
(ii) weighted-average volatility of 120%
(iii) weighted-average risk-free interest rate of 1.85%,
and (iv) weighted-average expected life of 5 years.
The debt issuance costs are included in other assets in the
consolidated balance sheet at December 31, 2009. Debt
issuance costs and debt discount are being amortized over the
life of the debt using the effective interest method. For the
year ended December 31, 2009 the Company recorded interest
expense of $101,951 and $37,097 related to the debt discount and
debt issuance costs, respectively.
On May 4, 2009, the Company conducted a first closing
(First Closing) of a private offering under
Regulation D for the sale to accredited investors of units
consisting of $1,327,250 principal amount of 12% Series 2
Senior Notes and five-year warrants to purchase a total of
2,123,600 shares of the Companys common stock at
$0.98 per share (the Warrant Shares). Under the
terms of the offering, the exercise price of the Warrant Shares
was 115% of the five (5) day volume weighted average
closing price of the Companys common stock on NYSE Amex US
for the five (5) trading days prior to the date of the
First Closing.
In connection with the offer and sale of securities to the
purchasers in the First Closing of the offering, the
Companys exclusive placement agent and all participating
brokers received aggregate cash sales commissions of $132,725
and $39,817 in non-accountable expenses for services in
connection with the First Closing. In addition, in the First
Closing the Company issued placement agent warrants to the
Companys exclusive placement agent to purchase a total of
212,360 shares, of which, 54,472 shares and warrants
to purchase 6,000 shares were assigned to other individuals.
The Company incurred debt issuance costs of $373,564 and debt
discounts of $838,826 in association with the First Closing in
May 2009, including $172,012 and $838,826, respectively, related
to the issuance of 212,360 and
71
2,123,600 warrants for the purchase of the Companys common
stock at $0.98 per share, issued to brokers and Senior Note
holders, respectively. These warrants were valued using the
Black-Scholes option pricing model, using the following
assumptions: (i) no dividend yield,
(ii) weighted-average volatility of 120%
(iii) weighted-average risk-free interest rate of 2.03%,
and (iv) weighted-average expected life of 5 years.
Those debt issuance costs are included in other assets in the
consolidated balance sheet at December 31, 2009. Debt
issuance costs and debt discount are being amortized over the
life of the debt using the effective interest method. For the
year ended December 31, 2009 the Company recorded interest
expense of $56,782 and $25,288 related to the debt discount and
debt issuance costs, respectively.
On June 12, 2009, the Company conducted the second closing
(the Second Closing) of a private offering under
Regulation D for the sale to accredited investors of units
consisting of $468,500 principal amount of 12% Series 2
Senior Notes (Notes) and five year warrants to
purchase a total of 749,600 shares of the Companys
common stock at $1.11 per share (the Warrant
Shares). Under the terms of the offering, the exercise
price of the Warrant Shares was to be greater of 115% of the
five day weighted average closing prices of the Companys
common stock as reported by NYSE Amex US for the five trading
days ended on June 11, 2009.
In connection with the offer and sale of securities to the
purchasers in the offering, the Companys exclusive
placement agent received sales commissions of $46,850 and
$14,055 of non-accountable expenses for services in connection
with the Second Closing. In addition, in the Second Closing, the
Company issued to the placement agent, warrants to purchase a
total of 74,960 shares, of which the Companys
exclusive placement agent received placement agent warrants to
purchase 58,360 shares, and two other brokers received
warrants to purchase 14,992 shares and 1,600 shares,
respectively.
The Company incurred debt issuance costs of $141,168 and debt
discounts of $300,583 in association with the Second Closing in
June 2009, including $68,963 and $300,583, respectively, related
to the issuance of 74,960 and 749,600 warrants for the purchase
of the Companys common stock at $1.11 per share, issued to
brokers and Senior Note holders, respectively . These warrants
were valued using the Black-Scholes option pricing model, using
the following assumptions: (i) no dividend yield,
(ii) weighted-average volatility of 120%
(iii) weighted-average risk-free interest rate of 2.03%,
and (iv) weighted-average expected life of 5 years.
Those debt issuance costs are included in other assets in the
consolidated balance sheet at December 31, 2009. Debt
issuance costs and debt discount are being amortized over the
life of the debt using the effective interest method. For the
period ended December 31, 2009 the Company recorded
interest expense of $27,215 and $12,782 related to the debt
discount and debt issuance costs, respectively.
Debt
Repayment Obligations
The following table sets forth the contractual repayment
obligations under the Companys notes payable. The table
assumes that Convertible Debt will be repaid at maturity, and
excludes interest payments, except for bonus interest payable
under the terms of the Convertible Debt instruments.
|
|
|
|
|
2010
|
|
$
|
3,557,798
|
|
2011
|
|
|
888,224
|
|
2012
|
|
|
1,414,997
|
|
|
|
|
|
|
|
|
$
|
5,861,019
|
|
|
|
|
|
|
|
|
NOTE 8
|
EMPLOYMENT
CONTRACT TERMINATION LIABILITY
|
In October 2008, the Companys former chief executive
officer agreed to retire from his employment with the Company.
The Company negotiated a settlement of its employment contract
with the former chief executive officer under which he received
$150,000 upon the effective date of the agreement, including
$25,000 for reimbursement of his legal expenses. In addition the
Company agreed to pay $540,000 in monthly installments of
$18,000, commencing January 31, 2009, to continue certain
insurance coverages, and to extend the term of options
previously granted which would have expired shortly after
termination of employment. Pursuant to FASB
ASC 420-10,
the Company recorded a liability of approximately $517,000 for
the present value of the monthly installments and insurance
coverages due under the settlement agreement.
Approximately $229,000 and $237,000
72
are included in accrued salaries and wages and $86,000 and
$280,000 are included in other long-term liabilities in the
accompanying consolidated balance sheets at December 31,
2009 and 2008, respectively. The Company has not made the
monthly $18,000 payments due, nor paid the premiums on a life
insurance policy on the former officer since October 2009 and as
of December 31, 2009 was in default under this obligation.
|
|
NOTE 9
|
COMMITMENTS
AND CONTINGENCIES
|
Operating
Leases
The Company leases its laboratory and manufacturing space under
a non-cancelable two year operating lease agreement that expires
on December 1, 2010. The lease requires monthly lease
payments of $6,944. As of December 31, 2009, the Company is
required to make future minimum rental payments required under
non-cancelable operating leases of approximately $83,000 in 2010.
Rent expense under non-cancelable leases was approximately
$83,000 and $80,000 for the years ended December 31, 2009
and 2008, respectively.
Litigation
On February 22, 2002, AcuVector Group, Inc.
(AcuVector) filed a Statement of Claim in the Court
of Queens Bench of Alberta, Judicial District of Edmonton
relating to the Companys CIT technology acquired from
Dr. Chang in August 2001. The claim alleges damages of $CDN
20 million and seeks injunctive relief against
Dr. Chang for, among other things, breach of contract and
breach of fiduciary duty, and against us for interference with
the alleged relationship between Dr. Chang and AcuVector.
The claim for injunctive relief seeks to establish that the
AcuVector license agreement with Dr. Chang is still in
effect. The Company performed extensive due diligence to
determine that AcuVector had no interest in the technology when
the Company acquired it. The Company is confident that
AcuVectors claims are without merit and that the Company
will receive a favorable result in the case. As the final
outcome is not determinable, no accrual or loss relating to this
action is reflected in the accompanying consolidated financial
statements.
The Company is also defending a companion case filed in the same
court by the Governors of the University of Alberta filed
against the Company and Dr. Chang in August 2003. The
University of Alberta claims, among other things, that
Dr. Chang failed to remit the payment of the
Universitys portion of the monies paid by the Company to
Dr. Chang for the CIT technology purchased by us from
Dr. Chang in 2001. In addition to other claims against
Dr. Chang relating to other technologies developed by him
while at the University, the University also claims that the
Company conspired with Dr. Chang and interfered with the
Universitys contractual relations under certain agreements
with Dr. Chang, thereby damaging the University in an
amount which is unknown to the University at this time. The
University has not claimed that the Company is not the owner of
the CIT technology, just that the University has an equitable
interest therein or the revenues there from.
If either AcuVector or the University is successful in their
claims, the Company may be liable for substantial damages, its
rights to the technology will be adversely affected and its
future prospects for exploiting or licensing the CIT technology
will be significantly impaired.
In the ordinary course of business, there are other potential
claims and lawsuits brought by or against the Company. In the
opinion of management, the ultimate outcome of these matters
will not materially affect the Companys operations or
financial position or are covered by insurance.
Licensing
Agreements
The Company has agreed to pay a 5% royalty on net sales of
products developed from the Companys CIT technology. The
Company has not paid any royalties to date as there have been no
sales of such products.
Contingent
Issuance of Shares Acquisition of JPI
In 2006, pursuant to the Stock Purchase and Sale Agreement (the
Purchase Agreement), the Company acquired 100% of
the outstanding shares of JPI from Jade Capital Group Limited
(Jade). The terms of the
73
Purchase Agreement provided that additional purchase
consideration of 100,000 shares of the Companys
common stock (the Escrow Shares) was deposited in an
escrow account held by a third party escrow agent and
administered pursuant to an Escrow Agreement. The Escrow
Agreement provided that if, within one year from and after the
closing of the Purchase Agreement, Jade or its shareholders
demonstrated that the SFDA had issued a permit or the equivalent
regulatory approval for the Company to sell and distribute the
Onko-Suretm
test kit in the PRC without qualification, in form and substance
satisfactory to the Company, then the escrow agent would
promptly disburse the Escrow Shares to Jade or its shareholders.
As part of the Agreement (see Note 1), shares held in
escrow will be cancelled and returned to the Company.
Indemnities
and Guarantees
The Company has executed certain contractual indemnities and
guarantees, under which it may be required to make payments to a
guaranteed or indemnified party. The Company has agreed to
indemnify its directors, officers, employees and agents to the
maximum extent permitted under the laws of the State of
Delaware. In connection with a certain facility lease, the
Company has indemnified its lessor for certain claims arising
from the use of the facilities. Pursuant to the Sale and
Purchase Agreement, the Company has indemnified the holders of
registrable securities for any claims or losses resulting from
any untrue, allegedly untrue or misleading statement made in a
registration statement, prospectus or similar document.
Additionally, the Company has agreed to indemnify the former
owners of JPI against losses up to a maximum of $2,500,000 for
damages resulting from breach of representations or warranties
in connection with the JPI acquisition. The duration of the
guarantees and indemnities varies, and in many cases is
indefinite. These guarantees and indemnities do not provide for
any limitation of the maximum potential future payments the
Company could be obligated to make. Historically, the Company
has not been obligated to make any payments for these
obligations and no liabilities have been recorded for these
indemnities and guarantees in the accompanying consolidated
balance sheets.
Tax
Matters
The Company is required to file federal and state income tax
returns in the United States and various other income tax
returns in foreign jurisdictions. The preparation of these
income tax returns requires the Company to interpret the
applicable tax laws and regulations in effect in such
jurisdictions, which could affect the amount of tax paid by the
Company. The Company, in consultation with its tax advisors,
bases its income tax returns on interpretations that are
believed to be reasonable under the circumstances. The income
tax returns, however, are subject to routine reviews by the
various taxing authorities in the jurisdictions in which the
Company files its income tax returns. As part of these reviews,
a taxing authority may disagree with respect to the
interpretations the Company used to calculate its tax liability
and therefore require the Company to pay additional taxes.
Change
in Control Severance Plan
On November 15, 2001, the board of directors adopted an
Executive Management Change in Control Severance Pay Plan. The
plan covered the persons who at any time during the
90-day
period ending on the date of a change in control (as defined in
the plan), were employed by the Company as Chief Executive
Officer
and/or
president and provided for cash payments upon a change in
control. The Change in Control Severance Pay Plan was terminated
in April 2009.
|
|
NOTE 10
|
SHARE-BASED
COMPENSATION
|
The Company has six share-based compensation plans under which
it may grant common stock or incentive and non-qualified stock
options to officers, employees, directors and independent
contractors. The exercise price per share under the incentive
stock option plan shall not be less than 100% of the fair market
value per share on the date of grant. The exercise price per
share under the non-qualified stock option plan shall not be
less than 85% 100% of the fair market value per
share on the date of grant. All options granted under the plans
through December 31, 2009 have an exercise price equal to
the fair market value at the date of grant. The expiration date
of options granted under any of the plans may not exceed
10 years from the date of grant.
74
Effective June 30, 1999, the Company adopted the 1999 Stock
Option Plan (the 1999 Plan). The Company can grant
options for the purchase of up to 400,000 shares of the
Companys common stock under the 1999 Plan. The 1999 Plan
terminated on June 30, 2009, after which grants cannot be
made from the 1999 Plan. All options vest upon grant and expire
five years from the date of grant. As of December 31, 2009,
60,001 options at a weighted average exercise price of $2.85 per
share were outstanding under the 1999 Plan.
On January 25, 2002, the board of directors adopted the
2002 Stock Option Plan (the 2002 Plan). The Company
can grant options for the purchase of up to 200,000 shares
of the Companys common stock under the 2002 Plan. All
options granted vest upon grant and expire five years from the
date of grant. As of December 31, 2009, there were no
options outstanding under the 2002 Plan. The Company had 39,237
options available for grant under the 2002 Plan at
December 31, 2009.
On February 23, 2004, the board of directors adopted the
2004 Stock Option Plan (the 2004 Plan). The Company
can grant options for the purchase of up to 480,000 shares
of the Companys common stock under the 2004 Plan. Under
the terms of the 2004 Plan, 50,260 options were granted under
incentive stock option agreements to employees, and 228,740
options were granted under non-qualified stock option agreements
to employees, directors and a consultant; these options vested
immediately and expire in five years. As of December 31,
2009, 106,000 options at a weighted average exercise price of
$2.85 per share were outstanding under the 2004 Plan. The
Company had 359,000 options available for grant under the 2004
Plan at December 31, 2009.
On March 14, 2006, the Board of Directors adopted the 2006
Equity Incentive Plan (the 2006 Plan). The Company
can grant options for the purchase of up to
1,000,000 shares of the Companys common stock under
the 2006 Plan. Vesting of grants under the 2006 Plan is
determined at the discretion of the Compensation Committee of
the Board of Directors. Options granted under the 2006 Plan have
generally vested upon grant. As of December 31, 2009,
857,000 options at a weighted average exercise price of $3.87
per share were outstanding under the 2006 Plan. The Company had
143,000 options available for grant under the 2006 Plan at
December 31, 2009.
On September 7, 2006, the Companys shareholders
approved the 2007 Equity Incentive Plan (the 2007
Plan). The Company can grant options for the purchase of
up to 1,500,000 shares of the Companys common stock
under the 2007 Plan. Vesting of grants under the 2007 Plan is
determined at the discretion of the Compensation Committee of
the Board of Directors. Options granted under the 2007 Plan
generally vest ratably over 24 months. As of
December 31, 2009, 835,000 options at a weighted average
exercise price of $3.45 per share were outstanding under the
2007 Plan. The Company had 665,000 options available for grant
under the 2007 Plan at December 31, 2009.
On January 7, 2009, the Company adopted the
2008-2009
Performance and Equity Incentive Plan (Performance
Plan) whereby up to 1,000,000 shares of the
Companys common stock may be issued under the Performance
Plan. The Board of Directors approved the grant of
870,000 shares of the Companys common stock under the
Performance Plan, subject to stockholder approval of the
Performance Plan. Subsequently, this plan was not approved by
the shareholders and no expense has been recorded in connection
with this Performance Plan.
Summary
of Assumptions and Activity
The fair value of option awards to employees and directors is
calculated using the Black-Scholes option pricing model, even
though the model was developed to estimate the fair value of
freely tradable, fully transferable options without vesting
restrictions, which differ significantly from the Companys
stock options. The Black-Scholes model also requires subjective
assumptions, including future stock price volatility and
expected time to exercise, which greatly affect the calculated
values. The expected volatility is based on the historical
volatility of the Companys stock price. The expected term
of options granted is derived from historical data on employee
exercises and post-vesting employment termination behavior. The
risk-free rate selected to value any particular grant is based
on the U.S. Treasury rate that corresponds to the pricing
term of the grant effective as of the date of the grant. The
Company does not expect to pay dividends in the foreseeable
future, thus the dividend yield is zero. These factors could
change in the future, affecting the determination of stock-based
compensation expense in future periods. No
75
options were granted during the year ended December 31,
2009. The Company used the following weighted-average
assumptions in determining fair value of its employee and
director stock options:
|
|
|
|
|
Expected volatility
|
|
|
111
|
%
|
Expected term
|
|
|
5 years
|
|
Risk-free interest rate
|
|
|
2.48
|
%
|
Dividend yield
|
|
|
|
%
|
The weighted-average grant date fair value of employee and
director stock options granted during the year ended
December 31, 2008 was $2.35.
Stock-based compensation expense recognized during the period is
based on the value of the portion of share-based payment awards
that is ultimately expected to vest during the period.
ASC 718-10
requires estimates of forfeitures of unvested options at the
time of grant. Estimated forfeitures are revised in subsequent
periods if actual forfeitures differ form those estimates. The
estimated average forfeiture rate for 2009 and 2008 was 0%, as
options generally vest upon grant.
Upon the retirement of the Companys former chief executive
officer in October 2008, the Company agreed to extend the
expiration date of the 982,000 options previously granted.
Without such a modification, the options would have expired
within 90 days of the termination of services. As a result
of the modification, the options retained the expiration dates
that would have been in effect, had the former chief executive
officer remained in the Companys employment. The
modification effectively accelerated the vesting of 200,000
options granted in 2008, as the chief executive officer was not
required to provide further services in order to earn the
unvested options at the date of retirement. The Company recorded
$265,420 in stock option expense in connection with the
modifications. The expense was calculated using the
Black-Scholes option pricing model, using weighted-average
volatility, term and risk-free interest rate of 93%,
2.9 years, and 1.88%, respectively.
Employee and director stock-based compensation expense for the
years ended December 31, 2009 and 2008, including expense
related to the modification of options upon the retirement of
our former Chief Executive Officer, as described above, was
$795,983 and $1,034,175, respectively. Stock-based compensation
related to employee and director stock options under
ASC 718-10
was primarily included in selling, general and administrative
expense; with the exception that approximately $15,000 was
charged to research and development in 2008. Unrecognized
compensation expense at December 31, 2009 related to
employee and director stock options amounted to approximately
$107,641. The expense is expected to be recognized over a period
of 0.17 years.
Substantially all of such compensation expense is reflected in
the accompanying consolidated statements of operations and
comprehensive income (loss) within the selling, general and
administrative line item. Share-based compensation expense
recognized in the periods presented is based on awards that have
vested or are ultimately expected to vest. Historically, options
have vested upon grant, thus it was not necessary for management
to estimate forfeitures. Options granted in 2008 vest ratably
over 24 months. Based on historical turnover rates and the
vesting pattern of the options, the Companys management
has assumed that there will be no forfeitures of unvested
options.
During September 2009, the Company modified the various employee
stock options to change the exercise price to $0.75. For the
fully vested options, this modification resulted in $129,360 of
expense recorded in September 2009. For those modified options
that were not fully vesting on the modification date a total of
$368,916 will be expensed in the remaining requisite service
period.
76
The following is a status of all stock options outstanding at
December 31, 2009 and 2008 and the changes during the years
then ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
Options
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
|
Outstanding and exercisable, beginning of year
|
|
|
2,757,001
|
|
|
$
|
3.75
|
|
|
|
2,093,239
|
|
|
$
|
3.97
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
850,000
|
|
|
|
3.45
|
|
Expired/forfeited
|
|
|
(899,000
|
)
|
|
|
4.02
|
|
|
|
(186,238
|
)
|
|
|
4.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and expected to vest, end of year
|
|
|
1,858,001
|
|
|
$
|
3.59
|
|
|
|
2,757,001
|
|
|
$
|
3.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable, end of year
|
|
|
1,753,626
|
|
|
$
|
3.60
|
|
|
|
2,444,918
|
|
|
$
|
3.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no options exercised in 2009 or 2008. The aggregate
intrinsic value of options outstanding at December 31,
2009, considering only options with positive intrinsic values
and based on the closing stock price, was $0. The
weighted-average remaining contractual term of outstanding and
exercisable options at December 31, 2009 was 2.49 and
2.45 years, respectively.
From time to time, the Company issues warrants pursuant to
various consulting agreements and other compensatory
arrangements.
On February 5, 2008, the Board of Directors authorized the
issuance of 300,000 shares of common stock to LWP1 pursuant
to a consulting agreement dated February 3, 2008 for
financial advisory services to be provided from February 3,
2008 through May 3, 2009. The shares are issuable in two
increments of 150,000 and were valued at $1,011,000 based on the
trading price of the common stock on the date that the shares
were issued. The shares vest over a fifteen month period. In
accordance with
ASC 505-50-30,
the shares issued will be periodically revalued through the
vesting period, and amount recorded as prepaid consulting will
be expensed based on the value of the shares earned at each
measurement date. During the year ended December 31, 2008,
the Company recorded general and administrative expense of
$527,801 related to the agreement and the balance of $483,200 is
included in prepaid consulting at December 31, 2008. The
difference between the amount recorded to additional paid-in
capital upon issuance of the shares and the amounts ultimately
expensed at the measurement dates pursuant to
ASC 505-50-30
will be recorded as an adjustment to additional paid-in capital
after all shares granted under the agreement have been earned.
In March 2008, the Company issued warrants to purchase a total
of 161,813 shares of the Companys common stock at an
exercise price of $4.74 in connection with the second closing of
the December 2007 private placement offering (see Note 12).
On April 30, 2008, the Company extended the term of
warrants to purchase 18,750 shares of common stock at $3.68
per share to October 31, 2009. The warrants were held by an
investor/service provider. The Company recorded $18,375 in
compensation expense related to the term extension, calculated
using the Black-Scholes option valuation model with the
following assumptions: expected volatility of 79%; risk-free
interest rate of 2.37%; expected term of 1.5 years; and
dividend yield of 0%.
On June 17, 2008, the Company entered into an agreement for
financial consulting services. In connection with the agreement,
the Company granted warrants to purchase 150,000 shares of
common stock at an exercise price of $3.50. The warrants, which
were approved by the Companys board of directors, were
granted in partial consideration for financial consulting
services, vests over a twelve month period, and expire in five
years. The warrants were initially valued at $315,000, based on
the application of the Black Scholes option valuation model with
the following assumptions: expected volatility of 95%; average
risk-free interest rate of 3.66%; expected term of 5 years;
and dividend yield of 0%. In accordance with FASB
ASC 505-50,
the warrants will be periodically revalued through the vesting
period. As of December 31, 2009, the estimated cumulative
value of the vested and unvested warrants, based on the periodic
revaluation, is $116,000. The value of the vested portion of the
warrants is
77
recorded to additional paid in capital and prepaid expense in
the month that vesting occurs. The Company recorded general and
administrative expense of $35,625 for the year ended
December 31, 2009.
In September 2008, the Company issued warrants to purchase a
total of 209,167 shares of the Companys common stock
at an exercise price of $2.69 per share in connection with the
Convertible Debt financing. These warrants became exercisable on
March 15, 2009 (see Note 7). The terms of these
warrants require that the Company issue additional warrants in
the case of certain dilutive issuances of the Companys
common stock through the first quarter of 2009. The number of
additional warrants to be issued is based on the percentage
decrease in share price of the dilutive issuance compared to the
exercise price of the warrants.
In December 2008, the Company issued warrants to purchase a
total of 948,200 shares of the Companys common stock
at an exercise price of $1.00 per share in connection with the
Senior Note financing (see Note 7).
During the year ended December 31, 2008, 252,733 warrants
were exercised at a weighted average exercise price of $2.34,
resulting in aggregate net proceeds of approximately $560,000,
after expenses and commissions of approximately $31,000.
In January 2009, the Company issued 598,400 warrants,
exercisable at $1.13 per share, in connection with the second
closing of the Senior Note financing (see Note 15).
On May 4, 2009, the Company issued five-year warrants to
purchase 2,123,600 shares of the Companys common
stock at $0.98 per share in connection with the First
Closing of a private offering of the Companys common
stock. Warrants to purchase an additional the
212,360 shares of the Companys stock were issued to
the private placement agent.
On June 12, 2009, the Company issued five-year warrants to
purchase 749,600 shares of the Companys common stock
at $1.11 per share in connection with the Second
Closing of a private offering of the Companys common
stock. Warrants to purchase an additional the 74,960 shares
of the Companys stock were issued to the private placement
agent.
On August 24, 2009, the Company issued five year warrants
to purchase 403,621 shares of the Companys common
stock at $0.66 per share, connection with the issue of
convertible debt which were valued and accounted for upon the
issuance of the related convertible debt in 2008.
On September 15, 2009, the Company issued a warrant to
purchase 500,000 shares of the Companys common stock,
$0.001 par value per share, at a exercise price of $0.65
per share, subject to certain anti-dilution adjustments, in
connection with a promissory note. The warrants expire five
years from the date of grant.
On September 10, 2009, the Company issued a two-year
warrant to purchase 116,000 shares of the Companys
common stock, exercisable at $0.60 per share, pursuant to the
Bridge Loan Agreement, against receipt of the Bridge Loan, to
the Lender.
The following represents a summary of the warrants outstanding
at December 31, 2009 and 2008 and changes during the years
then ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
Warrants
|
|
|
Price
|
|
|
Warrants
|
|
|
Price
|
|
|
Outstanding and exercisable, beginning of year
|
|
|
5,252,699
|
|
|
$
|
3.38
|
|
|
|
4,528,668
|
|
|
$
|
3.98
|
|
Granted
|
|
|
6,688,970
|
|
|
|
1.02
|
|
|
|
1,469,180
|
|
|
|
1.91
|
|
Expired/forfeited
|
|
|
(1,548,382
|
)
|
|
|
2.85
|
|
|
|
(492,416
|
)
|
|
|
5.00
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
(252,733
|
)
|
|
|
2.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable, end of year
|
|
|
10,393,287
|
|
|
$
|
1.84
|
|
|
|
5,252,699
|
|
|
$
|
3.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78
The following table summarizes information about warrants
outstanding at December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Remaining
|
|
|
|
Warrant
|
|
|
Contractual
|
|
Exercise Price
|
|
Shares
|
|
|
Life (Years)
|
|
|
$3.68
|
|
|
1,180,632
|
|
|
|
0.83
|
|
$4.74
|
|
|
1,366,319
|
|
|
|
2.00
|
|
$0.60
|
|
|
116,000
|
|
|
|
1.69
|
|
$2.69
|
|
|
209,166
|
|
|
|
3.71
|
|
$1.00
|
|
|
948,200
|
|
|
|
3.94
|
|
$1.13
|
|
|
598,400
|
|
|
|
4.08
|
|
$0.98
|
|
|
2,335,960
|
|
|
|
4.34
|
|
$1.11
|
|
|
824,560
|
|
|
|
4.44
|
|
$0.66
|
|
|
403,621
|
|
|
|
4.65
|
|
$0.60
|
|
|
200,000
|
|
|
|
4.69
|
|
$0.65
|
|
|
500,000
|
|
|
|
4.71
|
|
$1.25
|
|
|
1,710,429
|
|
|
|
0.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,393,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The outstanding warrants at December 31, 2009 are held by
consultants and other service providers, stockholders, and
current and former note-holders and are immediately exercisable.
NOTE 12
STOCKHOLDERS EQUITY
Preferred
Stock
The Companys Certificate of Incorporation authorizes the
Company to issue up to 25,000,000 shares of $0.001 par
value preferred stock. Shares of preferred stock may be issued
in one or more classes or series at such time and in such
quantities as the board of directors may determine. During the
periods presented, the Company had no shares of preferred stock
outstanding.
Common
Stock
The Companys Certificate of Incorporation authorizes the
Company to issue up to 100,000,000 shares of common stock,
$0.001 par value.
The Company has funded its operations primarily through a series
of Regulation S and Regulation D companion offerings
(the Offerings), described below. The Offerings have
consisted of units of one share of common stock and warrants to
purchase a number of shares of common stock equal to one-half
the number of shares of common stock included in the units
(Units) and units of one share of common stock and a
warrant to purchase one share of common stock (Full
Units). The Units and Full Units are priced at a discount
of 25% from the average closing prices of the Companys
common stock for the five consecutive trading days prior to the
close of the offering, as quoted on the American Stock Exchange,
and the exercise price of the warrants is set at 115% of the
average closing price. Unless otherwise noted below, the
warrants issued in the Offerings are exercisable at the date of
issuance and expire three years from issuance.
For all of the Offerings, the Company utilized the placement
agent services of Galileo Asset Management, S.A.
(Galileo), a Swiss corporation for sales to
non-U.S. persons.
In United States, the Company has utilized the placement agent
services of FINRA (formerly NASD) member broker-dealers Havkit
Corporation (Havkit), Securities Network, LLC
(Network) and Spencer Clarke, LLC (Spencer
Clarke), and licensed sub agents working under Spencer
Clarke. In addition to commissions and expenses paid to the
Companys placement agents for each of the Offerings, as
described below, the Company has agreed to pay cash commissions
of 6% of the gross amount received upon exercise of the warrants
by the purchasers.
79
December
2007 Offering
In December, 2007, the Company conducted the closing of a
private placement (December 2007 Offering) of Units.
On March 5, 2008 the Company conducted the second closing
of the December 2007 Offering. In the second closing the Company
received $1,000,000 in aggregate gross proceeds from the sale of
a total of 323,626 units at $3.09 per unit and issued
warrants to purchase 161,813 shares at an exercise price of
$4.74 per share. In connection with the second closing of the
December 2007 Offering, the Company paid a finders fee of
$100,000 and other expenses and fees of $42,729, including
$18,854 that were paid subsequent to the first quarter of 2008.
After the closing of the December 2007 Offering, the Company
filed a registration statement with the Securities and Exchange
Commission to register the shares of the Companys common
stock, shares issuable upon exercise of the related investor
warrants, and shares issuable upon exercise of the warrants
issued to the placement agents. The registration statement was
declared effective on April 22, 2008.
November
2007 Offering
On May 16, 2008, the Company settled litigation related to
the termination of an agreement regarding a proposed private
placement. In connection with the settlement, the Company paid
$12,500 in cash, and issued 25,000 shares of unregistered
common stock with a deemed value of $75,000, based on the
ten-day
volume weighted-average price of the Companys common stock
through May 8, 2008. The value of the cash and shares
issued in the settlement is included in general and
administrative expense in the consolidated statement of
operations for the year ended December 31, 2008.
Common
Stock Issued for Services
On September 14, 2007, the Board of Directors authorized
the issuance of 250,000 shares of common stock to First
International pursuant to an amendment to the consulting
agreement dated July 22, 2005, for financial advisory
services to be provided from September 22, 2007 through
September 22, 2008. The shares were valued at $817,500
based on the trading price of the common stock on the
measurement date. The Shares were issued pursuant to an
exemption under Section 4(2) of the Securities Act. No
underwriter was involved in this issuance. During 2008, the
Company recorded selling, general and administrative expense of
$592,687 related to the agreement.
On November 27, 2007, the Board of Directors authorized the
issuance of 75,000 shares of common stock to Boston
Financial Partners Inc. pursuant to an amendment to the
consulting agreement dated September 16, 2003, for
financial advisory services to be provided from November 1,
2007 through October 31, 2008. The shares were valued at
$336,000 based on the trading price of the common stock on the
measurement date. During 2008, the Company recorded general and
administrative expense of $280,000 related to the agreement.
On November 27, 2007, the Board of Directors authorized the
issuance of up to 300,000 shares of common stock, to be
earned at the rate of 25,000 shares per month to Madden
Consulting, Inc. for financial advisory services to be provided
from December 26, 2007 through December 26, 2008. The
Company issued 25,000 shares in the January 2008 that were
valued at $104,250 based on the trading price of the common
stock on the measurement date. During the nine months ended
September 30, 2008, the Company recorded general and
administrative expense of $104,250 related to
25,000 shares. This agreement was terminated on
January 29, 2008 and the remaining obligation to issue
250,000 shares was cancelled.
On February 5, 2008, the Board of Directors authorized the
issuance of 300,000 shares of common stock to LWP1 pursuant
to a consulting agreement dated February 3, 2008 for
financial advisory services to be provided from February 3,
2008 through May 3, 2009. The shares are issuable in two
increments of 150,000. The shares vest over a fifteen month
period and are being valued monthly as the shares are earned
based on the trading price of the common stock on the monthly
anniversary date. In accordance with FASB
ASC 505-50
, the shares issued will be periodically valued through the
vesting period. Shares vested under the agreement were 80,000
and 220,000 during the years ended December 31, 2009 and
2008, respectively. The Company recorded general and
administrative expense of $71,600 and $527,801 related to the
agreement during the same years then ended.
80
On January 22, 2009, the Company entered into an agreement
with B&D Consulting for investor relations services through
July 7, 2010. The Company granted B&D Consulting
400,000 shares of the Companys common stock in
exchange for services, in which 183,326 shares were earned
during the year ended December 31, 2009. In accordance with
FASB
ASC 505-50,
the shares issued will be periodically valued, as earned,
through the vesting period. During the year ended
December 31, 2009, the Company recorded general and
administrative expense of $128,162 related to the agreement.
On March 31, 2009, the Company issued 12,500 shares of
the Companys common stock to a consultant for investor
relations services. The Company recorded $10,125 of expense
during the year ended December 31, 2009 with respect to the
shares issued, based on the value of the stock at the date the
shares were earned.
On May 28, 2009, the Company entered into a Settlement
Agreement and Release with Strategic Growth International Inc.
(SGI), a consultant who provided investor relations
services. Under the SGI Settlement Agreement and Release, the
Company agreed to issue 56,000 shares of the Companys
common stock to SGI, which shares are subject to listing
approval by the NYSE Amex US. These shares were approved on
August 27, 2009. In lieu of cash payment for amount due of
$56,089 for services rendered, the Company issued these shares
based on the approval date valued at $35,280 and recorded a gain
in the amount of $20,809 in the accompanying consolidated
statements of operations and comprehensive income (loss) as of
December 31, 2009.
On June 23, 2009, the Company entered into a Settlement
Agreement dated May 29, 2009 with Strategic Growth
International. Strategic Growth International agreed to accept
37,500 shares of the Companys common stock in
exchange for warrants originally issued in accordance with the
Financial Consulting Agreement. These shares were approved and
issued on August 27, 2009. No additional cost was
recognized as the original warrant value was greater than the
value of the shares on the date the approval was obtained.
During the third quarter of 2009 some holders of the convertible
debt issued in September 2008 elected to convert debt under the
terms of the agreement into stock and warrants. This conversion
resulted in the issuance of 807,243 shares and 403,621
warrants with an exercise price of $0.66 (see Note 11.)
On September 22, 2009, the Company entered into an
agreement with Lyon Consulting for investor relation services
through September 2010. The Company granted Lyons Consulting
200,000 restricted shares of the Companys common stock in
exchange for services. In accordance with FASB
ASC 505-50,
the shares issued will be periodically valued through the
vesting period. The shares were approved by the NYSE AMEX US on
December 10, 2009. The Company recorded $27,000 related to
the vested shares during the year ended December 31, 2009.
On January 7, 2009, the Company granted 120,000 shares
of common stock to the Companys independent directors,
subject to stockholder approval. The grant of the
120,000 shares is based on performance through 2008. During
the quarter ended September 30, 2009 the Companys
stockholders approved this grant of common stock to the
Companys independent directors and approximately $72,000
in expense has been recorded based on the stock price at
August 21, 2009 (date in which approval was obtained) in
the accompanying consolidated statements of operations and
comprehensive income (loss) for the year ended December 31,
2009.
On September 29, 2009, the Company entered into an
agreement regarding the Cancellation of Indebtedness with SOX
Solutions. The Company agreed to issue 67,800 shares of the
Companys common stock to SOX Solutions, which shares are
subject to listing approval by the NYSE Amex US. The shares were
issued on December 10, 2009 and valued at $0.29 per share.
As a result of the reclass, the Company recorded a gain on
settlement of $26,442 which is included in interest and income
(expense), net in the accompanying consolidated statements of
operations and comprehensive income (loss) for the year ended
December 31, 2009.
On October 23, 2009, the Company entered into a Trigger
Event Agreement with St. George Investments, LLC. Under the
Trigger Event Agreement, the Company agreed to issue
250,000 shares of common stock to St. George Investments,
LLC. The shares are subject to listing approval by the NYSE Amex
US. The shares were issued on December 12, 2009 and valued
at $0.29 per share. The Company recorded the issuance as
interest expense in the accompanying consolidated statements of
operations and comprehensive income (loss) for the year ended
December 31, 2009.
81
On November 30, 2009, the Company entered into a securities
purchase agreement with Alpha Capital Group and Whalehaven
Capital Funds. The Company issued 1,860,714 and
1,428,571 shares of the Companys common stock to
Alpha Capital Group and Whalehaven Capital Funds, respectively.
The stock price of the common shares issued was valued at $0.28
per share with aggregate proceeds of $812,320, which is net of
direct offering costs of $108,680. In connection with the
securities purchase agreement, the Company also issued
6.5 year warrants, which represents 50% of the common stock
issuances. As a result, the Company issued warrants to purchase
930,357 and 714,286 of the Companys common stock,
$0.001 par value per share, at an exercise price of $1.25
per share to Alpha Capital Group and Whalehaven Capital Funds,
respectively, subject to certain anti-dilution adjustments. The
terms associated with the conversion feature and the reset of
the exercise price of the warrants resulted in classifying these
instruments as derivative liabilities (see Note 1). On the
date of issuance, the Company recorded a derivative liability of
$509,839. The derivative was revalued at December 31, 2009,
which resulted in a change in fair value of the derivative
liability. In connection with the revaluation, the Company
recorded a gain of $197,357 in the interest income (expense),
net of the accompanying statement of operations and
comprehensive income (loss).
On November 11, 2009, the Company entered into an agreement
with First International Capital Group, Ltd., to provide
investor relations services. In connection with the agreement,
the Company issued a total of 900,000 shares of the
Companys common stock, par value $0.001. The service term
is six months (commencing November 24, 2009 and ending
May 25, 2010). The value of the common shares using the
stock price on date of commencement is $0.24 per share. The
total value of $360,000 is recorded as prepaid consulting
expense and will be amortized over the service period of six
months. As of December 31, 2009, the Company amortized
$60,000 as general administrative expenses in the accompanying
statement of operations and comprehensive income (loss).
NOTE 13
SEGMENT REPORTING
Prior to the deconsolidation, the Company had two reportable
segments: (i) China, which consists of manufacturing and
wholesale distribution of pharmaceutical and cosmetic products
to distributors, hospitals, clinics and similar institutional
entities in China, and (ii) Corporate, which comprises the
development of in-vitro diagnostics and the Companys CIT
technology, as well as the development of the Companys
HPE-based products for markets outside of China. The 2008
segment information has been restated to reclassifly the
operating activities of YYB to discontinued operations. The
results previously reported for China-Direct have been combined
with China.
The following is information for the Companys reportable
segments for the year ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China
|
|
|
Corporate
|
|
|
Total
|
|
|
Net revenue
|
|
$
|
8,469,652
|
|
|
$
|
158,017
|
|
|
$
|
8,627,669
|
|
Gross profit
|
|
$
|
3,147,110
|
|
|
$
|
120,346
|
|
|
$
|
3,267,456
|
|
Depreciation and amortization
|
|
$
|
888,589
|
|
|
$
|
207,182
|
|
|
$
|
1,095,771
|
|
Interest expense
|
|
$
|
81,834
|
|
|
$
|
2,423,271
|
|
|
$
|
2,596,606
|
|
Loss before discontinued operations
|
|
$
|
(1,397,511
|
)
|
|
$
|
(11,084,507
|
)
|
|
$
|
(12,482,018
|
)
|
Capital expenditures
|
|
$
|
1,447,356
|
|
|
$
|
296,709
|
|
|
$
|
1,744,065
|
|
The following is information for the Companys reportable
segments for the year ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China
|
|
|
Corporate
|
|
|
Total
|
|
|
Net revenue
|
|
$
|
23,694,678
|
|
|
$
|
80,222
|
|
|
$
|
23,774,900
|
|
Gross profit
|
|
$
|
12,184,904
|
|
|
$
|
59,605
|
|
|
$
|
12,244,509
|
|
Depreciation and amortization
|
|
$
|
1,219,487
|
|
|
$
|
124,190
|
|
|
$
|
1,343,677
|
|
Interest expense
|
|
$
|
367,970
|
|
|
$
|
100,561
|
|
|
$
|
468,531
|
|
Income (loss) before discontinued operations
|
|
$
|
10,508,239
|
|
|
$
|
(9,795,291
|
)
|
|
$
|
712,948
|
|
NOTE 14
RELATED PARTY TRANSACTIONS
In October 2008, the Companys former chief executive
officer agreed to retire from his employment with the Company.
The Company negotiated a settlement of its employment contract
with the former chief executive officer
82
under which he received $150,000 upon the effective date of the
agreement, including $25,000 for reimbursement of his legal
expenses. In addition the Company agreed to pay $540,000 in
monthly installments of $18,000, commencing January 31,
2009, to continue certain insurance coverages, and to extend the
term of options previously granted which would have expired
shortly after termination of employment. Pursuant to FASB
ASC 420-10,
the Company recorded a liability of approximately $517,000 for
the present value of the monthly installments and insurance
coverages due under the settlement agreement.
Approximately $229,000 and $237,000 are included in accrued
salaries and wages and $86,000 and $280,000 are included in
other long-term liabilities in the accompanying consolidated
balance sheets at December 31, 2009 and 2008, respectively.
The Company has not made the monthly $18,000 payments due, nor
paid the premiums on a life insurance policy on the former
officer since October 2009 and as of December 31, 2009 was
in default under this obligation.
As part of the deconsolidation of JPI as of September 29,
2009, the Company recorded a note receivable from JPI totaling
$5,350,000 and an offsetting allowance of $2,675,000. These
amounts were previously classified as intercompany balances and
eliminated in consolidation. The note bears interest at 12%
annually. The payment terms are expected to be finalized in
fiscal 2010.
During the year ended December 31, 2009, the Company
received services from tripoint capital advisors, LLC, which was
Co-founded by the audit committee chairman. The Company incurred
$27,000 for expenses and the full amount is outstanding at
Dec. 31, 2009.
NOTE 15
SUBSEQUENT EVENTS (Unaudited)
In January 2010, 1,100,000 shares were issued to two
consultants.
NYSE
Amex Listing
On December 23, 2009, the Company received a letter from
NYSE Amex (the Exchange), indicating that the
Company was below certain of the Exchanges continued
listing standards. Specifically, the Company was not in
compliance with Section 1003(a)(iv) of the Exchanges
Company Guide (the Company Guide) in that the
Company had sustained losses which were so substantial in
relation to our overall operations or our existing financial
resources, or our financial condition had become so impaired
that it appeared questionable, in the opinion of the Exchange,
as to whether the Company could continue operations
and/or meet
our obligations as they matured. The letter from the Exchange
also indicated that, due to its low selling price, the
Companys Common stock may not be suitable for auction
market trading. The Exchange afforded us an opportunity to
submit a plan of compliance to the Exchange by January 22,
2010, demonstrating our ability to regain compliance with the
Exchanges continued listing standards. Management
submitted such a plan to the Exchange by the deadline, and, in a
letter dated January 6, 2009, and supplemented it
thereafter. The Exchange notified us on March 24, 2009 that
it accepted our plan of compliance and granted us an extension
until June 15, 2010 to regain compliance with the continued
listing standards. Failure to regain compliance within the given
timeframe may result in the Exchange initiating delisting
proceedings against us. As of the date hereof , the Company have
not received any updates from the Exchange regarding compliance
with the continued listing standards.
Defaults
on Prior Note Financings: Proposed Debt Exchanges
In December 2008 and January 2009, the Company completed two
closings with note holders of 12% Senior Notes (the
Series 1 Note Holders), pursuant to which we
issued an aggregate of $1,757,500 in 12% Series 1 Senior
Notes (Series 1 Notes); in consideration
thereof, we issued the Series 1 Note holders warrants to
purchase up to 1,406,000 shares of common stock at $1.00
per share. In May and June 2009, we completed two closings with
note holders of the 12% Series 2 Senior Promissory Notes
(the Series 2 Note Holders, together with the
Series 1 Note Holders, the Note Holders),
pursuant to which we issued an aggregate of $1,796,000 in 12%
Series 2 Senior Notes (Series 2 Notes,
together with the Series 1 Notes, the Notes);
in consideration thereof, we issued the Series 2 Note
Holders warrants to purchase up to 2,873,200 shares of
common stock at $0.98 per share. The terms of the Series 2
Notes provided that if the stockholders of the Company do not
approve of the Series 2 Note Offering by September 1,
2009 and the Company did not redeem the 12% Series 2 Notes
by November 30, 2009, then the
83
holders of such 12% Series 2 Notes shall be entitled to
declare such notes in default and declare the entire principal
and unpaid accrued interest thereon immediately due and payable.
Additionally, since we have not yet paid the interest that was
due on December 1, 2009 or March 1, 2010, we were in
default. Although we have not received any notice from the
holders of the Series 2 Notes requesting we cure this
default, we have exceeded the cure period and therefore, all of
the Series 2 Notes are immediately due and payable and the
interest increased from 12% per annum to 18% per annum. Interest
is also accruing on the Series 1 Notes.
The Company has been carrying approximately $7,900,000 of
indebtedness that is in default, or is due on outstanding notes
and other contractual obligations which are past due or soon to
be due. Management is concerned that we may not have sufficient
cash to satisfy these debts and carry on our current operations.
Therefore, Management believes it is prudent to reserve as much
cash as possible for our operations.
To that end, in March 2010, Management put together various
exchange agreements (the Debt Exchanges) to enter
into with a majority, and potentially all, of our debt holders
subject to shareholder approval (Shareholder
Approval) of such share issuances, pursuant to which the
debt holders would exchange their outstanding notes or other
debt obligations for shares of our Common Stock. Although the
exchange terms vary slightly between the debt
holders based upon the terms of each of the
particular notes, a few provisions are consistent in all of the
exchange agreements: First, all of the issuances pursuant to the
proposed Debt Exchanges are subject to Shareholder Approval. To
that end, we filed a Preliminary Proxy Statement on
Schedule 14A on February 1, 2010 and are in the
process of responding to SEC comments regarding same so that we
can finalize the proxy and send it out to our shareholders. We
have the right to seek Shareholder Approval two times; if we do
not receive Shareholder Approval at the second meeting, we shall
fall back into default on all of the notes for which
shareholders did not approve the issuance of shares pursuant to
the related exchange agreement . Once we obtain Shareholder
Approval to issue the shares pursuant to a particular Debt
Exchange, upon such issuance, the debt related to such exchange
agreement will be forgiven and the holders thereof shall waive
all current and future defaults under the debt. Second, we
agreed to use our best efforts to register the shares issuable
pursuant to the exchange agreements in the next registration
statement we file under the Securities Act of 1933, as amended.
And third, the issuance of all of the shares of Common Stock to
be issued under these Debt Exchanges are subject to NYSE Amex
listing approval. Therefore, although some debt holders have
signed an exchange agreement, they are not enforceable against
us until we receive Shareholder Approval and approval of the
NYSE Amex to list the shares, which we cannot guarantee and
therefore the exchange may never occur.
At this time, based on the recent rise in the price of our
shares of Common Stock and the closing of the March-April
2010 12% Convertible Note Financing discussed below,
it is unclear whether we will proceed with the proposed Debt
Exchange . If and when we do receive Shareholder Approval, we
shall disclose the final amount of debt that shall be exchanged
and the total number of shares issued in exchange therefor. Any
shares of Common Stock to be issued pursuant to the debt
exchange will be issued pursuant to Section 4(2) of the
Securities Act for issuances not involving a public offering and
Regulation D promulgated thereunder.
In March 2010, we also entered into an Exchange Fee Agreement
with Cantone Research Inc., who was the placement agent for the
original issuance of the Notes. Pursuant to the Exchange Fee
Agreement, Cantone Research agreed to negotiate the exchange
with the Note Holders described above and obtain the Note
Holders agreement and signature to the exchange agreement. Under
the Exchange Fee Agreement, we agreed to pay Cantone Research a
fee of 2% of the total principle and interest that is due, up
through March 1, 2010, on the Notes, which, as of the date
we entered into the Exchange Fee Agreement, was $3,952,402.50,
2% of which is $79,048. We agreed to pay Cantone Research the
number of shares of our Common Stock that is equal to the
quotient of $79,048 divided by $0.28, or 282,314 shares. We
also agreed to reduce the exercise price of the placement agent
warrants issued to Cantone Research to $0.28 per share upon
completion of the Debt Exchange. The issuance of shares to
Cantone Research under the Exchange Fee Agreement is subject to
NYSE Amex and Shareholder Approval. If we do not receive
Shareholder Approval, we will have to pay the exchange fee in
cash. Further, if we do not proceed with the Debt Exchanges,
none of the other agreements with Cantone Research Inc. will be
consummated.
Also in March 2010, in an effort to further reduce our cash
expenditures, we also amended a consulting agreement with one of
our corporate consultants Cantone Asset Management
LLC. Under the original consulting agreement, we were to pay
Cantone Asset an aggregate cash consulting fee of $144,000 and
issued them
84
warrants to purchase 200,000 shares of our common stock at
$0.60 per share. Pursuant to the amendment, (i) Cantone
Asset shall instead be paid with an aggregate of
514,285 shares of our common stock, (ii) we will use
our best efforts to register those shares in the next
registration statement we file; and, (iii) we will engage
counsel to issue a blanket opinion to our transfer agent
regarding the amendment shares once the related registration
statement is declared effective. In consideration for Cantone
Asset agreeing to the amendment, we agreed to adjust the
exercise price of their warrant to $0.28 per share. The issuance
of shares pursuant to the amendment is subject to our receipt of
NYSE AMEX approval and Shareholder Approval. If we do not
receive Shareholder Approval, the exercise price of the warrants
will still be effective, but we will have to pay the consulting
fee in cash.
St.
George Convertible Note and Warrant Purchase Agreement Defaults
and Waivers; Note Conversions and Warrant Exercises After
January 1, 2010
On September 15, 2009, we issued a 12% Convertible
Promissory Note (the St. George Note). to St. George
Investments, LLC (St. George). On December 11,
2009 we entered into a Waiver of Default with St. George
pursuant to which we agreed to repay the entire balance of the
St. George Note and any adjustments thereto pursuant to the
terms of the initial Waiver by February 1, 2010. Since we
failed to pay the entire balance of the note by February 1,
2010, we were in default on the St. George Note. On
February 16, 2010, we entered into a Waiver of Default
agreement (February 16 Waiver) with St. George
pursuant to which: (i) St. George waived all defaults
through May 15, 2010 and agreed not to accelerate the
amounts due under the Note before May 15, 2010 and
(ii) St. George shall exercise their Warrant to purchase
140,000 shares of our common stock at $0.65 per share. In
consideration for this waiver, we agreed to pay St. George a
default fee equal to $50,000, which shall be added to the
balance of the Note effective as of the February 16, 2010.
The February 16 Waiver included a provision that would reinstate
the default if the company failed to comply with the terms of
the February 16 Waiver.
At various times during the period January 1, 2010 through
April 8, 2010, St. George converted portions of the
remaining principal and interest due on the St. George Note and
in consideration thereof, the Company issued to St. George an
aggregate of 2,568,951 shares of our Common Stock. In
addition during the same period, St. George exercised warrants
to purchase an aggregate of 400,000 Shares of our Common
Stock. All of such note conversions and warrant exercises during
2010 were at $.28 per share. The total net proceed from the
exercise of warrants by St. George during such period was
$112,000. There were no net proceeds from the various note
conversions.
Note
and Warrant Purchase Agreements- March and April
2010
After the year ended December 31, 2009, the Company sought
additional financing for its continuing operations. On
March 22, 2010, the Board of Directors authorized the
Company to enter into a Note and Warrant Purchase Agreement
(Purchase Agreement) with one accredited investor
(Lender) pursuant which the Company issued the
Lender a Convertible Promissory Note in the principal amount of
$925,000 bearing interest at a rate of 12%, increasing to 18%
upon the occurrence of an event of certain triggering events.
The Purchase Agreement includes a warrant to purchase up to
1,100,000 shares of the Companys Common Stock at an
exercise price of $.28. The Note carries a 20% original issue
discount and matures on March 22, 2011. In addition, the
Company agreed to pay $200,000 to the Lender to cover their
transaction costs incurred in connection with this transaction;
such amount was withheld from the loan at the closing of the
transaction. As a result, the total net proceeds the Company
received were $540,000, exclusive of finders fees paid in
connection with the transaction. The Lender may convert the
Note, in whole or in part into shares of the Companys
Common Stock. The Conversion Price is equal to 80% of the
volume-weighted average price for the 5 trading days ending on
the business day immediately preceding the applicable date the
conversion is sought but will be at least $0.28 per share,
subject to adjustment upon the occurrence of certain events.
The transaction with the Lender was the First
Closing of a series of similar transactions, which
together are hereinafter referred to as March-April 2010
12% Convertible Note Financing. On April 8,
2009, the Board of Directors authorized the Company to enter
into additional Purchase Agreements to issue up to an additional
$7,500,000 of 12% Convertible notes and to issue warrants
to issue up to an additional 15,000,000 shares of the
Companys Common Stock pursuant to the March-April 2010
12% Convertible Note Financing.
85
On April 8, 2010, in the Second Closing of the
Lender and other accredited investors purchased an aggregate of
$5,524,425 principal amount of additional 12% Convertible
Notes and issued additional warrants to purchase
6,569,585 shares of the Companys Common Stock at an
exercise price of $.38 per share on terms substantially the
same as described above in the First Closing with the Lender.
The net proceeds from the Second Closing were $3,225,000,
exclusive of any finders fees paid in the Second Closing.
On April 13, 2010, in the Third Closing of the
March-April 2010 12% Convertible Note Financing, Lender and
other accredited investors, purchased an aggregate of $3,957,030
principal amount of additional 12% Convertible Notes and
issued additional warrants to purchase 4,705,657 shares of
the Companys Common Stock exercisable at $.69 per share on
terms substantially the same as described above in the First
Closing and Second Closing.. The net proceeds from the Third
Closing were $2,310,000, exclusive of any finders fees
paid in the Second Closing.
The Company applied for listing of all of the shares of the
Common Stock issuable on conversion of the 12% Convertible
Note and upon exercise of the warrant issued to the Lender in
the First Closing with the NYSE Amex, but has not yet received
approval for listing. Any shares of Common Stock issuable in
excess of NYSE Amex Rule 713 so-called 19.99%
Cap will require stockholder approval. No stockholder
approval has been solicited or obtained as of the date hereof.
The Company intends to file an additional listing application
with the NYSE Amex to list all of the shares of the
Companys Common Stock issuable on conversion of the
12% Convertible Notes and on exercise of the warrants
issued in the Second Closing and the Third Closing. The Company
also intends to seek stockholder approval for a waiver of the
19.99% Cap on such shares.
86
|
|
Item 9.
|
Changes
in and Disagreements With Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
Disclosure
Controls and Procedures
Our management, with the participation of our Principal
Executive Officer and Principal Financial Officer, has evaluated
the effectiveness of our disclosure controls and procedures (as
such term is defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended (the
Exchange Act) as of December 31, 2009. Based on
this evaluation, our Principal Executive Officer and our
Principal Financial Officer concluded that our disclosure
controls and procedures, subject to the limitations as noted
below, were effective during the period and as of the end of the
period covered by this annual report to ensure that information
required to be disclosed by us in reports that we file or submit
under the 1934 act is recorded, processed, summarized and
reported within the time periods specified in the SEC rules and
forms and that such information is accumulated and communicated
to our management as appropriate to allow timely decisions
regarding required disclosures.
Because of inherent limitations, our disclosure controls and
procedures may not prevent or detect misstatements. A control
system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of
the controls system are met. Because of the inherent limitations
in all controls systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of
fraud, if any, have been detected.
Managements
Report on Internal Control Over Financial Reporting
Our internal controls over financial reporting are designed by,
or under the supervision of our Principal Executive Officer and
Principal Financial Officer or persons performing similar
functions, and effected by our board of directors, management
and other personnel, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. Our internal control
over financial reporting includes those policies and procedures
that:
|
|
|
|
|
Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions
of our assets;
|
|
|
|
Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with accounting principles generally accepted in the
United States and that our receipts and expenditures are being
made only in accordance with authorizations of our management
and directors; and
|
|
|
|
Provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition or disposition of our
assets that could have a material effect on the financial
statements.
|
Our management has evaluated the effectiveness of our internal
control over financial reporting (ICFR) as of December 31,
2009 based on the control criteria established in a report
entitled Internal Control Integrated
Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this
evaluation, our management concluded that our internal control
over financial reporting was not effective as of
December 31, 2009. Based on its evaluation, our management
concluded that our internal control over financial reporting has
the following deficiencies as of December 31, 2009:
1. We did not maintain effective controls to ensure there
is adequate analysis, documentation, reconciliation, and review
of accounting records and supporting data, especially as it
relates to subsidiary accounting records. This control
deficiency contributed to the individual material weaknesses
described below:
a) Shortage of qualified financial reporting personnel with
sufficient depth, skills and experience to apply accounting
principles generally accepted in the United States of America
(GAAP).
87
b) We did not maintain effective controls to ensure there
is adequate analysis, documentation, reconciliation, and review
of accounting records and supporting data.
c) We do not have adequate controls in place to identify
and approve non-recurring transactions such that the validity
and proper accounting can be determined on a timely basis.
d) We do not have adequate procedures in place to detect
related party transactions which give rise to potential
conflicts of interest.
In summary, the control deficiencies and material weaknesses
noted above could result in a material misstatement of the
aforementioned accounts or disclosures that would result in a
material misstatement to the Companys interim or annual
consolidated financial statements that would not be prevented or
detected. Accordingly, management has determined that each of
the control deficiencies described above constitutes a material
weakness.
Remediation
of Material Weakness
As of December 31, 2009, there were control deficiencies
which constitute as a material weakness in our internal control
over financial reporting. To the extent reasonably possible in
our current financial condition, we have:
1. authorized the addition of staff members and outside
consultants with appropriate levels of experience and accounting
expertise to the finance department and information technology
department to ensure that there is sufficient depth and
experience to implement and monitor the appropriate level of
control procedures related to all of our US locations;
2. issued policies and procedures regarding the delegation
of authority and conducted training sessions with appropriate
individuals at our subsidiary locations.
Through these steps, we believe we are addressing the
deficiencies that affected our internal control over financial
reporting as of December 31, 2009. Because the remedial
actions require hiring of additional personnel, upgrading
certain of our information technology systems, and relying
extensively on manual review and approval, the successful
operation of these controls for at least several quarters may be
required before management may be able to conclude that the
material weakness has been remediated. We intend to continue to
evaluate and strengthen our ICFR systems. These efforts require
significant time and resources.
Inherent
Limitations Over Internal Controls
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect all errors or
misstatements and all fraud. Therefore, even those systems
determined to be effective can provide only
88
reasonable, not absolute, assurance that the objectives of the
policies and procedures are met. Also, projections of any
evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies
or procedures may deteriorate.
Our Audit Committee, Board of Directors and management and KMJ
Corbin and Company LLP discussed these weaknesses and we have
assigned the highest priority to their correction. In 2010, we
plan to continue to add financial resources and expertise, both
through internal hiring and using outside consultants that will
provide hands-on oversight of the monthly financial closing,
data analysis, and account reconciliation.
This annual report does not include an attestation report of our
independent registered public accounting independent firm
regarding internal control over financial reporting.
Managements report was not subject to attestation by our
independent registered public accounting firm pursuant to
temporary rules of the SEC that permit us to provide only
managements report in this annual report.
Changes
in Internal Control Over Financial Reporting
There have not been any changes in our internal control over
financial reporting (as such term is defined in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act) during the fourth quarter of 2009 that
have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
|
|
Item 9B.
|
Other
Information
|
There is no information that was required to be disclosed, but
was not disclosed in a report on a
Form 8-K
during the fourth quarter of our fiscal year ending
December 31, 2009.
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
The following table and text set forth the names and ages of all
directors and executive officers as of
[ ].
The size of our board is currently set at five and is divdided
into three classes. The terms of two directors will expire at
this years Annual Meeting; the term of one director shall
expire at the Annual Meeting of Stockholders to be held in 2011
(Class II); and the terms of the two remaining directors
shall expire at the Annual Meeting of Stockholders to be held in
2012 (Class I). Currently, Douglas MacLellan and Minghui
Jia serve as the Class I directors, Michael Boswell serves
as the Class II director, and William Thompson and Edward
Arquilla serve as the Class III directors. Commencing with
this years Annual Meeting, one class of directors will be
elected for a three-year term at each Annual Meeting of
Stockholders. There are no family relationships among our
directors and executive officers. Also provided herein are brief
descriptions of the business experience of each director,
executive officer and advisor during the past five years and an
indication of directorships held by each director in other
companies subject to the reporting requirements under the
Federal securities laws. None of our officers or directors is a
party adverse to us or has a material interest adverse to us.
|
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Year First
|
|
|
Name
|
|
Age
|
|
Elected
|
|
Position(s)
|
|
Douglas C. MacLellan
|
|
|
55
|
|
|
|
1991
|
|
|
Executive Chairman and Chief Executive Officer
|
Akio Ariura
|
|
|
52
|
|
|
|
2006
|
|
|
Chief Financial Officer
|
Michael Boswell
|
|
|
40
|
|
|
|
2008
|
|
|
Director
|
William M. Thompson III, M.D.
|
|
|
82
|
|
|
|
1989
|
|
|
Director
|
Edward R. Arquilla, M.D., Ph.D.
|
|
|
87
|
|
|
|
1997
|
|
|
Director
|
Minghui Jia
|
|
|
49
|
|
|
|
2006
|
|
|
Director
|
Mr. MacLellan transitioned into his new role after
nearly 17 years on Radients Board. He was appointed
to the Board in 1992 and became Chairman of the Audit and
Governance committees in 2001. In 2008 he assumed the role of
non-executive Chairman serving as an advisor and lead Company
spokesperson for Radient. Mr. MacLellan has been a member
of our Board since 1992 and is Chairman of the Boards
Audit and Governance Committees. Mr. MacLellan is currently
President and CEO of MacLellan Group, Inc., a privately held
business incubator and
89
financial advisory firm since May 1992. From August 2005 to the
present, Mr. MacLellan has been a member of the Board of
Directors of Edgewater Foods, International, Inc.
Mr. MacLellan was, until September 2005, formally
vice-chairman of the Board of Directors of AXM Pharma, Inc.
(AXMP.PK) and its predecessors. AXM is a China based
bio-pharmaceutical company. From January 1996 through August
1996, Mr. MacLellan was also the Vice-Chairman of Asia
American Telecommunications (now Metromedia China Corporation),
a majority owned subsidiary of Metromedia International Group,
Inc. From November 1996 until March 1998, Mr. MacLellan was
co-Chairman and investment committee member of the Strategic
East European Fund. From November 1995 until March 1998,
Mr. MacLellan was President, Chief Executive Officer and a
director of PortaCom Wireless, Inc., a company engaged as a
developer and operator of cellular and wireless
telecommunications ventures in selected developing world
markets. Mr. MacLellan is a former member of the Board of
Directors and co-founder of FirstCom Corporation, an
international telecommunications company that operates a
competitive access fiber and satellite network in Latin America,
which became AT&T Latin America, Inc. in August 2000. From
1993 to 1995, Mr. MacLellan was a principal and co-founder
of Maroon Bells Capital Partners, Inc., a U.S. based
merchant bank, which specializes in providing corporate finance
services to companies in the international and domestic
telecommunications and media industries. Mr. MacLellan was
educated at the University of Southern California in economics
and finance, with advanced training in classical economic theory.
Mr. Boswell was elected to the Board in 2008.
Mr. Boswell is President, COO and Chief Compliance Officer
for TriPoint Global Equities, LLC, a FINRA member firm that
maintains ,specialty practices in institutional private
placements, mergers and acquisitions and corporate finance. He
provides high-level financial services to
start-up
businesses and
small-to-mid-sized
companies including holding executive and CFO positions with
client companies. Mr. Boswell is also Managing Director of
TriPoint Capital Advisors, LLC a merchant bank and financial
advisory affiliate of TriPoint Global. With TriPoint Capital
Advisors he has assisted numerous companies by providing
high-level advice regarding corporate finance, corporate
structure, corporate governance, mergers and acquisitions, SOX
404 compliance, implications of various SEC rules and FASB
Emerging Issues Task Forces issues as they relate to private
placements, SEC reporting and disclosure requirements, employee
option programs, and the overall reverse merger process.
Mr. Boswell is currently a member of the board of directors
and chairman of the audit committee of AMDL, Inc. (AMEX: ADL), a
publicly held biotechnology firm and a Director and Acting Chief
Accounting Officer for Ocean Smart, Inc. (OTC BB: OCSM). Prior
to the founding of TriPoint Global, Mr. Boswell had a
number of executive positions focusing on business development
and management consulting. He also spent eight years as a senior
analyst
and/or
senior engineer for various branches of the United States
Government. Mr. Boswell earned a MBA from John Hopkins
University and a BS degree in Mechanical Engineering from
University of Maryland; he holds the Series 24, 82 and 63
licenses.
Dr. Thompson has served as one of our directors
since June 1989 and stepped down as our Chairman in 2008, and
was our CEO during the years
1992-1994.
He is currently Medical Director of PPO Next and a member of the
clinical surgical faculty of U. C. Irvine School of Medicine.
Dr. Thompson has practiced medicine for over 40 years
in general practice, general surgery and trauma surgery.
Previously, he practiced patent law and worked in the
pharmaceutical industry in the areas of research, law and senior
management for 13 years. During his medical career, he was
founding Medical Director of Beach Street and August Healthcare
Companies during a
25-year
association with the managed care PPO industry.
Dr. Thompson has also served on the OSCAP Board of SCPIE, a
malpractice carrier, for 20 years and chaired its Claims
Committee. He has been heavily involved with organized medicine
and hospital staff management for many years and was a principal
architect of the paramedic and emergency systems of Orange
County, CA.
Dr. Arquilla has been one of our directors since
February 1997. Dr. Arquilla received his M.D. and PhD from
Case Western University in 1955 and 1957, respectively. He was
board certified in anatomic pathology in 1963. In 1959, he was
appointed assistant professor of pathology at the University of
Southern California. In 1961, he was appointed assistant
professor of pathology at UCLA and promoted to full professor of
pathology in 1967. He was appointed as the founding chair of
Pathology at UCI in 1968. He continued in this capacity until
July 1, 1994. He is presently an active professor emeritus
of pathology at UCI. He has more that 80 peer reviewed published
articles. His current interests are focused on
immuno-pathological testing of biologically important materials.
Mr. Minghui Jia was elected to our Board in 2006 and
is currently the Managing Director of Jade Pharmaceutical, Inc.
Mr. Jia has over 10 years experience in investment
banking, venture capital, marketing institutional
90
trading and senior corporate management experience. Mr. Jia
is familiar with all procedures for manufacturing and marketing
with respect to the Asian Pharmaceutical market and has an
in-depth understanding of the industry. Prior to founding Jade
Capital Group, Ltd. and Jade Pharmaceutical Inc., Mr. Jia
served as marketing director for China Real Estate Corporation,
one of the largest Chinese property corporations between 1999
and 2003. Between 1989 and 1998, Mr. Jia served as General
Manager of several branches of China Resources Co. Ltd., the
largest China export corporation. From 1987 to 1989,
Mr. Jia worked for the China National Machinery import and
export corporation where he served as Manager of the Import
Department for Medical Instruments.
Communications
with Directors
Stockholders may communicate with the Chairman of the Board, the
directors as a group, the non-employee directors or an
individual director directly by submitting a letter in a sealed
envelope labeled accordingly and with instruction to forward the
communication to the appropriate party. Such letter should be
placed in a larger envelope and mailed to the attention of our
Secretary at Radient Pharmaceuticals Corporation, 2492 Walnut
Avenue, Suite 100, Tustin, California 92780. Shareholders
and other persons may also send communications to members of our
Board who serve on the Audit Committee by utilizing the webpage
on our website,
http://www.amdl.com,
designated for that purpose. Communications received through the
webpage are reviewed by a member of our internal audit staff and
the chairperson of the Audit Committee. Communications that
relate to functions of our Board or its committees, or that
either of them believes requires the attention of members of our
Board, are provided to the entire Audit Committee and reported
to our Board by a member of the Audit Committee. Directors may
review a log of these communications, and request copies of any
of the communications.
Board of
Directors Meetings
During the fiscal year ended December 31, 2009, there were
[ ]
meetings of the Board as well as numerous actions taken with the
unanimous written consent of the directors.
Section 16(a)
Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our officers and
directors and those persons who beneficially own more than 10%
of our outstanding shares of common stock to file reports of
securities ownership and changes in such ownership with the SEC.
Officers, directors and greater than 10% beneficial owners are
also required to furnish us with copies of all
Section 16(a) forms they file.
Based solely upon a review of the copies of such forms furnished
to us, we believe that during 2009 all Section 16(a) filing
requirements applicable to our officers, directors and persons
who own more than 10% of our outstanding shares of common stock
were complied with.
Code of
Ethics for Financial Professionals
The Company has adopted a Code of Ethics for Financial
Professionals. The Code of Ethics has been posted and may be
viewed on our website at:
[ ].
Audit
Committee and Financial Expert
Our Board has established an Audit Committee consisting of
Mr. Boswell, Dr. Thompson and Dr. Arquilla, each
of whom is independent within the meaning of the rules of the
NYSE Amex and the enhanced independence requirements for audit
committee members under Exchange Act
Rule 10A-3.
The Audit Committee met
[ ]
times in 2009. The Audit Committee has been established in
accordance with Section 3(a)(58)(A) of the
Securities and Exchange Act of 1934. The primary functions
of this Committee are to: appoint (subject to shareholder
approval), and be directly responsible for the compensation,
retention and oversight of, the firm that will serve as the
Companys independent accountants to audit our financial
statements and to perform services related to the audit
(including the resolution of disagreements between management
and the independent accountants regarding financial reporting);
review the scope and results of the audit with the independent
accountants; review with management and the independent
accountants, prior to the filing thereof, the annual and interim
financial results (including Managements Discussion and
Analysis) to be included in
Forms 10-K
and
91
10-Q,
respectively; consider the adequacy and effectiveness of our
internal accounting controls and auditing procedures; review,
approve and thereby establish procedures for the receipt,
retention and treatment of complaints received by Radient
regarding accounting, internal accounting controls or auditing
matters and for the confidential, anonymous submission by
employees of concerns regarding questionable accounting or
auditing matters; review and approve related person transactions
in accordance with the policies and procedures of the Company;
and consider the accountants independence and establish
policies and procedures for pre-approval of all audit and
non-audit services provided to Radiet by the independent
accountants who audit its financial statements. At each meeting,
Committee members may meet privately with representatives of our
independent accountants and with Radients Chief Financial
Officer.
The Board has determined that Mr. Boswell, an independent
director, satisfies the financially sophisticated
requirements set forth in the NYSE Amex Company Guide, and has
designated Mr. Boswell as the audit committee
financial expert, as such term is defined by the Amex.
Mr. Boswells qualifications as an audit committee
financial expert are described in his biography above.
A current copy of our Audit Committees amended and
restated charter is available upon request.
|
|
Item 11.
|
Executive
Compensation
|
The following table sets forth all compensation received during
the two years ended December 31, 2009 by our Chief
Executive Officer, Chief Financial Officer and each of the other
two most highly compensated individuals whose total compensation
exceeded $100,000 in such fiscal year. These officers and
individuals are referred to as the Named Executive Officers in
this Proxy Statement. As of October 31, 2008,
Mr. Dreher resigned as our President and CEO and Douglas
MacLellan was appointed to fill those positions; however, we are
required to provide executive compensation information for the
last two completed fiscal years. Upon Mr. MacLellans
appointment, we agreed to pay him an annual base salary of
$360,000, to be paid in equal monthly installments, and he is
also entitled to certain bonuses, the latter of which he has
deferred until the Companys cash position improves.
SUMMARY
COMPENSATION TABLE
|
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|
|
|
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|
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Non-Equity
|
|
Non-qualified
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive Plan
|
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Deferred
|
|
All Other
|
|
|
|
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|
|
Salary
|
|
Bonus
|
|
Stock
|
|
Option
|
|
Compensation
|
|
Compensation
|
|
Compensation
|
|
|
Name and Principal Position
|
|
Year
|
|
($)
|
|
($)
|
|
Awards ($)
|
|
Awards ($)
|
|
Earnings ($)
|
|
Earnings ($)
|
|
($)
|
|
Total ($)
|
|
Gary L. Dreher(1)
|
|
|
2009
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Gary L. Dreher President & CEO(1)
|
|
|
2008
|
|
|
$
|
541,667
|
|
|
$
|
100,000
|
|
|
$
|
|
|
|
$
|
500,420
|
(2)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
164,815
|
(3),(4)
|
|
$
|
1,306,902
|
|
Douglas MacLellan,
|
|
|
2009
|
|
|
$
|
360,000
|
|
|
$
|
30,000
|
|
|
$
|
|
|
|
$
|
127,940
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
517,940
|
|
President, CEO & Chairman
Douglas MacLellan, President, CEO & Chairman(1)
|
|
|
2008
|
|
|
$
|
|
|
|
$
|
60,000
|
(6)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
180,000
|
(5)
|
|
$
|
240,000
|
|
Akio Ariura, CFO
|
|
|
2009
|
|
|
$
|
300,000
|
|
|
$
|
20,000
|
|
|
$
|
|
|
|
$
|
40,900
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
360,900
|
|
Akio Ariura
|
|
|
2008
|
|
|
$
|
218,749
|
|
|
$
|
20,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
238,749
|
|
Frank Zheng(7)
|
|
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2009
|
|
|
$
|
186,667
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
20,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
206,667
|
|
Frank Zheng
|
|
|
2008
|
|
|
$
|
360,000
|
|
|
$
|
85,000
|
|
|
$
|
|
|
|
$
|
48,958
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
493,958
|
|
Minghui Jia(7)
|
|
|
2009
|
|
|
$
|
186,667
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
20,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
206,667
|
|
Minghui Jia
|
|
|
2008
|
|
|
$
|
240,000
|
|
|
$
|
85,000
|
|
|
$
|
|
|
|
$
|
48,958
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
373,958
|
|
|
|
|
(1) |
|
Effective as of October 31, 2008, Mr. Dreher resigned
from all of his positions; Mr. MacLellan replaced
Mr. Dreher as our President, Chief Executive Officer and
Chairman in November 2008. |
|
(2) |
|
The value of option awards included in this column represents
the compensation costs recognized by the Company in fiscal year
2008 for option awards made or modified in 2008 calculated
pursuant to SFAS No. 123(R). The values included
within this column have not been, and may never be realized. The
options might never be exercised and the value received by
Mr. Dreher, if any, will depend on the share price on the
exercise date. The assumptions we used with respect to the
valuation of the option awards are set forth in the Notes to our
Consolidated Financial Statements, which are included in our
Form 10-K
for the year ending December 31, 2009. There were no
forfeitures during the year. |
|
(3) |
|
Mr. Drehers perquisites and other personal benefits
include certain amounts for life insurance, car allowance and
membership dues aggregate $14,815. |
92
|
|
|
(4) |
|
Effective as of October 31, 2008, Mr. Dreher resigned
and his compensation as an executive officer ceased as of such
date. He received $125,000 upon the effective date of his
Severance Agreement, and we paid $25,000 of his legal expenses.
In addition, we agreed to pay Mr. Dreher $540,000 in
monthly installments of $18,000, commencing January 31,
2009 for consulting services, as well as continuation of certain
insurance coverages. |
|
(5) |
|
As Chairman of our Compensation Committee and as Chairman of our
Governance and Audit Committees, Douglas MacLellan received an
additional $15,000 per month. |
|
(6) |
|
Pursuant to Mr. MacLellans appointment as our
President and CEO in November 2008, he earned a bonus of $60,000
for the quarter ended December 31, 2008. |
|
(7) |
|
Due to the compensation received, we are including
Mr. Zheng and Mr. Jia two of our
directors in this table since disclosure would be
required but for the fact that they were not serving as an
executive officer at the end of the last completed fiscal year. |
Employment
Agreements
On March 31, 2008, we entered into a three-year employment
agreement with Gary L. Dreher, our the Chief Executive Officer,
President and a member of the Board of Directors. The agreement
was effective as of January 31, 2008, at a base $650,000
plus certain other benefits and participation in our various
Equity Incentive Plans. The employment agreement also contained
standard provisions concerning confidentiality, non-competition
and non-solicitation.
Effective October 31, 2008, Mr. Dreher resigned and we
agreed to enter into certain mutual general releases and related
covenants, and to tender to him certain payments as described
below. In connection with Mr. Drehers retirement, we
entered into a Severance Agreement with him, which provides that
his compensation as an executive ceased as of the effective date
of his retirement. In lieu of the compensation and other terms
and benefits provided by his then current employment agreement,
the Company agreed to pay him $125,000 and pay $25,000 in legal
expenses on his behalf, following the expiration of a
seven-day
statutory period. Further, Mr. Dreher agreed to consult for
us on an as-requested, mutually agreed basis (not to exceed four
hours per month). Thereafter, Mr. Dreher is entitled to
receive $540,000 in consulting fees consisting of
30 monthly payments of $18,000, commencing January 31,
2009. Mr. Dreher is also entitled to continuation of
certain insurance coverage. We also agreed to allow
Mr. Dreher to continue to vest in stock options granted to
him and to disregard the expiration of options that would have
occurred upon termination of employment. The Severance Agreement
contains other terms and conditions standard and customary for
the retirement of executive officers.
On November 4, 2008 Douglas C. MacLellan was appointed as
our President and Chief Executive Officer. Mr. MacLellan
does not have any employment agreement and is compensated at a
base salary of $30,000 per month and he participates in the
Companys health insurance and other benefits available to
executive officers. Additionally, Mr. MacLellan earned a
bonus of $60,000 for the quarter ended December 31, 2008.
On September 28, 2006, we entered into three-year
employment agreements with Minghui Jia, one of our directors and
Executive Vice-President of JPI, providing for a base salary of
$156,000 per annum and a signing bonus of $50,000. Also on that
date, we entered into a three-year employment agreement with
Fang Zheng, President of JPI, providing for a base salary of
$204,000 per annum and a signing bonus of $50,000.
Effective January 1, 2008, Mr. Zhengs base
compensation was increased to $30,000 per month and
Mr. Jias base compensation was increased to $20,000
per month. In February 2008, Mssrs. Jia and Zheng each received
an additional bonus of $25,000 each.
93
Outstanding
Equity Awards at Fiscal Year End
|
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|
Equity Incentive
|
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|
Plan Awards:
|
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|
Number of
|
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|
Number of
|
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|
Number of
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|
Securities
|
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|
Securities
|
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|
Securities
|
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Underlying
|
|
|
Underlying
|
|
|
Underlying
|
|
|
|
|
|
|
|
|
|
Unexercised
|
|
|
Unexercised
|
|
|
Unexercised
|
|
|
Option
|
|
|
Option
|
|
|
|
Options (#)
|
|
|
Options (#)
|
|
|
Unearned
|
|
|
Exercise
|
|
|
Expiration
|
|
Name
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
Options (#)
|
|
|
Price ($/Sh)
|
|
|
Date
|
|
|
Gary Dreher
|
|
|
35,088
|
|
|
|
|
|
|
|
|
|
|
|
2.85
|
|
|
|
2/27/2011
|
|
|
|
|
24,913
|
|
|
|
|
|
|
|
|
|
|
|
2.85
|
|
|
|
2/27/2011
|
|
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
|
3.70
|
|
|
|
10/8/2011
|
|
|
|
|
172,000
|
|
|
|
|
|
|
|
|
|
|
|
4.06
|
|
|
|
5/31/2012
|
|
|
|
|
262,500
|
|
|
|
37,500
|
|
|
|
|
|
|
|
3.45
|
|
|
|
3/3/2013
|
|
Douglas MacLellan
|
|
|
36,000
|
|
|
|
|
|
|
|
|
|
|
|
2.85
|
|
|
|
2/27/2011
|
|
|
|
|
120,000
|
|
|
|
|
|
|
|
|
|
|
|
3.70
|
|
|
|
10/8/2011
|
|
|
|
|
90,000
|
|
|
|
|
|
|
|
|
|
|
|
4.06
|
|
|
|
5/31/2012
|
|
|
|
|
175,000
|
|
|
|
25,000
|
|
|
|
|
|
|
|
3.45
|
|
|
|
3/3/2013
|
|
Akio Ariura
|
|
|
27,027
|
|
|
|
|
|
|
|
|
|
|
|
3.70
|
|
|
|
10/8/2011
|
|
|
|
|
12,973
|
|
|
|
|
|
|
|
|
|
|
|
3.70
|
|
|
|
10/8/2011
|
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
4.06
|
|
|
|
5/31/2012
|
|
|
|
|
43,750
|
|
|
|
6,250
|
|
|
|
|
|
|
|
3.45
|
|
|
|
3/3/2013
|
|
Frank Zheng
|
|
|
43,750
|
|
|
|
6,250
|
|
|
|
|
|
|
|
3.45
|
|
|
|
3/3/2013
|
|
Minghui Jia
|
|
|
43,750
|
|
|
|
6,250
|
|
|
|
|
|
|
|
3.45
|
|
|
|
3/3/2013
|
|
2008-2009
Performance and Equity Incentive Plan
On January 7, 2009, we adopted a new performance based
incentive plan, entitled the
2008-2009
Performance and Equity Incentive Plan ( Performance
Plan) for key executives that is based on meeting specific
comprehensive net income targets established by the Board of
Directors. The Performance Plan authorizes us to issue up to
1,000,000 shares of our common stock. The Performance Plan
was not approved by our stockholders.
Also, on January 7, 2009, we awarded a group of twelve
executives and employees an aggregate of 765,000 shares of
our restricted common stock,( subject stockholder approval of
the Plan) and to meeting the following performance targets,
which coincide with our guidance objectives over five quarterly
periods as follows:
Applicable Quarterly Period Comprehensive Income Target:
4th Quarter 2008 (ending 12.31.08) $2.2 million
1st Quarter 2009 (ending 03.31.09) ($315,000)
2nd Quarter 2009 (ending 06.30.09) $500,000
3rd Quarter 2009 (ending 09.30.09) $4.5 million
4th Quarter 2009 (ending 12.31.09) $5.5 million
The shares to be issued under the Performance Plan for each
Applicable Quarterly Period are subject to cancellation if the
stockholders do not approve the Performance Plan, the
Comprehensive Income Targets are not met, or if the
participating employees do not remain in continuous service with
the Company through the last day of each Applicable Quarterly
Period related to such shares.
Change in
Control Severance Pay Plan
On March 31, 2008, the board of directors adopted an
Executive Management Change in Control Severance Pay Plan. The
director, who is also the Companys Chief Executive
Officer, who may become entitled to benefits under the plan did
not participate in the deliberations or vote to approve the plan.
The plan covers the persons who at any time during the
90-day
period ending on the date of a change in control (as defined in
the plan),are employed by the Company as Chief Executive Officer
and/or
president and are not party to a separate agreement which makes
such person ineligible to participate in the plan. These persons
become
94
eligible for benefits under the plan if (1) (a) the Company
terminates his or her employment for any reason other than his
or her death or cause (as defined in the plan) or (b) the
person terminates his or her employment with the Company for
good reason (as defined in the plan) and (2) the
termination occurs within the period beginning on the date of a
change in control and ending on the last day of the twelfth
month that begins after the month in which the change in control
occurs or prior to a change in control if the termination was
either a condition of the change in control or at the request or
insistence of a person related to the change in control.
The plan requires the Company to make a cash payment in an
amount equal to three hundred percent (300%) of the
participants average total compensation of the prior three
years preceding the change in control or notice of termination.
If the total payments made to a person result in an excise tax
imposed by Internal Revenue Code § 4999, the Company
will make an additional cash payment to the person equal to an
amount such that after payment by the person of all taxes
(including any interest or penalties imposed with respect to
such taxes), including any excise tax, imposed upon the
additional payment, the person would retain an amount of the
additional payment equal to the excise tax imposed upon the
total payments.
Immediately following a change in control, the Company is
required to establish a trust and fund the trust with the amount
of any payments which may become owing to persons entitled to
receive benefits under the plan but only to the extent that the
funding of the trust would not impair the working capital of the
Company.
The Change in Control Severance Pay Plan was terminated in April
2009.
Director
Compensation
The following table contains information regarding the
compensation of our directors for the fiscal year ending
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonqualified
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-equity
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
|
|
|
Incentive Plan
|
|
|
Compensation
|
|
|
All other
|
|
|
|
|
|
|
Fees Earned or
|
|
|
Stock
|
|
|
Awards
|
|
|
Compensation
|
|
|
Earnings
|
|
|
Compensation
|
|
|
Total
|
|
Name
|
|
Paid in Cash ($)
|
|
|
Awards ($)
|
|
|
($) (1)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
William M. Thompson, III, MD
|
|
$
|
1,000
|
|
|
$
|
|
|
|
$
|
46,200
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
77,200
|
|
Michael Boswell
|
|
$
|
37,500
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
37,500
|
|
Edward R Arquilla, MD, PhD
|
|
$
|
15,500
|
|
|
$
|
|
|
|
$
|
21,600
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
37,100
|
|
|
|
|
(1) |
|
The value of option awards included in this column represent the
compensation costs recognized by the Company in fiscal year 2009
for option awards made in 2009 and in prior fiscal years
calculated pursuant to ASC
718-10. The
values included within this column have not been, and may never
be realized. The options might never be exercised and the value
received, if any, by the director, will depend on the share
price on the exercise date. The assumptions used by the Company
with respect to the valuation of the option awards are set forth
in the Notes to our Consolidated Financial Statements, which are
included in our Annual Report on
Form 10-K
for the period ending December 31, 2009. |
Effective June 1, 2009, in connection with across-the-board
comprehensive cost containment measures, our Board of Directors
voted to reduce fees paid to independent directors from
[ ] to $2,500 for in-person
attendance and $500 for telephonic attendance at Board meetings.
As Chairman of our Compensation Committee and of our Audit
Committee, Mr. Boswell will receive an additional $10,000
per year and, as Chairman of our Governance Committee,
Dr. Thompson will receive an additional $1,000 per year.
Also on January 7, 2009, we awarded a bonus of
40,000 shares of our restricted common stock to each of our
independent directors for their extraordinary services to us,
subject to approval of the stockholders and the listing on the
NYSE Amex. None of these 120,000 shares of common stock are
part of the Performance Plan and none of these shares are
subject to any vesting or other performance criteria.
We indemnify our directors and officers to the fullest extent
permitted by law so that they will be free from undue concern
about personal liability in connection with their service to us.
This is permitted by our Certificate of Incorporation and our
Bylaws.
95
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
Equity
Compensation Plan Information
The following provides information concerning compensation plans
under which equity securities of the Company were authorized for
issuance as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
Number of
|
|
|
|
|
|
Remaining Available
|
|
|
|
Securities to be
|
|
|
Weighted-Average
|
|
|
for Future Issuance
|
|
|
|
Issued Upon Exercise of
|
|
|
Exercise Price of
|
|
|
Under Equity Compensation
|
|
|
|
Outstanding Options,
|
|
|
Outstanding Options,
|
|
|
Plans (Excluding Securities
|
|
Plan Category
|
|
Warrants and Rights
|
|
|
Warrants and Rights
|
|
|
Reflected in Column (a))
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity Compensation plans approved by security holders
|
|
|
2,257,000
|
|
|
|
3.93
|
|
|
|
844,251
|
|
Equity compensations plans not approved by security holders
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,257,000
|
|
|
|
3.93
|
|
|
|
844,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96
Stock
Ownership of Certain Beneficial Owners and Management
The following table shows the beneficial ownership of our shares
of common stock as of March 31, 2009 by (i) each
person who is known by us to be the beneficial owner of more
than five percent (5%) of our common stock, (ii) each of
our directors and executive officers and (iii) all
directors and executive officers as a group. Except as otherwise
indicated, the beneficial owners listed in the table have sole
voting and investment powers of their shares.
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Percentage
|
|
Name and Address(1)
|
|
Shares
|
|
|
Owned
|
|
|
Douglas C. MacLellan
|
|
|
477,000
|
(2)
|
|
|
3
|
%
|
Akio Ariura
|
|
|
140,000
|
(3)
|
|
|
0.8
|
%
|
William M. Thompson III, M.D.
|
|
|
231,000
|
(4)
|
|
|
1.3
|
%
|
408 Town Square Lane
|
|
|
|
|
|
|
|
|
Huntington Beach, CA 92648
|
|
|
|
|
|
|
|
|
Edward R. Arquilla, M.D., Ph.D.
|
|
|
111,000
|
(5)
|
|
|
0.6
|
%
|
Department of Pathology
|
|
|
|
|
|
|
|
|
University of California Irvine
|
|
|
|
|
|
|
|
|
Irvine, CA 92697
|
|
|
|
|
|
|
|
|
Minghui Jia
|
|
|
1,943,672
|
(6)
|
|
|
10.3
|
%
|
Room 2502 Shun Hing Square
|
|
|
|
|
|
|
|
|
5002 Shennan Ave LuoHu
|
|
|
|
|
|
|
|
|
Shenzhen China 518008
|
|
|
|
|
|
|
|
|
Fang Zheng
|
|
|
1,942,672
|
(7)
|
|
|
10.3
|
%
|
Room 2502 Shun Hing Square
|
|
|
|
|
|
|
|
|
5002 Shennan Ave LuoHu
|
|
|
|
|
|
|
|
|
Shenzhen China 518008
|
|
|
|
|
|
|
|
|
Jade Capital Group
|
|
|
972,672
|
(8)
|
|
|
5.4
|
%
|
Room 2502 Shun Hing Square
|
|
|
|
|
|
|
|
|
5002 Shennan Ave LuoHu
|
|
|
|
|
|
|
|
|
Shenzhen China 518008
|
|
|
|
|
|
|
|
|
Mike Boswell
|
|
|
0
|
(9)
|
|
|
0
|
%
|
400 Professional Drive
|
|
|
|
|
|
|
|
|
Suite 310
|
|
|
|
|
|
|
|
|
Gaithersburg, MD 20879
|
|
|
|
|
|
|
|
|
Gary L. Dreher
|
|
|
982,000
|
(10)
|
|
|
7.0
|
%
|
6301 Acacia Hill Dr.
|
|
|
|
|
|
|
|
|
Yorba Linda, CA 92886
|
|
|
|
|
|
|
|
|
All Directors and Officers as a group (8 persons)
|
|
|
6,800,016
|
|
|
|
16
|
%
|
|
|
|
(1) |
|
Unless otherwise indicated, address is 2492 Walnut Avenue, Suite
100, Tustin, California, 92780. |
|
(2) |
|
Includes, 36,000 shares of common stock issuable upon the
exercise of options at $2.85 per share, 11,000 shares of
common stock issuable upon the exercise of options at $4.65 per
share, 20,000 shares of common stock issuable upon the
exercise of options at $6.15 per share,120,000 shares of
common stock issuable upon the exercise of options at $3.70 per
share,90.000 shares of common stock issuable upon the
exercise of options at $4.06 per share and 200,000 shares
of common stock issuable upon the exercise of options at $3.45
per share. |
|
(3) |
|
Includes 40,000 shares of common stock issuable on exercise
of options at $3.70 per share, 50,000 shares of common
stock issuable on exercise of options at $4.06 per share and
50,000 shares of common stock issuable on exercise of
options at $3.45 per share. |
|
(4) |
|
Includes, 30,000 shares of common stock issuable upon the
exercise of options at $2.85 per share, 11,000 shares of
common stock issuable upon the exercise of options at $4.65 per
share, 40,000 shares of common stock issuable upon the
exercise of options at $6.15 per share, 50,000 shares of
common stock issuable upon the exercise of options at $3.70 per
share,50,000 shares of common stock issuable upon the |
97
|
|
|
|
|
exercise of options at $4.06 per share and 50,000 of common
stock issuable upon exercise of options at $$3.45 per share.
Excludes 40,000 shares of common stock subject to
stockholder approval granted January 9, 2009 and not
presently exercisable. |
|
(5) |
|
Includes, 20,000 shares of common stock issuable upon the
exercise of options at $2.85 per share, 11,000 shares of
common stock issuable upon the exercise of options at $4.65 per
share, 20,000 shares of common stock issuable upon the
exercise of options at $6.15 per share, 20,000 shares of
common stock issuable upon the exercise of options at $3.70 per
share,20,000 shares of common stock issuable upon the
exercise of options at $4.06 per share and 20,000 shares of
common stock issuable upon exercise of options at $3.45 per
share. Excludes 40,000 shares of common stock subject to
stockholder approval granted January 9, 2009 and not
presently exercisable. |
|
(6) |
|
Includes 972,672 shares held in the name of Jade Capital
Group Limited of which Mr. Jia is a director and principal
stockholder, options to purchase 220,000 shares of common
stock exercisable at $2.95 per share and 50,000 shares of
common stock exercisable at $3.45 per share. |
|
(7) |
|
Includes 972,672 shares held in the name of Jade Capital
Group Limited of which Mr. Zheng is a director and
principal stockholder, options to purchase 220,000 shares
of common stock exercisable at $2.95 per share and
50,000 shares of common stock exercisable at $3.45 per
share. |
|
(8) |
|
Includes 100,000 shares held in escrow held by a third
party for the issuance by the SFDA of a permit or the equivalent
regulatory approval for the Company to sell and distribute
ONKO-SUREtm
in the PRC. Amendment No. 3 to the Escrow agreement was
executed on March 24 2009 extending the required approval date
to March 28, 2010. |
|
(9) |
|
Excludes 40,000 shares of common stock subject to
stockholder approval granted January 9, 2009 and not
presently exercisable. |
|
(10) |
|
Includes 60,000 shares of common stock issuable upon the
exercise of options at $2.85 per share, 50,000 shares of
common stock issuable upon the exercise of options at $4.65 per
share, per share, 140,000 shares of common stock issuable
upon the exercise of options at $6.15 per share,
60,000 shares of common stock issuable upon the exercise of
options at $4.15 per share, 200,000 shares of common stock
issuable upon the exercise of options at $3.70 per
share,172,000 shares of common stock issuable upon the
exercise of options at $4.06 per share and 300,000 shares
of common stock issuable upon exercise of options at $3.45 per
share. |
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
During 2008, the Company advanced approximately $650,000 to
KangDa in the form of a note receivable. One of the shareholders
of KangDa is a current key employee of the Company. The note
relates to taxes resulting from the Companys 2006
acquisition of JPI that were the responsibility of the seller.
JJB made the payment on behalf of KangDa. The note bore interest
at the rate of 6% per annum, and provided for the repayment of
amounts due in three equal monthly installments, starting in
September 2008, with interest payable in the last installment.
The note was guaranteed by three employee/shareholders and
collateralized by 220,000 shares of the Companys
common stock that they own or control, and was repaid in full at
December 31, 2008.
Review,
Approval and Ratification of Related Party
Transactions
Given our small size and limited financial resources, we do not
have formal policies and procedures for the review, approval or
ratification of transactions, such as those described above,
with our executive officers, directors and significant
shareholders. However, we intend that such transactions will, on
a going-forward basis, be subject to the review, approval or
ratification of our board of directors, or an appropriate
committee thereof.
Promoters
and Certain Control Persons
Our only promoters (within the meaning of
Rule 405 under the Securities Act), or person who took the
initiative in the formation of our business or in connection
with the formation of our business received 10% of our debt or
equity securities or 10% of the proceeds from the sale of such
securities in exchange for the contribution of property or
services, during the last five years have been
[ ].
98
Director
Independence
Under the Companys corporate governance principles (the
Corporate Governance Principles), a majority of the
Board will consist of independent directors. An
independent director is a director who meets the
NYSE Amex definition of independence and other applicable
independence standards under SEC guidelines, as determined by
the Board. The Corporate Governance and Nominating Committee
conducts an annual review of the independence of the members of
the Board and its Committees and reports its findings to the
full Board. Based on the report and recommendation of the
Corporate Governance Committee, the Board has determined that
each of the non-employee directors
Dr. Arquilla, Mr. Boswell, and
Dr. Thompson satisfies the independence
criteria (including the enhanced criteria with respect to
members of the Audit Committee) set forth in the applicable NYSE
Amex listing standards and SEC rules. Each Board Committee
consists entirely of independent, non-employee directors.
For a director to be considered independent, the Board must
determine that the director does not have any direct or indirect
material relationships (including vendor, supplier, consulting,
legal, banking, accounting, charitable and family relationships)
with Radient, other than as a director and shareholder. NYSE
Amex listing standards also impose certain per se bars to
independence, which are based upon a directors
relationships with Radient currently and during the three years
preceding the Boards determination of independence.
The Board considered all relevant facts and circumstances in
making its determinations, including the following:
|
|
|
|
|
No non-employee director receives any direct compensation from
WidePoint other than under the director compensation program
described in this proxy statement.
|
|
|
|
No immediate family member (within the meaning of the NYSE Amex
listing standards) of any non-employee director is an employee
of Radient or otherwise receives direct compensation from
Radient.
|
|
|
|
No non-employee director (or any of their respective immediate
family members) is affiliated with or employed in a professional
capacity by Radients independent accountants.
|
|
|
|
No non-employee director is a member, partner, or principal of
any law firm, accounting firm or investment banking firm that
receives any consulting, advisory or other fees from Radient.
|
|
|
|
No Radient executive officer is on the compensation committee of
the board of directors of a company that employs any of our
non-employee directors (or any of their respective immediate
family members) as an executive officer.
|
|
|
|
No non-employee director (or any of their respective immediate
family members) is indebted to Radient, nor is Radient indebted
to any non-employee director (or any of their respective
immediate family members).
|
|
|
|
No non-employee director serves as an executive officer of a
charitable or other tax-exempt organization that received
contributions from Radient.
|
Non-management members of the Board of Directors conduct at
least
[ ] regularly-scheduled
meetings per year without members of management being present.
[ ] serves
as the presiding director of such meetings. Following an
executive session of non-employee directors, the presiding
director may act as a liaison between the non-employee directors
and the Chairman, provide the Chairman with input regarding
agenda items for Board and Committee meetings, and coordinate
with the Chairman regarding information to be provided to the
non-employee directors in performing their duties.
99
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
Aggregate fees for professional services rendered to the Company
by KMJ Corbin & Company LLP for the years ended
December 31, 2009 and 2008 were as follows:
|
|
|
|
|
|
|
|
|
Services Provided
|
|
2009
|
|
|
2008
|
|
|
Audit Fees
|
|
$
|
427,000
|
|
|
$
|
430,000
|
|
Audit Related Fees
|
|
|
|
|
|
|
41,000
|
|
Tax Fees
|
|
|
|
|
|
|
[ ]
|
|
All Other Fees
|
|
|
|
|
|
|
[ ]
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
427,000
|
|
|
$
|
471,000
|
|
|
|
|
|
|
|
|
|
|
Audit Fees. The aggregate fees billed for the
years ended December 31, 2009 and 2008 were for the audits
of our financial statements and reviews of our interim financial
statements included in our annual and quarterly reports.
Audit Related Fees. There were no fees billed
for the years ended December 31, 2009 and 2008 for the
audit or review of our financial statements that are not
reported under Audit Fees.
Tax Fees. There were no fees billed for the
years ended December 31, 2009 and 2008 for professional
services related to tax compliance, tax advice and tax planning.
All Other Fees. The aggregate fees billed for
the years ended December 31, 2009 and 2008 were for
services other than the services described above. These services
include attendance and preparation for shareholder and Audit
Committee meetings, consultation on accounting, on internal
control matters and review of and consultation on our
registration statements and issuance of related consents
(Forms S-3).
Audit
Committee Pre-Approval Policies and Procedures
The Audit Committee has implemented pre-approval policies and
procedures related to the provision of audit and non-audit
services. Under these procedures, the Audit Committee
pre-approves both the type of services to be provided by KMJ
Corbin & Company LLP and the estimated fees related to
these services.
PART IV
|
|
Item 15.
|
Exhibits,
Financial Statement Schedules
|
(a) Documents filed as part of this Annual Report on
Form 10-K:
|
|
|
|
(1)
|
The financial statements required to be included in this Annual
Report on
Form 10-K
are included in Item 8 of this Report.
|
|
|
(2)
|
All other schedules have been omitted because they are not
required.
|
(3) Exhibits:
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description:
|
|
|
3
|
.1
|
|
Certificate of Incorporation of Registrant. (Incorporated by
reference to the Companys Report on
Form 10-KSB
for the year ended December 31, 1989.)
|
|
3
|
.2
|
|
Bylaws of the Company. (Incorporated by reference to the
Companys Report on
Form 10-KSB
for the year ended December 31, 1991.)
|
|
3
|
.3
|
|
Certificate of Amendment of Certificate of Incorporation.
(Incorporated by reference to the Companys Report on
Form 10-QSB
for the period ended September 30, 1998.)
|
|
3
|
.4
|
|
Certificate of Amendment of Certificate of Incorporation filed
with the Delaware Secretary of State on September 8, 2006.
(Incorporated by reference to the Companys definitive
Proxy Statement dated July 14, 2006.)
|
100
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description:
|
|
|
3
|
.5
|
|
Specimen of Common Stock Certificate. (Incorporated by reference
to the Companys Report on
Form 10-KSB
for the year ended December 31, 1999.)
|
|
3
|
.6
|
|
Certificate of Designations. (Incorporated by reference to the
Companys Report on
Form 10-KSB
for the year ended December 31, 1999.)
|
|
9
|
.1
|
|
Voting Trust Agreement by and between Jeanne Lai and Gary
L. Dreher, as Co-Trustees, and Chinese Universal Technologies
Co., Ltd. (Incorporated by reference to the Companys
Report on
Form 8-K
dated December 26, 2000.)
|
|
10
|
.1
|
|
Amendments to License Agreement between the Company and AMDL
Canada, Inc., dated September 20, 1989, June 16, 1990
and July 5, 1990. (Incorporated by reference to the
Companys Report on
Form 10-KSB
for the year ended December 31, 1990.)
|
|
10
|
.2
|
|
The Companys 1992 Stock Option Plan. (Incorporated by
reference to the Companys Report on
Form 10-KSB
for the year ended December 31, 1991.)
|
|
10
|
.3
|
|
Operating Agreement of ICD, L.L.C. (Incorporated by reference to
the Companys Report on
Form 10-KSB
for the year ended December 31, 1993.)
|
|
10
|
.4
|
|
Letter Agreement between the Company and BrianaBio-Tech, Inc.
and AMDL Canada, Inc., dated February 7, 1995 (Incorporated
by reference to the Companys Report on
Form 10-KSB
for the year ended December 31, 1993.)
|
|
10
|
.5
|
|
The Companys Stock Bonus Plan (Incorporated by reference
to the Companys Report on
Form 10-KSB
for the year ended December 31, 1995.)
|
|
10
|
.6
|
|
Employment Agreement between the Company and Gary L. Dreher
dated January 15, 1998 (Incorporated by reference to the
Companys Report on
Form 10-KSB
for the year ended December 31, 1997.)
|
|
10
|
.7
|
|
Salary Continuation Agreement between the Company and That T.
Ngo, Ph.D., dated May 21, 1998 (Incorporated by
reference to the Companys Report on
Form 10-QSB
for the period ended June 30, 1998.)
|
|
10
|
.8
|
|
Salary Continuation Agreement between the Company and Thomas V.
Tilton dated May 21, 1998 (Incorporated by reference to the
Companys Report on
Form 10-QSB
for the period ended June 30, 1998.)
|
|
10
|
.9
|
|
Salary Continuation Agreement between the Company and Harry Berk
dated May 21, 1998 (Incorporated by reference to the
Companys Report on
Form 10-QSB
for the period ended June 30, 1998.)
|
|
10
|
.1
|
|
Salary Continuation Agreement between the Company and Gary L.
Dreher dated May 21, 1998 (Incorporated by reference to the
Companys Report on
Form 10-QSB
for the period ended June 30, 1998.)
|
|
10
|
.11
|
|
Agreement between the Company and William M.
Thompson, M.D., dated May 21, 1998 (Incorporated by
reference to the Companys Report on
Form 10-QSB
for the period ended June 30, 1998.)
|
|
10
|
.12
|
|
Amendment No. 1 to Employment Agreement with That T.
Ngo, Ph.D., dated July 1, 1998 (Incorporated by
reference to the Companys Report on
Form 10-QSB
for the period ended June 30, 1998.)
|
|
10
|
.13
|
|
Agreement Relating to Salary deferral between the Company and
Thomas V. Tilton dated July 1, 1998 (Incorporated by
reference to the Companys Report on
Form 10-QSB
for the period ended June 30, 1998.)
|
|
10
|
.14
|
|
Agreement Relating to Salary deferral between the Company and
Harry Berk dated July 1, 1998 (Incorporated by reference to
the Companys Report on
Form 10-QSB
for the period ended June 30, 1998.)
|
|
10
|
.15
|
|
Securities Purchase Agreement between the Company and the
Purchasers listed on the Purchaser Signature Pages attached
thereto, dated February 17, 1999. (Incorporated by
reference to the Companys Registration Statement on
Form 10-SB
dated October 15, 1999.)
|
|
10
|
.16
|
|
The Companys 1999 Stock Option Plan (Incorporated by
reference to the Companys Registration Statement on
Form 10-SB
dated October 15, 1999.)
|
|
10
|
.17
|
|
Agreement Regarding Cancellation of Indebtedness between the
Company and William M. Thompson, III, M.D., dated
July 1, 1999 (Incorporated by reference to the
Companys Registration Statement on
Form 10-SB
dated October 15, 1999.)
|
101
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description:
|
|
|
10
|
.18
|
|
Agreement Regarding Cancellation of Indebtedness between the
Company and Harry Berk dated July 1, 1999 (Incorporated by
reference to the Companys Registration Statement on
Form 10-SB
dated October 15, 1999.)
|
|
10
|
.19
|
|
Agreement Regarding Cancellation of Indebtedness between the
Company and Edward Arquilla, M.D., dated July 1, 1999
(Incorporated by reference to the Companys Registration
Statement on
Form 10-SB
dated October 15, 1999.)
|
|
10
|
.20
|
|
Agreement Regarding Cancellation of Indebtedness between the
Company and Thomas V. Tilton dated July 1, 1999
(Incorporated by reference to the Companys Registration
Statement on
Form 10-SB
dated October 15, 1999.)
|
|
10
|
.21
|
|
Agreement Regarding Cancellation of Indebtedness between the
Company and Donald Rounds, dated July 1, 1999 (Incorporated
by reference to the Companys Registration Statement on
Form 10-SB
dated October 15, 1999.)
|
|
10
|
.22
|
|
Agreement Regarding Cancellation of Indebtedness between the
Company and That T. Ngo, Ph.D., dated July 1, 1999
(Incorporated by reference to the Companys Registration
Statement on
Form 10-SB
dated October 15, 1999.)
|
|
10
|
.23
|
|
Agreement Regarding Cancellation of Indebtedness between the
Company and Gary L. Dreher dated July 1, 1999 (Incorporated
by reference to the Companys Registration Statement on
Form 10-SB
dated October 15, 1999.)
|
|
10
|
.24
|
|
Agreement Regarding Cancellation of Indebtedness between the
Company and Douglas C. MacLellan dated July 1, 1999
(Incorporated by reference to the Companys Registration
Statement on
Form 10-SB
dated October 15, 1999.)
|
|
10
|
.25
|
|
Employment Agreement of Gary L. Dreher dated November 23,
1999 (Incorporated by reference to the Companys Report on
Form 10-KSB
for the year ended December 31, 1999.)
|
|
10
|
.26
|
|
Consulting Agreement with That T. Ngo dated October 1, 1999
(Incorporated by reference to the Companys Report on
Form 10-KSB
for the year ended December 31, 1999.)
|
|
10
|
.27
|
|
Securities Purchase Agreement between the Company and the
Purchasers listed on the Purchaser Signature Pages attached
thereto dated February 9, 2000 (Incorporated by reference
to the Companys Report on
Form 10-KSB
for the year ended December 31, 1999.)
|
|
10
|
.28
|
|
Securities Purchase Agreement dated as of December 14, 2000
executed December 19, 2000 (Incorporated by reference to
the Companys Report on
Form 8-K
dated December 26, 2000.)
|
|
10
|
.29
|
|
Secured Promissory Note dated December 14, 2000, effective
December 19, 2000 (Incorporated by reference to the
Companys Report on
Form 8-K
dated December 26, 2000.)
|
|
10
|
.30
|
|
Security and Pledge Agreement dated as of December 14,
2000, executed December 19, 2000 (Incorporated by reference
to the Companys Report on
Form 8-K
dated December 26, 2000.)
|
|
10
|
.31
|
|
Voting Trust Agreement dated as of December 14, 2000,
executed December 19, 2000. (Incorporated by reference to
the Companys Report on
Form 8-K
dated December 26, 2000.)
|
|
10
|
.32
|
|
Exclusive Distribution Agreement dated December 14, 2000,
effective December 19, 2000. (Incorporated by reference to
the Companys Report on
Form 8-K
dated December 26, 2000.)
|
|
10
|
.33
|
|
Technology Transfer Agreement effective July 30, 2001
between the Company and Lung-Ji Chang, Ph.D. (Incorporated
by reference from the Companys Report on
Form 8-K
dated August 31, 2001.)
|
|
10
|
.34
|
|
Executive Management Change in Control Severance Plan.
(Incorporated by reference from the Companys Report on
Form 10-KSB
for the year ended December 31, 2001.)
|
|
10
|
.35
|
|
The Companys 2002 Stock Option Plan. (Incorporated by
reference from the Companys Report on
Form 10-KSB
for the year ended December 31, 2002.)
|
|
10
|
.36
|
|
The Companys 2004 Stock Option Plan. (Incorporated by
reference from the Companys Report on
Form 10-KSB
for the year ended December 31, 2004.)
|
|
10
|
.37
|
|
Employment Agreement of Gary L. Dreher dated January 31,
2005. (Incorporated by reference from the Companys
Form 8-K
filed February 1, 2005.)
|
|
10
|
.38
|
|
Letter of Intent with Jade Capital Group Ltd. dated
November 21, 2005. (Incorporated by reference from the
Companys
Form 8-K
filed November 22, 2005.)
|
102
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description:
|
|
|
10
|
.39
|
|
Stock Purchase and Sale Agreement between the Company and Jade
Capital Group Limited dated May 12, 2006 and First
Amendment to Purchase and Sale Agreement dated June 30,
2006. (Incorporated by reference from the Companys
definitive Proxy Statement dated July 14, 2006.)
|
|
10
|
.40
|
|
2006 Equity Incentive Plan. (Incorporated by reference from the
Companys definitive Proxy Statement dated July 14,
2006.)
|
|
10
|
.41
|
|
Escrow Agreement between the Company and Jade Capital Group
Limited (dated as of the closing on September 28, 2006.
(Incorporated by reference from the Companys definitive
Proxy Statement dated July 14, 2006.)
|
|
10
|
.42
|
|
Opinion of Amaroq Capital, LLC dated May 9, 2006.
(Incorporated by reference from the Companys definitive
Proxy Statement dated July 14, 2006.)
|
|
10
|
.43
|
|
Amendment No. 1 to Escrow Agreement dated August 10,
2007. (Incorporated by reference from the Companys
Form 10-K
filed March 31, 2008)
|
|
10
|
.44
|
|
Amendment No 2 to Escrow Agreement dated March 11, 2007
(Incorporated by reference from the
Form 10-K
filed April 15, 2009).
|
|
10
|
.45
|
|
Employment Agreement of Gary L. Dreher dated March 31,
2008. (Incorporated by reference from the
Form 10-K
filed March 31, 2008)
|
|
10
|
.46
|
|
Change in Control Severance Pay Plan. (Incorporated by reference
from the
Form 10-K
filed March 31, 2008)
|
|
10
|
.47
|
|
Product License, Distribution and Manufacturing Agreement with
MGI dated March 28, 2008. (Incorporated by reference from
the Companys
Form 8-K
filed April 2, 2008.)
|
|
10
|
.48
|
|
2008-2009
Performance Incentive Plan (Incorporated from the Companys
Form 8-K
filed January 9, 2009)
|
|
10
|
.49
|
|
Amendment No. 3 to Escrow Agreement dated March 24,
2008 ( Incorporated by reference from the
Form 10-K
filed April 15, 2009.)
|
|
10
|
.50
|
|
Note and Warrant Purchase Agreement dated March 22, 2010 (
Incorporated by reference from the
Form 8-K
filed March 26, 2010.)
|
|
10
|
.51
|
|
Form of Note ( Incorporated by reference from the
Form 8-K
filed March 26, 2010.)
|
|
10
|
.52
|
|
Form of Warrant ( Incorporated by reference from the
Form 8-K
filed March 26, 2010.)
|
|
10
|
.53
|
|
Form of Registration Rights Agreement dated March 22, 2010
( Incorporated by reference from the
Form 8-K
filed March 26, 2010.)
|
|
21
|
.1
|
|
Subsidiaries of AMDL, Inc. include Jade Pharmaceutical Inc., a
British Virgin Islands corporation, Jiangxi Jiezhong
Bio-Chemical Pharmacy Company Limited, a China WFOE, Yangbian
Yiqiao Bio-Chemical Pharmacy Company Limited, a China WFOE, and
AMDL Diagnostics, Inc, a United States corporation.
|
|
23
|
.1
|
|
Consent of KMJ Corbin & Company LLP. (Filed herewith.)
|
|
24
|
.1
|
|
Power of Attorney. (Included on signature page.)
|
|
31
|
.1
|
|
Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. (Filed
herewith.)
|
|
31
|
.2
|
|
Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. (Filed
herewith.)
|
|
32
|
.1
|
|
Certification of Chief Executive Officer pursuant to
18 U.S.C. § 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. (Filed
herewith.)
|
|
32
|
.2
|
|
Certification of Chief Financial Officer pursuant to
18 U.S.C. § 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. (Filed
herewith.)
|
103
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Tustin, State of
California on April 15, 2010.
RADIENT PHARMACEUTICALS CORPORATION
|
|
|
|
By:
|
/s/ Douglas
C. MacClellan
|
Douglas C. MacClellan,
Chief Executive Officer
POWER OF
ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Douglas C. MacClellan and
Akio Ariura, or either of them, as his true and lawful
attorneys-in-fact and agents, with full power of substitution
and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this
Annual Report on
Form 10-K
and any documents related to this report and filed pursuant to
the Securities Exchange Act of 1934, and to file the same, with
all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, full power and authority
to do and perform each and every act and thing requisite and
necessary to be done in connection therewith as fully to all
intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and
agents, or their substitute or substitutes may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant in the capacities and on the dates
indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Douglas
C. MacClellan
DOUGLAS
C. MACCLELLAN
|
|
President, Chief Executive Officer, and Director (Principal
Executive Officer)
|
|
April 15, 2010
|
|
|
|
|
|
/s/ Akio
Ariura
AKIO
ARIURA
|
|
Chief Operating Officer, Chief Financial Officer and Secretary
(Principal Financial Officer and Principal Accounting Officer)
|
|
April 15, 2010
|
|
|
|
|
|
/s/ Edward
R. Arquilla
EDWARD
R. ARQUILLA
|
|
Director
|
|
April 15, 2010
|
|
|
|
|
|
/s/ Michael
Boswell
MICHAEL
BOSWELL
|
|
Director
|
|
April 15, 2010
|
|
|
|
|
|
/s/ Minghui
Jia
MINGHUI
JIA
|
|
Director
|
|
April 15, 2010
|
|
|
|
|
|
/s/ William
M. Thompson, III
WILLIAM
M. THOMPSON III
|
|
Director
|
|
April 15, 2010
|
104
EXHIBIT
INDEX
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description:
|
|
|
3
|
.1
|
|
Certificate of Incorporation of Registrant. (Incorporated by
reference to the Companys Report on
Form 10-KSB
for the year ended December 31, 1989.)
|
|
3
|
.2
|
|
Bylaws of the Company. (Incorporated by reference to the
Companys Report on
Form 10-KSB
for the year ended December 31, 1991.)
|
|
3
|
.3
|
|
Certificate of Amendment of Certificate of Incorporation.
(Incorporated by reference to the Companys Report on
Form 10-QSB
for the period ended September 30, 1998.)
|
|
3
|
.4
|
|
Certificate of Amendment of Certificate of Incorporation filed
with the Delaware Secretary of State on September 8, 2006.
(Incorporated by reference to the Companys definitive
Proxy Statement dated July 14, 2006.)
|
|
3
|
.5
|
|
Specimen of Common Stock Certificate. (Incorporated by reference
to the Companys Report on
Form 10-KSB
for the year ended December 31, 1999.)
|
|
3
|
.6
|
|
Certificate of Designations. (Incorporated by reference to the
Companys Report on
Form 10-KSB
for the year ended December 31, 1999.)
|
|
9
|
.1
|
|
Voting Trust Agreement by and between Jeanne Lai and Gary
L. Dreher, as Co-Trustees, and Chinese Universal Technologies
Co., Ltd. (Incorporated by reference to the Companys
Report on
Form 8-K
dated December 26, 2000.)
|
|
10
|
.1
|
|
Amendments to License Agreement between the Company and AMDL
Canada, Inc., dated September 20, 1989, June 16, 1990
and July 5, 1990. (Incorporated by reference to the
Companys Report on
Form 10-KSB
for the year ended December 31, 1990.)
|
|
10
|
.2
|
|
The Companys 1992 Stock Option Plan. (Incorporated by
reference to the Companys Report on
Form 10-KSB
for the year ended December 31, 1991.)
|
|
10
|
.3
|
|
Operating Agreement of ICD, L.L.C. (Incorporated by reference to
the Companys Report on
Form 10-KSB
for the year ended December 31, 1993.)
|
|
10
|
.4
|
|
Letter Agreement between the Company and BrianaBio-Tech, Inc.
and AMDL Canada, Inc., dated February 7, 1995 (Incorporated
by reference to the Companys Report on
Form 10-KSB
for the year ended December 31, 1993.)
|
|
10
|
.5
|
|
The Companys Stock Bonus Plan (Incorporated by reference
to the Companys Report on
Form 10-KSB
for the year ended December 31, 1995.)
|
|
10
|
.6
|
|
Employment Agreement between the Company and Gary L. Dreher
dated January 15, 1998 (Incorporated by reference to the
Companys Report on
Form 10-KSB
for the year ended December 31, 1997.)
|
|
10
|
.7
|
|
Salary Continuation Agreement between the Company and That T.
Ngo, Ph.D., dated May 21, 1998 (Incorporated by
reference to the Companys Report on
Form 10-QSB
for the period ended June 30, 1998.)
|
|
10
|
.8
|
|
Salary Continuation Agreement between the Company and Thomas V.
Tilton dated May 21, 1998 (Incorporated by reference to the
Companys Report on
Form 10-QSB
for the period ended June 30, 1998.)
|
|
10
|
.9
|
|
Salary Continuation Agreement between the Company and Harry Berk
dated May 21, 1998 (Incorporated by reference to the
Companys Report on
Form 10-QSB
for the period ended June 30, 1998.)
|
|
10
|
.1
|
|
Salary Continuation Agreement between the Company and Gary L.
Dreher dated May 21, 1998 (Incorporated by reference to the
Companys Report on
Form 10-QSB
for the period ended June 30, 1998.)
|
|
10
|
.11
|
|
Agreement between the Company and William M.
Thompson, M.D., dated May 21, 1998 (Incorporated by
reference to the Companys Report on
Form 10-QSB
for the period ended June 30, 1998.)
|
|
10
|
.12
|
|
Amendment No. 1 to Employment Agreement with That T.
Ngo, Ph.D., dated July 1, 1998 (Incorporated by
reference to the Companys Report on
Form 10-QSB
for the period ended June 30, 1998.)
|
|
10
|
.13
|
|
Agreement Relating to Salary deferral between the Company and
Thomas V. Tilton dated July 1, 1998 (Incorporated by
reference to the Companys Report on
Form 10-QSB
for the period ended June 30, 1998.)
|
|
10
|
.14
|
|
Agreement Relating to Salary deferral between the Company and
Harry Berk dated July 1, 1998 (Incorporated by reference to
the Companys Report on
Form 10-QSB
for the period ended June 30, 1998.)
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description:
|
|
|
10
|
.15
|
|
Securities Purchase Agreement between the Company and the
Purchasers listed on the Purchaser Signature Pages attached
thereto, dated February 17, 1999. (Incorporated by
reference to the Companys Registration Statement on
Form 10-SB
dated October 15, 1999.)
|
|
10
|
.16
|
|
The Companys 1999 Stock Option Plan (Incorporated by
reference to the Companys Registration Statement on
Form 10-SB
dated October 15, 1999.)
|
|
10
|
.17
|
|
Agreement Regarding Cancellation of Indebtedness between the
Company and William M. Thompson, III, M.D., dated
July 1, 1999 (Incorporated by reference to the
Companys Registration Statement on
Form 10-SB
dated October 15, 1999.)
|
|
10
|
.18
|
|
Agreement Regarding Cancellation of Indebtedness between the
Company and Harry Berk dated July 1, 1999 (Incorporated by
reference to the Companys Registration Statement on
Form 10-SB
dated October 15, 1999.)
|
|
10
|
.19
|
|
Agreement Regarding Cancellation of Indebtedness between the
Company and Edward Arquilla, M.D., dated July 1, 1999
(Incorporated by reference to the Companys Registration
Statement on
Form 10-SB
dated October 15, 1999.)
|
|
10
|
.20
|
|
Agreement Regarding Cancellation of Indebtedness between the
Company and Thomas V. Tilton dated July 1, 1999
(Incorporated by reference to the Companys Registration
Statement on
Form 10-SB
dated October 15, 1999.)
|
|
10
|
.21
|
|
Agreement Regarding Cancellation of Indebtedness between the
Company and Donald Rounds, dated July 1, 1999 (Incorporated
by reference to the Companys Registration Statement on
Form 10-SB
dated October 15, 1999.)
|
|
10
|
.22
|
|
Agreement Regarding Cancellation of Indebtedness between the
Company and That T. Ngo, Ph.D., dated July 1, 1999
(Incorporated by reference to the Companys Registration
Statement on
Form 10-SB
dated October 15, 1999.)
|
|
10
|
.23
|
|
Agreement Regarding Cancellation of Indebtedness between the
Company and Gary L. Dreher dated July 1, 1999 (Incorporated
by reference to the Companys Registration Statement on
Form 10-SB
dated October 15, 1999.)
|
|
10
|
.24
|
|
Agreement Regarding Cancellation of Indebtedness between the
Company and Douglas C. MacLellan dated July 1, 1999
(Incorporated by reference to the Companys Registration
Statement on
Form 10-SB
dated October 15, 1999.)
|
|
10
|
.25
|
|
Employment Agreement of Gary L. Dreher dated November 23,
1999 (Incorporated by reference to the Companys Report on
Form 10-KSB
for the year ended December 31, 1999.)
|
|
10
|
.26
|
|
Consulting Agreement with That T. Ngo dated October 1, 1999
(Incorporated by reference to the Companys Report on
Form 10-KSB
for the year ended December 31, 1999.)
|
|
10
|
.27
|
|
Securities Purchase Agreement between the Company and the
Purchasers listed on the Purchaser Signature Pages attached
thereto dated February 9, 2000 (Incorporated by reference
to the Companys Report on
Form 10-KSB
for the year ended December 31, 1999.)
|
|
10
|
.28
|
|
Securities Purchase Agreement dated as of December 14, 2000
executed December 19, 2000 (Incorporated by reference to
the Companys Report on
Form 8-K
dated December 26, 2000.)
|
|
10
|
.29
|
|
Secured Promissory Note dated December 14, 2000, effective
December 19, 2000 (Incorporated by reference to the
Companys Report on
Form 8-K
dated December 26, 2000.)
|
|
10
|
.30
|
|
Security and Pledge Agreement dated as of December 14,
2000, executed December 19, 2000 (Incorporated by reference
to the Companys Report on
Form 8-K
dated December 26, 2000.)
|
|
10
|
.31
|
|
Voting Trust Agreement dated as of December 14, 2000,
executed December 19, 2000. (Incorporated by reference to
the Companys Report on
Form 8-K
dated December 26, 2000.)
|
|
10
|
.32
|
|
Exclusive Distribution Agreement dated December 14, 2000,
effective December 19, 2000. (Incorporated by reference to
the Companys Report on
Form 8-K
dated December 26, 2000.)
|
|
10
|
.33
|
|
Technology Transfer Agreement effective July 30, 2001
between the Company and Lung-Ji Chang, Ph.D. (Incorporated
by reference from the Companys Report on
Form 8-K
dated August 31, 2001.)
|
|
10
|
.34
|
|
Executive Management Change in Control Severance Plan.
(Incorporated by reference from the Companys Report on
Form 10-KSB
for the year ended December 31, 2001.)
|
|
10
|
.35
|
|
The Companys 2002 Stock Option Plan. (Incorporated by
reference from the Companys Report on
Form 10-KSB
for the year ended December 31, 2002.)
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description:
|
|
|
10
|
.36
|
|
The Companys 2004 Stock Option Plan. (Incorporated by
reference from the Companys Report on
Form 10-KSB
for the year ended December 31, 2004.)
|
|
10
|
.37
|
|
Employment Agreement of Gary L. Dreher dated January 31,
2005. (Incorporated by reference from the Companys
Form 8-K
filed February 1, 2005.)
|
|
10
|
.38
|
|
Letter of Intent with Jade Capital Group Ltd. dated
November 21, 2005. (Incorporated by reference from the
Companys
Form 8-K
filed November 22, 2005.)
|
|
10
|
.39
|
|
Stock Purchase and Sale Agreement between the Company and Jade
Capital Group Limited dated May 12, 2006 and First
Amendment to Purchase and Sale Agreement dated June 30,
2006. (Incorporated by reference from the Companys
definitive Proxy Statement dated July 14, 2006.)
|
|
10
|
.40
|
|
2006 Equity Incentive Plan. (Incorporated by reference from the
Companys definitive Proxy Statement dated July 14,
2006.)
|
|
10
|
.41
|
|
Escrow Agreement between the Company and Jade Capital Group
Limited (dated as of the closing on September 28, 2006.
(Incorporated by reference from the Companys definitive
Proxy Statement dated July 14, 2006.)
|
|
10
|
.42
|
|
Opinion of Amaroq Capital, LLC dated May 9, 2006.
(Incorporated by reference from the Companys definitive
Proxy Statement dated July 14, 2006.)
|
|
10
|
.43
|
|
Amendment No. 1 to Escrow Agreement dated August 10,
2007. (Incorporated by reference from the Companys
Form 10-K
filed March 31, 2008)
|
|
10
|
.44
|
|
Amendment No 2 to Escrow Agreement dated March 11, 2007
(Incorporated by reference from the
Form 10-K
filed April 15, 2009).
|
|
10
|
.45
|
|
Employment Agreement of Gary L. Dreher dated March 31,
2008. (Incorporated by reference from the
Form 10-K
filed March 31, 2008)
|
|
10
|
.46
|
|
Change in Control Severance Pay Plan. (Incorporated by reference
from the
Form 10-K
filed March 31, 2008)
|
|
10
|
.47
|
|
Product License, Distribution and Manufacturing Agreement with
MGI dated March 28, 2008. (Incorporated by reference from
the Companys
Form 8-K
filed April 2, 2008.)
|
|
10
|
.48
|
|
2008-2009
Performance Incentive Plan (Incorporated from the Companys
Form 8-K
filed January 9, 2009)
|
|
10
|
.49
|
|
Amendment No. 3 to Escrow Agreement dated March 24,
2008 ( Incorporated by reference from the
Form 10-K
filed April 15, 2009.)
|
|
10
|
.50
|
|
Note and Warrant Purchase Agreement dated March 22, 2010 (
Incorporated by reference from the
Form 8-K
filed March 26, 2010.)
|
|
10
|
.51
|
|
Form of Note ( Incorporated by reference from the
Form 8-K
filed March 26, 2010.)
|
|
10
|
.52
|
|
Form of Warrant ( Incorporated by reference from the
Form 8-K
filed March 26, 2010.)
|
|
10
|
.53
|
|
Form of Registration Rights Agreement dated March 22, 2010
( Incorporated by reference from the
Form 8-K
filed March 26, 2010.)
|
|
21
|
.1
|
|
Subsidiaries of AMDL, Inc. include Jade Pharmaceutical Inc., a
British Virgin Islands corporation, Jiangxi Jiezhong
Bio-Chemical Pharmacy Company Limited, a China WFOE, Yangbian
Yiqiao Bio-Chemical Pharmacy Company Limited, a China WFOE, and
AMDL Diagnostics, Inc, a United States corporation.
|
|
23
|
.1
|
|
Consent of KMJ Corbin & Company LLP. (Filed herewith.)
|
|
24
|
.1
|
|
Power of Attorney. (Included on signature page.)
|
|
31
|
.1
|
|
Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. (Filed
herewith.)
|
|
31
|
.2
|
|
Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. (Filed
herewith.)
|
|
32
|
.1
|
|
Certification of Chief Executive Officer pursuant to
18 U.S.C. § 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. (Filed
herewith.)
|
|
32
|
.2
|
|
Certification of Chief Financial Officer pursuant to
18 U.S.C. § 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. (Filed
herewith.)
|