Attached files
file | filename |
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EX-32.1 - NURX PHARMACEUTICALS, INC. | v184968_ex32-1.htm |
EX-31.2 - NURX PHARMACEUTICALS, INC. | v184968_ex31-2.htm |
EX-31.1 - NURX PHARMACEUTICALS, INC. | v184968_ex31-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended March 31, 2010
OR
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
Commission
file number 000-1174228
NuRx
Pharmaceuticals, Inc.
(Exact
name of registrant as specified in its charter)
NEVADA
|
87-0681500
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
18
Technology Drive, Suite 130
Irvine,
CA 92618
(Address
of principal executive offices, including zip code)
(949)
336-7111
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No ¨
Indicate
by check mark whether the registrant has 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 such shorter period that the
registrant was required to submit and post such
files). ¨ Yes ¨ No
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.
Large
accelerated filer ¨ Accelerated
filer ¨ Non-accelerated
filer ¨ Smaller
reporting company x
Indicate
by check mark whether the registrant is a shell company (as defined in Exchange
Act Rule 12b-2).
Yes ¨ No x
As of May
1, 2010, there were 23,444,234 shares of common stock outstanding.
NURX
PHARMACEUTICALS, INC.
QUARTERLY
REPORT ON FORM 10-Q
March
31, 2010
TABLE
OF CONTENTS
PART
I.
|
FINANCIAL
INFORMATION
|
||||
Item
1.
|
Financial
Statements
|
1
|
|||
Condensed
Balance Sheets
|
1
|
||||
Condensed
Statements of Operations
|
2
|
||||
Condensed
Statement of Stockholders’ Equity
|
3
|
||||
Condensed
Statements of Cash Flows
|
4
|
||||
Notes
to Condensed Financial Statements
|
5
|
||||
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
21
|
|||
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
30
|
|||
Item
4.
|
Controls
and Procedures
|
30
|
|||
PART
II.
|
OTHER
INFORMATION
|
||||
Item
1.
|
Legal
Proceedings
|
32
|
|||
Item
1A.
|
Risk
Factors
|
32
|
|||
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
33
|
|||
Item
3.
|
Defaults
Upon Senior Securities
|
33
|
|||
Item
4.
|
Reserved
|
33
|
|||
Item
5.
|
Other
Information
|
33
|
|||
Item
6.
|
Exhibits
|
33
|
|||
SIGNATURES
|
34
|
ITEM 1.
|
FINANCIAL
STATEMENTS
|
(a
corporation in the development stage)
Condensed
Balance Sheets
March 31,
2010 (unaudited) and September 30, 2009
(Unaudited)
|
||||||||
March 31, 2010
|
September 30, 2009
|
|||||||
ASSETS
|
||||||||
Cash
and cash equivalents
|
$ | 1,009,161 | $ | 1,899,752 | ||||
Prepaid
expenses and other current assets
|
109,063 | 128,783 | ||||||
Other
receivable
|
- | 100,000 | ||||||
Total
current assets
|
1,118,224 | 2,128,535 | ||||||
Property
and equipment, net of accumulated depreciation and amortization of $33,624
and $25,710, respectively
|
58,870 | 66,784 | ||||||
Investment
in joint venture
|
2,528,178 | 3,535,245 | ||||||
Other
investments
|
533,000 | 1,000,000 | ||||||
Deposits
|
- | 27,093 | ||||||
Total
assets
|
$ | 4,238,272 | $ | 6,757,657 | ||||
LIABILITIES AND STOCKHOLDERS'
EQUITY
|
||||||||
Accounts
payable and accrued expenses
|
$ | 992,412 | $ | 504,211 | ||||
Commitments
and contingencies
|
||||||||
Stockholders'
Equity
|
||||||||
Series
A preferred stock, $.001 par value, 1,000,000 shares designated, no shares
issued and outstanding
|
- | - | ||||||
Series
B preferred stock, $.001 par value, 500,000 shares designated, no shares
issued and outstanding
|
- | - | ||||||
Series
C preferred stock, $.001 par value, 300,000 shares designated, no shares
issued and outstanding
|
- | - | ||||||
Common
stock, $.001 par value; 150,000,000 shares authorized, 23,444,234 shares
issued and outstanding
|
23,444 | 23,444 | ||||||
Additional
paid-in capital
|
22,082,297 | 21,947,475 | ||||||
Accumulated
deficit during development stage
|
(18,896,081 | ) | (15,753,673 | ) | ||||
Retained
earnings
|
36,200 | 36,200 | ||||||
Total
stockholders' equity
|
3,245,860 | 6,253,446 | ||||||
Total
liabilities and stockholders' equity
|
$ | 4,238,272 | $ | 6,757,657 |
See Notes
to Condensed Financial Statements
1
(a
corporation in the development stage)
Condensed
Statements of Operations (unaudited)
For the
three and six months ended March 31, 2010 and 2009 and for
the period from inception (May 1, 2007) through March 31, 2010
Three months ended March 31,
|
Six months ended March 31,
|
|||||||||||||||||||
2010
|
2009
|
2010
|
2009
|
Inception (May 1,
2007)
through March
31, 2010
|
||||||||||||||||
Operating
Expenses:
|
||||||||||||||||||||
General
and administrative (includes share based compensation of $64,647,
$156,998, $134,822, $219,931 and $836,136, and related party
consulting fees of $0, $0, $0, $30,000 and $572,200,
respectively)
|
$ | 472,171 | $ | 497,527 | $ | 1,098,755 | $ | 937,919 | $ | 5,814,491 | ||||||||||
Research
and clinical development (includes share based compensation of $0,
$26,327, $0, $40,524 and $140,969, related party consulting fees of $0,
$52,500, $0, $105,000 and $378,910 respectively, and fair value of shares
issued in connection with license amendment, license fee, and milestone
payment under technology license of $0, $0, $0, $100,000 and
$3,613,000, respectively)
|
64,751 | 798,080 | 170,499 | 1,675,335 | 11,457,712 | |||||||||||||||
Litigation
settlement
|
400,000 | - | 400,000 | - | 400,000 | |||||||||||||||
Impairment
of other investments
|
85,000 | - | 467,000 | - | 467,000 | |||||||||||||||
Share
of net loss from joint venture
|
356,002 | - | 1,007,067 | - | 1,471,822 | |||||||||||||||
Total
operating expenses
|
1,377,924 | 1,295,607 | 3,143,321 | 2,613,254 | 19,611,025 | |||||||||||||||
Loss
from operations
|
(1,377,924 | ) | (1,295,607 | ) | (3,143,321 | ) | (2,613,254 | ) | (19,611,025 | ) | ||||||||||
Other
income and (expense):
|
||||||||||||||||||||
Interest
income
|
154 | 13,489 | 913 | 36,758 | 727,569 | |||||||||||||||
Interest
expense
|
- | - | - | - | (12,625 | ) | ||||||||||||||
Total
other income (expense)
|
154 | 13,489 | 913 | 36,758 | 714,944 | |||||||||||||||
Net
Loss
|
$ | (1,377,770 | ) | $ | (1,282,118 | ) | $ | (3,142,408 | ) | $ | (2,576,496 | ) | $ | (18,896,081 | ) | |||||
Loss
per common share - basic and diluted
|
$ | (0.06 | ) | $ | (0.05 | ) | $ | (0.13 | ) | $ | (0.09 | ) | $ | (0.70 | ) | |||||
Weighted
average common shares - basic and diluted
|
23,444,234 | 28,444,234 | 23,444,234 | 28,419,234 | 26,840,680 |
See Notes
to Condensed Financial Statements
2
(a
corporation in the development stage)
Condensed
Statement of Stockholders' Equity
For the
period from inception (May 1, 2007) through March 31, 2010
Accumulated
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Deficit
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Additional
|
During the
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||
Series A Preferred Stock
|
Series B Preferred Stock
|
Series C Preferred Stock
|
Common Stock
|
Paid-in
|
Treasury Stock
|
Retained
|
Development
|
|||||||||||||||||||||||||||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Shares
|
Amount
|
Earnings
|
Stage
|
Total
|
|||||||||||||||||||||||||||||||||||||||||||
Balance
at October 1, 2006
|
- | $ | - | - | $ | - | - | $ | - | 2,564,752 | $ | 2,565 | $ | 160,485 | - | $ | - | $ | 166,854 | $ | - | $ | 329,904 | |||||||||||||||||||||||||||||||||
Private
placement April 27, 2007, 15,750,000 common shares at $0.001
per share
|
- | - | - | - | - | - | 15,750,000 | 15,750 | - | - | - | - | - | 15,750 | ||||||||||||||||||||||||||||||||||||||||||
Private
placement May 16, 2007, 10,000,000 common shares at $2.00 per
share
|
- | - | - | - | - | - | 10,000,000 | 10,000 | 19,990,000 | - | - | - | - | 20,000,000 | ||||||||||||||||||||||||||||||||||||||||||
Private
placement June 25, 2007, 250,000 common shares at $2.00 per
share
|
- | - | - | - | - | - | 250,000 | 250 | 499,750 | - | - | - | - | 500,000 | ||||||||||||||||||||||||||||||||||||||||||
Private
placement fees, reorganization costs and related registration costs,
including fair market value of warrants
|
- | - | - | - | - | - | - | - | (5,151,228 | ) | - | - | - | - | (5,151,228 | ) | ||||||||||||||||||||||||||||||||||||||||
Share-based
compensation
|
- | - | - | - | - | - | 12,500 | 12 | 65,817 | - | - | - | - | 65,829 | ||||||||||||||||||||||||||||||||||||||||||
Fair
value of warrants issued in connection with private
placement
|
- | - | - | - | - | - | - | - | 2,988,064 | - | - | - | - | 2,988,064 | ||||||||||||||||||||||||||||||||||||||||||
Repurchase
of 1,939,750 common shares, May 2007
|
- | - | - | - | - | - | - | - | - | (1,939,750 | ) | (750,000 | ) | - | - | (750,000 | ) | |||||||||||||||||||||||||||||||||||||||
Net
loss
|
- | - | - | - | - | - | - | - | - | - | - | (130,654 | ) | (2,954,723 | ) | (3,085,377 | ) | |||||||||||||||||||||||||||||||||||||||
Balance
September 30, 2007
|
- | - | - | - | - | - | 28,577,252 | 28,577 | 18,552,888 | (1,939,750 | ) | (750,000 | ) | 36,200 | (2,954,723 | ) | 14,912,942 | |||||||||||||||||||||||||||||||||||||||
Share
based compensation
|
- | - | - | - | - | - | - | - | 324,105 | - | - | - | - | 324,105 | ||||||||||||||||||||||||||||||||||||||||||
Fair
value of shares issued in connection with milestone payments under
technology license (shares valued at $2.00 per
share)
|
- | - | - | - | - | - | 1,756,732 | 1,757 | 3,511,243 | - | - | - | - | 3,513,000 | ||||||||||||||||||||||||||||||||||||||||||
Cancellation
of treasury stock
|
- | - | - | - | - | - | (1,939,750 | ) | (1,940 | ) | (748,060 | ) | 1,939,750 | 750,000 | - | - | - | |||||||||||||||||||||||||||||||||||||||
Net
loss
|
- | - | - | - | - | - | - | - | - | - | - | - | (7,338,825 | ) | (7,338,825 | ) | ||||||||||||||||||||||||||||||||||||||||
Balance
September 30, 2008
|
- | - | - | - | - | - | 28,394,234 | 28,394 | 21,640,176 | - | - | 36,200 | (10,293,548 | ) | 11,411,222 | |||||||||||||||||||||||||||||||||||||||||
Share
based compensation
|
- | - | - | - | - | - | - | - | 452,349 | - | - | - | - | 452,349 | ||||||||||||||||||||||||||||||||||||||||||
Fair
value of shares issued in connection with amended technology license
(shares valued at $2.00 per share)
|
- | - | - | - | - | - | 50,000 | 50 | 99,950 | - | - | - | - | 100,000 | ||||||||||||||||||||||||||||||||||||||||||
Shares
redeemed and cancelled
|
- | - | - | - | - | - | (5,000,000 | ) | (5,000 | ) | (245,000 | ) | - | - | - | - | (250,000 | ) | ||||||||||||||||||||||||||||||||||||||
Net
loss
|
- | - | - | - | - | - | - | - | - | - | - | - | (5,460,125 | ) | (5,460,125 | ) | ||||||||||||||||||||||||||||||||||||||||
Balance
September 30, 2009
|
- | - | - | - | - | - | 23,444,234 | 23,444 | 21,947,475 | - | - | 36,200 | (15,753,673 | ) | 6,253,446 | |||||||||||||||||||||||||||||||||||||||||
Share
based compensation (unaudited)
|
- | - | - | - | - | - | - | - | 134,822 | - | - | - | - | 134,822 | ||||||||||||||||||||||||||||||||||||||||||
Net
loss (unaudited)
|
- | - | - | - | - | - | - | - | - | - | - | - | (3,142,408 | ) | (3,142,408 | ) | ||||||||||||||||||||||||||||||||||||||||
Balance
March 31, 2010 (unaudited)
|
- | $ | - | - | $ | - | - | $ | - | 23,444,234 | $ | 23,444 | $ | 22,082,297 | - | $ | - | $ | 36,200 | $ | (18,896,081 | ) | $ | 3,245,860 |
See Notes
to Condensed Financial Statements
3
(a
corporation in the development stage)
Condensed
Statements of Cash Flows (unaudited)
For the
six months ended March 31, 2010 and 2009, and for the period from
inception (May 1, 2007) through March 31, 2010
Six months ended
March 31, 2010
|
Six Months ended
March 31, 2009
|
Inception (May 1, 2007)
through March 31, 2010
|
||||||||||
Cash flows from operating
activities:
|
||||||||||||
Net
loss
|
$ | (3,142,408 | ) | $ | (2,576,496 | ) | $ | (18,896,081 | ) | |||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||||||
Depreciation
and amortization
|
7,914 | 9,602 | 33,624 | |||||||||
Share-based
compensation
|
134,822 | 260,455 | 977,105 | |||||||||
Fair
value of shares issued in connection with license amendment, license fee,
and milestone payments under technology license
|
- | 100,000 | 3,613,000 | |||||||||
Write
off of uncollectible other receivable
|
100,000 | - | 100,000 | |||||||||
Impairment
of other investments
|
467,000 | - | 467,000 | |||||||||
Share
of net loss from operations of joint venture
|
1,007,067 | - | 1,471,822 | |||||||||
Changes
in operating assets and liabilities:
|
||||||||||||
Deposits
|
27,093 | 15,000 | - | |||||||||
Prepaid
expenses and other current assets
|
19,720 | 27,133 | (109,063 | ) | ||||||||
Other
receivable
|
- | - | (100,000 | ) | ||||||||
Accounts
payable and accrued expenses
|
488,201 | 63,092 | 1,028,502 | |||||||||
Due
to related parties
|
- | (30,000 | ) | (36,090 | ) | |||||||
Net
cash used in continuing operating activities
|
(890,591 | ) | (2,131,214 | ) | (11,450,181 | ) | ||||||
Net
cash provided by discontinued operating activities
|
- | - | 41,146 | |||||||||
Net
cash used in operating activities
|
(890,591 | ) | (2,131,214 | ) | (11,409,035 | ) | ||||||
Cash flows from investing
activities:
|
||||||||||||
Purchase
of property and equipment
|
- | (28,718 | ) | (92,494 | ) | |||||||
Investment
in joint venture
|
- | - | (4,000,000 | ) | ||||||||
Investment
in warrants
|
- | - | (1,000,000 | ) | ||||||||
Issuance
of note receivable
|
- | - | (250,000 | ) | ||||||||
Collection
of note receivable
|
- | - | 250,000 | |||||||||
Net
cash used in investing activities
|
- | (28,718 | ) | (5,092,494 | ) | |||||||
Cash flows from financing
activities:
|
||||||||||||
Private
placements of common shares
|
- | - | 20,563,000 | |||||||||
Private
placement offering costs
|
- | - | (2,163,164 | ) | ||||||||
Proceeds
of note receivable
|
- | - | 125,000 | |||||||||
Repayment
of note receivable
|
- | - | (125,000 | ) | ||||||||
Redemption
of treasury stock
|
- | - | (1,000,000 | ) | ||||||||
Net
cash provided by financing activities
|
- | - | 17,399,836 | |||||||||
Net
increase (decrease) in cash and cash equivalents
|
(890,591 | ) | (2,159,932 | ) | 898,307 | |||||||
Cash
transferred to discontinued operations
|
- | - | (166,463 | ) | ||||||||
Cash
and cash equivalents, beginning of period
|
1,899,752 | 11,365,646 | 277,317 | |||||||||
Cash
and cash equivalents, end of period
|
$ | 1,009,161 | $ | 9,205,714 | $ | 1,009,161 | ||||||
Supplemental
disclosure of cash flow information
|
||||||||||||
Cash
paid for -
|
||||||||||||
Income
taxes
|
$ | - | $ | - | $ | 1,600 | ||||||
Interest
|
$ | - | $ | - | $ | 12,625 |
Non-cash
financing activities:
In 2007,
the Company incurred $5,151,228 in private placement fees, reorganization costs
and related registration costs, which included the issuance of warrants with a
fair value of $2,988,064.
See Notes
to Condensed Financial Statements
4
NuRx
Pharmaceuticals, Inc.
(a
corporation in the development stage)
Notes to
Condensed Financial Statements
March 31,
2010
Note 1 - The Company and its
Significant Accounting Policies
General
Business:
From the
Company’s inception in 2001 to May 2007, it was in the business of selling
nutritional products under the name Quest Group International, Inc. In May 2007,
the Company spun off this nutritional products business and began to pursue a
new business plan in the pharmaceuticals industry. On May 11, 2007, the Company
entered into a license agreement with Vitae Pharmaceuticals, Inc. (“Vitae”),
pursuant to which it acquired an exclusive, worldwide sublicense, with the right
to grant further sublicenses, to certain compounds and nuclear receptor
technology for all human and veterinary use. The principal therapeutic
indications for the lead compounds are acute promyelocytic leukemia, solid
cancers (lung and breast) and chemotherapy-induced neutropenia (low white cell
count). On October 23, 2007, the Company changed its name to NuRx
Pharmaceuticals, Inc. (“NuRx”). While NuRx was initially established to explore
the broad application of second and third generation retinoid and rexinoid
compounds, it has evolved into a more broad Life Sciences company with research
and development (“R&D”) interests in additional novel cancer therapeutics
and, more recently, a novel delivery of point of care diagnostics. (See Note 5).
In January, 2010, the Company formally terminated its cancer therapeutic
clinical trials and drug development activities, terminate the underlying
licenses with Vitae Pharmaceuticals, Inc. (“Vitae”) and Allergan
Pharmaceuticals, Inc. (“Allergan”), and terminate the co-development agreement
with Piramal Life Sciences, Ltd. (“Piramal”) (See Notes 4, 12,16 and
17).
On March
3, 2010, the Company entered into an agreement with Io Therapeutics, LLC (a
company wholly owned by a shareholder and former Chief Scientific Officer of the
Company) to assume the record keeping and regulatory reporting requirements for
all clinical trials formerly conducted by the Company and to transfer its
clinical trial data, materials, compounds and records in exchange for the
assumption by the transferee of certain de minimus liabilities with third party
vendors. (See Note 17).
On
January 29, 2010, the Company, entered into an Agreement and Plan of Merger (the
“Merger Agreement”) with QuantRx Biomedical Corporation, a Nevada corporation
(“QuantRx”), and NP Acquisition Corporation, a Nevada corporation and a
wholly-owned subsidiary of QuantRx (“Merger Sub”). The Merger Agreement provides
that Merger Sub will be merged with and into the Company (the “Merger”), with
the Company continuing as the surviving corporation and a wholly-owned
subsidiary of QuantRx. The Merger Agreement terminates on June 30,
2009, if not extended by mutual agreement of the parties. (See Note
16).
Interim Financial
Information:
The
accompanying unaudited condensed financial statements have been prepared in
accordance with U.S. generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the
information and footnote disclosures required by U.S. generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring and other
adjustments) considered necessary for a fair presentation have been
included. These condensed financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company’s Annual Report on Form 10-K filed with the Securities and Exchange
Commission (SEC), which includes audited financial statements at September 30,
2009 and 2008 and for each of the years then ended and the development stage
from inception (May 1, 2007) through September 30, 2009. The results
of the Company’s operations for any interim period are not necessarily
indicative of the results of operations for any other interim period or full
year.
5
Development
Stage Enterprise:
The
Company is a development stage company as defined in Financial Accounting
Standards Board (FASB) Accounting Standards Codification (ASC) 915 “Development
Stage Entities”. Since September 30, 2009, the Company has been devoting
substantially all of its present efforts to development of the point-of-care
lateral flow diagnostic products for human and veterinary applications through
its QN Diagnostics, LLC joint venture (“QND”) with QuantRx Biomedical
Corporation (“QuantRx”) (See Note 5), and its planned principal
operations have not yet commenced. The Company has not generated any revenues
from operations and has no assurance of any future revenues. All losses
accumulated since May 1, 2007 have been considered as part of the Company's
development stage activities. The Company held approximately $1.0 million in
cash and cash equivalents at March 31, 2010.
Liquidity
and Going Concern:
Until
July 2009, the Company was an early stage R&D biopharmaceutical company with
a focus solely on oncology products (leukemia and lung cancer). Because of (1)
the current suboptimal conditions for new financing of a pure early-stage,
oncology-focused research and development biotech company and (2) the slower
than expected recruitment in its U.S. clinical trials with its resultant delays
in delivery of Phase II data, the Company concluded that there was an immediate
need to expand its interests to broader areas of life sciences with products
that offer a near term revenue stream to support the R&D programs. After
examining a number of options in the medical diagnostics arena, the Company
ultimately focused on point-of-care diagnostics in human and veterinary medicine
through QND (See Note 5). The Company terminated further patient accruals under
its U.S. clinical trials, eliminated its U.S. clinical development team,
undertook significant cost reductions and through December 31, 2009, limited its
focus in drug development to winding down the U.S. clinical trials and
supporting the clinical development activities in India in collaboration
with Piramal (See Note 12). In January 2010, the Company
formally decided to terminate its drug developments activities including the
Piramal Agreement (See Note 17).
As an
early stage clinical development company, the Company has not generated any
revenues from operations to meet its operating expenses, and has historically
financed its operations primarily through issuances of equity securities. The QN
Diagnostics business is also in its early stage and may require additional
funding to complete the development and launch of its initial products, which
both venture partners are mutually obligated to provide.
On
October 29, 2009, the Company called for the redemption of certain shares
representing 46.2% of the issued and outstanding shares of the Company at a cost
of approximately $1,231,000. On November 13, 2009, the holder of such shares
filed a complaint in U.S. District Court in Nevada for declaratory and
injunctive relief from such redemption (See Note 15). On April 9,
2010, the litigation was settled for an amount of $400,000 payable to the
plaintiffs and withdrawal of the redemption demand (See Note 18).
On
January 29, 2010, the Company announced a proposed merger with QuantRx. (See
Note 16).
The
Company has sufficient capital to continue operations only through July
2010. Management believes that given the current economic environment
and the continuing need to strengthen the Company’s cash position, there is
substantial doubt about its ability to continue as a going concern regardless of
the outcome of the proposed merger. The Company continues to actively pursue
various funding options, including the merger with QuantRx, equity offerings and
debt financing; however, there can be no assurance that it will be successful in
its efforts to successfully complete the merger or raise additional capital on a
timely basis and on acceptable terms.
Management
believes that the successful growth and operation of the Company’s business is
dependent upon its ability to obtain adequate sources of debt or equity
financing to:
·
|
wind
down the cancer therapeutic clinical trials and drug development
activities;
|
|
·
|
fund
its share of future additional development costs of the QND joint venture;
and
|
|
·
|
manage
or control working capital requirements by further reducing operating
expenses.
|
6
There can
be no assurance that the Company will be successful in achieving its long-term
plans as set forth above, or that such plans, if consummated, will enable the
Company to obtain profitable operations or continue in the long-term as a going
concern.
The
accompanying financial statements have been prepared assuming the Company will
continue as a going concern, which contemplates the realization of assets and
settlement of obligations in the normal course of business. The 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. The report from the Company’s independent registered
public accounting firm states that there is substantial doubt about the
Company’s ability to continue as a going concern.
Research
and Development Costs:
The
Company expenses all research and development costs as incurred. Research and
development expenses consist of salaries, share based compensation, preclinical
activities, pharmacology, stability testing and other drug development costs,
clinical trial expenses including patient and data management, outside
manufacturing, and consulting costs for regulatory affairs and other activities.
Also included in these costs are in-process research and development costs
incurred from a licensing agreement as more fully described in Note
4.
The
Company has adopted the requirements in FASB ASC 730 “Research and Development”
on accounting for nonrefundable advance payments for goods or services received
for use in future research and development activities. The requirements provide
that nonrefundable advance payments for goods or services that will be used or
rendered for future research and development activities should be deferred and
capitalized. Such amounts should be recognized as an expense as the related
goods are delivered or the related services are performed. At March 31, 2010 and
September 30, 2009, there were no advance payments for drug development
manufacturing costs capitalized as prepaid expenses in the accompanying
condensed balance sheet.
Use
of Estimates:
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ materially from those estimates.
Cash
and Cash Equivalents:
Cash
equivalents are certificates of deposit, U.S. government securities or other
highly liquid investments with original maturities of three months or less when
purchased. There are no cash equivalents at March 31, 2010, and at
September 30, 2009 cash equivalents consisted of certificates of
deposit.
Property
and Equipment:
Property
and equipment are stated at cost. Depreciation and amortization are computed
using the straight-line method over the estimated useful lives of the related
assets, which range from 3 to 5 years. Leasehold improvements are amortized over
the shorter of the life of the lease or their useful lives.
Income
Taxes:
Deferred
income taxes are provided in amounts sufficient to give effect to temporary
differences between financial and tax reporting, principally related to
accruals, in-process research and development costs, and share-based
consideration for license milestones.
7
Deferred
income taxes arise from temporary differences resulting from income and expense
items reported for financial accounting and tax purposes in different periods.
Deferred taxes are classified as current or noncurrent, depending on the
classification of the assets and liabilities to which they relate. Deferred
taxes arising from temporary differences that are not related to an asset or
liability are classified as current or noncurrent depending on the periods in
which the temporary differences are expected to reverse. A valuation allowance
is established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.
The
Company has adopted FASB ASC 740 “Income Taxes” that requires the recognition in
the financial statements the impact of a tax position if that position is more
likely than not of being sustained on audit, based on the technical merits of
the position. The adoption of the standard had no effect on the Company’s
financial position or results of operations.
Earnings
Per Common Share:
Basic
earnings per share are computed by dividing earnings available to common
stockholders by the weighted-average number of common shares outstanding.
Diluted earnings per share is computed similarly to basic earnings per share
except that the denominator is increased to include additional common shares
available upon exercise of stock options and warrants using the treasury stock
method, except for periods of operating loss for which no common share
equivalents are included because their effect would be anti-dilutive. These
potentially dilutive securities were not included in the calculation of loss per
share for the three and six months ended March 31, 2010 and 2009, and the period
from inception (May 1, 2007) through March 31, 2010, because the Company
incurred a loss during such periods and thus their effect would have been
anti-dilutive. Accordingly, basic and diluted loss per share are the same for
these periods. At March 31, 2010 and September 30, 2009 potentially dilutive
securities consisted of outstanding warrants and stock options to acquire an
aggregate of 5,125,560 and 4,925,560 shares, respectively.
Fair
Value of Financial Instruments:
The
Company’s financial instruments consist of cash and warrants to purchase common
stock of QuantRx. The carrying amount of these financial instruments
approximates fair value. (See Note 6).
Variable
Interest Entities/Equity Method of Accounting
The
Company has evaluated its material contractual relationships and has concluded
that the entities involved in these relationships are not Variable Interest
Entities ("VIEs") or, in the case of QND, a 50% joint venture , that the Company
is not the primary beneficiary of the VIE. As such, the Company accounts for the
activities of QND utilizing the equity method of accounting. The
Company recorded a loss from QND representing the Company’s 50% portion of the
activities of QND under the equity method of $356,002, $1,007,067 and $1,471,822
for the three and six months ended March 31, 2010, and from QND’s
inception (July 30, 2009) through March 31, 2010, respectively (See Note
5).
Concentrations
of Credit Risk:
Financial
instruments, which potentially subject the Company to concentrations of credit
risk, consist primarily of cash and cash equivalents. The Company maintains its
cash and cash equivalents in interest and non-interest bearing transaction
accounts at a Standard & Poor’s AAA rated domestic bank. Accounts at the
institution are insured by the Federal Deposit Insurance Corporation up to
$250,000. As of March 31, 2010, the Company had $759,000 cash balance
in excess of this limit. The Company has not experienced any losses
in such accounts and believes it is not exposed to any significant credit risk
on cash and cash equivalents.
8
Impairment
of Long-Lived Assets:
Long-lived
assets, such as property and equipment, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The Company’s management assesses the recoverability of
long-lived assets by determining whether the depreciation and amortization of
long-lived assets over their remaining lives can be recovered through projected
undiscounted future cash flows. The amount of long-lived asset impairment, if
any, is measured based on fair value and is charged to operations in the period
in which long-lived asset impairment is determined by management. At March 31,
2010 and September 30, 2009, the Company’s management believes there is no
impairment of its long-lived assets. There can be no assurance, however, that
market conditions will not change which could result in impairment of long-lived
assets in the future.
Recent
Accounting Pronouncements:
In June
2009, the FASB amended the requirements relating to the accounting for variable
interest entities under ASC 810. The amendments require an enterprise to
qualitatively assess the determination of the primary beneficiary (or
“consolidator”) of a variable interest entity, (“VIE”), based on whether the
entity (1) has the power to direct matters that most significantly impact the
activities of the VIE, and (2) has the obligation to absorb losses or the right
to receive benefits of the VIE that could potentially be significant to the VIE.
The amendments change the consideration of kick-out rights in determining if an
entity is a VIE and requires an ongoing reconsideration of the primary
beneficiary. They further amend the events that trigger a reassessment of
whether an entity is a VIE. The amendments are effective as of the beginning of
each reporting entity’s first annual reporting period that begins after November
15, 2009, interim periods within that first annual reporting period, and for
interim and annual reporting periods thereafter. Earlier adoption is prohibited.
The Company does not expect that the adoption of these amendments will have a
material impact on its results of operations or financial
condition.
Management
does not believe that any other recently issued, but not yet effective,
accounting standards if currently adopted would have a material effect on the
accompanying financial statements.
Note 2 - Property and
Equipment
Property
and equipment consisted of the following at March 31, 2010 and September 30,
2009:
March 31,
2010
(unaudited)
|
September
30,
2009
|
|||||||
Office
equipment
|
$
|
33,264
|
$
|
33,264
|
||||
Computer
equipment
|
11,564
|
11,564
|
||||||
Lab
equipment
|
46,466
|
46,466
|
||||||
Leasehold
Improvements
|
1,200
|
1,200
|
||||||
92,494
|
92,494
|
|||||||
Accumulated
depreciation and amortization
|
(33,624
|
)
|
(25,710
|
)
|
||||
$
|
58,870
|
$
|
66,784
|
Depreciation
and amortization expense for the three and six months ended March 31, 2010 and
2009 amounted to $3,957, $4,801, $7,914 and $9,602, respectively.
Note 3 – Reverse Stock
Split
On May 9,
2008, the Company completed a one-for-four reverse stock split for common
shareholders of record on that same date. As a result of the reverse stock
split, the number of common shares outstanding was reduced to 28,394,234 from
113,576,927 shares outstanding immediately prior to the effective date. Common
shares authorized were unchanged, resulting in an increase in the number of
authorized but unissued shares of common stock to 121,605,766 from 36,423,073.
The per unit exercise price of all outstanding options and warrants were
increased proportionately and shares issuable under such instruments were
decreased proportionately.
9
The
reverse stock split did not affect the par value of the Company’s common stock.
As a result, the stated capital on the Company’s balance sheet attributable to
the outstanding common stock was reduced by $91,002 to $30,334 (one-fourth of
its amount immediately preceding the reverse stock split), and the additional
paid-in capital account was increased by $91,002. The per share net income or
loss and net book value of the outstanding common stock increased because there
are fewer shares of the Company’s common stock outstanding.
The
Company’s financial statements and footnotes give retroactive effect to this
stock split.
Note 4 – Vitae License and
Amendment
On May
11, 2007, the Company entered into a license agreement with Vitae
Pharmaceuticals, Inc. (“Vitae”), pursuant to which the Company acquired an
exclusive, worldwide sublicense (with the right to grant further sublicenses) to
certain compounds and technology for all human and veterinary use, in order to
research, develop and commercialize the compounds. The indications for the lead
compounds are acute myeloid, solid cancers (lung and breast) and
chemotherapy-induced neutropenia. The Company paid Vitae an aggregate of $2.15
million, comprised of an upfront license fee of $2.1 million and $50,000 for its
inventory of the licensed compounds. As a milestone payment required under the
license, the Company also issued to Vitae 1,756,732 shares of common stock, or
such number representing 5.66% of the Company’s fully diluted shares, on October
17, 2007, the date it received acceptance of an Investigational New Drug
Application (“IND”) by the United States Food and Drug Administration for a
licensed compound that had not previously received an IND. The Company will also
be required to pay, on Vitae’s behalf, the existing licensors additional
milestone payments if it reaches FDA marketing approval for a product containing
a licensed compound.
In
addition to the aforementioned fees and milestone payments, the Company agreed
to pay the original licensor of the compounds and Vitae specified revenue
percentages of the Company’s net sales of products based on the licensed
technology. The percentages vary from product to product, but when combined may
total as much as 12% of the Company’s net sales. The Company must meet certain
development milestones under the original license agreements with the existing
licensors in order to maintain the rights to the licensed products, including,
among others, filing at least one New Drug Application (“NDA”) in the U.S. or
another major market for a product by May 10, 2011. The Company also agreed to
pay Vitae a specified percentage of any sublicense revenues received from any
sublicense of the licensed technology.
On
December 31, 2008, the Vitae license was amended to include certain additional
intellectual property and compounds potentially useful in dermatological
therapeutic applications, and a novation agreement was executed transferring
Vitae’s rights and obligations under its license with Allergan to the Company.
In consideration of the amendment, the Company paid Vitae $125,000 in cash and
issued 50,000 shares of common stock, valued at $2.00 per share.
The
acquired assets, which consist of intellectual property and inventory of
compounds at the date of acquisition and date of amendment, were determined to
be in the research and development stage (the pre-clinical discovery stage). The
primary compounds underlying the patents and licenses are to be used in ongoing
research and development activities and are not determined to have any
alternative future uses. Accordingly, pursuant to the provisions of FASB ASC
730, the Company has charged the costs of the acquired assets to
expense.
During
the three months ended March 31, 2010, the Company terminated all drug
development activities, cancelled the Vitae and Allergan licenses, and returned
the licensed intellectual property rights granted thereunder. (See
Note 17).
10
Note 5 – Joint Venture with
QuantRx Biomedical Corporation
On July
30, 2009, the Company and QuantRx Biomedical Corporation (“QuantRx”) entered
into agreements to form QN Diagnostics, LLC, a Delaware limited liability
company (“QND”). Pursuant to the agreements, QuantRx contributed certain
intellectual property and other assets related to its lateral flow strip
technology and related lateral flow strip reader technology with a fair value of
$5,450,000, and NuRx contributed $5,000,000 in cash to QND. Following the
respective contributions by NuRx and QuantRx to the joint venture, NuRx and
QuantRx each own a 50% interest in QND. QND is managed by a Board of Managers
consisting of members from both NuRx and QuantRx and an independent member
mutually agreed by the members. The purpose of the joint venture is to develop
and commercialize products incorporating the lateral flow strip technology and
related lateral flow strip readers.
Under the
terms of the agreements, QND made a $2,000,000 cash distribution to QuantRx.
QuantRx is committed to further capital contributions aggregating $1.55 million,
comprised of certain milestone payments under a technology purchase agreement in
QuantRx common stock (fair value of $750,000); transfer of fixed assets with a
fair value of $100,000 to QND at time requested by the QND Board of Managers;
and a $700,000 sustaining capital contribution as required to sustain QND
operations. If necessary, subsequent sustaining capital contributions will be
made by QuantRx and NuRx on an equal basis.
QuantRx
and QND also entered into a one year Development and Services Agreement,
pursuant to which QND shall pay a monthly fee consisting of a base of $250,000
plus approved overages, not to exceed $3.7 million to QuantRx in exchange for
QuantRx providing all services related to the development, regulatory approval
and commercialization of lateral flow products. For the three and six
months ended March 31, 2010, and for the period July 30, 2009 (inception)
through March 31, 2010, an aggregate of $575,000, $1,911,936 and $2,595,924,
respectively, was paid by QND to QuantRx pursuant to this
agreement.
In
connection with the formation of the Joint Venture on July 30, 2009, NuRx
received two warrants to purchase 2,000,000 shares of QuantRx common stock each,
for an aggregate of 4,000,000 shares of QuantRx common stock. The warrants are
separately stated as “Other Investments” (see Note 6).
Summarized
unaudited financial information of QND for the three months and six month ended
March 31, 2010, and for the period July 30, 2009 (inception) through March 31,
2010 is as follows:
Three months
Ended
March 31,
2010
|
Six months
Ended
March 31,
2010
|
July 30,
2009
(inception)
through
March 31,
2010
|
||||||||||
Revenue
and gross profit
|
$
|
75,000
|
$
|
150,216
|
$
|
200,216
|
||||||
Operating
expenses
|
787,525
|
2,166,876
|
3,149,518
|
|||||||||
50%
of net loss under the equity method
|
$
|
(356,002
|
)
|
$
|
(1,007,067
|
)
|
$
|
(1,471,822
|
)
|
There
were no intercompany profits to eliminate.
Summarized
balance sheets at March 31, 2010 and September 30, 2009 are as
follows:
March 31,
2010
(unaudited)
|
September 30,
2009
|
|||||||
Cash
|
$
|
127,123
|
$
|
2,061,060
|
||||
Related
party receivable, QuantRx
|
240,960
|
250,000
|
||||||
Intangible
assets, net of amortization
|
5,118,824
|
5,367,206
|
||||||
Total
assets
|
5,571,573
|
7,710,768
|
||||||
Accounts
payable – related party
|
52,717
|
190,278
|
||||||
Total
liabilities
|
$
|
65,217
|
$
|
190,278
|
11
The
"Investment in Joint Venture” presented on the balance sheet at March 31, 2010
reflects the following:
Cash
investment
|
$
|
5,000,000
|
||
Fair
value of warrants in QuantRx received in connection with formation of
QND
|
(1,000,000
|
)
|
||
Equity
method losses:
|
||||
July
30, 2009 (inception) through September 30, 2009
|
(464,755
|
)
|
||
October
1, 2009 through December 31, 2009
|
(651,065
|
)
|
||
January
1, 2010 through March 31, 2010
|
(356,002
|
)
|
||
$
|
2,528,178
|
Pursuant
to the LLC Operating Agreement, NuRx has the right, prior to the achievement of
two specified milestones by QND and subject in certain circumstances to prior
approval by QuantRx, to withdraw up to $1,500,000 of its capital contribution
from the joint venture. If withdrawn, the funds must be returned to the joint
venture within thirty days of the achievement of the respective milestone. The
first milestone was achieved in November, 2009 and $1,000,000 was released into
the QND operating account. As a result, NuRx may request withdrawal of up to
$500,000 prior to achievement of the second milestone. No withdrawals
have been requested by NuRx. The second milestone date was March 31,
2010 which was not achieved. QuantRx is now in the sixty day cure
period provided under the LLC Agreement. Failure by QuantRx to
achieve the milestone within the cure period will be a breach of the LLC
Agreement and results in the loss of a Manager with voting control of the Joint
Venture Board of Managers shifting to NuRx.
As of
March 31, 2010, $52,717 is included in prepaid expenses and other current
assets, and was due from QND for reimbursement of consulting fees paid to a
former director and compensation and related payroll costs related to the
employment of a QND executive for which the Company acted as nominal employer on
behalf of QND under the employment agreement with the executive. Under this
agreement, the Company is obligated to advance compensation and related payroll
costs for the executive through December 31, 2009, and QND is obligated to
reimburse the Company for these advances upon receipt by QND of first cash flow
from product sales. The executive resigned on November 6,
2009.
Note 6– Other
Investments
The
following table summarizes the Company’s long-term investments classified as
available-for-sale at March 31, 2010 and September 30, 2009:
Warrants to purchase QuantRx Biomedical Corporation
common shares
|
March 31,
2010
(unaudited)
|
September 30,
2009
|
||||||
Cost
|
$
|
1,000,000
|
$
|
1,000,000
|
||||
Gross
unrealized gains
|
—
|
—
|
||||||
Impairment
loss
|
(467,000
|
)
|
—
|
|||||
Fair
value
|
$
|
533,000
|
$
|
1,000,000
|
The
investments consist of two warrants to purchase 2,000,000 shares of QuantRx
common stock each, for an aggregate of 4,000,000 shares of QuantRx common stock,
received in connection with the formation of QND on July 30, 2009. (See Note 5).
The warrants expire on July 30, 2014 and have exercise prices of $0.50 and
$1.25, respectively.
12
The fair
value of the warrants at March 31, 2010 and September 30, 2009 using the
Black-Sholes pricing model was $533,000 and $1,000,000 using a stock price of
$0.36 and $0.50 per share, respectively, and the following
assumptions:
March 31,
2010
|
September 30,
2009
|
|||||||
Expected
Volatility
|
70 | % | 70 | % | ||||
Expected
Dividends
|
— | — | ||||||
Expected
term, in years
|
4.33 | 5.0 | ||||||
Risk-free
rate
|
2.23 | % | 3.24 | % |
FASB ASC
820 establishes a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value into three levels as follows:
Level 1:
Quoted prices (unadjusted) in active markets for an identical asset of liability
that the Company has the ability to access as of the measurement date. Financial
assets and liabilities utilizing Level 1 inputs include active-exchange traded
securities and exchange-based derivatives.
Level 2:
Inputs other than quoted prices included within Level 1 that are directly
observable for the asset or liability or indirectly observable through
corroboration with observable market data. Financial assets and liabilities
utilizing Level 2 inputs include fixed income securities, non-exchange based
derivatives, mutual funds, and fair-value hedges.
Level 3:
Unobservable inputs for the assets or liability are only used when there is
little, if any, market activity for the asset or liability at the measurement
date. Financials assets and liabilities utilizing level 3 inputs include
infrequently traded, non-exchange-based derivatives and commingled investment
funds and are measured using present value pricing models.
The
warrants to purchase shares of QuantRx common stock are measured and recorded at
fair value on the Company’s balance sheets using Level 2. As a result
of fair value measurement, the Company determined that the fair value of the
QuantRx warrants no longer approximated the original valuation and recorded an
impairment loss on investment in warrants of $85,000 and $467,000, respectively
during the three and six months ended March 31, 2010. Subsequent to
March 31, 2010, there has been a further decline in the fair value of the
QuantRx warrants resulting in an additional impairment loss of approximately
$170,000.
If the
proposed merger with QuantRx is consummated the warrants will be cancelled (See
Note 16).
Note 7 - Related Party
Transactions
On May 1,
2007, the Company entered into a consulting agreement with an affiliate to
provide consulting services relating to strategic planning, investor relations
and corporate governance for a monthly fee of $30,000, plus reimbursement of
expenses, for a six-month period ended on October 31, 2007. The consulting
agreement provided for automatic extensions at the end of each six-month term,
unless terminated by either party at least 30 days prior to the end of such
term. The agreement was terminated on October 30, 2008. For the three and six
months ended March 31, 2010 and 2009, and from inception (May 1, 2007) through
March 31, 2010, the Company incurred costs of $0, $0, $0, $30,000, and $540,000,
respectively, pursuant to this consulting agreement.
13
On
November 5, 2007, the Company entered into a five year consulting agreement
effective May 31, 2007 with a company wholly owned by an affiliate to provide
the technical services of that affiliate along with other employees and
resources of the consulting company. This contract was changed to “at-will” as
discussed in Note 13. The consulting agreement superseded an existing five year
employment agreement with that affiliate. For the three months and six months
ended March 31, 2010 and 2009, and from inception (May 1, 2007) through March
31, 2010, the Company incurred costs of $0, $52,500, $0, $105,000 and $378,910,
respectively under the consulting agreement (See Note 13).
For the
three and six months ended March 31, 2010 and 2009, and for the period from
inception (May 1, 2007) through March 31, 2010, the Company incurred and paid an
aggregate of $0, $0, $0, $0 and $32,200 respectively, for advisory and corporate
board meeting management, website and graphics design services provided by a
company 100% owned by the chief executive officer.
Note 8 - Stock Options and
Warrants
Options
In 2007,
the Company adopted a stock compensation plan, the 2007 Stock Compensation Plan
(the “Plan”), pursuant to which it is authorized to grant options, restricted
stock and stock appreciation rights to purchase up to 3,750,000 shares of common
stock to the Company’s employees, officers, directors, consultants and
advisors.
The 2007
Stock Plan is administered by the Company’s Board of Directors or a committee
appointed by the Board, which determines the persons to whom awards will be
granted, the type of award to be granted, the number of awards to be granted and
the specific terms of each grant, including the vesting thereof, subject to the
provisions of the Plan.
All
options issued pursuant to the Plan have an exercise price that is greater than
or equal to the fair market value of the Company’s common stock on the date of
grant.
On March
6, 2009, in order to provide continued economic incentive to option holders,
most of whose options were issued at prices that were “out of the money”, the
Board of Directors authorized a re-pricing of all 1,406,000 shares under stock
option grants previously issued through that date to an exercise price of $0.45
per share from the post reverse-split adjusted $4.00 exercise price at date of
grant. The incremental compensation cost computed using the Black-Scholes option
pricing model was $242,000. The amount of the incremental compensation cost
attributable to options vested as of the date of re-pricing was $100,000 which
was charged to expense at that date. The amount of incremental compensation cost
attributable to option grants vesting after the date of re-pricing was $142,000
which was adjusted to $121,000 during the six months ended March 31, 2010 due to
termination of employees. An amount of $18,000 was charged to expense
during the six months ended March 31, 2010. Approximately $67,000
remains to be recognized over the remaining vesting period of the underlying
grants. There were no other changes to the terms of any stock option grants (See
Note 9).
Restricted
shares of 12,500 have been issued under the Plan.
A summary
of option activity under the Plan for the six months ended March 31, 2010 is as
follows:
Shares
|
Weighted Average
Exercise Price
|
|||||||
Stock
options outstanding, October 1, 2009
|
1,838,060
|
$
|
0.45
|
|||||
Granted
|
500,000
|
$
|
0.45
|
|||||
Exercised
|
—
|
$
|
—
|
|||||
Forfeited
|
(300,000
|
)
|
$
|
0.45
|
||||
Total
options outstanding, March 31, 2010
|
2,038,060
|
$
|
0.45
|
|||||
Options
exercisable at March 31, 2010
|
1,006,263
|
$
|
0.45
|
|||||
Shares
available for future grant under Plan
|
1,699,440
|
14
The
weighted average remaining life of outstanding options at March 31, 2010 was 33
months. The intrinsic value is not greater than the grant price.
Warrants
A summary
of warrant activity for the six months ended March 31, 2010 is as
follows:
Shares
|
Weighted Average
Exercise Price
|
|||||||
Warrants
outstanding, October 1, 2009
|
3,087,500
|
$
|
4.01
|
|||||
Granted
|
—
|
$
|
—
|
|||||
Exercised
|
—
|
$
|
—
|
|||||
Forfeited
|
—
|
$
|
—
|
|||||
Warrants
outstanding, March 31, 2010
|
3,087,500
|
$
|
4.01
|
|||||
Warrants
exercisable at March 31, 2010
|
3,087,500
|
$
|
4.01
|
The
weighted average remaining life at March 31, 2010 was 38 months. The intrinsic
value is not greater than the grant price.
Note 9 - Share Based
Payments
Pursuant
to the provisions of FASB ASC 718 “Compensation – Stock Compensation”, the cost
resulting from all share-based payment transactions (including, but not limited
to grants of employee options, and warrants to purchase the Company’s common
stock) shall be recognized in the statement of operations based on their fair
values, unless related to capital financing.
On
October 29, 2009, the Company granted options to purchase 500,000 shares of
common stock to the Chief Executive Officer at an exercise price of $0.45 per
share. The options vest ratably over the 36 months following the date of grant.
The options have a five year term. The fair value of the option awards estimated
on the date of grant using the Black-Scholes option pricing model was $101,000
using the following assumptions:
Assumptions
|
||||
Expected
Volatility
|
75 | % | ||
Expected
Dividends
|
— | |||
Expected
term, in years
|
3.5 | |||
Risk-free
rate
|
1.75 | % |
The
option value is amortized to expense ratably over the 36 month period following
the grant date. Of the total, $8,417 and $14,028 was expensed during
the three and six months ended March 31, 2010.
Note 10 - Lease
Commitments
The
Company entered into a three year lease of approximately 2,960 sq. ft. for
premises located in Irvine, California in which it conducts its operations. The
lease commenced July 15, 2007 and ends on July 31, 2010. The base rent is $4,096
per month through July 31, 2008, $4,243 per month through July 31, 2009, and
$4,389 per month thereafter. In addition, the Company entered into a one year
lease of approximately 100 sq. ft. in Nevada for sales and recruiting activities
in connection with the QN Diagnostics point-of-care diagnostic devices directed
to the law enforcement and hospitality market segments. The annual lease of
$2,500 was prepaid in full in September 2009. Rent expense for the three and six
months ended March 31, 2010 and 2009 was $18,350, 16,555, $36,076 and $35,891,
respectively. Minimum payments remaining under operating leases are
approximately $18,600 through July 31, 2010.
15
Note 11 - Income
Taxes
Deferred
income taxes are provided for the differences between the basis of assets and
liabilities for financial reporting and income tax purposes. A valuation
allowance is established when necessary to reduce deferred tax assets to the
amount expected to be realized. The Company recorded a deferred income tax asset
for the tax effect of net operating loss carry-forwards, in-process research and
development, share-based milestone payments and other temporary differences,
aggregating approximately $7,526,000 and $6,274,000 at March 31, 2010 and
September 30, 2009, respectively. In recognition of the uncertainty regarding
the ultimate amount of income tax benefits to be realized, the Company has
recorded a full valuation allowance at March 31, 2010 and September 30,
2009.
The
Company has net Federal and California losses for tax purposes totaling
approximately $12,410,000 and $12,335,000, respectively, which may be applied
against future taxable income and will expire in 2029 and 2019. The California
net operating loss carry-forward has been suspended for two years. Accordingly,
there is no tax expense for the three and six months ended March 31, 2010
and 2009, and the period inception (May 1, 2007) through March 31, 2010.
The potential tax benefits arising from these losses have not been recorded in
the financial statements. The Company evaluates its valuation allowance
requirements on an annual basis based on projected future operations. When
circumstances change and cause a change in management’s judgment about the
realizability of deferred tax assets, the impact of the change on the valuation
allowance is reflected in current operations.
Significant
components of the Company’s net deferred tax assets at March 31, 2010 and
September 30, 2009 are as follows:
March 31,
2010
(unaudited)
|
September 30,
2009
|
|||||||
Tax
loss carryforwards
|
$
|
4,751,000
|
$
|
3,692,000
|
||||
Share
based compensation
|
419,000
|
361,000
|
||||||
In-Process
R&D/share based milestone payments
|
2,262,000
|
2,177,000
|
||||||
Depreciation/Amortization/Gain/Loss
|
70,000
|
17,000
|
||||||
Vacation
accrual
|
24,000
|
27,000
|
||||||
Valuation
allowance
|
(7,526,000
|
)
|
(6,274,000
|
)
|
||||
$
|
—
|
$
|
—
|
The
provision for income taxes differs from the amount computed at federal statutory
rates as follows:
Six months
ended
March 31,
2010
|
Six months
ended
March 31,
2009
|
May 1, 2007
(inception)
through
March 31,
2010
|
||||||||||
Provision
for income taxes at 34% statutory rate
|
$
|
(1,068,000
|
)
|
$
|
(876,000
|
)
|
(6,468,000
|
)
|
||||
State
taxes, net of federal benefit
|
(183,000
|
)
|
(150,000
|
)
|
(1,112,000
|
)
|
||||||
Change
in valuation allowance
|
1,252,000
|
991,000
|
7,526,000
|
|||||||||
Other
|
(1,000
|
)
|
35,000
|
54,000
|
||||||||
$
|
—
|
$
|
—
|
$
|
—
|
The
Company has not recorded any uncertain tax positions under FASB ASC 740 as of
March 31, 2010 or September 30, 2009.
16
The
Company’s continuing practice is to recognize interest and/or penalties related
to income tax matters in income tax expense. As of March 31, 2010 and September
30, 2009, the Company has no accrued interest and penalties related to uncertain
tax positions.
The
Company is subject to taxation in the U.S. and California. The tax years 2006 to
2008 remain open to examination by the major taxing jurisdictions to which the
Company is subject. The Company currently is not under examination by any tax
authority.
Note 12 – Piramal
Agreement
On March
6, 2009, the Company entered into a development and commercialization agreement
with Piramal Life Sciences, Limited (“Piramal”) with respect to compound NRX
5183 in India (the “Piramal Agreement”). Pursuant to the Piramal Agreement,
Piramal has the exclusive right to develop, manufacture and exploit the NRX 5183
technology within India at its sole expense. The Company was to obtain the
clinical data for use in registration in countries outside of India. Piramal was
also to reimburse the Company for development expenses incurred with regard to
clinical trials in India up to $100,000. This reimbursement was recorded as a
receivable with a corresponding reduction of research and development expenses
at September 30, 2009. At December 31, 2009, this receivable had not been paid
and determined to be uncollectable. Accordingly, the Company recorded a bad debt
expense equal to the full amount which has been charged to general and
administrative expense during the period. Effective January 2010, the company
terminated its drug development activities and underlying licenses and on
February 10, 2010 it terminated the co-development agreement with Piramal
effective April 10, 2010. (See Note 17).
Note 13 – Executive
Compensation
On April
15, 2009, the Company entered into amendments to the Consulting Agreement with
SOQ, Inc. (a company owned by Dr. Parkash Gill, then a Director of the Company
and Chairman of the Scientific Advisory Board) and the Employment Agreements
with each of Dr. Harin Padma-Nathan, the Company’s Chief Executive Officer, and
Dr. Rosh Chandraratna, the Company’s Chief Scientific Officer, to change the
term of each agreement from five years to “at-will”, allowing either party to
terminate the agreements immediately upon written notice to the other party,
with or without “Cause” or “Good Reason”. The agreements were also
amended to eliminate the automatic renewal of the agreement each year for
additional one-year periods.
Dr. Gill
resigned from the Board of Directors and the Scientific Advisory Board of the
Company effective June 13, 2009 and the Consulting Agreement with SOQ, Inc. was
cancelled.
On
October 3, 2009, the Company terminated the at-will employment contract of Dr.
Chandraratna and simultaneously entered into a consulting agreement with him to
continue to provide the services of Chief Scientific Officer on an hourly basis
terminable upon ten days written notice.
Note 14 – Stockholder Rights
Plan
Effective
June 1, 2009, the Company’s Board of Directors adopted a stockholder rights plan
(the “Rights Plan”). Pursuant to the Rights Plan, the Board of Directors
declared a dividend distribution of one right for each share of common stock.
Each right entitles the holder to purchase from the Company one one-hundreth of
a share of Series C Preferred Stock at an initial exercise price of $5 per
share. The Rights Plan is intended to assure that all of the Company’s
stockholders receive fair and equal treatment in the event of any proposed
takeover of the Company and to protect stockholders’ interests in the event the
Company is confronted with partial tender offers or other coercive or unfair
takeover tactics. Rights become exercisable upon the earlier of (i) ten
days following the acquisition by a person or group of 20% or more of the
Company’s outstanding common stock, and (ii) ten business days after the
announcement of a tender offer or exchange offer to acquire 20% or more of the
outstanding common stock. The continuing directors (defined as the directors who
are not affiliated or associated with an acquiring person) may vote to extend
these timeframes in their discretion. If such a person or group acquires 20% or
more of the common stock, each right (other than such person’s or group’s
rights, which will become void) will entitle the holder to purchase at an
exercise price equal to 50% of the then current trading price of the Company’s
common stock. In the alternative, the Board of Directors may authorize
issuance of one share of fully paid common stock for each right. If not
redeemed, the rights will expire on June 1, 2014. These rights were exercisable
at March 31, 2010, but the exercise (distribution date) has been
extended.
17
On April
9, 2010, the Rights Plan was modified as a result of the settlement of
shareholder litigation with DYVA Management Ltd. and its affiliates (“DYVA”)
(See Note 18).
Note 15 – Redemption of
Control Shares under Nevada Control Shares Act
On
October 29, 2009, pursuant to the authority provided in the Bylaws and pursuant
to Nevada Control Share Act (the “Nevada Act”), the Company called for
redemption of the entire 10,832,876 common share holding of DYVA, which such
shares represent 46.2% of the total issued and outstanding shares of the
Company. Under the Nevada Act, the Company is entitled to call for redemption of
DYVA’s shares at the average price paid by DYVA for its shares, which has been
reported by DYVA to be for an aggregate of 833,298 Euros
($1,231,000).
On
November 13, 2009, DYVA filed a complaint in the United States District Court,
District of Nevada seeking declaratory and injunctive relief to halt the
proposed redemption. In addition, the complaint seeks attorney’s fees and costs
to the extent permitted by law and any further and other relief the Court may
deem proper. The Company filed its response on January 22, 2010
seeking a Motion for Summary Judgment. On February 8, 2010, DYVA
filed an Opposition to Motion for Summary Judgment.
On April
9, 2010, the shareholder litigation with DYVA was settled and the redemption
withdrawn. (See Note 18).
Note 16 – Proposed Merger
with QuantRx Biomedical Corporation
On
January 29, 2010, NuRx Pharmaceuticals, Inc. (the “Company”), entered into an
Agreement and Plan of Merger (the “Merger Agreement”) with QuantRx Biomedical
Corporation, a Nevada corporation (“QuantRx”), and NP Acquisition Corporation, a
Nevada corporation and a wholly-owned subsidiary of QuantRx (“Merger Sub”). The
Merger Agreement provides that Merger Sub will be merged with and into the
Company (the “Merger”), with the Company continuing as the surviving corporation
and a wholly-owned subsidiary of QuantRx.
Under the
terms of the Merger Agreement, at the effective time of the Merger (the
“Effective Time”), each outstanding share of the Company’s common stock (other
than shares held by the Company or any wholly-owned subsidiary of the Company or
by QuantRx or Merger Sub or any of their respective subsidiaries or by
stockholders of the Company who have properly demanded appraisal rights for
their shares in accordance with Nevada law) will be converted into the right to
receive approximately 1.54 shares of QuantRx common stock. Upon
consummation of the Merger, the pre-Merger security holders of the Company will
own approximately 40% of QuantRx. All options and warrants of the
Company outstanding at the Effective Time will be assumed by QuantRx and
converted into rights with respect to QuantRx common stock.
The
parties have made customary representations, warranties and covenants in the
Merger Agreement, including among other things, covenants (a) to conduct their
respective businesses in the ordinary course between the date of the Merger
Agreement and the Effective Time; (b) that QuantRx will prepare and file with
the Securities and Exchange Commission (the “SEC”) a registration statement on
Form S-4 (the “Registration Statement”) in which the Company’s proxy statement
will be included as a prospectus; (c) that the Company will solicit proxies and
cause a special meeting of the stockholders of the Company to be held to approve
and adopt the Merger Agreement and the transactions contemplated thereby; (d)
subject to certain exceptions which permit the Company’s board of directors (the
“Board”) to withdraw its recommendation if failure to do so would be
inconsistent with its fiduciary obligations, that the Board will recommend that
the stockholders of the Company approve and adopt the Merger Agreement; (e) that
the Company will not (i) solicit proposals relating to alternative transactions
or (ii) subject to certain exceptions which permit the Board to discuss
certain unsolicited proposals for alternative transactions received from third
parties if failure to do so would be inconsistent with its fiduciary
obligations, enter into discussions concerning, or provide information in
connection with, alternative transactions; and (f) that QuantRx will honor the
terms of the existing indemnification obligations of the
Company. Additionally, QuantRx has agreed to take reasonable actions
to (A) change its name to “QuantRx Diagnostics Corp.,” (B) qualify for listing
on the NYSE Amex or the Nasdaq Global Market, (C) increase the number of shares
under its equity incentive plans such that shares reserved for issuance under
such plans represent 15% of the capital stock of QuantRx post-Merger on a fully
diluted basis, (D) maintain a board of directors consisting of five directors,
which shall consist of three directors to be designated by QuantRx and two
directors to be designated by the Company, (E) designate an executive management
team which shall consist of Mr. Walter Witoshkin, Harin Padma-Nathan, M.D. and
Sasha Afanassiev, with the exact officer positions of such individuals to be
determined prior to the Effective Time, and (F) terminate the QN Diagnostics,
LLC Joint Venture, and to wind up and dissolve the affairs of the Joint Venture
in a tax efficient manner.
18
The
consummation of the Merger is subject to certain customary conditions,
including, without limitation, (a) the approval of the Merger Agreement and the
transactions contemplated thereunder by the Company’s stockholders; (b) the
absence of any legal prohibitions on the closing of the Merger; (c) subject to
certain exceptions, the continued accuracy of the Company’s and QuantRx’s
representations and warranties as of the Effective Time; (d) the absence of any
circumstance or event since the date of the Merger Agreement that has had or
would reasonably be expected to have, individually or in the aggregate, a
material adverse effect on either the Company (in the case of QuantRx’s
obligation to close) or QuantRx (in the case of the Company’s obligation to
close); (e) the effectiveness of the Registration Statement; (f) obtaining
required governmental consents; and (g) evidence reasonably satisfactory to
QuantRx that, immediately prior to the closing, the Company has cash or cash
equivalents equal to or greater than $1 million.
Under the
Merger Agreement, each of the Company and QuantRx has certain rights to
terminate the Merger Agreement and the Merger, including (a) by either party, if
the Merger has not been consummated on or prior to June 30, 2010, subject to
certain exceptions; (b) by either party, if the required stockholder approval is
not obtained; (c) by QuantRx, if the Board changes its recommendation regarding
the Merger Agreement and the Merger; and (d) by the Company, if the Board
validly accepts a superior proposal. If the Merger Agreement is terminated (i)
by the Company prior to approval by its stockholders because the Board validly
accepts a superior proposal, (ii) by QuantRx because the Board makes an adverse
recommendation to the Company’s stockholders regarding approval of the Merger or
the Merger Agreement, or (iii) by the Company or QuantRx (A) due to failure of
the Company’s stockholders to approve the Merger or the Merger Agreement, (B) a
competing transaction is publicly announced before the Company’s stockholders
approve the Merger and (C) the Company enters into an agreement providing for
its acquisition by a third party within 12 months after the date the Merger
Agreement was terminated, the Company shall pay QuantRx a cash break-up fee of
$260,000, minus certain expenses paid by the Company to QuantRx pursuant to the
Merger Agreement.
Note 17 - Termination of all
Cancer Therapeutic Clinical Trials and Drug Development
Activities
Effective
January 2010, the Company has focused solely on development of the
point-of-care lateral flow diagnostic products for human and veterinary
applications through QND and terminated all of its cancer therapeutic clinical
trials and drug development activities. In February, 2010, notice of
termination of the Vitae and Allergan licenses were delivered to the licensors
along with termination of the co-development agreement with Piramal. There are
no penalties as a result of these terminations.
In
connection with these activities, on March 3, 2010 the Company entered into an
agreement with Io Therapeutics, LLC (a company wholly owned by a shareholder and
former Chief Scientific Officer of the Company) to assume the record keeping and
regulatory reporting requirements for all clinical trials formerly conducted by
the Company and to transfer its clinical trial data, materials, compounds and
records in exchange for the assumption by the transferee of certain de minimus
liabilities with third party vendors. The agreement is subject to
certain closing conditions, including the formal closing of all U.S. clinical
trial sites and written notification to the FDA.
19
Note 18 – Subsequent
Events
Settlement
of Shareholder Litigation
On April
9, 2010, the Company entered into a Settlement Agreement (the “Settlement
Agreement”) with DYVA, pursuant to which DYVA agreed to dismiss its lawsuit
against the Company filed on November 13, 2009 in the United States District
Court, District of Nevada for declaratory and injunctive relief to halt the
Company’s redemption of DYVA’s shares of Company common stock (the
“Action”). Under the Settlement Agreement, the parties also agreed to
a mutual release relating to all claims arising from the Action. In
addition, the Company agreed to (i) pay DYVA an aggregate amount of $400,000,
and (ii) upon dismissal of the Action, amend the Stockholder Rights Agreement,
dated as of June 1, 2009, as amended, by and between the Company and Continental
Stock Transfer & Trust Company (the “Rights Agreement”), to exempt DYVA from
the Rights Agreement, provided DYVA does not acquire additional shares of
Company common stock prior to April 2012. See Note
14. DYVA also entered into a voting agreement to approve the proposed
Merger Agreement, dated January 29, 2010, by and among the Company, QuantRx
Biomedical Corporation and NP Acquisition Corporation, a wholly-owned subsidiary
of QuantRx Biomedical Corporation (See Note 16). The settlement
amount of $400,000 is included in accounts payable and accrued expenses at March
31, 2010.
The
Company has evaluated subsequent events through May 14, 2010, the date which the
condensed financial statements were issued.
20
ITEM 2.
|
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
|
Management’s
Discussion and Analysis or Plan of Operation.
Throughout
this Quarterly Report on Form 10-Q, the terms “we,” “us,” “our,” “our company,”
“Company” and “NuRx” refer to NuRx Pharmaceuticals, Inc., a Nevada corporation
formerly known as Quest Group International, Inc.
Forward
Looking and Cautionary Statements
This
Quarterly Report on Form 10-Q contains certain forward-looking statements. For
example, statements regarding our financial position, business strategy and
other plans and objectives for future operations, and assumptions and
predictions about future product demand, supply, manufacturing, costs, marketing
and pricing factors are all forward-looking statements. These statements are
generally accompanied by words such as “intend,” “anticipate,” “believe,”
“estimate,” “potential(ly),” “continue,” “forecast,” “predict,” “plan,” “may,”
“will,” “could,” “would,” “should,” “expect” or the negative of such terms or
other comparable terminology. We believe that the assumptions and expectations
reflected in such forward-looking statements are reasonable, based on
information available to us on the date hereof, but we cannot assure you that
these assumptions and expectations will prove to have been correct or that we
will take any action that we may presently be planning. However, these
forward-looking statements are inherently subject to known and unknown risks and
uncertainties. Actual results or experience may differ materially from those
expected or anticipated in the forward-looking statements. Factors that could
cause or contribute to such differences include, but are not limited to,
regulatory policies, competition from other similar businesses, market and
general economic factors, as well as the additional factors which are listed
under the section “Risk Factors” in our Annual Report on Form 10-K for the year
ended September 30, 2009. This discussion should be read in conjunction with the
condensed consolidated financial statements and notes thereto included in this
Quarterly Report.
If
one or more of these or other risks or uncertainties materialize, or if our
underlying assumptions prove to be incorrect, actual results may vary materially
from what we project. Any forward-looking statement you read in this Quarterly
Report reflects our current views with respect to future events and is subject
to these and other risks, uncertainties and assumptions relating to our
operations, results of operations, growth strategy, and liquidity. All
subsequent forward-looking statements attributable to us or individuals acting
on our behalf are expressly qualified in their entirety by this paragraph. You
should specifically consider the factors identified in this Quarterly Report,
which would cause actual results to differ before making an investment decision.
We are under no duty to update any of these forward-looking statements after the
date of this Quarterly Report or to conform these statements to actual
results.
Overview
NuRx
Pharmaceuticals Inc. (“NuRx”) has historically been an early stage R&D
biopharmaceutical company with a focus on oncology products (leukemia and lung
cancer). The combination of (1) the current suboptimal conditions for new
financing of a pure early stage, oncology-focused research and development
biotech company and (2) the slower than
expected recruitment in our U.S. clinical trials with its resultant
delays in delivery of Phase II data has recently caused the company to carefully
evaluate options to its current singular focus. We concluded in May 2009 that
there was an immediate need to expand our R&D focus to novel oncology
targets in collaboration with academic centers as well as re-examine the value
of our oncology supportive care neutropenia product. More significantly we
determined that we needed to expand our interests to broader areas of life
sciences with products that offer a near term revenue stream to support the
R&D programs. We examined a number of options in the medical diagnostics
arena and ultimately focused on point-of-care diagnostics in human and
veterinary medicine which resulted in the formation on July 30, 2009 of QN
Diagnostics, LLC (“QND”), a 50/50 joint venture with QuantRx Biomedical
Corporation (“QuantRx”).
21
During
the quarter ended September 30, 2009, patient enrollment in clinical trials in
the U.S. was placed on hold while we focused on those clinical trials that are
being initiated in India in collaboration with Piramal Life Sciences, Ltd.
(“Piramal”). The trials which were opened in Mexico were closed and our U.S.
clinical trials support team was terminated.
In
January, 2010, we decided to devote all of our present efforts to development of
the point-of-care lateral flow diagnostic products for human and veterinary
applications through QND, and to terminate all of our cancer therapeutic
clinical trials and drug development activities, terminate the underlying
licenses with Vitae Pharmaceuticals, Inc. (“Vitae”) and Allergan
Pharmaceuticals, Inc. (“Allergan”) returning the underlying intellectual
property rights acquired thereunder, and terminate the co-development agreement
with Piramal in India as described below.
From our
inception in 2001 to May 2007, we were in the business of selling nutritional
products. In May 2007, we spun off this nutritional products business and began
to pursue a new business plan in the pharmaceuticals
industry. On May 11, 2007, we entered into a license agreement
with Vitae, pursuant to which we acquired an exclusive, worldwide sublicense,
with the right to grant further sublicenses, to certain compounds and nuclear
receptor technology for all human and veterinary use. The principal therapeutic
indications for the lead compounds are acute promyelocytic leukemia, acute
myeloid leukemia, solid cancers (lung, mesothelioma, adenoid cystic carcinoma,
and breast) and chemotherapy-induced neutropenia (low white cell count). The
Company paid Vitae an upfront licensing fee of $2,100,000 and $50,000 for its
inventory of the licensed compounds. The Company also agreed to issue Vitae
1,756,732 shares of common stock (on a post-split basis), representing 5.66% of
our outstanding common stock (after the issuance of these shares) as of the
effective date of the license, upon reaching a certain milestone. These shares
were issued to Vitae on October 31, 2007, when the Company met this milestone by
receiving approval from the Food and Drug Administration (“FDA”) to begin Phase
I clinical trials for one of the lead compounds.
We were
also required to pay the existing licensors, on Vitae’s behalf, additional
milestone payments if we reached other milestones, including Phase III clinical
trials, and upon obtaining FDA marketing approval for a product containing a
licensed compound. In addition to the aforementioned fees and milestone
payments, we agreed to pay the original licensor of the compounds and Vitae
specified revenue percentages of our net sales of products based on the licensed
technology. The percentages varied from product to product, but when combined
may have totaled as much as 12% of our net sales. We were also obligated to meet
certain development milestones under the original license agreements with the
existing licensors in order to maintain the rights to the licensed
products.
On
December 31, 2008, we entered into an amendment of our May 11, 2007 license with
Vitae for the license of additional compounds directed at dermatological
therapeutic applications. We agreed to make a cash payment of $125,000 and to
issue 50,000 shares of common stock valued at $2.00 per share upon execution of
the license amendment. These costs were charged to expense as in-process
research and development for the year ended September 30, 2009.
On
February 10, 2010, we served notice of our intent to terminate the Vitae license
as well as the underlying license to Allergan Pharmaceuticals, Inc.
On March
6, 2009, we entered into a development and commercialization agreement with
Piramal with respect to NRX 5183 in India (the “Piramal Agreement”). Piramal is
a pharmaceutical company listed on the Indian National Stock Exchange and the
Bombay Stock Exchange and which was recently demerged from Piramal Healthcare
Limited. Pursuant to the Piramal Agreement, Piramal was granted the exclusive
right to develop, manufacture and exploit the NRX 5183 technology within India
at its sole expense. We were to obtain the clinical data generated by Piramal
for use in registration in countries outside of India. Until manufacturing was
undertaken by Piramal, we were obligated to provide clinical grade drug product
to Piramal for use in clinical trials. We are obligated as sponsor of
the initial clinical trial in India for continuing costs which Piramal was
obligated to reimburse. Piramal was also required to reimburse us for
development expenses incurred with regard to clinical trials in India prior to
March 6, 2009 up to $100,000. This reimbursement was recorded as a receivable
with a corresponding reduction of research and development expenses at September
30, 2009. As of the date of this Quarterly Report, this receivable
remains unpaid, and as a result we have charged this off to bad debt expense
during the three months ended December 31, 2009. On February 10,
2010, we served notice of our intent to terminate the Piramal
Agreement.
22
On
January 29, 2010, we entered into an Agreement and Plan of Merger (the “Merger
Agreement”) with QuantRx, and NP Acquisition Corporation, a Nevada corporation
and a wholly-owned subsidiary of QuantRx (“Merger Sub”). The Merger Agreement
provides that Merger Sub will be merged with and into the Company (the
“Merger”), with the Company continuing as the surviving corporation and a
wholly-owned subsidiary of QuantRx.
Under the
terms of the Merger Agreement, at the effective time of the Merger (the
“Effective Time”), each outstanding share of the Company’s common stock (other
than shares held by the Company or any wholly-owned subsidiary of the Company or
by QuantRx or Merger Sub or any of their respective subsidiaries or by
stockholders of the Company who have properly demanded appraisal rights for
their shares in accordance with Nevada law) will be converted into the right to
receive approximately 1.54 shares of QuantRx common stock. Upon
consummation of the Merger, the pre-Merger security holders of the Company will
own approximately 40% of QuantRx. All options and warrants of the
Company outstanding at the Effective Time will be assumed by QuantRx and
converted into rights with respect to QuantRx common stock. Also upon
consummation, the QND joint venture will be terminated.
The Board
of Directors of the Company unanimously approved the Merger and the Merger
Agreement at a special meeting on January 11, 2010, and resolved to recommend
that the Merger Agreement be submitted to the Company’s stockholders for
adoption.
The
Merger is subject to approval of the Company’s stockholders and other customary
conditions to closing and a shareholders meeting is expected to be held during
the second or third quarter of 2010.
We
currently have no source of revenue and have incurred significant losses to
date. We have incurred net losses of approximately $18,896,000 for the
cumulative period from inception (May 1, 2007) through March 31, 2010. Our
losses have resulted principally from costs associated with inbound technology
licensing, clinical development expenses, 50% share of losses for our QND joint
venture, general and administrative activities, and costs related to our
financing in May 2007. As a result of development and commercialization
activities of the lateral flow products through QND, expenditures relating to
the termination of the cancer therapeutic clinical trial and drug development
activities, costs related to the proposed merger with QuantRx and continuing
general and administrative costs, we expect to incur additional operating losses
for the foreseeable future.
Going
Concern
Our
management believes that the successful growth and operation of the Company’s
business is dependent upon its ability to obtain adequate sources of debt or
equity financing to:
|
·
|
wind down the cancer therapeutic
clinical trials and drug development
activities;
|
|
·
|
fund its share of future
additional development costs of the QND joint venture;
and
|
|
·
|
further reduce continuing
operating costs and merger related
expenses.
|
There can
be no assurance that we will be successful in achieving the long-term plans as
set forth above, or that such plans, if consummated, will enable the Company to
obtain profitable operations or continue in the long-term as a going concern.
Our continuation as a going concern is dependent on its ability to obtain
additional financing to fund operations, implement its business model, and
ultimately, to attain profitable operations. We intend to raise
additional financing to fund our operations through various means, including
equity or debt financing, funding from a corporate partnership or licensing
arrangement, business combination or any similar financing. However, there is no
assurance that sufficient financing will be available or, if available, on terms
that would be acceptable to the Company.
The
financial statements accompanying this Quarterly Report on Form 10-Q have been
prepared assuming the Company will continue as a going concern, which
contemplates the realization of assets and settlement of obligations in the
normal course of business. The 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. The report from
our independent registered public accounting firm in our Annual Report on Form
10-K for the fiscal year ended September 30, 2009 states that there is
substantial doubt about the Company’s ability to continue as a going
concern.
23
Private
Placements
In May
through June 2007, the Company raised approximately $20,500,000 from a small
group of accredited investors from the sale of 41,000,000 shares of common stock
at a price of $.50 per share in a private placement offering. As
adjusted for the 1-for-4 reverse stock split that took place in May 2008, this
represents the sale of 10,250,000 shares of common stock at a price of $2.00 per
share. Pursuant to the terms of the private placement, these
investors had certain anti-dilutive price protections until July 18,
2008.
Hunter
World Markets, Inc. acted as the exclusive placement agent in the private
placement offering, and received a fee of $2,012,500 (approximately 10% of the
gross proceeds) and two six-year warrants 3,075,000 shares of the Company’s
common stock at an exercise price of $4.00 per share on a post-split basis.
These warrants expire in 2013. Hunter World Markets, Inc. also loaned us
$125,000 at an interest rate of 6% per annum. This loan together with accrued
interest and a loan fee of $12,500 was repaid from the proceeds of the private
placement.
In
connection with the private offering, stockholders who had acquired our common
stock prior to April 27, 2007 canceled an aggregate 1,939,750 shares of common
stock on a post-split basis in consideration for an aggregate amount of
$750,000.
During
the period between May 30, 2007 and June 27, 2007, we sold an aggregate 250,000
shares of our common stock at a price of $2.00 per share on a post-split basis
and received aggregate proceeds of $500,000. In connection with the
aforementioned sales, Hunter World Markets received a commission of 5% on half
the gross proceeds and received a six-year warrant to purchase common stock
equal to 75,000 shares at an exercise price of $4.00 per share on a post-split
basis.
Critical
Accounting Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Such estimates are described in Note 1, Basis of
Presentation and Summary of Significant Accounting Policies to the Notes to
Financial Statements. We base our estimates on historical experience and on
various other assumptions that we believe to be reasonable under the
circumstances, the results of which form our basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent from
other sources, and evaluate our estimates on an ongoing basis. These estimates
are reviewed by other members of financial management before being recorded into
the accounting records. Actual results could differ from those
estimates under different assumptions or conditions.
Development
Stage Enterprise
We are a
development stage enterprise and are devoting substantially all of our present
efforts to prototype development for our lateral flow technologies through our
QN Diagnostics joint venture. All losses accumulated are considered as part of
our development stage activities.
Research
and Development Costs
Although
we believe that our research and development activities related to our lateral
flow technologies through our QN Diagnostics joint venture and underlying
technologies have continuing value, the amount of future benefits to be derived
from them is uncertain. Furthermore, our development activities are principally
in the early clinical stage. Research and development costs are therefore
expensed as incurred.
24
Share-Based
Compensation
Share-based
payments to employees, directors and consultants, including grants of employee
stock options, are recognized in the statement of operations based on their fair
values. Fair values are determined at the date of each option grant
using the Black-Scholes method. Because our common shares traded so
infrequently and the quoted price of the shares was not indicative of fair
value, through December, 2008, the stock price used for purposes of these
computations was based upon a value of $2.00 per share on a post-split basis,
the share price paid by the purchasers in the April and May 2007 private
placements. Beginning in March 2009 with the option re-pricing,
a 90 day average price share has been used. It is the policy of the
Board of Directors to grant stock options at not less than their fair
value.
In-Process
Research and Development
Share-based
milestone payments made pursuant to the license Agreement with Vitae
Pharmaceuticals, Inc. during the three months ended December 31, 2008 have been
expensed in the Statement of Operations as in-process research and development
costs consistent with the treatment of the cash payments to Vitae upon
initiation of the license during the fiscal year ended September 30, 2007. The
fair value of the stock-based payments was based upon a value of $2.00 per share
on a post-split basis, the share price paid by the purchasers in the April and
May 2007 private placements.
Valuation
of Warrants
An
impairment in the value of other investments in the amount of $85,000 and
$467,000 was expensed in the Statement of Operations during the three and six
months ended March 31, 2010. This decline in fair market value was
attributable to a sustained decline in the fair value of the underlying common
stock in QuantRx Biomedical Corporation to $0.36 per share from $0.50 per
share. Subsequent to March 31, 2010, there has been a further decline
in the fair market value of the QuantRX warrants resulting in an additional
impairment loss of approximately $170,000.
Results
of Operations
During
the quarter ended September 30, 2009, we suspended patient accruals under all
four active U.S. clinical trials for both lead compounds in order to reserve
cash for other diversification opportunities, and to await preliminary data from
patients already accrued and planned clinical trials in
India. Patient accruals for the Mexico clinical trials was also
suspended and the single open site in Mexico was closed. As
additional cost cutting we terminated our U.S. clinical trials support staff and
undertook significant reductions in the number of patent cases in our
intellectual property portfolio we were actively prosecuting and maintaining,
limiting legal and patent annuity expenditures to the most promising lead
compounds.
In
January 2010, we decided to devote all of our present efforts to development of
the point-of-care lateral flow diagnostic products for human and veterinary
applications through QND, and to terminate all of our cancer therapeutic
clinical trials and drug development activities, terminate the underlying
licenses with Vitae and Allergan returning the underlying intellectual property
rights acquired thereunder, and terminate the co-development agreement with
Piramal.
Both the
time required and costs we may incur in order to commercialize a lateral flow
product candidate that would result in material net cash inflow are subject to
numerous variables, and hence, we are unable at this stage of our development to
forecast useful estimates. Due to technological and regulatory uncertainties,
among others, it is not possible to give accurate and meaningful estimates of
the ultimate cost to bring QND products to market, the timing of costs,
completion of our program and the period during which material net cash inflows
will commence.
25
Three Months ended March 31,
2010 Compared to Three Months Ended March 31, 2009
General
and Administrative Expenses.
General
and administrative (“G&A”) expenses were approximately $472,000 during the
three months ended March 31, 2010, as compared to approximately $497,000
incurred during the three months ended March 31, 2009 or a decrease of
approximately $25,000 or 5%. General and administrative expenses consist
primarily of employee compensation and legal costs involved in our regulatory
filings, in connection with general corporate matters, litigation, proposed
merger and other contracting matters. G&A costs also include insurance,
payroll costs and benefits for all employees, and share-based compensation
expense related to option issuances to Board members, employees and consultants
and bad debt expense. The approximately $25,000 net decrease in total G&A
expenses, resulted from an aggregate of approximately $129,000 cost increases,
offset by approximately $154,000 in cost reductions. The approximately $129,000
in cost increases consisted primarily of approximately $82,000 in legal fees
related to merger and litigation matters and $47,000 salaries
reflecting increased compensation to the CEO and change in CFO’s time commitment
to full-time effective April 2009. These cost increases were offset
by approximately $154,000 in expense reductions consisting of reductions of
approximately $92,000 in share-based compensation, $27,000 in director’s
compensation, $13,000 in accounting fees, and $22,000 in other net cost
reductions.
Research
and Clinical Development Expenses.
Research
and clinical development (“R&D”) expenses were approximately $65,000 during
the three months ended March 31, 2010, as compared to approximately $798,000
incurred during the three months ended March 31, 2009 or a decrease of
approximately $733,000 or 92%.
R&D
expenses for the three months ended March 31, 2010 consist primarily of costs
related to closing the U.S. clinical trials for which patient accruals had been
suspended in the quarter ended September 30, 2009.
R&D
expenses for the three months ended March 31, 2009 consist primarily of costs
involved in the following activities:
|
·
|
Manufacture of the intermediates,
API and clinical grade drug product for the Company’s two lead compounds
for use in clinical trials;
|
|
·
|
Regulatory affairs activities
including:
|
|
o
|
regulatory filings including
protocol submissions to governmental bodies in and outside of the United
States with respect to clinical trials,
and
|
|
o
|
regulatory filings including
protocol submissions to governing ethics committees for proposed clinical
trial sites in and outside of the United States including negotiation of
related contracts;
|
|
·
|
Continuation of the Phase I
clinical trial for NRX 4204 in the United
States;
|
|
·
|
Costs of readying and initiating
the Phase II clinical trials for NRX 5183 in India, Mexico and the
U.S.;
|
|
·
|
Patient and data management
activities for active clinical trials;
and
|
|
·
|
Costs of readying and initiating
Phase II clinical trials in NSCLC and Mesothelioma for NRX 4204 in the
United States.
|
R&D
costs also include payroll costs of R&D employees, costs of third party
consultants, legal costs related to maintenance of the patent portfolio,
including patent annuity payments, in-process R&D costs related to the
share-based license amendment payment under the Vitae license and share-based
compensation costs.
Our
R&D expenses for the three months ended March 31, 2010 as compared to the
three months ended March 31, 2009 were related to the following
activities:
26
Three Months Ended
March 31,
(in thousands)
|
||||||||
2010
|
2009
|
|||||||
Direct
clinical trials costs
|
$ | 40 | $ | 185 | ||||
Drug
development and manufacturing
|
2 | 307 | ||||||
R&D
compensation, including share based compensation
|
— | 203 | ||||||
Other
R&D costs
|
23 | 103 | ||||||
Total
|
$ | 65 | $ | 798 |
Direct
clinical trial costs decreased by approximately $145,000 compared to the three
months ended December 31, 2008. The decrease is due to the cessation of accruals
under US clinical trials. Drug development and manufacturing costs
decreased approximately $305,000 as no further manufacture was required in the
absence of clinical trials. R&D compensation costs decreased
approximately $203,000 as a result of the termination of our U.S. clinical
development team on September 30, 2009, and the termination of the employment
agreement of our Chief Scientific Officer in October 2009. Other
R&D costs decreased by $80,000, related primarily to the reduction in legal
costs and annuity payments on the licensed technology portfolio as a result of
eliminating non-critical cases from the portfolio, and return of the
intellectual property to Allergan upon termination of the license in February
2010.
Loss
from QN Diagnostics, LLC Joint Venture
We
reported $356,002 on the equity method for our 50% share of the net loss
incurred by QND for the three months ended March 31, 2010. As the
joint venture was formed on July 30, 2009, there was no comparable activity for
the three months ended March 31, 2009.
Interest
Income.
Interest
income of $153 for the three months ended March 31, 2010 consisted primarily of
income from savings accounts, and approximately $13,500 for the three months
ended March 31, 2009 from savings and certificates of
deposits. The decrease in interest income was due to
significantly lower cash balances and lower interest rate yields in the three
months ended March 31, 2010.
Six Months ended March 31,
2010 Compared to Six Months Ended March 31, 2009
General
and Administrative Expenses.
General
and administrative (“G&A”) expenses were approximately $1,098,000 during the
six months ended March 31, 2010, as compared to approximately $938,000 incurred
during the six months ended March 31, 2000 or an increase of approximately
$160,000 or 17%. General and administrative expenses consist primarily of
employee compensation and legal costs involved in our regulatory filings, in
connection with general corporate matters, litigation, proposed merger and other
contracting matters. G&A costs also include insurance, payroll costs and
benefits for all employees, and share-based compensation expense related to
option issuances to Board members, employees and consultants and bad debt
expense. The approximately $160,000 net increase in total G&A expenses,
resulted from an aggregate of approximately $375,000 cost increases, offset by
approximately $215,000 in cost reductions. The approximately $375,000 in cost
increases consisted primarily of bad debt expense related to the write down of
the receivable for reimbursable expenses pursuant to the Piramal Agreement in
the amount of $100,000, approximately $128,000 in legal fees related to
contracting, related regulatory filings and litigation matters and proposed
merger, $111,000 salaries reflecting increased compensation to the CEO, change
in CFO’s time commitment to full-time effective April 2009, and $36,000 in
travel expenses primarily related to management activities of QN
Diagnostics. These cost increases were offset by approximately
$215,000 in expense reductions consisting of reductions of approximately $45,000
in director’s compensation, $30,000 from the termination of the consulting
contract with an affiliate in October, 2008, $85,000 in share based
compensation, $21,000 in health insurance premiums, and $34,000 in other net
cost reductions.
Research
and Clinical Development Expenses.
Research
and clinical development (“R&D”) expenses were approximately $170,000 during
the six months ended March 31, 2010, as compared to approximately $1,675,000
incurred during the six months ended March 31, 2009 or a decrease of
approximately $1,505,000 or 90%.
27
R&D
expenses for the six months ended March 31, 2010 consisted primarily of costs
related to closing the U.S. clinical trials for which patient accruals had been
suspended in the quarter ended September 30, 2009.
R&D
expenses for the six months ended March 31, 2009 consisted primarily of costs
involved in the following activities:
|
·
|
Manufacture of the intermediates,
API and clinical grade drug product for the Company’s two lead compounds
for use in clinical trials;
|
|
·
|
Regulatory affairs activities
including:
|
|
o
|
regulatory filings including
protocol submissions to governmental bodies in and outside of the United
States with respect to clinical trials,
and
|
|
o
|
regulatory filings including
protocol submissions to governing ethics committees for proposed clinical
trial sites in and outside of the United States including negotiation of
related contracts;
|
|
·
|
Continuation of the Phase I
clinical trial for NRX 4204 in the United
States;
|
|
·
|
Costs of readying and initiating
the Phase II clinical trials for NRX 5183 in India, Mexico and the
U.S.;
|
|
·
|
Patient and data management
activities for active clinical trials;
and
|
|
·
|
Costs of readying and initiating
Phase II clinical trials in NSCLC and Mesothelioma for NRX 4204 in the
United States.
|
R&D
costs also include payroll costs of R&D employees, costs of third party
consultants, legal costs related to maintenance of the patent portfolio,
including patent annuity payments, in-process R&D costs related to the
share-based license amendment payment under the Vitae license and share-based
compensation costs.
Our
R&D expenses for the six months ended March 31, 2010 as compared to the six
months ended March 31, 2009 were related to the following
activities:
Six Months Ended
March 31,
(in thousands)
|
||||||||
2010
|
2009
|
|||||||
Direct
clinical trials costs
|
$ | 110 | $ | 347 | ||||
Drug
development and manufacturing
|
8 | 487 | ||||||
R&D
compensation, including share based compensation
|
2 | 389 | ||||||
In-process
R&D costs
|
— | 225 | ||||||
Other
R&D costs
|
50 | 227 | ||||||
Total
|
$ | 170 | $ | 1,675 |
Direct
clinical trial costs decreased by approximately $237,000 compared to the six
months ended March 31, 2009. The decrease is due principally to the cessation of
accruals under US clinical trials. Drug development and manufacturing
costs decreased approximately $479,000, as a result of the cessation of clinical
trials. R&D compensation costs decreased approximately $387,000
as a result of the termination of our U.S. clinical development team during the
quarter ended September 30, 2009, and the termination of the employment
agreement of our Chief Scientific Officer in October 2009. In-process R&D
costs decreased $225,000 as a result of a one-time cash and stock payment upon
revision of the Vitae agreement during the six months ended March 31, 2009.
Other R&D costs decreased by $177,000, related primarily to the reduction in
legal costs and annuity payments on the licensed technology portfolio as a
result of eliminating non-critical cases from the portfolio and return of the
intellectual property to Allergan upon termination of the license in February
2010.
28
Loss
from QN Diagnostics, LLC Joint Venture
We
reported $1,007,067 on the equity method for our 50% share of the net loss
incurred by QND for the six months ended March 31, 2010. As the joint
venture was formed on July 30, 2009, there was no comparable activity for the
six months ended March 31, 2009.
Interest
Income.
Interest
income of $913 for the six months ended March 31, 2010 consisted primarily of
income from certificates of deposit and savings, and approximately $36,800 for
the six months ended March 31, 2009 from certificates of deposit and
savings. The decrease was due to lower cash balances and lower
interest rate yields in the six months ended March 31, 2010.
Revenues
Cancer
Therapeutics
We had no
revenues and we do not anticipate that we will derive any revenues from either
product sales or licensing from clinical development of our cancer therapeutic
lead compounds as a result of our decision to terminate further clinical trials
and drug development activities, the underlying technology licenses and our
co-development agreement with Piramal.
Liquidity
As an
early stage clinical development company, we have not generated any revenues
from operations to meet operating expenses, and have historically financed
operations through issuances of equity securities.
We held
approximately $1.0 million in cash and cash equivalents at March 31, 2010 in
comparison to $1.9 million in cash and cash equivalents at September 30,
2009. The decrease in cash and cash equivalents for the six months
ended March 31, 2010 of approximately $900,000 was primarily caused by the cash
loss from operations. There were no significant cash flows from financing or
other investing activities during the year.
The QN
Diagnostics business is also in its early stage and will require additional
funding to complete the development and launch of its initial products, which we
and our venture partner are mutually obligated to provide.
On April
9, 2010, we settled the shareholder litigation with DYVA Management Ltd. with a
payment of $400,000 (the “DYVA Settlement”), further depleting our cash
reserves.
Management
believes that given the current economic environment, the cash requirements of
QN Diagnostics, the DYVA Settlement, and the continuing need to strengthen the
Company’s cash position, there is substantial doubt about its ability to
continue as a going concern. We have sufficient capital to continue
operations only through July 2010. The Company continues to actively
pursue various funding options, including equity offerings, debt financings and
the proposed merger with QuantRx. There can be no assurance that we
will be successful in our efforts to raise additional capital.
Management
believes that the successful growth and operation of the Company’s business is
dependent upon its ability to do any or all of the following:
|
·
|
obtain adequate sources of debt
or equity financing to (i) wind down the cancer therapeutics clinical
trials and drug development activities; and (ii) fund its share of future
additional development costs of the QND joint venture;
and
|
29
|
·
|
manage or control working capital
requirements by further reducing operating
expenses.
|
There can
be no assurance that the Company will be successful in achieving its long-term
plans as set forth above, or that such plans, if consummated, will enable the
Company to obtain profitable operations or continue in the long-term as a going
concern.
Capital
Resources
The
Company has no significant planned capital expenditures for the fiscal year
ending September 30, 2010.
Off-Balance
Sheet Arrangements
We do not
engage in trading activities involving non-exchange traded contracts. In
addition, we have no financial guarantees, debt or lease agreements or other
arrangements that could trigger a requirement for an early payment or that could
change the value of our assets.
Joint
Venture
On July
30, 2009, we formed a 50/50 joint venture with QuantRx Biomedical Corporation
called QN Diagnostics, LLC where we invested $5.0 million cash and QuantRx
contributed its lateral flow and optics intellectual property for the joint
development of point of care diagnostic products for human, forensic and
veterinary use valued at approximately $5.5 million. It is
anticipated that this initial capital investment will not be sufficient to fund
the planned operations of QN Diagnostics through cash flow; and there can be no
assurance that additional funds will be available at all, or at a cost which is
economically viable to the joint venture. Both we and QuantRx share
jointly in the obligation to raise additional capital if needed, although
QuantRx is obligated to provide the first $700,000 of any such
funds.
On
January 29, 2010, we entered into the Merger Agreement with QuantRx and Merger
Sub. The Merger Agreement provides that Merger Sub will be merged with and into
the Company, with the Company continuing as the surviving corporation and a
wholly-owned subsidiary of QuantRx. The Merger Agreement provides,
among other things, that subsequent to the Effective Time, the Joint Venture
will be terminated.
ITEM 3.
|
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET
RISK
|
Not
applicable.
ITEM 4.
|
CONTROLS AND
PROCEDURES
|
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our reports under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms and that such information is accumulated and
communicated to the Company’s management, including our Chief Executive Officer
and Chief Financial Officer, as appropriate, to allow for timely decisions
regarding required disclosure. In designing and evaluating the disclosure
controls and procedures, management recognizes that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives, and management is required to apply
its judgment in evaluating the cost-benefit relationship of possible controls
and procedures. Limitations are inherent in all control systems, so no
evaluation of controls can provide absolute assurance that all control issues
and any fraud within the company have been detected.
As
required by Securities and Exchange Commission Rule 13a-15(b), we carried out an
evaluation, under the supervision and with the participation of the Company’s
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this Report. Based on this
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that the Company’s disclosure controls and procedures were effective as of that
date.
30
As
required by Securities and Exchange Commission Rule 13a-15(c), we carried out an
evaluation, under the supervision and with the participation of the Company’s
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our system of internal
control over financial reporting as of the end of the period covered by this
Report. The Company utilizes the framework established by the
Committee on Sponsoring Organizations (COSO) as the framework for its system of
internal controls. Management has assessed the system of internal
control over financial reporting to be effective.
There was
no change in our internal control over financial reporting identified in
connection with the evaluation required by paragraph (d) of Rule 13a-15(d) under
the Securities Exchange Act of 1934 that occurred during our most recent fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
This
quarterly report does not include an attestation report of the Company’s
registered public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management’s report in this quarterly report.
Our
management, including our Chief Executive Officer and our Chief Financial
Officer, do not expect that our disclosure controls or our internal control over
financial reporting will prevent or detect all errors and all fraud. A control
system, no matter how well designed and operated, can provide only reasonable,
not absolute, assurance that the control system’s objectives will be met. The
design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Further, because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that misstatements due to
error or fraud will not occur or that all control issues and instances of fraud,
if any, have been detected. These inherent limitations include the realities
that judgments in decision-making can be faulty and that breakdowns can occur
because of simple error or mistake. Controls can also be circumvented by the
individual acts of some persons, by collusion of two or more people, or by
management override of the controls. The design of any system of controls is
based in part on certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions. Projections of any evaluation of
controls effectiveness to future periods are subject to risks. Over time,
controls may become inadequate because of changes in conditions or deterioration
in the degree of compliance with policies or procedures.
31
PART
II. OTHER INFORMATION
ITEM 1.
|
LEGAL
PROCEEDINGS
|
As we
disclosed in our Annual Report on Form 10-K for our fiscal year ended September
30, 2009, on October 29, 2009, pursuant to the authority provided in the Bylaws
and pursuant to Nevada Control Share Act ((the “Nevada Act”), we called for
redemption of the entire 10,832,876 common share holding of DYVA Management Ltd.
and its affiliates (“DYVA”), which such shares represent 46.2% of our total
issued and outstanding shares. Under the Nevada Act, we are entitled
to call for redemption of DYVA’s shares at the average price paid by DYVA for
its shares, which has been reported by DYVA to be for 833,298 Euros
(approximately $1,231,000). On November 13, 2009, DYVA filed a complaint in the
United States District Court, District of Nevada for declaratory and injunctive
relief to halt the proposed redemption (the “Action”). In addition, the
complaint seeks attorneys’ fees and costs to the extent permitted by law and any
further and other relief the Court may deem proper. The Company filed
its response on January 22, 2010 seeking a Motion for Summary
Judgment. On February 8, 2010 DYVA filed an Opposition to Motion for
Summary Judgment.
On April
9, 2010, the Company entered into a Settlement Agreement (the “Settlement
Agreement”) with DYVA, pursuant to which DYVA agreed to dismiss the
Action. Under the Settlement Agreement, the parties also agreed to a
mutual release relating to all claims arising from the Action. In
addition, the Company agreed to (i) pay DYVA an aggregate amount of $400,000,
and (ii) upon dismissal of the Action, amend the Stockholder Rights Agreement,
dated as of June 1, 2009, as amended, by and between the Company and Continental
Stock Transfer & Trust Company (the “Rights Agreement”), to exempt DYVA from
the Rights Agreement, provided DYVA does not acquire additional shares of
Company common stock prior to April 2012. DYVA also entered into a
voting agreement to approve the proposed Merger Agreement, dated January 29,
2010, by and among the Company, QuantRx Biomedical Corporation and NP
Acquisition Corporation, a wholly-owned subsidiary of QuantRx Biomedical
Corporation.
We may
occasionally become subject to legal proceedings and claims that arise in the
ordinary course of our business. It is impossible for us to predict
with any certainty the outcome of any disputes that may arise, and we cannot
predict whether any liability arising from claims and litigation will be
material in relation to our financial position or results of
operations.
ITEM 1A.
|
RISK
FACTORS
|
In
addition to the other information set forth in this report, you should carefully
consider the factors discussed in Part I, Item 1A. “Risk Factors” in
our Annual Report on Form 10-K for our fiscal year ended September 30,
2009. The risks discussed in our Annual Report on Form 10-K could
materially affect our business, financial condition and future results. The
risks described in our Annual Report on Form 10-K are not the only risks
facing us. Additional risks and uncertainties not currently known to us or that
we currently deem to be immaterial also may materially and adversely affect our
business, financial condition or operating results. In addition, we are also
subject to the following additional risks:
Risks
Related to Our Proposed Merger
On
January 29, 2010, we entered into a Merger Agreement with QuantRx and Merger
Sub. The Merger Agreement provides that Merger Sub will be merged with and into
the Company, with the Company continuing as the surviving corporation and a
wholly-owned subsidiary of QuantRx. The Board of Directors of the
Company unanimously approved the Merger and the Merger Agreement at a special
meeting on January 11, 2010 and resolved to recommend that the Merger Agreement
be submitted to the Company’s stockholders for adoption. The Merger is subject
to approval of the Company’s stockholders and other customary conditions to
closing and a shareholders meeting is expected to be held during the third
quarter of 2010.
32
If
we are unable to consummate the Merger, our business, financial condition,
operating results and stock price could suffer.
The
completion of the Merger is subject to the satisfaction of numerous closing
conditions, including the approval of the Merger by our stockholders. In
addition, the occurrence of certain material events, changes or other
circumstances could give rise to the termination of the Merger Agreement. As a
result, no assurances can be given that the Merger will be consummated. If our
stockholders choose not to approve the Merger, we otherwise fail to satisfy, or
obtain a waiver of the satisfaction of, the closing conditions to the
transaction and the Merger is not consummated, a material event, change or
circumstance has occurred that results in the termination of the Merger
Agreement, or any legal proceeding results in enjoining the Merger, we could be
subject to various adverse consequences, including, but not limited to, the
following:
|
•
|
we would remain liable for
significant costs relating to the Merger, including, among others, legal,
accounting, financial advisory and financial printing
expenses;
|
|
•
|
we may face various disruptions
to the operation of our business as a result of the substantial time and
effort invested by our management in connection with the
Merger;
|
|
•
|
an announcement that we have
abandoned the Merger could trigger a decline in our stock price to the
extent that the stock price reflects a market assumption that we will
complete the Merger;
|
|
•
|
our inability to solicit
competing acquisition proposals and the possibility that we could be
required to pay a termination fee if the Merger Agreement is terminated
under certain circumstances;
and
|
|
•
|
we may forego alternative
business opportunities or fail to respond effectively to competitive
pressures.
|
ITEM 2.
|
UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF
PROCEEDS
|
None
ITEM
3.
|
DEFAULTS UPON SENIOR
SECURITIES
|
None
ITEM
4.
|
RESERVED
|
None
ITEM
5.
|
OTHER
INFORMATION
|
None
ITEM
6.
|
EXHIBITS
|
See the
attached exhibit index.
33
SIGNATURES
Pursuant
to the requirements 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.
NURX
PHARMACEUTICALS, INC.
|
|||
May
14, 2010
|
By:
|
/s/ Harin
Padma-Nathan
|
|
Name:
Harin Padma-Nathan
|
|||
Title: Chief Executive
Officer
|
|||
(Principal
Executive Officer)
|
May
14, 2010
|
By:
|
/s/ Steven
Gershick
|
|
Name: Steven
Gershick
|
|||
Title: Chief
Financial Officer
|
|||
(Principal
Financial and Accounting Officer)
|
34
EXHIBIT
INDEX
Form
10-Q
Three
and six months ended March 31, 2010
Exhibit
Number
|
|
Description
|
31.1
|
Certification
of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act.
|
|
31.2
|
Certification
of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act.
|
|
32.1
|
Certifications
pursuant to Section 906 of the Sarbanes-Oxley
Act.
|
35