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EX-31.2 - EXHIBIT 31.2 - Medisun Precision Medicine Ltd.ex31_2apg.htm
EX-31.1 - EXHIBIT 31.1 - Medisun Precision Medicine Ltd.ex31_1apg.htm
EX-32.1 - EXHIBIT 32.1 - Medisun Precision Medicine Ltd.ex32_1apg.htm
EX-32.2 - EXHBIIT 32.2 - Medisun Precision Medicine Ltd.ex32_2apg.htm



 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-K


[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal years ended December 31, 2015


or


[   ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the transition period from ______to ______


Commission File Number:  000-54907


ACCUREXA INC.

(Exact name of registrant as specified in its charter)


Delaware

47-2999657

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

 

113 Barksdale

Newark, DE 19711

(Address of principal executive offices, including Zip Code)

 

(302) 709-1822

(Registrant’s telephone number, including area code)


Securities registered under Section 12 (b) of the Exchange Act:  None


Securities registered under Section 12 (g) of the Exchange Act:  Common stock, $0.0001 par value (the “Common Stock”)


Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     [   ] Yes            [X] No


Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    [   ] Yes            [X] No


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.     [X] Yes            [   ] 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 (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   [X] Yes            [   ] No


Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    [X] 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

[   ] (Do not check if a smaller reporting company)

Smaller reporting company

[X]


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).      [   ] Yes            [X] No


There were a total of 8,580,816 shares of the registrant’s common stock outstanding as of March 30, 2016.



DOCUMENTS INCORPORATED BY REFERENCE


None.



2



Table of Contents

 

 

Page

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

4

 

 

 

 

 

PART I

 

 

 

5

 

 

 

 

 

 

 

 

 

Item 1.

 

Business

 

5

 

 

 

 

 

 

 

 

 

Item 1A.

 

Risk Factors

 

17

 

 

 

 

 

 

 

 

 

Item 1B.

 

Unresolved Staff comments

 

32

 

 

 

 

 

 

 

 

 

Item 2.

 

Properties

 

32

 

 

 

 

 

 

 

 

 

Item 3.

 

Legal Proceedings

 

32

 

 

 

 

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

32

 

 

 

 

 

 

 

PART II

 

 

 

32

 

 

 

 

 

 

 

 

 

Item 5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

32

 

 

 

 

 

 

 

 

 

Item 6.

 

Selected Financial Data

 

35

 

 

 

 

 

 

 

 

 

Item 7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

35

 

 

 

 

 

 

 

 

 

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

 

40

 

 

 

 

 

 

 

 

 

Item 8.

 

Financial Statements and Supplementary Data

 

41

 

 

 

 

 

 

 

 

 

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

37

 

 

 

 

 

 

 

 

 

Item 9A.

 

Controls and Procedures

 

37

 

 

 

 

 

 

 

 

 

Item 9B.

 

Other Information

 

39

 

 

 

 

 

 

 

PART III

 

 

 

39

 

 

 

 

 

 

 

 

 

Item 10.

 

Directors, Executive Officers of the Registrant

 

39

 

 

 

 

 

 

 

 

 

Item 11.

 

Executive Compensation

 

42

 

 

 

 

 

 

 

 

 

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

43

 

 

 

 

 

 

 

 

 

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

 

44

 

 

 

 

 

 

 

 

 

Item 14.

 

Principal Accountant Fees and Services

 

44

 

 

 

 

 

 

 

PART IV

 

 

 

45

 

 

 

 

 

 

 

 

 

Item 15.

 

Exhibits and Financial Statement Schedules

 

45

 

 

 

 

 

 

 

SIGNATURES

 

 

 

47



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CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS


This annual report on Form 10-K and other reports that we file with the SEC contain statements that are considered forward-looking statements.  These forward-looking statements are not historical facts and can be identified by use of terminology such as believe, hope, may, anticipate, should, intend, plan, will, expect, estimate, project, positioned, strategy and similar expressions. You should be aware that these forward-looking statements are subject to risks and uncertainties that are beyond our control. For a discussion of these risks, you should read this entire annual report on Form 10-K carefully, especially the risks discussed under Risk Factors. The assumptions underlying the forward looking statements included in this annual report on Form 10-K do not guarantee our future performance, and actual results could differ from those contemplated by these forward looking statements. The assumptions used for purposes of the forward-looking statements specified in the following information represent estimates of future events and are subject to uncertainty as to possible changes in economic, legislative, industry, and other circumstances. As a result, the identification and interpretation of data and other information and their use in developing and selecting assumptions from and among alternatives require the exercise of judgment. To the extent that the assumed events do not occur, the outcome may vary substantially from anticipated or projected results. In the light of these risks and uncertainties, there can be no assurance that the results and events contemplated by the forward-looking statements contained in this annual report on Form 10-K will in fact transpire. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. We do not undertake any obligation to update or revise any forward-looking statements.


We are an "emerging growth company" under applicable Securities and Exchange Commission rules and are subject to reduced public company reporting requirements. See "Implications of Being an Emerging Growth Company" and "Risk Factors".



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PART I


ITEM 1.  BUSINESS


Introduction


We are a development stage company. We were incorporated in Delaware on August 29, 2012.  We are focused on developing novel neurological therapies to be directly delivered into specific regions of the brain.  As our first development program, we are developing our ACX-31 program to deliver two chemotherapy drugs, temozolomide in combination with BCNU, locally to brain tumor sites. Our ACX-31 program is based on an issued patent licensed from Accelerating Combination Therapies LLC which is co-owned by Dr. Henry Brem, Director of the Neurosurgery Department at Johns Hopkins University (“ACL License”). We are collaborating in the development of our ACX-31 program with Dr. Henry Brem who built one of the largest brain tumor research and treatment centers in the world at Johns Hopkins University.  Dr. Robert Langer, who is the David H. Koch Institute Professor at MIT and the most cited engineer in history, is also advising us in the development of our ACX-31 program. Both Dr. Brem and Dr. Langer are pioneers in the development of local drug delivery treatments, and invented and developed Gliadel® which is a FDA approved, local chemotherapy for the treatment of glioblastoma multiforme.  We entered into an agreement with the Yissum Research Development Company of The Hebrew University of Jerusalem Ltd. (“Yissum”) to develop and supply a polymeric formulation of a combination of temozolomide and BCNU.  Professor Avi Domb of The Hebrew University of Jerusalem had previously worked with Dr. Langer on the formulation of Gliadel® and leads the development efforts provided by Yissum.


As our second development program, we are developing our BranchPoint device that can potentially deliver therapeutics through the radial deployment of a flexible delivery catheter to large and anatomically complex brain targets through a single initial brain penetration.  Our BranchPoint device was originally developed at the University of California, San Francisco (UCSF) with $1.8 million in funding from the California Institute for Regenerative Medicine (CIRM).  It is based on a neurosurgical delivery platform that we have exclusively licensed from UCSF.  It can potentially enable new approaches to neurological therapy and be modified for the delivery of a broad range of novel therapeutics, such as stem cells to treat neurodegenerative diseases, chemotherapeutics to brain tumors and gene therapy vectors.  A 510(k) application was submitted to the FDA (U.S. Food and Drug Administration) on June 15, 2015.  Furthermore, UCSF requested a pre-IND meeting with the FDA on November 4, 2015 to discuss a collaborative program between UCSF and us to evaluate a combined stem cell/gene transfer candidate therapeutic CNS10-NPC GDNF for the treatment of Parkinson's Disease using our BranchPoint delivery device. UCSF received a written response from the FDA on March 21, 2016 which provided guidance on the non-clinical activities that are necessary to enable the filing of a future potential IND application. CNS10-NPC are human fetal neural stem cells that express Glial-Derived Neurotrophic Factor (GDNF) in the treatment of Parkinson's Disease, and are expected to be supplied by the Cedars-Sinai Regenerative Medicine Institute in support of IND (Investigational New Drug) enabling studies.


We cannot assure you that we will be successful with our development activities.  We have an office at 113 Barksdale, Newark, Delaware 19711 and our telephone number is (302) 709-1822.


Implications of Being an Emerging Growth Company


As a company with less than $1.0 billion in revenue, we qualify as an "emerging growth company" as defined in the Jumpstart our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other burdens that are otherwise applicable generally to public companies. These provisions include:


·

exemption from the auditor attestation requirement on the effectiveness of our internal controls over financial reporting;

·

reduced disclosure about the company's executive compensation arrangements; and

·

no requirements for non-binding advisory votes on executive compensation or golden parachute arrangements.


We may take advantage of these provisions until December 31, 2017 or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company if we have more than $1.0 billion in annual revenues, have more than $700 million in market value of our capital stock held by non-affiliates, or issue more than $1.0 billion of non-convertible debt over a three-year period. We may choose to take advantage of some but not all of these reduced burdens.  To the extent that we take advantage of these reduced burdens, the information that we provide stockholders may be different than you might get from other public companies in which you hold equity interests.




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Section 107(b) of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other companies.


Development Pipeline


We are a development stage company and focused on developing novel neurological therapies to be directly delivered into specific regions of the brain.  We are currently developing two programs in our pipeline.

 

1.

We are developing our ACX-31 program to deliver two chemotherapy drugs, temozolomide in combination with BCNU, locally to brain tumor sites.  Temozolomide is a generic, approved chemotherapy drug that is indicated for the treatment of adult patients with newly diagnosed glioblastoma multiforme concomitantly with radiotherapy and then as maintenance treatment.  Local delivery of temozolomide has been demonstrated to be superior to oral administration in an animal model.  In the scientific publication at Johns Hopkins University Brem S, Tyler BM, Li K, Pradilla G, Legnani F, Caplan J, et al. Local delivery of temozolomide by biodegradable polymers is superior to oral administration in a rodent glioma model. Cancer Chemother Pharmacol 2007;60:643-50, it was demonstrated that that intracranial concentrations of temozolomide increased threefold compared with orally delivered temozolomide. In a rodent glioma model, animals treated with a single temozolomide polymer (50% w/w) had a median survival of 28 days (P < 0.001 vs. controls, P < 0.001 vs. oral treatment), whereas animals treated with oral temozolomide had a median survival of 22 days compared to control animals (median survival of 13 days). Animals treated with two temozolomide polymers (50% w/w) had a median survival of 92 days (P < 0.001 vs. controls, P < 0.001 vs. oral treatment). The percentage of long-term survivors (LTS) for groups receiving intracranial temozolomide ranged from 25 to 37.5%; there were no LTS with oral temozolomide treatment. Animals treated with radiation therapy (XRT) and intracranial temozolomide (median survival not reached, LTS = 87.5%) demonstrated improved survival compared to those with intracranial temozolomide alone (median survival, 41 days; LTS = 37.5%), or oral temozolomide and XRT (median survival, 43 days, LTS = 38.9%).  BCNU (carmustine) is a chemotherapy drug that is contained in Gliadel®, a biodegradable polymer that is implanted locally into the resection cavity after surgical removal of a brain tumor and is indicated for the treatment of newly diagnosed and recurrent glioblastoma multiforme.  In another scientific publication at Johns Hopkins University Renard Recinos V, Tyler BM, Brem H, et al. Combination of intracranial temozolomide with intracranial carmustine improves survival when compared with either treatment alone in a rodent glioma model. Neurosurgery 2010; 66:530-537, it was shown that the additive effect of combined delivery of local temozolomide with local BCNU, especially in combination with radiotherapy, was significantly more effective than delivery of either drug alone or one systemically and one locally, either with or without radiation. Groups treated with combination of local temozolomide, local BCNU and radiation therapy had 75% long-term survivors.


2.

We are developing our BranchPoint device that can potentially deliver therapeutics through the radial deployment of a flexible delivery catheter to large and anatomically complex brain targets through a single initial brain penetration. It can potentially enable new approaches to neurological therapy and be modified for the delivery of a broad range of novel therapeutics, such as stem cells to treat neurodegenerative diseases, chemotherapeutics to brain tumors and gene therapy vectors. A 510(k) application was submitted to the FDA on June 15, 2015.  Furthermore, UCSF requested a pre-IND meeting with the FDA on November 4, 2015 to discuss a collaborative program between UCSF and us to evaluate a combined stem cell/gene transfer candidate therapeutic CNS10-NPC GDNF for the treatment of Parkinson's Disease using our BranchPoint delivery device. UCSF received a written response from the FDA on March 21, 2016 which provided guidance on the non-clinical activities that are necessary to enable the filing of a future potential IND application. CNS10-NPC are human fetal neural stem cells that express Glial-Derived Neurotrophic Factor (GDNF) in the treatment of Parkinson's Disease, and are expected to be supplied by the Cedars-Sinai Regenerative Medicine Institute in support of IND enabling studies.


The development of our programs is estimated to cost approximately $5-7 million over 4-5 years as a standalone company. However, we may seek to pursue a strategic collaboration partnership which may accelerate the development timeline, share expenses, and also provide access to ex-US markets.  The development of our programs may also cost substantially more than $5-7 million and may require a substantially longer development timeline than 4-5 years.  Higher development expenses and delays may be caused by but are not limited to sub-optimal product performance and continued product optimization cycles, adverse clinical results and repeat of clinical trials, or delays of an FDA approval.  In such a scenario, we may not be able to secure sufficient funding or a strategic collaboration partnership and could cease operations under such circumstances.



6




We are actively seeking additional capital investment.  We cannot assure you that we will have access to the necessary funding or that if available it will be available on terms that are not dilutive to our present shareholders. If the funding is not available, we may have to severely curtail or cease operations.


ACL License


On August 11, 2015 (“Effective Date”), we entered into an exclusive license agreement (“ACL License”) with Accelerating Combination Therapies LLC (“ACL”) in regards to the exclusive licensing of the issued U.S. Patent No. 8,895,597 B2 Combination of Local Temozolomide with Local BCNU (“Patent Rights”).  ACL is beneficially owned by the original Patent Rights holders and Inventors Violette Renard Recinos, Betty Tyler, Sarah Brem Sunshine and Henry Brem (“Inventors”) who assigned the Patent Rights to ACL.  Henry Brem is the Harvey Cushing Professor of Neurosurgery, Director of the Department of Neurosurgery, and Neurosurgeon-in-Chief at The Johns Hopkins University, and invented and developed Gliadel® wafers to deliver local chemotherapy to brain tumors.  Betty Tyler is Associate Professor of Neurosurgery at Johns Hopkins University.  Violette Renard Recinos is a Neurosurgeon at the Cleveland Clinic.  The Patent Rights relate to formulations for chemotherapy, especially of brain tumors such as gliomas.  They claim a composition for treating an individual with a solid tumor comprising a combination of BCNU and temozolomide in a pharmaceutically acceptable polymeric carrier for sustained local administration of an effective amount of BCNU and temozolomide to reduce tumor size or prolong survival of the individual with greater efficacy or reduced systemic side effects as compared to administration of either BCNU or temozolomide systemically (“Invention”).  Under the ACL License, we obtained rights to develop and commercialize the Patent Rights, and have been granted the right to sublicense to third parties. The ACL License requires us to initiate a first human clinical trial within 30 months and to pay ACL royalties and other consideration which includes (i) a license issue fee of 1,000,000 shares of the Company’s common stock to be issued within 6 months after the Effective Date; (ii) reimbursement of past patent expenses of $19,392; (iii) license maintenance fees of $8,000 annually until the first commercial sale; (iv) running royalties of 4% of net sales; and (v) certain minimum annual royalties and milestone payments.  The ACL License remains in effect from the Effective Date until expiration of the Patent Rights.  For a full description of payment obligations and the ACL License itself, the license agreement is filed and can be reviewed as an exhibit to the Form 8-K as filed on August 12, 2015.


ACL Patent


Our ACL License includes U.S. Patent No. US 8,895,597 B2, Combination of Local Temozolomide with Local BCNU which is summarized as follows.  The patent can be accessed under the following link:

https://www.google.com/patents/US8895597


Background of the Invention:


New strategies are needed to improve the outcome of patients with adult glioblastoma multiforme (GBM). In addition to surgical resection (Rostomily et al. Baillieres Clin Neurol 5:345-369, 1996) and radiotherapy (Castro et al. Pharmacol Ther 98:71-108, 2003), numerous chemotherapeutic agents have been used to treat this disease (Parney et al. Cancer J 9:149-156, 2003), but limitations including poor central nervous system drug penetration and dose limiting toxicities have restricted their use (Rautioa et al. Curr Pharm Des 10:1341-1353, 2004). Temozolomide (TMZ), given orally as Temodar®, has been shown in randomized, placebo controlled, multi-institutional clinical trials, to be effective in prolonging survival and has received FDA approval for the treatment of newly diagnosed (Stupp et al. J Clin Oncol 20:1375-1382, 2002; Stupp et al. N Engl J Med 352:987-996, 2005) or recurrent (Yung et al. J Clin Oncol 17:2762-2771, 1999) malignant glioma. TMZ is an imidazotetrazine second-generation alkylating agent which, when given with radiation treatment has been shown to extend median survival 2.5 months compared to radiation alone (Stupp 2005) (Temodar® dose of 150-200 mg/m2). Higher doses of Temodar®, which might increase efficacy, are associated with dose-limiting myelosuppression including severe leukopenia and thrombocytopenia (Stupp 2002, 2005; Yung 1999; Gerber et al. Neuro Oncol 9:47-52, 2007). Research efforts have been directed towards local delivery of agents to the site of the tumor to achieve maximal drug concentrations while limiting toxicity. Recent advances in the local delivery of chemotherapeutic agents have shown encouraging results in the treatment of patients with malignant gliomas. See Attenello 2008; Soffietti et al. Anticancer Drugs 18:621-632, 2007; Raza et al. Expert Opin Biol Ther 5:477-494, 2005. While a number of therapeutic clinical trials are currently underway, there continues to be a limited number of agents in the armamentarium to effectively combat this disease. Gliadel®, a biodegradable polymer containing the alkylating agent Carmustine (BCNU), is implanted locally into the surgical bed at the time of high grade glioma resection, and has been shown to increase survival in both newly diagnosed (Brem et al. J Neurooncol 26:111-123, 1995; Westphal et al. Neuro Oncol 5:79-88, 2003; Valtonen et al. Neurosurgery 41:44-48, 1997; Westphal et al. Acta Neurochir (Wien) 148:269-275, 2006) and recurrent (Brem et al. Lancet 345:1008-1012, 1995) malignant gliomas. Alklyating agents, such as BCNU and TMZ, have clearly shown effective dose-



7



response cytotoxicity for many glioma cell lines in vitro (Raza 2005; Wedge Anticancer Drugs 8:92-97, 1997). The maximal doses for each drug, however, are limited due to dose dependent systemic toxicity. To this end, Gliadel® is used to maximize local concentrations of BCNU and minimize systemic exposure. Based on similar principles and on the fact that systemic toxicity has been observed as a dose limiting factor for TMZ (Stupp 2005; Gerber 2007; Brock et al. Cancer Res 58:4363-4348, 1998), it has been shown in rodents that intracranial delivery of TMZ has improved efficacy when compared to the systemic administration of TMZ (Brem 2007).


Recent clinical evidence has suggested that treatment with a combination of modalities consisting of surgical excision, locally delivered BCNU, concurrent and adjuvant systemic TMZ, and radiotherapy is safe and effective, and provides improved survival compared to each treatment group alone. See Menei 2008; McGirt 2010; La Rocca 2008; Gururangan et al. Neuro Oncol 3:246-250, 2001; Pan et al. J Neurooncol 88:353-357, 2008. These clinical advances in glioma therapy, with multimodality treatments, have led to an improvement in expected survival for GBM from 9 to 20 months (Menei “Biodegradable carmustine-impregnated wafers (Gliadel®): the French experience”. Presented at the 8th Congress of the European Association of Neurooncology, Barcellona, Spain, Sep. 12-14, 2008; McGirt “Gliadel (BCNU) wafer plus concomitant temozolomide therapy after primary resection of glioblastoma multiforme” J Neurosurg (2010 in press); La Rocca “A phase 2 study of multi-modal therapy with surgery, carmustine (BCNU) wafer, radiation therapy (RT), and temozolomide (TMZ) in patients (pts) with newly diagnosed supratentorial malignant glioma (MG)” Presented at the 8th Congress of the European Association of Neurooncology, Barcellona, Spain, Sep. 12-14, 2008; Attenello et al. Ann Surg Oncol 15:2887-2893, 2008.


Although the survival time has increased from nine to twenty months, on average, there remains a critical need for even greater prolongation of survival, preferably while maintaining the best possible quality of life.


It is therefore an object of the present invention to provide compositions providing significantly great efficacy in treating tumors, with far fewer side effects that limit the dosage that can be used, and cause patient discomfort.


Summary of the Invention:


The additive effect of combined intracranial carmustine (“BCNU”) with intracranial temozolomide (“TMZ”), and particularly in combination with radiation (“XRT”), in the treatment of two rat intracranial glioma models, the 9L gliosarcoma and the F98 glioma, demonstrates that local, preferably sustained, delivery of both drugs, especially in combination with radiation, is far more effective than delivery of either drug alone or one systemically and one locally, either with or without radiation. TMZ and BCNU were incorporated into biodegradable polymer discs that were implanted in F344 rats bearing established intracranial tumors useful as glioma models, the 9L gliosarcoma and the F98 glioma. In the 9L rodent glioma model, groups treated with the combination of local TMZ, local BCNU, and radiation (XRT) had 75% long-term survivors (LTS), which was superior to the combination of local TMZ and local BCNU (median survival of 95 days, LTS=25%) and the combination of oral TMZ, local BCNU and XRT (median survival of 62 days, LTS=12.5%). In order to simulate the effect of this treatment in chemo-resistant gliomas, a second rodent model was used with the F98 glioma, a cell line relatively resistant to alkylating agents due to expression of high levels of alkyltransferase, an enzyme that deactivates alkylating agents and is the major mechanism of resistance of gliomas. The triple therapy showed a significant improvement in survival when compared to controls (p=0.0004), local BCNU (p=0.0043), oral TMZ (p=0.0026), local TMZ (p=0.0105), and the combinations of either BCNU and XRT (p=0.0378) or oral TMZ and local BCNU (p=0.0154).


The survival of tumor-bearing animals in the 9L and F98 glioma models was improved with the local delivery of BCNU and TMZ, especially when combined with XRT, when compared with either treatment alone and with the clinically used modality of oral TMZ, local BCNU and XRT.


Our BranchPoint Device


Effective and safe delivery of therapeutics to the brain is often limited by the blood-brain barrier and lack of accurate, anatomic targeting of the intended site in the brain.  Our BranchPoint device is a single platform that allows the delivery of multiple novel therapeutics under "real-time" MRI guidance and can potentially deliver therapeutics through the radial deployment of a flexible delivery catheter to large and anatomically complex brain targets through a single initial brain penetration. Clinicians can "tailor" therapeutic delivery to individual patient anatomy and specific disease targets, which may enhance the efficacy of therapies.  The BranchPoint device may also give surgeons more precise control of the volume of therapeutics delivered and may ensure that the therapeutics delivered into the brain stay in the brain, avoiding the problem of reflux out to the brain surface. This modern and "easy to use" platform technology allows "real-time" monitoring of therapeutic delivery under interventional MRI guidance (iMRI), which can improve the accuracy of delivery, reduce the risk of complications, and increase patient safety. Currently



8



available neurosurgical devices can deliver a straight, rigid needle to single brain locations. However, this basic strategy limits the size and "shape" of the brain treatment area. In order to deliver to larger and more complex brain targets, the surgeon needs to penetrate the brain multiple times with such straight needles, which may increase the risk of bleeding and stroke, and may reduce the efficacy of therapeutics due to reflux, whereby therapeutics injected using straight needles can flow back out to the brain surface along the needle's path. The BranchPoint device was originally developed at UCSF with $1.8 million in funding from the California Institute for Regenerative Medicine (CIRM). It is based on a neurosurgical delivery platform that can enable new approaches to neurological therapy and be modified for the delivery of a broad range of novel therapeutics, such as stem cells to treat neurodegenerative diseases, chemotherapeutics to brain tumors and gene therapy vectors.  


UCSF License


On September 16, 2014 (“Effective Date”), we entered into an exclusive license agreement (“UCSF License”) with the Regents of the University of California acting through its Office of Innovation, Technology, and Alliances, University of California San Francisco (“UCSF”) in regards to the exclusive licensing of a medical stereotactic device for the delivery of therapeutics to the human brain, characterized as “Microinjection Brain Catheter”, a.k.a. BranchPoint device ("Invention"). The invention was made in the course of research at UCSF by Drs. Daniel A. Lim, Matthew Silvestrini, and Tejal A. Desai, (collectively, the “Inventors”) and claimed in U.S. Patent Application No. PCT/US2013/052301, Microinjection Catheter; UC Case No. SF2012-063 (“Patent Rights”). The Invention was developed under funding from the California Institute for Regenerative Medicine ("CIRM") and sponsored in part by the National Institutes of Health. The UCSF License remains in effect from the Effective Date until expiration or abandonment of the Patent Rights.


Under the UCSF License, we are obligated to develop, manufacture, market and sell the invention, and have been granted the right to sublicense to third parties. Specifically, the UCSF License requires us to: (i) market the Invention for research use within three (3) months from the Effective Date; (ii) sell the Invention for research use within 12 months of the Effective Date; (iii) file and finalize any necessary regulatory documentation for FDA 510(k) approval within 6 months after the 510(k) application has been filed; (iv) market the Invention for clinical use within 6 months of receiving market approval from FDA or equivalent foreign regulatory agency; (v) sell the Invention for clinical use within 12 months of receiving market approval from FDA or equivalent foreign regulatory agency; (vi) within 1 year of the Effective Date, raise at least $750,000 in funding or revenue; (vii) market the Invention in the United States within 6 months of receiving approval from the FDA; and (viii) use commercially reasonable efforts to fill the market demand for the Invention following commencement of marketing. We are also required to pay UCSF 35% of our net sales or any sublicense royalty as defined therein, and a non-refundable license issue fee of $50,000.  For a full description of further payment obligations and the UCSF License itself, the license agreement was filed as exhibit 10.1 to the Form 8-K as of September 17, 2014.


UCSF Patent


Our UCSF License includes U.S. Patent Application No. PCT/US2013/052301, Microinjection Catheter; UC Case No. SF2012-063 which is summarized as follows.  The patent application can be accessed under the following link:

http://www.google.com/patents/WO2014018871A1?cl=en


Background of the Invention:


Cell therapy has shown great promise in the treatment of a wide range of neurological diseases, including Parkinson's disease (PD), Huntington's disease, and stroke. To date, cell therapies have been delivered to the human brain with a stereotactically inserted straight cannula. While effective for small animal experimental models, straight cannula transplantation strategies present significant challenges when scaled-up for human therapy. The human brain is 800 to 2300 times larger than that of rodents used for preclinical research. With a straight cannula, cell delivery to the larger target volumes of human brain requires several independent brain penetrations. Some patients with PD have received up to 16 separate penetrations for transplantation to the putamen. Every transcortical brain penetration injures normal brain tissue and threatens hemorrhagic stroke.


In one approach to translational scale -up, very large numbers of cells can be delivered to a single location or along a short segment of the cannula tract. Unfortunately, the implantation of a large mass of cells within a confined location can severely impair graft viability, resulting in necrosis at the center of the transplant.


Another approach has been to insert a large host catheter, which is comprised of a number of internal passages, or lumens for the advancement of micro-catheters. These internal passages within the host catheter exit at specified distal orifice locations around the distal end to allow the delivery of a media to a desired target area. Using this approach, the host catheter is inserted into the



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center of the desired target, or delivery area in the patient. Then, the micro-catheters are inserted into the various lumens, where multiple doses can be delivered to each of the distal orifice locations along the elongate member. This method allows a larger target area to be covered without the need for multiple cranial penetrations. The introduction of a relatively large host catheter displaces a larger amount of tissue and the use of multiple micro catheters makes the ability to deliver a metered injection more difficult due to their variable lengths. A problem with at least some prior systems is that the delivered media may not stay at the desired delivery site. In a phenomenon called reflux, a portion of the media may flow back up the penetration shaft, significantly reducing the amount of media that remains at the treatment site. Larger injection volumes worsen the reflux of infused materials along the penetration tract making cell dosing unpredictable in terms of numbers as well as final graft location.


In most clinical trials, a syringe is used to deliver cells through the inserted cannula. Unless the syringe is kept in constant motion, the cells naturally sediment to the most dependent location, usually the end attached to cannula. Thus, the first partial injection volume from a syringe may contain far more cells than those dispensed later, further contributing to unpredictable variability of cell dosing. The use of a syringe having a larger diameter than the catheter main lumen may make it difficult to control the volume of each dose, and may subject the cells to shear and other mechanical forces that result in the decrease of cell viability for cell transplantation.


Brief Summary of the Invention:


An insertion device for delivering media inside a patient includes an outer guide tube having a closed end configured for insertion into patient tissue. The outer guide tube defines a side port in a wall of the guide tube near the closed end. The insertion device also includes an inner guide tube nested within the outer guide tube and movable axially within the outer guide tube. The inner guide tube includes a deflector at an end within the outer guide tube. The device also includes a catheter nested within the inner guide tube and movable axially within the inner guide tube. The catheter has a dispensing end that defines one more dispensing holes for dispensing the media. The deflector of the inner guide tube is positionable in relation to the opening of the outer guide tube such that it deflects the dispensing end of the catheter outward through the opening in the outer guide tube when the catheter is advanced axially within the inner guide tube.


Termination of UAMS License


On December 15, 2012 (“Effective Date”), we executed an Exclusive License Agreement (“UAMS License”) with the Board of Trustees of the University of Arkansas (“UofA”) acting on behalf of the University of Arkansas for Medical Sciences (“UAMS”) to commercially develop certain patents and patent applications owned by UAMS throughout the world for the life of the patents.  Our UAMS License includes three patents (i) U.S. Patent Application Serial No. 12/334,217, Device and Method for In Vivo Flow Cytometry Using the Detection of Photoacoustic Waves; UAMS ID No. 2008-16; (ii) U.S. Patent Application Ser. No.: 12/945,576 Device and Method for In Vivo Noninvasive Magnetic Manipulation of Circulating Objects in BioFlows; UAMS ID No. 2008-16 CIP; (iii) U.S. Patent Application Ser. No.: 13/253,767 Device and Method for In Vivo Detection of Clots Within Circulatory Vessels; UAMS ID No. 2008-16 CIP2.  Our three licensed patents cover a method for in vivo flow cytometry using the detection of photoacoustic waves by which targeted objects moving in the bloodstream absorb the energy level of a pulsed laser, and then either emit an acoustic wave that can be detected by an ultrasound transducer, or can be destroyed if a sufficient laser energy level is absorbed.  The license agreement was filed as exhibit 10.2 to the Form 10 as of February 27, 2013.


On April 18, 2013, we executed a Research Agreement (“Research Agreement”) with the Board of Trustees of the UofA acting on behalf of the UAMS and its employees Laura Hutchins, M.D. and Vladimir Zharov, Ph.D. in connection with the UAMS License under which we would sponsor research for the development of a prototype for the photoacoustic, in vivo real-time detection of circulating melanoma cells and a clinical trial in melanoma patients.  The Research Agreement was filed as exhibit 10.5 to the Company’s Form 10, Amendment No. 2 as of April 23, 2013.


On or about February 3, 2014, as previously disclosed in our filing on Form 8-K on February 24, 2014, we confirmed in the normal course of events that a portion of one of the three licensed patent applications, U.S. Patent Application Serial No. 12/334,217, Device and Method for In Vivo Flow Cytometry Using the Detection of Photoacoustic Waves; UAMS ID No. 2008-16, had been rejected by the United States Patent and Trademark Office and U.S. Patent Application Serial No. 12/334,217 was then abandoned prior to the Effective Date of our UAMS License.  The basis for the rejection was primarily that the rejected portion of the application had previously been published in a scientific journal by the inventor Prof. Vladimir Zharov, an employee of the UAMS, prior to the filing of the application and therefore was not patentable.


On August 18, 2015, we executed a License Termination Agreement (“Termination Agreement”) with the Board of Trustees of the UofA acting for and on behalf of the UAMS under which both parties terminated the UAMS License and Research



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Agreement in order to be relieved of all liability for future payments of any consideration due under Article 6.1 of the UAMS License and Article 1 of the Research Agreement, and the UofA has agreed to terminate the UAMS License and Research Agreement and release us in accordance with the terms thereof.  For a full description of the Termination Agreement, a copy of which is filed and can be reviewed as Exhibit 10.18 to the Form 8-K as filed on August 20, 2015.


Government Regulation of Pharmaceutical Products


The FDA (U.S. Food and Drug Administration) and comparable regulatory agencies in state and local jurisdictions and in foreign countries impose substantial requirements upon the clinical development, manufacture and marketing of pharmaceutical products. These agencies and other federal, state, and local entities regulate research and development activities and the testing, manufacture, quality control, safety, effectiveness, labeling, storage, recordkeeping, tracking, approval, import, export, advertising, and promotion of our products.


The process required by the FDA before product candidates may be marketed in the United States generally involves the following:

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nonclinical laboratory and animal tests, including some that must be conducted in accordance with Good Laboratory Practices;

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submission of an IND, which must become effective before clinical trials may begin;

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adequate and well-controlled human clinical trials to establish the safety and efficacy of the proposed drug candidate for its intended use;

·

pre-approval inspection of manufacturing facilities and selected clinical investigators for their compliance with Good Manufacturing Practices, or cGMP, and Good Clinical Practices; and

·

FDA approval of an NDA to permit commercial marketing for particular indications for use.


The testing and approval process requires substantial time, effort, and financial resources. Prior to commencing the first clinical trial with a product candidate, we must submit an IND to the FDA. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA, within the 30-day time period, raises safety concerns or questions about the conduct of the clinical trial by imposing a clinical hold. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. Submission of an IND may not result in FDA authorization to commence a clinical trial. A separate submission to the existing IND must be made for each successive clinical trial conducted during product development. Further, an independent institutional review board for each medical center proposing to conduct the clinical trial must review and approve the plan for any clinical trial and its informed consent form before the clinical trial commences at that center. Regulatory authorities or an institutional review board or the sponsor may suspend a clinical trial at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk. Some studies also include a data safety monitoring board, which receives special access to unblinded data during the clinical trial and may halt the clinical trial if it determines that there is an unacceptable safety risk for subjects or other grounds, such as no demonstration of efficacy.


In general, for purposes of NDA approval, human clinical trials are typically conducted in three sequential phases that may overlap.


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Phase 1: Studies are initially conducted to test the product candidate for safety, dosage tolerance, absorption, metabolism, distribution, and excretion in healthy volunteers or patients.

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Phase 2: Studies are conducted with groups of patients with a specified disease or condition to provide enough data to evaluate the preliminary efficacy, optimal dosages and dosing schedule, and expanded evidence of safety. Multiple Phase 2 clinical trials may be conducted to obtain information prior to beginning larger and more expensive Phase 3 clinical trials.

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Phase 3: These clinical trials are undertaken in larger patient populations to further evaluate dosage, to provide statistically significant evidence of clinical efficacy, and to further test for safety in an expanded patient population at multiple clinical trial sites. These clinical trials are intended to establish the overall risk/benefit ratio of the product and provide an adequate basis for product labeling. These trials may be done globally to support global registrations.


The FDA generally requires that sponsors successfully complete two Phase 3 studies to obtain approval for a new drug, though in certain circumstances a single Phase 3 study is sufficient.  The FDA may require, or companies may pursue, additional clinical trials after a product is approved. These so-called Phase 4 studies may be made a condition to be satisfied after approval. The results of Phase 4 studies can confirm the effectiveness of a product candidate and can provide important safety information.




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Concurrent with clinical trials, companies usually complete additional animal studies and must also develop additional information about the chemistry and physical characteristics of the product candidate, as well as finalize a process for manufacturing the product in commercial quantities in accordance with cGMP requirements. The manufacturing process must be capable of consistently producing quality batches of the product candidate and, among other things, must develop methods for testing the identity, strength, quality and purity of the final product. Additionally, appropriate packaging must be selected and tested, and stability studies must be conducted to demonstrate that the product candidate does not undergo unacceptable deterioration over its shelf life.


ANDA Approval Process


The Drug Price Competition and Patent Term Restoration Act of 1984, commonly known as the Hatch-Waxman Act, established abbreviated FDA approval procedures for drugs that are shown to be equivalent to proprietary drugs previously approved by the FDA through its NDA process. Approval to market and distribute these drugs is obtained by filing an abbreviated NDA, or ANDA, with the FDA. An ANDA is a comprehensive submission that contains, among other things, data and information pertaining to the active pharmaceutical ingredient, drug product formulation, specifications, and stability of the generic drug, as well as analytical methods, manufacturing process validation data, and quality control procedures. Premarket applications for generic drugs are termed abbreviated because they generally do not include preclinical and clinical data to demonstrate safety and effectiveness. Instead, a generic applicant must demonstrate that its product is bioequivalent to the innovator drug. In certain situations, an applicant may obtain ANDA approval of a generic product with a strength or dosage form that differs from a referenced innovator drug pursuant to the filing and approval of an ANDA suitability petition. The FDA will approve the generic product as suitable for an ANDA application if it finds that the generic product does not raise new questions of safety and effectiveness as compared to the innovator product. A product is not eligible for ANDA approval if the FDA determines that it is not equivalent to the referenced innovator drug, if it is intended for a different use, or if it is not subject to an approved suitability petition. However, such a product might be approved under an NDA, with supportive data from clinical trials.


505(b)(2) Approval Process


Section 505(b)(2) of the FDCA provides an alternate regulatory pathway to FDA approval for new or improved formulations or new uses of previously approved drug products. Specifically, Section 505(b)(2) permits the filing of an NDA where at least some of the information required for approval comes from studies not conducted by or for the applicant and for which the applicant has not obtained a right of reference. The applicant may rely upon the FDA's findings of safety and effectiveness for an approved product that acts as the Reference Listed Drug, or RLD. The FDA may also require 505(b)(2) applicants to perform additional studies or measurements to support the change from the RLD. The FDA may then approve the new product candidate for all or some of the labeled indications for which the referenced product has been approved, as well as for any new indication sought by the Section 505(b)(2) applicant.


Orange Book Listing


In seeking approval for a drug through an NDA, including a 505(b)(2) NDA, applicants are required to list with the FDA certain patents whose claims cover the applicant's product. Upon approval of an NDA, each of the patents listed in the application for the drug is then published in Approved Drug Products with Therapeutic Equivalence Evaluations, also known as the Orange Book. Any applicant who files an ANDA seeking approval of a generic equivalent version of a drug listed in the Orange Book or a 505(b)(2) NDA referencing a drug listed in the Orange Book must certify to the FDA that (1) no patent information on the drug product that is the subject of the application has been submitted to the FDA; (2) such patent has expired; (3) the date on which such patent expires; or (4) such patent is invalid or will not be infringed upon by the manufacture, use, or sale of the drug product for which the application is submitted. This last certification is known as a Paragraph IV certification. If the competitor has provided a Paragraph IV certification to the FDA, the competitor must also send notice of the Paragraph IV certification to the holder of the NDA for the RLD and the patent owner once the application has been accepted for filing by the FDA. The NDA holder or patent owner may then initiate a patent infringement lawsuit in response to the notice of the Paragraph IV certification. The filing of a patent infringement lawsuit within 45 days of the receipt of a Paragraph IV certification prevents the FDA from approving the application until the earlier of 30 months from the date of the lawsuit, expiration of the patent, settlement of the lawsuit, or a decision in the infringement case that is favorable to the applicant. The applicant may also elect to submit a "Section VIII" statement certifying that its proposed label does not contain, or carves out, any language regarding the patented method-of-use rather than certify to a listed method-of-use patent.




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NDA Submission and Review by the FDA


The results of product development, nonclinical studies, and clinical trials are submitted to the FDA as part of an NDA. The submission of an NDA requires payment of a substantial user fee to the FDA. The FDA may convene an advisory committee to provide clinical insight on application review questions. The FDA reviews applications to determine, among other things, whether a product is safe and effective for its intended use and whether the manufacturing controls are adequate to assure and preserve the product's identity, strength, quality, and purity. Before approving an NDA, the FDA will inspect the facility or facilities where the product is manufactured. The FDA will not approve an application unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure consistent production of the product within required specifications. Once the NDA submission has been accepted for filing, which occurs, if at all, within 60 days after submission of the NDA, the FDA's goal for a non-priority review of a 505(b)(2) NDA is ten months to complete the review process for the application and respond to the applicant, which can take the form of either a Complete Response Letter or Approval. The review process is often significantly extended by FDA requests for additional information, studies, or clarification. The FDA may delay or refuse approval of an NDA if applicable regulatory criteria are not satisfied, require additional testing or information, and/or require post-marketing testing and surveillance to monitor safety or efficacy of a product. FDA approval of any NDA submitted by us will be at a time the FDA chooses. Also, if regulatory approval of a product is granted, such approval may entail limitations on the indicated uses for which such product may be marketed. Once approved, the FDA may withdraw the product approval if compliance with pre- and post-marketing regulatory standards is not maintained or if problems occur after the product reaches the marketplace. In addition, the FDA may require Phase 4 post-marketing studies to monitor the effect of approved products, and may limit further marketing of the product based on the results of these post-marketing studies.


Post-Approval Requirements


Any products manufactured or distributed by us pursuant to FDA approvals are subject to continuing regulation by the FDA, including recordkeeping requirements and reporting of adverse experiences. Drug and biologic manufacturers and their subcontractors are required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with cGMP, which impose certain procedural and documentation requirements upon us and our third-party manufacturers. We cannot be certain that we or our present or future suppliers will be able to comply with the cGMP regulations and other FDA regulatory requirements. If our present or future suppliers are not able to comply with these requirements, the FDA may halt our clinical trials, require us to recall a product from distribution, or withdraw approval of the NDA.


The FDA closely regulates the marketing and promotion of drugs. A company can make only those claims relating to safety and efficacy, purity, and potency that are approved by the FDA. Failure to comply with these requirements can result in adverse publicity, warning letters, corrective advertising, and potential civil and criminal penalties. Physicians may prescribe legally available products for uses that are not described in the product's labeling and that differ from those tested by us and approved by the FDA. Such off-label uses are common across medical specialties. Physicians may believe that such off-label uses are the best treatment for many patients in varied circumstances. The FDA does not regulate the behavior of physicians in their choice of treatments. The FDA does, however, restrict manufacturer's communications on the subject of off-label use.


Moreover, the recently enacted Drug Supply Chain Security Act imposes new obligations on manufacturers of pharmaceutical products related to product and tracking and tracing. Among the requirements of this new legislation, manufacturers will be required to provide certain information regarding the drug products to individuals and entities to which product ownership is transferred, label drug product with a product identifier, and keep certain records regarding the drug product. The transfer of information to subsequent product owners by manufacturers will eventually be required to be done electronically. Manufacturers will also be required to verify that purchasers of the manufacturers' products are appropriately licensed. Further, under this new legislation, manufactures will have drug product investigation, quarantine, disposition, and notification responsibilities related to counterfeit, diverted, stolen, and intentionally adulterated products, as well as products that are the subject of fraudulent transactions or which are otherwise unfit for distribution such that they would be reasonably likely to result in serious health consequences or death.


Medical Device Approval Process


Medical devices are subject to extensive regulation by the FDA and other regulatory authorities in the US.  The Food, Drug, and Cosmetic Act (“FD&C Act”) and other federal and state statutes and regulations govern the research, design, development, preclinical and clinical testing, manufacturing, safety, approval or clearance, labeling, packaging, storage, record keeping, servicing, promotion, import and export, and distribution of medical devices.



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Unless an exemption applies, each medical device we wish to commercially distribute in the U.S. will require either prior premarket notification, or 510(k) clearance, or premarket approval (PMA) from the FDA.  The FDA classifies medical devices into one of three classes.  Devices requiring fewer controls because they are deemed to pose lower risk are placed in Class I or II. Class I devices are subject to general controls such as labeling, premarket notification, and adherence to the FDA’s Quality System Regulation (a set of current good manufacturing practice requirements put forth by the FDA which govern the methods used in, and the facilities and controls used for, the design, manufacture, packaging, labeling, storage, installation and servicing of finished devices) (“QSR”). Class II devices are subject to special controls such as performance standards, post-market surveillance, FDA guidelines, as well as general controls.  Some Class I and Class II devices are exempted by regulation from the premarket notification, or 510(k), clearance requirement or the requirement of compliance with certain provisions of the QSR. Devices are placed in Class III, which requires approval of a PMA application, if insufficient information exists to determine that the application of general controls or special controls are sufficient to provide reasonable assurance of safety and effectiveness, or they are life-sustaining, life-supporting or implantable devices, or the FDA deems these devices to be “not substantially equivalent” either to a previously 510(k) cleared device or to a “pre-amendment” Class III device in commercial distribution before May 28, 1976, for which PMA applications have not been required.  A PMA application must be supported by valid scientific evidence, which typically requires extensive data, including technical, pre-clinical, clinical, manufacturing and labeling data, to demonstrate to the FDA’s satisfaction the safety and effectiveness of the device. A PMA application must include, among other things, a complete description of the device and its components, a detailed description of the methods, facilities and controls used to manufacture the device, and proposed labeling. A PMA application also must be accompanied by a user fee, unless exempt. For example, the FDA does not require the submission of a user fee for a small business’s first PMA. After a PMA application is submitted and found to be sufficiently complete, the FDA begins an in-depth review of the submitted information. During this review period, the FDA may request additional information, or clarification of information already provided. Also during the review period, an advisory panel of experts from outside the FDA maybe convened to review and evaluate the application and provide recommendations to the FDA as to the approvability of the device. In addition, the FDA generally will conduct a pre-approval inspection of the manufacturing facility to ensure compliance with the QSR, which requires manufacturers to follow design, testing, control, documentation, and other quality assurance procedures.   


The FDA can delay, limit, or deny approval of a PMA application for many reasons, including:


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the product may not be safe or effective to the FDA’s satisfaction;

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the data from our pre-clinical studies and clinical trials may be insufficient to support approval;

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the manufacturing process or facilities we use may not meet applicable requirements; and

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changes in FDA approval policies or adoption of new regulations may require additional data.


If the FDA evaluations of both the PMA application and the manufacturing facilities are favorable, the FDA will either issue an approval letter, or approvable letter, which usually contains a number of conditions which must be met in order to secure final approval of the PMA. When and if those conditions have been fulfilled to the satisfaction of the FDA, the agency will issue a PMA approval letter authorizing commercial marketing of the device for certain indications. If the FDA’s evaluation of the PMA or manufacturing facilities is not favorable, the FDA will deny approval of the PMA or issue a not approvable letter. The FDA may also determine that additional clinical trials are necessary, in which case the PMA approval may be delayed while the trials are conducted and the data acquired is submitted in an amendment to the PMA. Even with additional trials, the FDA may not approve the PMA application. The PMA process can be expensive, uncertain, and lengthy and a number of devices for which FDA approval has been sought by other companies have never been approved for marketing.


New PMA applications or PMA supplements may be required for modifications to the manufacturing process, labeling and device specifications, materials or design of a device that is approved through the PMA process. PMA supplements often require submission of the same type of information as an initial PMA application, except that the supplement is limited to information needed to support any changes from the device covered by the original PMA application, and may not require as extensive clinical data or the convening of an advisory panel.


Clinical trials are almost always required to support a PMA application, and are sometimes required for a 510(k) clearance. These trials generally require submission of an application for an Investigational Device Exemption (“IDE”) to the FDA. If a trial is considered a “Non-Significant Risk” (“NSR”) study subject to abbreviated IDE regulations, a formal IDE submission is not required by the FDA.  An IDE application must be supported by appropriate data, such as animal and laboratory testing results, showing that it is safe to test the device in humans and that the testing protocol is scientifically sound.  The IDE application must be approved in advance by the FDA for a specified number of patients, unless the product is deemed a non-significant risk device and eligible for more abbreviated IDE requirements.  Generally, clinical trials for a significant risk device may begin once the



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IDE application is approved by the FDA and the study protocol and informed consent form are approved by appropriate institutional review boards (“IRBs”) at the clinical trial sites. The FDA’s approval of an IDE allows clinical testing to go forward, but does not bind the FDA to accept the results of the trial as sufficient to prove the product’s safety and effectiveness, even if the trial meets its intended success criteria.  All clinical trials must be conducted in accordance with the FDA’s IDE regulations that govern investigational device labeling, prohibit promotion of the investigational device, and specify an array of recordkeeping, reporting and monitoring responsibilities of study sponsors and study investigators.  Required records and reports are subject to inspection by the FDA. The results of clinical testing may be unfavorable or, even if the intended safety and effectiveness success criteria are achieved, may not be considered sufficient for the FDA to grant approval or clearance of a product.


Delays in receipt of or failure to receive FDA approval, the withdrawal of previously received approvals, or failure to comply with existing or future regulatory requirements would have a material adverse effect on our business, financial condition, and results of operations. Even if granted, the approvals may include significant limitations on the intended use and indications for use for which our products may be marketed.


After a device is approved or cleared and placed in commercial distribution, numerous regulatory requirements apply. These include:

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establishing registration and device listing;

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implementing QSR, which requires manufacturers to follow design, testing, control, documentation and other quality assurance procedures;

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labeling regulations, which prohibit the promotion of products for unapproved or “off-label” uses and impose other restrictions on labeling;

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medical device reporting regulations, which require that manufacturers report to the FDA if a device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if it were to recur; and

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corrections and removal reporting regulations, which require that manufacturers report to the FDA field corrections and product recalls or removals if undertaken to reduce a risk to health posed by the device or to remedy a violation of the FD&C Act that may present a risk to health.


Also, the FDA may require us to conduct post market studies or order us to establish and maintain a system for tracking our products through the chain of distribution to the patient level.  The FDA enforces regulatory requirements by conducting periodic, unannounced inspections and market surveillance.


Failure to comply with applicable regulatory requirements, including those applicable to the conduct of our clinical trials, can result in enforcement action by the FDA, which may lead to any of the following sanctions:


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warning letters;

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fines and civil penalties;

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unanticipated expenditures;

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delays in approving or refusal to approve our applications, including supplements;

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withdrawal of FDA approval;

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product recall or seizure;

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interruption of production;

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operating restrictions;

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injunctions; and

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criminal prosecution.


Our products will need to be manufactured in compliance with current Good Manufacturing Practices (“cGMP”) requirements set forth in the QSR. The QSR requires a quality system for the design, manufacture, packaging, labeling, storage, installation and servicing of marketed devices, and includes extensive requirements with respect to quality management and organization, device design, equipment, purchase and handling of components, production and process controls, packaging and labeling controls, device evaluation, distribution, installation, complaint handling, servicing, and record keeping. The FDA enforces the QSR through periodic unannounced inspections If the FDA believes that we are not in compliance with QSR, it can shut down the manufacturing operations, require recall of our products, refuse to approve new marketing applications, institute legal proceedings to detain or seize products, enjoin future violations, or assess civil and criminal penalties against us or our officers or other employees.  Any such action by the FDA would have a material adverse effect on our business.  We cannot assure you that we will be able to comply with all applicable FDA regulations.



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Non-FDA Government Regulation


The advertising of our products will be subject to both FDA and Federal Trade Commission regulations. In addition, the sale and marketing of our products will be subject to a complex system of federal and state laws and regulations intended to deter, detect, and respond to fraud and abuse in the healthcare system.  These laws and regulations restrict and may prohibit pricing, discounting, commissions and other commercial practices that may be typical outside of the healthcare business. In particular, anti-kickback and self-referral laws and regulations will limit our flexibility in crafting promotional programs and other financial arrangements in connection with the sale of our products and related services, especially with respect to physicians seeking reimbursement through Medicare or Medicaid.  These federal laws include, by way of example, the following:


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the anti-kickback statute prohibits certain business practices and relationships that might affect the provision and cost of healthcare services reimbursable under Medicare, Medicaid and other federal healthcare programs, including the payment or receipt of remuneration for the referral of patients whose care will be paid by Medicare or other federal healthcare programs;  

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the physician self-referral prohibition, commonly referred to as the Stark Law, which prohibits referrals by physicians of Medicare or Medicaid patients to providers of a broad range of designated healthcare services in which the physicians or their immediate family members have ownership interests or with which they have certain other financial arrangements;

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the anti-inducement law, which prohibits providers from offering anything to a Medicare or Medicaid beneficiary to induce that beneficiary to use items or services covered by either program;

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the Civil False Claims Act, which prohibits any person from knowingly presenting or causing to be presented false or fraudulent claims for payment by the federal government, including the Medicare and Medicaid programs; and

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the Civil Monetary Penalties Law, which authorizes the US Department of Health and Human Services (“HHS”) to impose civil penalties administratively for fraudulent or abusive acts.


Sanctions for violating these federal laws include criminal and civil penalties that range from punitive sanctions, damage assessments, money penalties, imprisonment, denial of Medicare and Medicaid payments, or exclusion from the Medicare and Medicaid programs, or both.  These laws also impose an affirmative duty on those receiving Medicare or Medicaid funding to ensure that they do not employ or contract with persons excluded from the Medicare and other government programs.


Many states have adopted or are considering legislative proposals similar to the federal fraud and abuse laws, some of which extend beyond the Medicare and Medicaid programs to prohibit the payment or receipt of remuneration for the referral of patients and physician self-referrals regardless of whether the service was reimbursed by Medicare or Medicaid.  Many states have also adopted or are considering legislative proposals to increase patient protections, such as limiting the use and disclosure of patient-specific health information.  These state laws typically impose criminal and civil penalties similar to the federal laws.


In the ordinary course of their business, medical device manufacturers and suppliers have been and are subject regularly to inquiries, investigations and audits by federal and state agencies that oversee these laws and regulations.  Recent federal and state legislation has greatly increased funding for investigations and enforcement actions, which have increased dramatically over the past several years.  This trend is expected to continue. Private enforcement of healthcare fraud also has increased, due in large part to amendments to the Civil False Claims Act in 1986 that were designed to encourage private persons to sue on behalf of the government. These whistleblower suits by private persons, known as qui tam relaters, may be filed by almost anyone, including physicians and their employees and patients, our employees, and even competitors. The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), in addition to its privacy provisions, created a series of new healthcare-related crimes.


Competition


The business for delivery of therapeutics to the human brain is highly competitive, while our industry is subject to rapid and significant technological change.  Our products must gain acceptance by the medical community and show clinically meaningful advantages in performance, and we may face competition from pharmaceutical, biotechnology and medical device companies, specialty pharmaceutical companies, generic drug companies, academic institutions, government agencies, research institutions, and others.


Many of our competitors may have significantly greater financial, technical, and human resources than we have. Mergers and acquisitions in the pharmaceutical, biotechnology and medical device industries may result in even more resources being concentrated among a smaller number of our competitors. Our commercial opportunity could be reduced or eliminated if our



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competitors develop or market products or other novel technologies that are more effective, safer, or less costly than any that will be commercialized by us, or obtain regulatory approval for their products more rapidly than we may obtain approval for ours. Our success will be based in part on our ability to identify, develop, and manage a portfolio of products that are safer, more efficacious, and/or more cost-effective than alternative therapies.


Backlog


We are in a development stage and do not have any backlog.


Proposed Sales, Marketing and Advertising


We are planning to seek commercial partners to market the products upon approval by the FDA.


Environmental Matters


Laws and regulations relating to protection of the environment have not had and should not have a material impact on our business.


Proprietary Rights


In addition to our licensed patent rights, we have entered into an employment agreement with our CEO and intend to enter into similar agreements with other key employees that require them to keep all of our proprietary information confidential.  We cannot assure that such protections will prove adequate should they be challenged in litigation.  


Research and Development


We anticipate that our expenses in 2016 will include product development, contractor expenses, and professional fees.


Employees


In addition to the employment of our CEO, we have retained approximately 5 individuals or companies as consultants or independent contractors that are involved in regulatory affairs, product development, scientific advisory and administrative functions.   


Seasonality


We do not anticipate that our business will be seasonal to any material extent.


ITEM 1A.  RISK FACTORS


Risks Relating To Our Business


You should carefully consider the risks described below before investing in our publicly traded securities. The risks described below are not the only ones facing us. Our business is also subject to the risks that affect many other companies, such as competition, technological obsolescence, labor relations, general economic conditions, geopolitical events, climate change and international operations. Additional risks not currently known to us or that we currently believe are immaterial also may impair our business operations and our liquidity.


We are in an early development stage and have limited resources and are dependent on conducting successful clinical trials and raising additional capital.


To date our activities have involved obtaining and executing license agreements with third parties, and raising sufficient funds for product development and clinical trials.  As of December 31, 2015, we had $2,011,777 cash, cash equivalents and marketable securities on hand.  This is not sufficient to complete our product development as a standalone company, which we estimate will cost approximately $5 to $7 million over the next four to five years.  We do not have any commitments for the additional capital we require and management believes that our ability to raise additional capital is highly dependent on successful product development.  We will be able to fund the current stage of product development with cash on hand, but if any stage of our product



17



development produces ambiguous or unfavorable results, it is unlikely that we will be able to raise additional funds for subsequent stages and our business will fail and our stock will become virtually worthless.


Our auditors have qualified their opinion based on our ability to continue as a going concern.


Our auditors qualified their report that we will continue as a going concern because we have no revenues, have incurred recurring losses and recurring negative cash flow from operating activities, and have an accumulated deficit.  If we are unable to raise additional funds and continue as a going concern, investors in our stock will lose their money.  


Even if our product development is successful and we raise additional capital, our shareholders may suffer substantial dilution.


We will require $5 to $7 million in additional capital to complete our clinical trials as a standalone company.  We do not have any commitments for those funds, but are dependent on conducting successful product development and seeking additional investors.  The terms of investment of any additional investors may result in substantial dilution to the holders of our common stock.


Our limited ability to protect our intellectual property, and the possibility that our technology could inadvertently infringe technology owned by others, may adversely affect our ability to compete.


We depend on a patent obtained from ACL under our ACL License and a patent application obtained from UCSF under our UCSF License to protect our intellectual property rights. A successful challenge to the ownership of our technology could materially damage our business prospects. Our competitors may assert that our technologies or products infringe on their patents or proprietary rights. We may be required to obtain from others licenses that may not be available on commercially reasonable terms, if at all. Problems with intellectual property rights could increase the cost of our proposed products or delay or preclude our new product development and commercialization.  If infringement claims against us are deemed valid, we may not be able to obtain appropriate licenses on acceptable terms or at all. Litigation could be costly and time-consuming but may be necessary to protect our technology license positions or to defend against infringement claims. UCSF has applied for a United States patent which is the subject of our UCSF License.  No assurance can be given that this patent will be granted, that, if granted, this patent will provide us with meaningful protection from infringement by others or that any patent that we may be granted will not be held by a court to infringe on the rights of others.  The loss of patent protection could materially adversely affect our business.


The patent application that we licensed from UCSF under our UCSF License could become not patentable and impact the viability of our UCSF License.


A portion of one of the three patent applications that we originally licensed under our UAMS License, U.S. Patent Application Serial No. 12/334,217, Device and Method for In Vivo Flow Cytometry Using the Detection of Photoacoustic Waves; UAMS ID No. 2008-16, had been rejected by the United States Patent and Trademark Office and U.S. Patent Application Serial No. 12/334,217 was then abandoned prior to the Effective Date of our UAMS License.  The basis for the rejection was primarily that the rejected portion of the application had previously been published in a scientific journal by the inventor Prof. Vladimir Zharov, an employee of the UAMS, prior to the filing of the application and therefore was not patentable.  U.S. Patent Application No. PCT/US2013/052301, Microinjection Catheter; UC Case No. SF2012-063 which we licensed under our UCSF License could also be rejected by the Unites States Patent and Trademark Office and become not patentable.


The Federal government has “March-in Rights” to grant additional licenses to the patents that we licensed from UCSF under our UCSF License.


The work resulting in the invention of the device described in the patent applications that we licensed was generated with the assistance of Federal grant funding.  Therefore, the Federal government has the rights established and described in 35 U.S.C. §§ 200-212. Of particular relevance is 35 U.S.C. § 202(c)(4), which in respect to any invention in which we elect rights, provides the Federal agency that gave the grant funding a nonexclusive, nontransferrable, irrevocable, paid-up license to practice or have practiced for or on behalf of the United States any subject invention throughout the world: Provided, that the funding agreement may provide for such additional rights, including the right to assign or have assigned foreign patent rights in the subject invention, as are determined by the agency as necessary for meeting the obligations of the United States under any treaty, international agreement, arrangement of cooperation, memorandum of understanding, or similar arrangement, including military agreement relating to weapons development and production. Also of particular relevance is 35 U.S.C. § 203, which establishes the “March-in Rights” granted to the government.  In summary, the statute provides the power for the Federal agency that gave the grant funding to bestow on a third-party applicant an additional license to the patents if that Federal agency determines that (1) we have not



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taken sufficient steps to achieve practical application of the technology; (2) action is necessary to alleviate health or safety needs not currently being addressed by us; (3) public use requirements specified by Federal regulations are not being met by us; or (4) the technology is not being manufactured substantially in the United States.  To date, despite multiple applications requesting such action, a Federal agency such as the NIH (National Institutes of Health) has never exercised the powers provided for in 35 U.S.C. § 203.  


Our ACX-31 Program might fail in its product development or clinical trials, may never receive FDA approval, or might we withdrawn after receiving FDA approval.

 

We might fail to develop a formulation that could safely and effectively deliver chemotherapeutics directly to brain tumor sites.  The FDA can delay, limit, or deny approval of our products for many reasons, including:


·

our products may not be safe or effective to the FDA’s satisfaction;

·

the data from our pre-clinical studies and clinical trials may be insufficient to support approval;

·

the manufacturing process or facilities we use may not meet applicable requirements; and

·

changes in FDA approval policies or adoption of new regulations may require additional data.


Also, the FDA may require us to conduct post market studies or order us to establish and maintain a system for tracking our products through the chain of distribution to the patient level.  The FDA enforces regulatory requirements by conducting periodic, unannounced inspections and market surveillance.


Failure to comply with applicable regulatory requirements, including those applicable to the conduct of our clinical trials, can result in enforcement action by the FDA, which may lead to any of the following sanctions:


·

warning letters;

·

fines and civil penalties;

·

unanticipated expenditures;

·

delays in approving or refusal to approve our applications, including supplements;

·

withdrawal of FDA approval;

·

product recall or seizure;

·

interruption of production;

·

operating restrictions;

·

injunctions; and

·

criminal prosecution.


Delays in receipt of or failure to receive FDA approval, the withdrawal of previously received approvals, or failure to comply with existing or future regulatory requirements would have a material adverse effect on our business, financial condition, and results of operations.  Even if granted, the approvals may include significant limitations on the intended use and indications for use for which our products may be marketed.  We cannot assure you that we will be able to comply with all applicable FDA regulations.


Our BranchPoint device may not be able to deliver therapeutics to brain targets, improve accuracy, reduce risk of complications, increase patient safety, or receive FDA approval.

 

We demonstrated the ability of our BranchPoint device to deliver therapeutics to brain targets and improve accuracy of therapeutic delivery under interventional MRI guidance (iMRI) in animal and human cadaver studies.  The ability of our BranchPoint device to reduce risk of complications or increase patient safety, however, needs to be demonstrated in patients.  The FDA could request either pre-approval or post-approval clinical trials.  If we conduct a clinical trial, such a trial could fail to demonstrate the ability of our BranchPoint device to perform as expected.  The FDA can delay, limit, or deny approval of our BranchPoint device for many reasons, including:


·

our device may not be safe or effective to the FDA’s satisfaction;

·

the data from our pre-clinical studies and clinical trials may be insufficient to support approval;

·

the manufacturing process or facilities we use may not meet applicable requirements; and

·

changes in FDA approval policies or adoption of new regulations may require additional data.




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We are subject to the periodic reporting requirements of the Securities Exchange Act of 1934 that requires us to incur audit fees and legal fees in connection with the preparation of such reports.  These additional costs could reduce or eliminate our ability to earn a profit.  


We are required to file periodic reports with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934 and the rules and regulations promulgated thereunder.  In order to comply with these requirements, our independent registered public accounting firm has to review our financial statements on a quarterly basis and audit our financial statements on an annual basis.  Moreover, our legal counsel has to review and assist in the preparation of such reports.  The costs charged by these professionals for such services cannot be accurately predicted because factors such as the number and type of transactions that we engage in and the complexity of our reports cannot be determined at this time and have a major effect on the amount of time to be spent by our auditors and attorneys.  However, our incurring these costs obviously is an expense to our operations and thus has a negative effect on our ability to meet our overhead requirements and earn a profit. We may be exposed to potential risks resulting from new requirements under Section 404 of the Sarbanes-Oxley Act of 2002. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, the trading price of our common stock could drop significantly, and the market for our common stock could freeze.


We currently do not have, and may never develop, any commercialized products.


We are a development stage company and currently do not have any commercialized products or any significant source of revenue. We have invested substantially all of our time and resources since inception in developing our products. Our development products may require additional development and clinical evaluation and they will require regulatory approval, significant marketing efforts and substantial additional investment before they can provide us with any revenue.  Commercialization of each of our products remains subject to certain significant risks. Our efforts may not lead to commercially successful products for a number of reasons, including:


·

we may not be able to obtain regulatory approvals for our development products, or the approved indication may be narrower than we seek;

·

any of our development products may not prove to be safe and effective in clinical trials to the FDA’s satisfaction;

·

physicians may not receive any reimbursement from third-party payers, or the level of reimbursement may be insufficient to support widespread adoption of our development products;

·

we may experience delays in our continuing development program;

·

any products that are approved by regulators  may not be accepted in the marketplace by physicians or patients;

·

we may not have adequate financial or other resources to complete the continued development or to commence the commercialization of our products and we may not have adequate financial or other resources to achieve significant commercialization of our products;

·

we may not be able to manufacture our products in commercial quantities or at an acceptable cost; and

·

rapid technological change may make our technology and products obsolete.


If we are unable to obtain regulatory approval for or successfully commercialize our products, we will be unable to generate revenue.


We have not received, and may never receive, FDA approval to market any of our products.


We do not have the necessary regulatory approvals to market any of our products in the U.S. or in any foreign market. We plan initially to launch our products, once approved, in the U.S. The regulatory approval may process involve, among other things, successfully completing clinical trials. The FDA may requires us to prove the safety and effectiveness of our products to the FDA’s satisfaction. This process can be expensive and uncertain, and requires detailed and comprehensive scientific and human clinical data. FDA review may take years after an application is filed. The FDA may never grant approval. The FDA can delay, limit, or deny approval of an application for many reasons, including:


·

any of our products may not be safe or effective to the FDA’s satisfaction;

·

the data we may obtain from our pre-clinical studies and clinical trials may be insufficient to support approval;

·

the manufacturing process or facilities we use may not meet applicable requirements; and

·

changes in FDA approval policies or adoption of new regulations may require additional data.




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The FDA may not consider the data we may gather in clinical trials sufficient to support approval of our products. The FDA may determine that additional clinical trials or data are necessary, in which case regulatory approval may be delayed for several months or even years while the trials are conducted and the data acquired are submitted in an amendment to initial application. The occurrence of unexpected findings in connection with any clinical trial may prevent or delay obtaining regulatory approval, and may adversely affect coverage or reimbursement determinations.  If we are unable to complete our clinical trials necessary to successfully support our intended applications, our ability to commercialize our products, and our business, financial condition, and results of operations would be materially adversely affected, thereby threatening our ability to continue operations.   


If any of our products are approved by the FDA, they may be approved only for narrow indications.


Even if approved, our products may not be approved for the indications that are necessary or desirable for successful commercialization.  If the use of our products is restricted, then the size of the market for our products and the rate of acceptance of our products by physicians may be adversely affected.


If we wish to modify any of our products after receiving FDA approval, including changes in indications or other modifications that could affect safety and effectiveness, additional approvals could be required from the FDA, we may be required to submit extensive pre-clinical and clinical data, depending on the nature of the changes. Any request by the FDA for additional data, or any requirement by the FDA that we conduct additional clinical studies, could delay the commercialization of our devices and require us to make substantial additional research, development and other expenditures. We may not obtain the necessary regulatory approvals to market our products in the U.S. or anywhere else. Any delay in, or failure to receive or maintain, approval for our products could prevent us from generating revenue or achieving profitability, and our business, financial condition, and results of operations would be materially adversely affected.


Any of our products may not be commercially viable if we fail to obtain an adequate level of reimbursement by Medicare and other third party payers.  The markets for our products may also be limited by the indications for which its use may be reimbursed.


The availability of medical insurance coverage and reimbursement for newly approved products is uncertain.  In the U.S., physicians and other healthcare providers are generally reimbursed for all or part of the cost of patient treatment by Medicare, Medicaid, or other third-party payers.


The commercial success of our products in both domestic and international markets will significantly depend on whether third-party coverage and reimbursement are available for services involving our products. Medicare, Medicaid, health maintenance organizations and other third-party payers are increasingly attempting to contain healthcare costs by limiting both the scope of coverage and the level of reimbursement of new products, and as a result, they may not cover or provide adequate payment for the use of our products.  In order to obtain satisfactory reimbursement arrangements, we may have to agree to a fee or sales price lower than the fee or sales price we might otherwise charge.  Even if Medicare and other third-party payers decide to cover procedures involving our products, we cannot be certain that the reimbursement levels will be adequate.  Accordingly, even if our products or future products we develop are approved for commercial sale, unless government and other third-party payers provide adequate coverage and reimbursement for our products, some physicians may be discouraged from using them, and our sales would suffer.


Medicare reimburses for use of medical products in a variety of ways, depending on where and how a product is used. However, Medicare only provides reimbursement if the Centers for Medicare and Medicaid Services (“CMS”) determines that a certain product should be covered and that the use of the product is consistent with the coverage criteria. A coverage determination can be made at the local level by the Medicare administrative contractor (formerly called carriers and fiscal intermediaries), a private contractor that processes and pays claims on behalf of CMS for the geographic area where the services were rendered, or at the national level by CMS through a national coverage determination. There are new statutory provisions intended to facilitate coverage determinations for new products, but it is unclear how these new provisions will be implemented. Coverage presupposes that the product has been cleared or approved by the FDA and further, that the coverage will be no broader than the indication as approved or cleared by the FDA, but coverage can be narrower. A coverage determination may be so limited that relatively few patients will qualify for a covered use of a product. Should a very narrow coverage determination be made for our products, it may undermine the commercial viability of our products.


Obtaining a coverage determination, whether local or national, is a time-consuming, expensive and highly uncertain proposition, especially for new products, and inconsistent local determinations are possible. On average, according to an industry report, Medicare coverage determinations for medical products lag 15 months to five years or more behind FDA approval for a product.



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The Medicare statutory framework is also subject to administrative rulings, interpretations and discretion that affect the amount and timing of reimbursement made under Medicare. Medicaid coverage determinations and reimbursement levels are determined on a state by state basis, because Medicaid, unlike Medicare, is administered by the states under a state plan filed with the Secretary of the U.S. Department of Health and Human Services (“HHS”). Medicaid generally reimburses at lower levels than Medicare. Moreover, Medicaid programs and private insurers are frequently influenced by Medicare coverage determinations.


The FDA may require additional clinical trials and any adverse results in such clinical trials, or difficulties in conducting such clinical trials, could have a material adverse effect on our business.


The FDA may require us to conduct additional clinical studies upon evaluation of our regulatory submission.  The occurrence of unexpected findings in connection with any initial or subsequent clinical trial required by the FDA may prevent or delay obtaining regulatory approval.  In addition subsequent clinical studies would require the expenditure of additional company resources and could be a long and expensive process subject to unexpected delays. Any adverse results in such clinical trials, or difficulties in conducting such clinical trials, could have a material adverse effect on our business.


We expect to operate in a highly competitive market, we may face competition from large, well-established pharmaceutical, biotechnology or medical device companies with significant resources, and we may not be able to compete effectively.


Our products must gain acceptance by the medical community and show clinically meaningful advantages in performance.  However, our present and future competitors may enjoy


·

significantly greater name recognition;

·

established relations with healthcare professionals, customers and third-party payers;

·

established distribution networks;

·

additional lines of products, and the ability to offer rebates, higher discounts or incentives to gain a competitive advantage;

·

greater experience in conducting research and development, manufacturing, clinical trials, obtaining regulatory approval for products, and marketing approved products; and

·

greater financial and human resources for product development, sales and marketing, and patent litigation.


As a result, we may not be able to compete effectively against these companies or their products.


Technological breakthroughs could render our products obsolete.


The medical field is subject to rapid technological change and product innovation. Our products are based on our proprietary technologies, but a number of companies and medical researchers are pursuing new technologies. Companies in the medical field with significantly greater financial, technical, research, marketing, sales and distribution and other resources have expertise and interest in the delivery of therapeutics to the human brain targets.  Some of these companies are working on potentially competing products or therapies.


In addition, the National Institutes of Health and other supporters of medical research are presumptively seeking ways to improve patient diagnosis and treatment by sponsoring corporate and academic research.  There can be no assurance that one or more of these companies will not succeed in developing or marketing technologies and products or services that demonstrate better safety or effectiveness, superior clinical results, greater ease of use or lower cost than our products, or that such competitors will not succeed in obtaining regulatory approval for introducing or commercializing any such products or services prior to us.  


FDA approval of a commercially viable alternative to our products produced by a competitor could significantly reduce market acceptance of our products. Any of the above competitive developments could have a material adverse effect on our business, financial condition, and results of operations.  There is no assurance that products, services, or technologies introduced prior to or subsequent to the commercialization of our products will not render our products less marketable or obsolete.


For initial or additional clinical trials required for our products by the FDA or with respect to clinical trials relating to the development of our technology for other applications, we depend on clinical investigators and clinical sites and other third parties to manage the trials and to perform related data collection and analysis, and, as a result, we may face costs and delays that are outside of our control.




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With respect to any additional clinical studies for our products which may required by the FDA or with respect to clinical trials relating to the development of our core technology for other applications, we rely on clinical investigators and clinical sites, some of which are private practices, and some of which are research university- or government-affiliated, to enroll patients in our clinical trials.  We may rely on: pathologists and pathology laboratories; a contract research organization to assist in monitoring, collection of data, and ensuring FDA Good Clinical Practices (“GCP”) are observed at our sites; a consultant biostatistician; and other third parties to manage the trial and to perform related data collection and analysis.  


However, we may not be able to control the amount and timing of resources that clinical sites and other third parties may devote to our clinical trials. If these clinical investigators and clinical sites fail to enroll a sufficient number of patients in our clinical trials, or if the clinical sites fail to comply adequately with the clinical protocols, we will be unable to complete these trials, which could prevent us from obtaining regulatory approvals for our products or other products developed from our technology.  Our agreements with clinical investigators and clinical sites for clinical testing place substantial responsibilities on these parties and, if these parties fail to perform as expected, our trials could be delayed or terminated.  


If these clinical investigators, clinical sites or other third parties do not carry out their contractual duties or obligations or fail to meet expected deadlines, or if the quality or accuracy of the clinical data they obtain are compromised due to their failure to adhere to our clinical protocols or for other reasons, our clinical trials may be extended, delayed or terminated, and we may be unable to obtain regulatory approval for, or successfully commercialize, our products or other products developed from our technology.


In addition to the foregoing, any initial or additional clinical studies for any of our products which may required by the FDA and any clinical trials relating to the development of our technology for other applications may be delayed or halted, or be inadequate to support regulatory approval, for numerous other reasons, including, but not limited to, the following:


·

the FDA, an Institutional Review Board (“IRB”) or other regulatory authorities place our clinical trial on hold;

·

patients do not enroll in clinical trials at the rate we expect;

·

patient follow-up is not at the rate we expect;

·

IRBs and third-party clinical investigators delay or reject our trial protocol;

·

third-party organizations do not perform data collection and analysis in a timely or accurate manner;

·

regulatory inspections of our clinical trials or manufacturing facilities, among other things, require us to undertake corrective action or suspend or terminate our clinical trials, or invalidate our clinical trials;

·

changes in governmental regulations or administrative actions; and

·

the interim or final results of the clinical trial are inconclusive or unfavorable as to safety or effectiveness.


If our products are approved for reimbursement, we anticipate experiencing significant pressures on pricing.


Even if Medicare covers a product for certain uses, that does not mean that the level of reimbursement will be sufficient for commercial success.  


We expect to experience pricing pressures in connection with the commercialization of our products and our future products due to efforts by private and government-funded payers to reduce or limit the growth of healthcare costs, the increasing influence of health maintenance organizations, and additional legislative proposals to reduce or limit increases in public funding for healthcare services. Private payers, including managed care payers, increasingly are demanding discounted fee structures and the assumption by healthcare providers of all or a portion of the financial risk. Efforts to impose greater discounts and more stringent cost controls upon healthcare providers by private and public payers are expected to continue. Payers frequently review their coverage policies for existing and new diagnostic tools and can, sometimes without advance notice, deny or change their coverage policies. Significant limits on the scope of services covered or on reimbursement rates and fees on those services that are covered could have a material adverse effect on our ability to commercialize our products and therefore, on our liquidity and our business, financial condition, and results of operations.


Our products may never achieve market acceptance even if we obtain regulatory approvals.


Even if we obtain regulatory approval, patients and physicians may not endorse our products. Physicians tend to be slow to change their diagnostic and medical treatment practices because of perceived liability risks arising from the use of new products and the uncertainty of third party reimbursement. Physicians may not utilize any of our products until there is long-term clinical evidence to convince them to alter their existing methods of diagnosing or evaluating suspicious lesions or other conditions addressed by our products and there are recommendations from prominent physicians that our products are effective. We cannot



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predict the speed at which physicians may adopt the use of any of our products.  If our products receive the appropriate regulatory approvals but do not achieve an adequate level of acceptance by patients, physicians and healthcare payers, we may not generate significant product revenue and we may not become profitable.  The degree of market acceptance of our products will depend on a number of factors, including:


·

perceived effectiveness of our products;

·

convenience of use;

·

cost of use of our products;

·

availability and adequacy of third-party coverage or reimbursement;

·

approved indications and product labeling;

·

publicity concerning our products or competitive products;

·

potential advantages over alternative diagnostic methodologies;

·

introduction and acceptance of competing products or technologies; and

·

extent and success of our sales, marketing and distribution efforts.


The success of our products will depend upon the acceptance by physicians and hospitals.  We will be subject to intense scrutiny before physicians will be comfortable incorporating our products in their treatment approaches.  We believe that recommendations by respected physicians and marketing by established licensees will be essential for the development and successful marketing of our products; however, there can be no assurance that any such recommendations will be obtained.  To date, the medical community has had little exposure to us and our products.


Because the medical community is often skeptical of new companies and new technologies, we may be unable to gain access to potential customers in order to demonstrate the operational effectiveness of our products.  Even if we gain access to potential customers, no assurance can be given that physicians will perceive a need for or accept our products, even after we receive approval from the FDA for marketing the product.  


We intend to contract with third parties in order to commercialize our products.  


To the extent that we enter into arrangements with third parties to perform marketing and distribution services in the U.S., our product revenue could be lower and our costs higher than if we directly marketed our products. Furthermore, to the extent that we enter into co-promotion or other marketing and sales arrangements with other companies, any revenue received will depend on the skills and efforts of others, and we do not know whether these efforts will be successful. If we are unable to establish and maintain adequate sales, marketing and distribution capabilities, independently or with others, we will not be able to generate product revenue, and may not become profitable.


We have no in-house manufacturing capabilities and manufacturing personnel, and intend to rely on third parties for manufacturing.  Accordingly, our manufacturing operations will be dependent upon third-party suppliers, making us vulnerable to supply problems and price fluctuations, which could harm our business.  


If our products are approved, we intend to rely on third party licensees for their manufacture.  Our success will therefore be dependent on those third parties’ ability to manufacture our products that meet all FDA requirements and are cost effective and reliable. Any failures on the part of those third parties could negatively affect our results.  Our products are complex and may contain undetected design defects and errors when first introduced, or errors that may be introduced when enhancements are released. Such defects and errors may occur despite our testing, and may not be discovered until after our devices have been shipped to and used by our customers. The existence of these defects and errors could result in costly repairs, returns of devices, diversion of development resources and damage to our reputation in the marketplace. Any of these conditions could have a material adverse impact on our business, financial condition, and results of operations. In addition, when we contract with third-party manufacturers for the production of our products, these manufacturers may inadvertently produce devices that vary from devices we have produced in unpredictable ways that cause adverse consequences.


We intend to enter into a contract for commercial production of our devices once commercial specifications for the devices have been finalized, but we may not be able to enter such an agreement on mutually acceptable terms.  Failure to enter into such an agreement would require us to expand our own manufacturing facilities or obtain such services elsewhere.  Our planned reliance upon an outside provider for assembly and production services subjects us to the risk of adverse consequences from delays and defects caused by the failure of such outside supplier to meet its contractual obligations.  The failure by us or our supplier to produce a sufficient number of devices that can operate according to our specifications could delay the commercial sale of our



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products, and would adversely affect both our ability to successfully commercialize any such product and our business, financial condition and results of operations.


We will not be able to sell our products unless and until its design and/or manufacture are verified and validated in accordance with current good manufacturing practices as set forth in FDA regulatory requirements.


We have not yet successfully completed all the steps necessary to verify and validate the design and/or manufacture of our products that are required to be performed prior to commercialization. If we are delayed or unable to complete verification and validation successfully, we will not be able to sell our products, and we will not be able to meet our plans for the commercialization of our products.  Later discovery of previously unknown problems with our products, including manufacturing problems, or failure to comply with regulatory requirements, may result in restrictions on our products or its manufacturing processes, withdrawal of our products from the market, patient or physician notification, voluntary or mandatory recalls, fines, withdrawal of regulatory approvals, refusal to approve pending applications or supplements to approved applications, refusal to permit the import or export of our products, product seizures, injunctions or the imposition of civil or criminal penalties. Should any of these enforcement actions occur, our business, financial condition and results of operations could be materially and adversely affected.


Assuming that our products are approved by regulatory authorities, if we or our suppliers fail to comply with ongoing regulatory requirements, or if we experience unanticipated problems with our products, they could be subject to restrictions or withdrawal from the market.


Any product for which we obtain marketing approval, along with the manufacturing processes, post-approval clinical data and promotional activities for such product, will be subject to continuous review and periodic inspections by the FDA and other regulatory bodies. In particular, we and our suppliers are required to comply with FDA regulatory requirements which cover the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging, storage, promotion, distribution, shipping of our products, and record keeping practices.


We also will be subject to ongoing FDA requirements, including required submissions of safety and other post-market information and reports and registration and listing requirements. To the extent that we contract with third parties to manufacture some of our products, our manufacturers will be required to adhere to cGMP requirements enforced by the FDA, or similar regulations required by regulatory agencies in other countries. The manufacturing facilities of our contract manufacturers must be inspected or must have been inspected, and must be in full compliance with cGMP requirements before approval for marketing. The FDA enforces its regulatory requirements through unannounced inspections. We have not yet been inspected by the FDA for any of our products and will have to complete such an inspection successfully before we ship any products.


We are involved in a heavily regulated sector, and our ability to remain viable will depend on favorable government decisions at various points by various agencies.


From time to time, legislation is introduced in the U.S. Congress that could significantly change the statutory provisions governing the approval, manufacture, and marketing of a medical product. Additionally, healthcare is heavily regulated by the federal government, and by state and local governments. The federal laws and regulations affecting healthcare change constantly, thereby increasing the uncertainty and risk associated with any healthcare related venture, including our business and our products. In addition, FDA regulations and guidance are often revised or reinterpreted by the agency in ways that may significantly affect our business and our products. It is impossible to predict whether legislative changes will be enacted or FDA regulations, guidance, or interpretations changed, and what the impact of such changes, if any, may be.


The federal government regulates healthcare through various agencies, including but not limited to the following: (i) the FDA, which administers the Food, Drug, and Cosmetic Act, as well as other relevant laws; (ii) CMS, which administers the Medicare and Medicaid programs; (iii) the Office of Inspector General (“OIG”) which enforces various laws aimed at curtailing fraudulent or abusive practices, including by way of example, the Anti-Kickback Law, the Anti-Physician Referral Law, commonly referred to as Stark, the Anti-Inducement Law, the Civil Money Penalty Law, and the laws that authorize the OIG to exclude healthcare providers and others from participating in federal healthcare programs; and (iv) the Office of Civil Rights, which administers the privacy aspects of the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”). All of the aforementioned are agencies within HHS. Healthcare is also provided or regulated, as the case may be, by the Department of Defense through its TriCare program, the Public Health Service within HHS under the Public Health Service Act, the Department of Justice through the Federal False Claims Act and various criminal statutes, and state governments under Medicaid and other state sponsored or funded programs and their internal laws regulating all healthcare activities.



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In addition to regulation by the FDA, we are subject to general healthcare industry regulations. The healthcare industry is subject to extensive federal, state and local laws and regulations relating to:


·

billing for services;

·

quality of medical equipment and services;

·

confidentiality, maintenance and security issues associated with medical records and individually identifiable health information;

·

false claims; and

·

labeling products.


These laws and regulations are extremely complex and, in some cases, still evolving. In many instances, the industry does not have the benefit of significant regulatory or judicial interpretation of these laws and regulations. If our operations are found to be in violation of any of the federal, state or local laws and regulations that govern our activities, we may be subject to the applicable penalty associated with the violation, including civil and criminal penalties, damages, fines or curtailment of our operations. The risk of being found in violation of these laws and regulations is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. Any action against us for violation of these laws or regulations, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s time and attention from the operation of our business.


The application of the privacy provisions of HIPAA is uncertain.


HIPAA, among other things, protects the privacy and security of individually identifiable health information by limiting its use and disclosure. HIPAA directly regulates “covered entities” (insurers, clearinghouses, and most healthcare providers) and indirectly regulates “business associates” with respect to the privacy of patients’ medical information. Certain entities that receive and process protected health information are required to adopt certain procedures to safeguard the security of that information.


It is uncertain whether we would be deemed to be a covered entity under HIPAA, and it is unlikely that based on our current business model, we would be a business associate. Nevertheless, we will likely be contractually required to physically safeguard the integrity and security of the patient information that we or our physician customers receive, store, create or transmit. If we fail to adhere to our contractual commitments, then our physician customers may be subject to civil monetary penalties, and this could adversely affect our ability to market our products. We also may be liable under state laws governing the privacy of health information.


We may become subject to claims of infringement or misappropriation of the intellectual property rights of others, which could prohibit us from shipping affected products, require us to obtain licenses from third parties or to develop non-infringing alternatives, and subject us to substantial monetary damages and injunctive relief. Our patents may also be subject to challenge on validity grounds, and our patent applications may be rejected.


Third parties could, in the future, assert infringement or misappropriation claims against us with respect to our current or future products. Whether a product infringes a patent involves complex legal and factual issues, the determination of which is often uncertain. Therefore, we cannot be certain that we have not infringed the intellectual property rights of such third parties. Our potential competitors may assert that some aspect of the intellectual property utilized in our products infringes their patents. Because patent applications may take years to issue, there also may be applications now pending of which we are unaware that may later result in issued patents on which our owned or licensed intellectual property infringes. There also may be existing patents of which we are unaware that one or more components of our products’ systems may inadvertently infringe.


Any infringement or misappropriation claim could cause us to incur significant costs, could place significant strain on our financial resources, divert management’s attention from our business and harm our reputation. If the relevant patents were upheld as valid and enforceable and we were found to infringe, we could be prohibited from selling our product that is found to infringe unless we could obtain licenses to use the technology covered by the patent or are able to design around the patent. We may be unable to obtain a license on terms acceptable to us, if at all, and we may not be able to redesign our products to avoid infringement. A court could also order us to pay compensatory damages for such infringement, plus prejudgment interest and could, in addition, treble the compensatory damages and award attorney fees. These damages could be substantial and could harm our reputation, business, financial condition, and operating results. A court also could enter orders that temporarily, preliminarily or permanently enjoin us and our customers from making, using, selling, offering to sell or importing our products, and/or could



26



enter an order mandating that we undertake certain remedial activities. Depending on the nature of the relief ordered by the court, we could become liable for additional damages to third parties.


We also may rely on our patents, patent applications and other intellectual property rights to give us a competitive advantage. Whether a patent is valid, or whether a patent application should be granted, is a complex matter of science and law, and therefore we cannot be certain that, if challenged, our patents, patent applications and/or other intellectual property rights would be upheld. If one or more of those patents, patent applications and other intellectual property rights are invalidated, rejected or found unenforceable, that could reduce or eliminate any competitive advantage we might otherwise have had.


New product development in the healthcare industry is both capital and labor intensive with very low success rates for successful commercialization; if we cannot successfully develop or obtain future products, our growth would be delayed.


Our long-term success is dependent, in large part, on the design, development and commercialization of our products. The product development process is time-consuming, unpredictable and capital intensive. There can be no assurance that we will be able to develop or acquire new products, successfully complete clinical trials, obtain the necessary regulatory clearances or approvals required from the FDA on a timely basis, or at all, manufacture our potential products in compliance with regulatory requirements or in commercial volumes, or that our products or other potential products will achieve market acceptance.


In addition, changes in regulatory policy for product approval during the period of product development, and regulatory agency review of each submitted new application, may cause delays or rejections. It may be necessary for us to enter into licensing arrangements in order to market effectively any new products or new indications for existing products. There can be no assurance that we will be successful in entering into such licensing arrangements on terms favorable to us or at all. Failure to develop, obtain necessary regulatory clearances or approvals for, or successfully market potential new products could have a material adverse effect on our business, financial condition, and results of operations.


We face the risk of product liability claims and may not be able to obtain or maintain adequate insurance.


Our business exposes us to the risk of product liability claims that is inherent in the testing, manufacturing and marketing of medical devices, including those that may arise from the misuse or malfunction of, or design flaws in, our products. We may be subject to product liability claims if any of our products causes, or merely appears to have caused, an injury or if a patient alleges that any of our products failed to provide appropriate treatment. Claims may be made by patients, healthcare providers or others involved with our products.


Each of our products will require regulatory approval prior to commercialization in the U.S. We may only maintain limited domestic clinical trial liability insurance, as may be required by clinical sites.  We intend to obtain clinical trial liability insurance in certain European countries where required by statute or clinical site policy. Although we intend to obtain general liability insurance that we believe will be appropriate, and anticipate obtaining adequate product liability insurance before commercialization of any of our products, this insurance is and will be subject to deductibles and coverage limitations.  


Our anticipated product liability insurance may not be available to us in amounts and on acceptable terms, if at all, and if available, the coverages may not be adequate to protect us against any future product liability claims. If we are unable to obtain insurance at an acceptable cost or on acceptable terms with adequate coverage, or otherwise protect against potential product liability claims, we will be exposed to significant liabilities, which may harm our business. A product liability claim, recall or other claim with respect to uninsured liabilities or for amounts in excess of insured liabilities could result in significant costs and significant harm to our business.


We may be subject to claims against us even if the apparent injury is due to the actions of others. For example, we rely on the expertise of physicians, nurses and other associated medical personnel to operate our devices.  If these medical personnel are not properly trained or are negligent, we may be subjected to liability. These liabilities could prevent or interfere with our product commercialization efforts.  Defending a suit, regardless of merit, could be costly, could divert management attention and might result in adverse publicity, which could result in the withdrawal of, or inability to recruit, clinical trial volunteers, or result in reduced acceptance of any of our devices in the market.


Insurance and surety companies have reassessed many aspects of their business and, as a result, may take actions that could negatively affect our business. These actions could include increasing insurance premiums, requiring higher self-insured retentions and deductibles, reducing limits, restricting coverages, imposing exclusions, and refusing to underwrite certain risks



27



and classes of business. Any of these actions may adversely affect our ability to obtain appropriate insurance coverage at reasonable costs, which could have a material adverse effect on our business, financial condition and results of operations.


Failure to obtain and maintain regulatory approval in foreign jurisdictions will prevent us from marketing abroad.


We intend to seek partners to develop and market our products internationally. Outside the U.S., we can market a product only if we receive a marketing authorization and, in some cases, pricing approval, from the appropriate regulatory authorities. The approval procedure varies among countries and can involve additional testing, and the time required to obtain approval may differ from that required to obtain FDA approval.


The foreign regulatory approval process may include all of the risks associated with obtaining FDA approval, in addition to other risks. Foreign regulatory bodies have established varying regulations governing product standards, packaging requirements, labeling requirements, import restrictions, tariff regulations, duties and tax requirements. We may not obtain foreign regulatory approvals on a timely basis, if at all. Foreign regulatory agencies, as well as the FDA, periodically inspect manufacturing facilities both in the U.S. and abroad. Approval by the FDA does not ensure approval by regulatory authorities in other countries, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or by the FDA. We have not taken any significant actions to obtain foreign regulatory approvals. We may not be able to file for regulatory approvals and may not receive necessary approvals to commercialize any of our products in any market on a timely basis, or at all. Our inability or failure to comply with varying foreign regulation, or the imposition of new regulations, could restrict our sale of products internationally.


Risks Relating to our Common Stock


Currently, liquidity of the public market for our securities is limited, and there can be no assurances that liquidity of the public market will further develop or increase, while our common stock is likely to be subject to significant price fluctuations.


We cannot predict the extent to which investor interest in us will lead to the development of an active, liquid trading market. Active trading markets generally result in lower price volatility and more efficient execution of buy and sell orders for investors.  In addition, our common stock is unlikely to be followed by any market analysts, and there may be few institutions acting as market makers for the common stock. Either of these factors could adversely affect the liquidity and trading price of our common stock. Until our common stock is fully distributed and an orderly market develops in our common stock, if ever, the price at which it trades is likely to fluctuate significantly. Prices for our common stock will be determined in the marketplace and may be influenced by many factors, including the depth and liquidity of the market for shares of our common stock, developments affecting our business, including the impact of the factors referred to elsewhere in these Risk Factors, investor perception, and general economic and market conditions. No assurances can be given that an orderly or liquid market will ever develop for the shares of our common stock.  Because of the anticipated low price of the securities, many brokerage firms may not be willing to effect transactions in these securities.


Any market that develops in shares of our common stock will be subject to the penny stock restrictions which will create a lack of liquidity and make trading difficult or impossible.


SEC Rule 15g-9 (as most recently amended and effective on September 12, 2005) establishes the definition of a "penny stock," for purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to a limited number of exceptions. It is likely that our shares will be considered to be penny stocks for the foreseeable future. This classification severely and adversely affects the market liquidity for our common stock. For any transaction involving a penny stock, unless exempt, the penny stock rules require that a broker-dealer approve a person's account for transactions in penny stocks and the broker-dealer receive from the investor a written agreement to the transaction setting forth the identity and quantity of the penny stock to be purchased.


In order to approve a person's account for transactions in penny stocks, the broker-dealer must obtain financial information and investment experience and objectives of the person and make a reasonable determination that the transactions in penny stocks are suitable for that person and that person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.


The broker-dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prepared by the SEC relating to the penny stock market, which, in highlight form, sets forth:



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·

the basis on which the broker-dealer made the suitability determination, and

·

that the broker-dealer received a signed, written agreement from the investor prior to the transaction.


Disclosure also has to be made about the risks of investing in penny stock in both public offerings and in secondary trading and commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.


Because of these regulations, broker-dealers may not wish to engage in the above-referenced necessary paperwork and disclosures and/or may encounter difficulties in their attempt to sell shares of our common stock, which may affect the ability of selling shareholders or other holders to sell their shares in the secondary market and have the effect of reducing the level of trading activity in the secondary market. These additional sales practice and disclosure requirements could impede the sale of our securities, if and when our securities become publicly traded. In addition, the liquidity for our securities may decrease, with a corresponding decrease in the price of our securities. Our shares in all probability will be subject to such penny stock rules for the foreseeable future and our shareholders will, in all likelihood, find it difficult to sell their securities.


We are an “emerging growth company” as defined in the JOBS Act and we cannot be certain whether the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.


Management intends to take full advantage of the regulatory relief afforded by the JOBS Act.  We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding an annual non-binding advisory vote on executive compensation and nonbinding stockholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may become more volatile.


In addition, Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we are choosing to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.


If we fail to maintain an effective system of internal control over financial reporting in the future, we may not be able to accurately report our financial condition, results of operations or cash flows, which may adversely affect investor confidence in us and, as a result, the value of our common stock.


The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal controls for financial reporting and disclosure controls and procedures. We will be required, under Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. A material weakness is a control deficiency, or combination of control deficiencies, in internal control over financial reporting that results in more than a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected on a timely basis. Section 404 of the Sarbanes-Oxley Act also generally requires an attestation from our independent registered public accounting firm on the effectiveness of our internal control over financial reporting. However, for as long as we remain an emerging growth company as defined in the JOBS Act, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the independent registered public accounting firm attestation requirement.




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Our compliance with Section 404 will require that we incur substantial accounting expense and expend significant management efforts. We currently do not have an internal audit group, and we will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge, and compile the system and process documentation necessary to perform the evaluation needed to comply with Section 404. We may not be able to complete our evaluation, testing and any required remediation in a timely fashion. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal control over financial reporting is effective. We cannot assure you that there will not be material weaknesses or significant deficiencies in our internal control over financial reporting in the future. Any failure to maintain internal control over financial reporting could severely inhibit our ability to accurately report our financial condition, results of operations or cash flows. If we are unable to conclude that our internal control over financial reporting is effective, or if our independent registered public accounting firm determines we have a material weakness or significant deficiency in our internal control over financial reporting once that firm begin its Section 404 reviews, we could lose investor confidence in the accuracy and completeness of our financial reports, the market price of our common stock could decline, and we could be subject to sanctions or investigations by the NASDAQ, the SEC or other regulatory authorities. Failure to remedy any material weakness in our internal control over financial reporting, or to implement or maintain other effective control systems required of public companies, could also restrict our future access to the capital markets.


We are incurring increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives.


As a public company, we are incurring significant legal, accounting and other expenses that we did not incur as a private company, and these expenses may increase even more after we are no longer an "emerging growth company." We will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Protection Act, as well as rules adopted, and to be adopted, by the SEC and the NASDAQ Stock Market. Our management and other personnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, we expect these rules and regulations to substantially increase our legal and financial compliance costs and to make some activities more time-consuming and costly. We cannot predict or estimate the amount or timing of additional costs we may incur to respond to these requirements.


Our Board of Directors is authorized to issue shares of preferred stock, which may have rights and preferences detrimental to the rights of the holders of our common shares.


We are authorized to issue up to 2,000,000 shares of preferred stock, $0.0001 par value. Our preferred stock may bear such rights and preferences, including dividend and liquidation preferences, as the Board of Directors may fix and determine from time to time. Any such preferences may operate to the detriment of the rights of the holders of the common stock being offered hereby.  On June 16, 2015, we filed a Certificate of Designation that authorized the issuance of up to two thousand two hundred fifty (2,250) shares of a new series designated “Series A Convertible Preferred Stock,” and established the rights, preferences and limitations thereof.  Each share of Preferred Stock has a par value of $0.0001 per share and a stated value equal to $1,000.  Each share of Preferred Stock shall be convertible, at any time at the option of the Holder thereof, into that number of shares of Common Stock determined by dividing the Stated Value of such share of Preferred Stock ($1,000.00) by the Conversion Price of $1.25 per share. There are no dividend rights or liquidation preference associated with the Series A Convertible Preferred Stock. The summary of the rights, privileges and preferences of the Series A Convertible Preferred Stock described above is qualified in its entirety by reference to the Certificate of Designation, a copy of which is attached as Exhibit 2.1 to our Form 8-K, filed on June 18, 2015.


Our Articles of Incorporation provide for indemnification of officers and directors at our expense and limit their liability which may result in a major cost to us and hurt the interests of our shareholders because corporate resources may be expended for the benefit of officers and/or directors.


Our Articles of Incorporation and applicable Delaware law provide for the indemnification of our directors, officers, employees, and agents, under certain circumstances, against attorney's fees and other expenses incurred by them in any litigation to which they become a party arising from their association with or activities on our behalf. We will also bear the expenses of such litigation for any of our directors, officers, employees, or agents, upon such person's promise to repay us, therefore if it is ultimately determined that any such person shall not have been entitled to indemnification. This indemnification policy could result in substantial expenditures by us, which we will be unable to recoup. In addition, limitations on indemnification which we are allowed to offer may discourage qualified persons from serving as our officers or directors.




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Our stock is being quoted on the OTCQB which may result in limited liquidity and the inability of our stockholders to maintain accurate price quotations of their stock.


Until our shares of common stock qualify for inclusion in the NASDAQ system, if ever, the trading of our securities will be in the over-the-counter market which is commonly referred to as the OTCQB as operated by OTC Markets Inc. As a result, an investor may find it difficult to dispose of, or to obtain accurate quotations as to the price of our securities.


It is anticipated that our stock price will be volatile and the value of your shares may be subject to sudden decreases.


Our stock price is likely to be volatile. The stock market in general and the market for medical technology companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies.  The following factors, in addition to other risk factors described in this section and general market and economic conditions, may have a significant impact on the market price of our common stock:


·

results of our research and development efforts and our clinical trials;

·

the timing of regulatory approval for our products;

·

failure of any of our products, if approved, to achieve commercial success;

·

the announcement of new products or product enhancements by us or our competitors;

·

regulatory developments in the US and foreign countries;

·

ability to manufacture our products to commercial standards;

·

developments concerning our clinical collaborators, suppliers or marketing partners;

·

changes in financial estimates or recommendations by securities analysts;

·

public concern over our products;

·

developments or disputes concerning patents or other intellectual property rights;

·

product liability claims and litigation against us or our competitors;

·

the departure of key personnel;

·

changes in the structure of and third-party reimbursement in the US and other countries;

·

general economic, industry and market conditions; and

·

future sales of our common stock by us to fund our operations.


A decline in the market price of our common stock could cause you to lose some or all of your investment and may adversely impact our ability to attract and retain employees and raise capital. In addition, stockholders may initiate securities class action lawsuits if the market price of our stock drops significantly. Whether or not meritorious, litigation brought against us could result in substantial costs and could divert the time and attention of our management. Our insurance to cover claims of this sort may not be adequate.


Your stock ownership will be diluted by our issuance of additional securities, including in connection with subsequent rounds of financing.


We will need further financing for the continued growth of our business to achieve our planned growth.  No assurance can be given as to the availability of additional financing or, if available, the terms upon which it may be obtained. Raising additional financing may result in our issuing additional securities, which could result in the dilution of your ownership percentage of us. We may also decide to issue shares in exchange for the acquisition of other companies in order to expand business operations. The issuance of any such shares will have the effect of further diluting your ownership percentage.


There may be restrictions on your ability to resell shares of Common Stock under Rule 144.


Currently, Rule 144 under the Securities Act permits the public resale of securities under certain conditions after a six or twelve month holding period by the seller, including requirements with respect to the manner of sale, sales volume restrictions, filing requirements and a requirement that certain information about the issuer is publicly available (the “Rule 144 resale conditions”). At the time that stockholders intend to resell their shares under Rule 144, there can be no assurances that we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) or, if so, current in our reporting requirements under the Exchange Act, in order for stockholders to be eligible to rely on Rule 144 at such time. In addition to the foregoing requirements of Rule 144 under the federal securities laws, the various state securities laws may impose further restrictions on the ability of a holder to sell or transfer the shares of Common Stock.




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We do not anticipate paying dividends.


We never have paid any dividends on our common stock and we do not intend to pay any dividends in the foreseeable future.  


ITEM 1B.  UNRESOLVED STAFF COMMENTS


None.


ITEM 2.  PROPERTIES.


Our present operations do not require a permanently staffed office.  We can book office space with an unaffiliated business center on an “as needed” basis for an hourly fee ranging from $30 to $150 per hour depending on the size of the room or for a longer period of time, and believe that they are sufficient for our foreseeable needs.  


ITEM 3.  LEGAL PROCEEDINGS.


We are not currently a defendant in any legal proceeding or governmental proceeding nor are we currently aware of any pending legal proceeding or governmental proceeding proposed to be initiated against us. There are no proceedings in which any of our current directors, executive officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to us.


ITEM 4. MINE SAFETY DISCLOSURES


Not applicable.



PART II


ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES


Common Stock


We are authorized to issue 20,000,000 shares of common stock. There are 8,580,816 shares of our common stock issued and outstanding which shares are held by approximately 60 shareholders. The holders of our common stock:


 

Have equal ratable rights to dividends from funds legally available for payment of dividends when, as and if declared by the Board of Directors;

  

are entitled to share ratably in all of the assets available for distribution to holders of common stock upon liquidation, dissolution or winding up of our affairs;

  

do not have preemptive, subscription or conversion rights, or redemption; and

  

are entitled to one non-cumulative vote per share on all matters submitted to stockholders for a vote at any meeting of stockholders.


Any market that develops in shares of our common stock will be subject to the penny stock restrictions which will make trading difficult or impossible regarding negative implications of being classified as a "Penny Stock."


Preferred Stock


We are authorized to issue 2,000,000 shares of preferred stock, $0.0001 par value.  Our preferred stock may bear such rights and preferences, including dividend and liquidation preferences, as the Board of Directors may fix and determine from time to time. Any such preferences may operate to the detriment of the rights of the holders of the common stock.  On June 16, 2015, we filed a Certificate of Designation that authorized the issuance of up to two thousand two hundred fifty (2,250) shares of a new series designated “Series A Convertible Preferred Stock,” and established the rights, preferences and limitations thereof.  Each share of Preferred Stock has a par value of $0.0001 per share and a stated value equal to $1,000.  Each share of Preferred Stock shall be convertible, at any time at the option of the Holder thereof, into that number of shares of Common Stock determined by dividing the Stated Value of such share of Preferred Stock ($1,000.00) by the Conversion Price of $1.25 per share. There are no dividend



32



rights or liquidation preference associated with the Series A Convertible Preferred Stock. The summary of the rights, privileges and preferences of the Series A Convertible Preferred Stock described above is qualified in its entirety by reference to the Certificate of Designation, a copy of which is attached as Exhibit 2.1 to our Form 8-K, filed on June 18, 2015.


Among other rights, our Board of Directors may determine, without further vote or action by our stockholders:


 

the number of shares of preferred stock and the designation of the series;

  

whether to pay dividends on the series and, if so, the dividend rate, whether dividends will be cumulative and, if so, from which date or dates, and the relative rights of priority of payment of dividends on shares of the series;

  

whether the series will have voting rights in addition to the voting rights provided by law and, if so, the terms of the voting rights;

  

whether the series will be convertible into or exchangeable for shares of any other class or series of stock and, if so, the terms and conditions of conversion or exchange;

  

whether or not the shares of the series will be redeemable and, if so, the dates, terms and conditions of redemption and whether there will be a sinking fund for the redemption of that series and, if so, the terms and amount of the sinking fund; and

  

the rights of the shares of the series in the event of our voluntary or involuntary liquidation, dissolution or winding up and the relative rights or priority, if any, of payment of shares of the series.


In the future, preferred stock could be used to dilute a potential hostile acquirer. Accordingly, any future issuance of preferred stock or any rights to purchase preferred shares may have the effect of making it more difficult for a third party to acquire control of us. This may delay, defer or prevent a change of control in our Company or an unsolicited acquisition proposal. The issuance of preferred stock also could decrease the amount of earnings attributable to, and assets available for distribution to, the holders of our common stock and could adversely affect the rights and powers, including voting rights, of the holders of our common stock.


Authorized but Un-issued Capital Stock


Delaware law does not require stockholder approval for any issuance of authorized shares. However, the marketplace rules of the NASDAQ, which would apply only if our common stock were listed on the NASDAQ, require stockholder approval of certain issuances of common stock equal to or exceeding 20% of the then-outstanding voting power or then-outstanding number of shares of common stock, including in connection with a change of control of the Company, the acquisition of the stock or assets of another company or the sale or issuance of common stock below the book or market value price of such stock. These additional shares may be used for a variety of corporate purposes, including future public offerings to raise additional capital or to facilitate corporate acquisitions.


One of the effects of the existence of un-issued and unreserved common stock may be to enable our Board of Directors to issue shares to persons friendly to current management, which issuance could render more difficult or discourage an attempt to obtain control of our board by means of a merger, tender offer, proxy contest or otherwise, and thereby protect the continuity of our management and possibly deprive the stockholders of opportunities to sell their shares of our common stock at prices higher than prevailing market prices.


Shareholder Matters


Certain provisions of Delaware law create rights that might be deemed material to our shareholders. Other provisions might delay or make more difficult acquisitions of our stock or changes in our control or might also have the effect of preventing changes in our management or might make it more difficult to accomplish transactions that some of our shareholders may believe to be in their best interests.


Transfer Agent


The transfer agent for our common stock is Nevada Agency and Transfer Company whose address is 50 West Liberty Street, Suite 880, Reno NV 89501. Its telephone number is 775-322-0626.


Market Information


Our Common Stock currently trades only on the OTCQB operated by OTC Markets Inc. under the symbol “ACXA”.  Our Common Stock commenced trading under the symbol on June 16, 2014.



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The following historical quotations obtained online at www.yahoo.com reflects the high and low bids for our Common Stock based on inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions:


Quarter Ended

High ($)

Low ($)

December 31, 2015

0.72

0.68

September 30, 2015

1.45

1.41

June 30, 2015

1.79

1.71

March 31, 2015

2.10

2.10

December 31, 2014

3.20

3.20

September 30, 2014

5.40

5.40

June 30, 2014

4.40

4.30



As of March 25, 2016, our Common Stock closed at a price of $0.62.


Shareholders


As of March 30, 2016, we had 8,580,816 shares of common stock issued and outstanding and approximately 60 stockholders of record of our common stock.  


Dividends


We have never declared or paid any cash dividends on our common stock.  The payment by us of dividends, if any, in the future rests within the discretion of our board of directors and will depend, among other things, upon our earnings, capital requirements, debt covenants and financial condition, as well as other relevant factors. We do not intend to pay any cash dividends in the foreseeable future, but intend to retain all earnings, if any, for use in our business. There are no restrictions in our articles of incorporation or bylaws that prevent us from declaring dividends. The Delaware General Corporation Law, however, does prohibit us from declaring dividends where, after giving effect to the distribution of the dividend, we would not be able to pay our debts as they become due in the usual course of business, or our total assets would be less than the sum of our total liabilities plus the amount that would be needed to satisfy the rights of shareholders who have preferential rights superior to those receiving the distribution.  Management is not aware of any such rights.


Securities Approved For Issuance Under Equity Compensation Plans


As of the end of our fiscal year ended December 31, 2015, we had no outstanding equity award and no equity compensation plan in effect under which any shares of our common stock were authorized for issuance.  We do not have any compensation plan or individual compensation arrangement under which our common stock or other equity securities are authorized for issuance to employees or non-employees in exchange for consideration in the form of goods or service as described in FAS 123.  


Recent Sales of Unregistered Securities


The following is a summary of all transactions during our fiscal year ended December 31, 2015. Shares issued for cash consideration paid to us are valued at the purchase price per share; all other shares are valued as stated. All shares issued were issued as “restricted” shares of our common stock except as otherwise expressly stated.


On February 4, 2015, we issued 57,000 shares of our Company’s common stock to a consultant to provide investor relations services over 3 months per our consulting agreement.  These shares were issued pursuant to Regulation D under the Securities Act of 1933, as amended, were exempt from registration by reason of Section 4(2) of the Securities Act of 1933, as amended (the “Act”), and bear an appropriate restrictive legend.


On February 10, 2015, we issued 150,000 shares of our Company’s common stock to a consultant to provide media services over 6 months per our consulting agreement.  These shares were issued pursuant to Regulation D under the Securities Act of 1933, as amended, were exempt from registration by reason of Section 4(2) of the Securities Act of 1933, as amended (the “Act”), and bear an appropriate restrictive legend.




34



On March 17, 2015, we issued 20,000 shares of our Company’s common stock to a consultant to provide investor relations services over 6 months per our consulting agreement.  These shares were issued pursuant to Regulation D under the Securities Act of 1933, as amended, were exempt from registration by reason of Section 4(2) of the Securities Act of 1933, as amended (the “Act”), and bear an appropriate restrictive legend.


On November 12, 2015, we issued 1,000,000 shares of the Company’s common stock in order to access the technology know-how in connection with the service agreement that we entered into with the Yissum Research Development Company of The Hebrew University of Jerusalem Ltd. to develop and supply a polymeric formulation of a combination of carmustine and temozolomide for sustained local administration to a solid tumor.  These shares are issued pursuant to Regulation D under the Securities Act of 1933, as amended, are exempt from registration by reason of Section 4(2) of the Securities Act of 1933, as amended (the “Act”), and bear an appropriate restrictive legend.   


On February 8, 2016, we issued 1,000,000 shares of the Company’s common stock as license issue fee in connection with the exclusive license agreement (“ACL License”) that we entered into with Accelerating Combination Therapies LLC (“ACL”) in regards to the exclusive licensing of the issued U.S. Patent No. 8,895,597 B2 Combination of Local Temozolomide with Local BCNU on August 11, 2015 (“Effective Date”).  The license issue fee is to be issued within 6 months after the Effective Date.  These shares are issued pursuant to Regulation D under the Securities Act of 1933, as amended, are exempt from registration by reason of Section 4(2) of the Securities Act of 1933, as amended (the “Act”), and bear an appropriate restrictive legend.   


On March 18, 2016, we issued 67,000 shares of our Company’s common stock to a consultant to provide media services over 3 months per our consulting agreement.  These shares were issued pursuant to Regulation D under the Securities Act of 1933, as amended, were exempt from registration by reason of Section 4(2) of the Securities Act of 1933, as amended (the “Act”), and bear an appropriate restrictive legend.


There were no underwriters employed in connection with any of the transactions described above.


Purchase of Equity Securities by the Company and Affiliated Purchasers


Not Applicable.


ITEM 6. SELECTED FINANCIAL DATA


The Company, as a “smaller reporting company” (as defined by §229.10(f)(1)), is not required to provide the information required by this Item.


ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


You should read the following plan of operation together with our financial statements and related notes appearing elsewhere in this annual report.  This plan of operation contains forward-looking statements that involve risks, uncertainties, and assumptions.  The actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors.


Overview


We are a development stage company. We were incorporated in Delaware on August 29, 2012.  We are focused on developing novel neurological therapies to be directly delivered into specific regions of the brain.  As our first development program, we are developing our ACX-31 program to deliver two chemotherapy drugs, temozolomide in combination with BCNU, locally to brain tumor sites. Our ACX-31 program is based on an issued patent licensed from Accelerating Combination Therapies LLC which is co-owned by Dr. Henry Brem, Director of the Neurosurgery Department at Johns Hopkins University (“ACL License”). We are collaborating in the development of our ACX-31 program with Dr. Henry Brem who built one of the largest brain tumor research and treatment centers in the world at Johns Hopkins University.  Dr. Robert Langer, who is the David H. Koch Institute Professor at MIT and the most cited engineer in history, is also advising us in the development of our ACX-31 program. Both Dr. Brem and Dr. Langer are pioneers in the development of local drug delivery treatments, and invented and developed Gliadel® which is a FDA approved, local chemotherapy for the treatment of glioblastoma multiforme.  We entered into an agreement with the Yissum Research Development Company of The Hebrew University of Jerusalem Ltd. (“Yissum”) to develop and supply a polymeric formulation of a combination of temozolomide and BCNU.  Professor Avi Domb of The Hebrew University of Jerusalem had previously worked with Dr. Langer on the formulation of Gliadel® and leads the development efforts provided by Yissum.




35



As our second development program, we are developing our BranchPoint device that can potentially deliver therapeutics through the radial deployment of a flexible delivery catheter to large and anatomically complex brain targets through a single initial brain penetration.  Our BranchPoint device was originally developed at the University of California, San Francisco (UCSF) with $1.8 million in funding from the California Institute for Regenerative Medicine (CIRM).  It is based on a neurosurgical delivery platform that we have exclusively licensed from UCSF.  It can potentially enable new approaches to neurological therapy and be modified for the delivery of a broad range of novel therapeutics, such as stem cells to treat neurodegenerative diseases, chemotherapeutics to brain tumors and gene therapy vectors.  A 510(k) application was submitted to the FDA on June 15, 2015.  Furthermore, UCSF requested a pre-IND meeting with the FDA on November 4, 2015 to discuss a collaborative program between UCSF and us to evaluate a combined stem cell/gene transfer candidate therapeutic CNS10-NPC GDNF for the treatment of Parkinson's Disease using our BranchPoint delivery device. UCSF received a written response from the FDA on March 21, 2016 which provided guidance on the non-clinical activities that are necessary to enable the filing of a future potential IND application. CNS10-NPC are human fetal neural stem cells that express Glial-Derived Neurotrophic Factor (GDNF) in the treatment of Parkinson's Disease, and are expected to be supplied by the Cedars-Sinai Regenerative Medicine Institute in support of IND (Investigational New Drug) enabling studies.


We cannot assure you that we will be successful with our development activities.


Recent Developments


On August 11, 2015 (“Effective Date”), we entered into an exclusive license agreement (“ACL License”) with Accelerating Combination Therapies LLC (“ACL”) in regards to the exclusive licensing of the issued U.S. Patent No. 8,895,597 B2 Combination of Local Temozolomide with Local BCNU (“Patent Rights”).  ACL is beneficially owned by the original Patent Rights holders and Inventors Violette Renard Recinos, Betty Tyler, Sarah Brem Sunshine and Henry Brem (“Inventors”) who assigned the Patent Rights to ACL.  Henry Brem is the Harvey Cushing Professor of Neurosurgery, Director of the Department of Neurosurgery, and Neurosurgeon-in-Chief at The Johns Hopkins University, and invented and developed Gliadel® wafers to deliver local chemotherapy to brain tumors.  Betty Tyler is Associate Professor of Neurosurgery at Johns Hopkins University.  Violette Renard Recinos is a Neurosurgeon at the Cleveland Clinic.  The Patent Rights relate to formulations for chemotherapy, especially of brain tumors such as gliomas.  They claim a composition for treating an individual with a solid tumor comprising a combination of BCNU and temozolomide in a pharmaceutically acceptable polymeric carrier for sustained local administration of an effective amount of BCNU and temozolomide to reduce tumor size or prolong survival of the individual with greater efficacy or reduced systemic side effects as compared to administration of either BCNU or temozolomide systemically (“Invention”).  Under the ACL License, we obtained rights to develop and commercialize the Patent Rights, and have been granted the right to sublicense to third parties. The ACL License requires us to initiate a first human clinical trial within 30 months and to pay ACL royalties and other consideration which includes (i) a license issue fee of 1,000,000 shares of the Company’s common stock to be issued within 6 months after the Effective Date; (ii) reimbursement of past patent expenses of $19,392; (iii) license maintenance fees of $8,000 annually until the first commercial sale; (iv) running royalties of 4% of net sales; and (v) certain minimum annual royalties and milestone payments.  The ACL License remains in effect from the Effective Date until expiration of the Patent Rights.  For a full description of payment obligations and the ACL License itself, the license agreement is filed and can be reviewed as an exhibit to the Form 8-K as filed on August 12, 2015.


On August 18, 2015, we executed a License Termination Agreement (“Termination Agreement”) with the Board of Trustees of the University of Arkansas (“UofA”) acting for and on behalf of the University of Arkansas for Medical Sciences (“UAMS”) under which both parties terminated the UAMS License and Research Agreement in order to be relieved of all liability for future payments of any consideration due under Article 6.1 of the UAMS License and Article 1 of the Research Agreement, and the UofA has agreed to terminate the UAMS License and Research Agreement and release us in accordance with the terms thereof.  For a full description of the Termination Agreement, a copy of which is filed and can be reviewed as Exhibit 10.18 to the Form 8-K as filed on August 20, 2015.


On November 1, 2015, we entered into a service agreement (“Agreement”) with the Yissum Research Development Company of The Hebrew University of Jerusalem Ltd. (“Yissum”) to develop and supply a polymeric formulation of a combination of carmustine and temozolomide for sustained local administration to a solid tumor (the “Services”).  Under the Agreement we will retain ownership of all intellectual property rights that are discovered or developed during the course of the provision of the Services.  Professor Avi Domb of The Hebrew University of Jerusalem leads the development efforts provided by Yissum.  For a full description, a Form of the Agreement is filed and can be reviewed as an exhibit 10.19 to the Form 8-K as filed on November 2, 2015.





36



Plan of Operations


As a development stage company, we are focused on developing novel neurological therapies to be directly delivered into specific regions of the brain.  We are currently developing two programs in our pipeline.

 

1.

We are developing our ACX-31 program to deliver two chemotherapy drugs, temozolomide in combination with BCNU, locally to brain tumor sites.  Temozolomide is a generic, approved chemotherapy drug that is indicated for the treatment of adult patients with newly diagnosed glioblastoma multiforme concomitantly with radiotherapy and then as maintenance treatment.  Local delivery of temozolomide has been demonstrated to be superior to oral administration in an animal model.  In the scientific publication at Johns Hopkins University Brem S, Tyler BM, Li K, Pradilla G, Legnani F, Caplan J, et al. Local delivery of temozolomide by biodegradable polymers is superior to oral administration in a rodent glioma model. Cancer Chemother Pharmacol 2007;60:643-50, it was demonstrated that that intracranial concentrations of temozolomide increased threefold compared with orally delivered temozolomide. In a rodent glioma model, animals treated with a single temozolomide polymer (50% w/w) had a median survival of 28 days (P < 0.001 vs. controls, P < 0.001 vs. oral treatment), whereas animals treated with oral temozolomide had a median survival of 22 days compared to control animals (median survival of 13 days). Animals treated with two temozolomide polymers (50% w/w) had a median survival of 92 days (P < 0.001 vs. controls, P < 0.001 vs. oral treatment). The percentage of long-term survivors (LTS) for groups receiving intracranial temozolomide ranged from 25 to 37.5%; there were no LTS with oral temozolomide treatment. Animals treated with radiation therapy (XRT) and intracranial temozolomide (median survival not reached, LTS = 87.5%) demonstrated improved survival compared to those with intracranial temozolomide alone (median survival, 41 days; LTS = 37.5%), or oral temozolomide and XRT (median survival, 43 days, LTS = 38.9%).  BCNU (carmustine) is a chemotherapy drug that is contained in Gliadel®, a biodegradable polymer that is implanted locally into the resection cavity after surgical removal of a brain tumor and is indicated for the treatment of newly diagnosed and recurrent glioblastoma multiforme.  In another scientific publication at Johns Hopkins University Renard Recinos V, Tyler BM, Brem H, et al. Combination of intracranial temozolomide with intracranial carmustine improves survival when compared with either treatment alone in a rodent glioma model. Neurosurgery 2010; 66:530-537, it was shown that the additive effect of combined delivery of local temozolomide with local BCNU, especially in combination with radiotherapy, was significantly more effective than delivery of either drug alone or one systemically and one locally, either with or without radiation. Groups treated with combination of local temozolomide, local BCNU and radiation therapy had 75% long-term survivors.


2.

We are developing our BranchPoint device that can potentially deliver therapeutics through the radial deployment of a flexible delivery catheter to large and anatomically complex brain targets through a single initial brain penetration. It can potentially enable new approaches to neurological therapy and be modified for the delivery of a broad range of novel therapeutics, such as stem cells to treat neurodegenerative diseases, chemotherapeutics to brain tumors and gene therapy vectors. A 510(k) application was submitted to the FDA on June 15, 2015.  Furthermore, UCSF requested a pre-IND meeting with the FDA on November 4, 2015 to discuss a collaborative program between UCSF and us to evaluate a combined stem cell/gene transfer candidate therapeutic CNS10-NPC GDNF for the treatment of Parkinson's Disease using our BranchPoint delivery device. UCSF received a written response from the FDA on March 21, 2016 which provided guidance on the non-clinical activities that are necessary to enable the filing of a future potential IND application. CNS10-NPC are human fetal neural stem cells that express Glial-Derived Neurotrophic Factor (GDNF) in the treatment of Parkinson's Disease, and are expected to be supplied by the Cedars-Sinai Regenerative Medicine Institute in support of IND enabling studies.


The development of our programs is estimated to cost approximately $5-7 million over 4-5 years as a standalone company. However, we may seek to pursue a strategic collaboration partnership which may accelerate the development timeline, share expenses, and also provide access to ex-US markets.  The development of our programs may also cost substantially more than $5-7 million and may require a substantially longer development timeline than 4-5 years.  Higher development expenses and delays may be caused by but are not limited to sub-optimal product performance and continued product optimization cycles, adverse clinical results and repeat of clinical trials, or delays of an FDA approval.  In such a scenario, we may not be able to secure sufficient funding or a strategic collaboration partnership and could cease operations under such circumstances.


Need for Additional Capital


As we continue the development of our pipeline programs, we are actively seeking to raise additional capital.  If we are unable to raise additional capital to develop our development pipeline and business, we might have to suspend or cease operations and our investors may lose their investment.



37




We have no assurance that future financings will be available to us on acceptable terms.  If financing is not available on satisfactory terms, we may be unable to continue, develop, or expand our operations. Equity financing could result in additional dilution to existing shareholders.


Liquidity and Capital Resources


The reader is referred to our financial statements included elsewhere herein.  As of December 31, 2015, we had $2,011,777 cash, cash equivalents and marketable securities on hand.  We are actively seeking additional capital investment as the total required capital for our product development over the next four to five years is estimated to be from $5 million to $7 million as a standalone company.  We cannot assure you that we will have access to the funding required for our product development or that if available it will be available on terms that are not dilutive to our present shareholders.  If the funding is not available, we may have to severely curtail or cease operations.  We believe that our OTCQB listing will assist us in our funding efforts.  Most of the funds we raise will be applied directly towards continued development of our pipeline programs.  


Results of Operations for the Twelve Months ended December 31, 2015


Revenues


We had no revenues as a development stage company for the twelve months ended December 31, 2015 and 2014, respectively.


Operating Expenses


Depreciation and Amortization Expenses:  Depreciation and Amortization expenses were $42,276 and $94,298 for the twelve months ended December 31, 2015 and 2014, respectively.  The decrease was due to the termination of the UAMS License and end of associated patent amortization.


Impairment Loss:  Impairment losses were $0 and $4,304,927 for the twelve months ended December 31, 2015 and 2014, respectively.  The decrease was due to the termination of the UAMS License and end of associated write-offs of the licensing fees.


Research and Development:  Research and development expenses were $1,638,868 and $177,414 for the twelve months ended December 31, 2015 and 2014, respectively.  The increase was due to the development efforts and formulation work associated with our ACX-31 program and BranchPoint device.


General and Administrative:  General and administrative expenses were $956,482 and $123,127 for the twelve months ended December 31, 2015 and 2014, respectively.  The increase was primarily caused by the share issuances in connection with investor relations and media consulting agreements.


Net Loss


We had a net loss of $2,564,597 and $4,737,670 for the twelve months ended December 31, 2015 and 2014, respectively.  The decrease was due to the end of impairment losses caused by write-offs.


Off-Balance Sheet Arrangements


We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, and results of operations, liquidity or capital expenditures.


CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES


We prepare our financial statements in accordance with generally accepted accounting principles in the United States of America.  The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.  Significant accounting policies and methods used in preparation of the financial statements are described in Note 1 to our financial statements included in this Form 10-k.  We evaluate our estimates and assumptions on a regular basis, based on historical experience and other relevant factors.  Actual results could differ materially from these estimates and



38



assumptions.  The following critical accounting policies are impacted by judgments, assumptions and estimates used in preparation of our financial statements included in this registration statement.


Prepaid Assets


On January 12, 2015, we and the Lim Development Group (“Consultant”) entered into a consulting agreement (“Agreement”) under which the Consultant provides scientific advisory to us in the development, partnering and commercialization of the “Microinjection Brain Catheter” (a.k.a. BranchPoint device) that we exclusively licensed from the University of California San Francisco (“UCSF”) on September 16, 2014.  As consideration for provided services, we issued a promissory note (“Note”) in the amount of $200,000 at an interest rate of 5.00% per annum to the Consultant.  The principal amount of the Note is amortized on a straight-line basis over the 24-month term of the Agreement.


On February 18, 2015, we entered into a consulting agreement (“Agreement”) with the Capital Communications Group (“Consultant”) under which the Consultant assists us in our efforts to gain greater recognition and awareness among relevant investors in the public capital markets on a non-exclusive basis.  In connection with the Agreement, we issued a four-year Warrant (“Warrant”) to the Consultant under which the Consultant is entitled to purchase from us up to 200,000 shares of our Company’s Common Stock (“Warrant Shares”) at an exercise price of $0.50 per Share (“Exercise Price”).  The Warrant is exercisable, in whole or in part, during the term commencing on the issuance date of the Warrant on February 18, 2015 and ending on February 18, 2019 (the “Exercise Period”).  The 200,000 Warrant Shares are valued at $527,500 based on the Black-Scholes formula and are amortized on a straight-line basis over the 24-month term of the Agreement.


On February 4, 2015, we issued 57,000 shares of our common stock to a consultant to provide investor relations services over 3 months per its consulting agreement.  The 57,000 issued shares of common stock are valued at $2 per share, equal to the price per share paid by an investor in a prior sale of our Company’s shares of common stock on July 15, 2014, and are capitalized in the amount of $114,000 and amortized over the 3-month term of the consulting agreement.


On February 10, 2015, we issued 150,000 shares of our common stock to a consultant to provide media services over 6 months per its consulting agreement.  The 150,000 issued shares of common stock are valued at $2 per share, equal to the price per share paid by an investor in a prior sale of our Company’s shares of common stock on July 15, 2014, and are capitalized in the amount of $300,000 and amortized over the 6-month term of the consulting agreement.


On March 17, 2015, we issued 20,000 shares of our common stock to a consultant to provide investor relations services over 6 months per its consulting agreement.  The 20,000 issued shares of common stock are valued at $2 per share, equal to the price per share paid by an investor a prior sale of our Company’s shares of common stock on July 15, 2014, and are capitalized in the amount of $40,000 and amortized over the 6-month term of the consulting agreement.


On August 11, 2015 (“Effective Date”), we entered into an exclusive license agreement (“ACL License”) with Accelerating Combination Therapies LLC (“ACL”) in regards to the exclusive licensing of the issued U.S. Patent No. 8,895,597 B2 Combination of Local Temozolomide with Local BCNU (“Patent Rights”).  Under the ACL License, we are required to pay ACL a license issue fee of 1,000,000 shares of our Company’s common stock to be issued within 6 months after the Effective Date. The 1,000,000 shares of common stock are valued at $1.13 per share, equal to the publicly traded share price on the Effective Date, are capitalized in the amount of $1,130,000 and amortized over an expected patent life of 15 years.


Fixed Assets


We have purchased equipment to support the development of our prototype device which are capitalized in the amount of $166,119 as fixed assets on our Company’s balance sheet as of December 31, 2015.  The equipment is amortized on a straight-line basis over 5 years.


Research and Development Expenses


We expense all of our research and development expenses in the period in which they are incurred.  At such time as our products are determined to be commercially available, we will capitalize those development expenditures that are related to the maintenance of the commercial products, and amortize these capitalized expenditures over the estimated life of the commercial product. The estimated life of the commercial product will be based on management’s estimates, including estimates of current and future industry conditions. A significant change to these assumptions could impact the estimated useful life of our commercial products resulting in a change to amortization expense and impairment charges.



39




Impact of New Accounting Standards


The Company does not expect the adoption of recently issued accounting pronouncements to have a significant impact on the Company's results of operations, financial position, or cash flow.


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


Not applicable




40



ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


Set forth below is a list of audited financial statements for the years ended December 31, 2015 and 2014.



INDEX TO FINANCIAL STATEMENTS


Report of Independent Registered Public Accounting Firm Seale & Beers, CPAs

F-1

 

 

 

 

 

 

 

 

 

Balance Sheets at December 31, 2015 and 2014

F-2

 

 

 

 

 

 

 

 

 

Statements of Operations for the year ended December 31, 2015 and 2014

F-3

 

 

 

 

 

 

 

 

 

Statements of Cash Flow for the year ended December 31, 2015 and 2014

F-4

 

 

 

 

 

 

 

 

 

Statements of Stockholders' Deficit for the year ended December 31, 2015 and 2014

F-5

 

 

 

 

 

 

 

 

 

Notes to Financial Statements

F-6





41



SEALE AND BEERS, CPAs

PCAOB & CPAB REGISTERED AUDITORS

www.sealebeers.com



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Stockholders of

Accurexa, Inc.


We have audited the accompanying balance sheets of Accurexa, Inc. as of December 31, 2015 and December 31, 2014, and the related statements of operations, stockholders’ equity (deficit), and cash flows for the periods ended December 31, 2015 and December 31, 2014. Accurexa, Inc.’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.


We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.


In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Accurexa, Inc. as of December 31, 2015 and December 31, 2014, and the related statements of income, stockholders’ equity (deficit), and cash flows for each of the years in the two-year period ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of America.


The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 2 to the financial statements, the Company has no revenues, has incurred recurring losses and recurring negative cash flow from operating activities, and has an accumulated deficit which raises substantial doubt about its ability to continue as a going concern.  Management’s plans concerning these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.


/s/ Seale and Beers, CPAs


Seale and Beers, CPAs

Las Vegas, Nevada

March 28, 2016




F-1




ACCUREXA INC.

Balance Sheets

(Audited)

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

2015

 

December 31,

2014

ASSETS

 

 

 

Current assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,811,871 

$

555,506 

 

Marketable securities

 

 

199,906 

 

 

    Total current assets

 

 

2,011,777 

 

555,506 

Prepaid assets

 

 

2,067,694 

 

786,685 

Fixed assets, net

 

 

166,119 

 

157,320 

 

    Total assets

 

$

4,245,590 

$

1,499,511 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

Accounts payable and other accruals, including related party liabilities of $149,000 as of December 31, 2015 and $105,000 as of December 31, 2014

$

180,782 

$

266,026 

 

    Total current liabilities

 

 

180,782 

 

266,026 

 

Convertible notes, net of unamortized debt discount

 

 

383,980 

 

353,060 

 

    Total liabilities

 

 

564,762 

 

619,085 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

STOCKHOLDERS' EQUITY

 

 

 

 

 

 

Convertible preferred stock

 

 

 

 

 

 

 

Authorized 2,000,000 shares at par value of $0.0001 and with a stated value of $1,000

 

 

 

 

 

 

 

Issued and outstanding 1,625 shares as of December 31, 2015 and 0 shares as of December 31, 2014

 

 

 

 

Common stock

 

 

 

 

 

 

 

Authorized 20,000,000 shares at par value of $ 0.0001 each

 

 

 

 

 

 

 

Issued and outstanding 7,513,816 shares as of December 31, 2015 and 5,786,816 shares as of December 31, 2014

 

 

751 

 

579 

 

Common stock issuable

 

 

1,132,000 

 

2,000 

 

Additional paid-in capital

 

 

12,639,978 

 

6,425,151 

 

Accumulated deficit

 

 

(10,091,902)

 

(5,547,305)

 

 

Total stockholders' deficit

 

 

3,680,828 

 

880,425 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders' deficit

 

$

4,245,590 

$

1,499,511 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements.



F-2




ACCUREXA INC.

Statements of Operations

(Audited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended

December 31,

2015

 

Year Ended

December 31,

2014

 

 

 

 

 

 

 

 

Revenue

 

$

$

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

Depreciation and Amortization Expense

 

 

42,276 

 

94,298 

 

Impairment Loss

 

 

 

4,304,927 

 

Research & Development

 

 

1,638,868 

 

177,414 

 

General and Administrative

 

 

956,482 

 

123,127 

Total Operating Expenses

 

 

2,637,627 

 

4,699,766 

 

 

 

 

 

 

 

 

Loss from Operations

 

 

(2,637,627)

 

(4,699,766)

 

 

 

 

 

 

 

 

Interest Income (Expense)

 

 

(71,475)

 

(37,904)

Gain from Extinguishment of Debt

 

 

144,505 

 

Loss before provisions for income taxes

 

 

(2,564,597)

 

(4,737,670)

 

 

 

 

 

 

 

 

Provision for income taxes

 

 

 

Net Loss

 

$

(2,564,597)

 $

(4,737,670)

 

 

 

 

 

 

 

 

Loss per common share - basic and fully diluted:

 

$

(0.41)

 $

(1.19)

 

 

 

 

 

 

 

 

Weighted average number of basic and fully diluted common shares outstanding

 

 

6,306,019 

 

3,976,122 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements.



F-3




ACCUREXA INC.

Statements of Cash Flows

(Audited)

 

 

 

 

 

 

 

 

 

 

 

Year Ended

December 31,

2015

 

Year Ended

December 31,

2014

 

 

 

 

 

 

 

Cash flows from operations:

 

 

 

 

 

Loss from continuing operations

$

(2,564,597)

$

(4,737,670)

 

Adjustment to reconcile net loss to net cash used in operating activities:

 

 

 

 

Depreciation and Amortization

 

42,276 

 

94,298 

 

 

Impairment Loss

 

 

4,304,927 

 

 

Amortization of non-cash expenses

 

2,090,490 

 

113,315 

 

 

Amortization of discount on convertible notes

 

30,920 

 

3,060 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts payable and other accruals

 

(85,244)

 

58,346 

Net cash used in operations

 

(486,154)

 

(163,724)

 

 

 

 

 

 

 

Investment activities:

 

 

 

 

 

Investment in fixed assets

 

(51,075)

 

(162,294)

 

Investment in marketable securities

 

(199,906)

 

Net cash used in investment activities

 

(250,981)

 

(162,294)

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

Convertible notes received

 

 

20,000 

 

Share subscriptions received

 

1,993,500 

 

43,454 

Net cash provided by financing activities

 

1,993,500 

 

63,454 

 

 

 

 

 

 

 

Net (decrease) / increase in cash

 

1,256,365 

 

(262,564)

 

 

 

 

 

 

 

Cash, beginning of period

 

555,506 

 

818,070 

Cash, end of period

$

1,811,871 

$

555,506 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid for interest

$

35,000 

$

35,000 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements.



F-4




ACCUREXA INC.

Statement of Stockholders' Equity

(Audited)

 

 

 

 

 

 

 

 

 

 

 Convertible Preferred Stock

 Preferred Stock Amount

 Common Stock

 Common Stock Amount

 Common Stock Issuable

 Additional paid-in capital

 Accumulated (Deficit)

 Stockholders' Equity

 

 

 

 

 

 

 

 

 

Balance December 31, 2013

3,162,316

$

316

$

-

$

1,161,960 

$

(809,634)

$

352,642 

 

 

 

 

 

 

 

 

 

Shares issued pursuant to private placements

24,500

2

-

43,452 

43,454 

Common Stock Issuable to Mr. Callahan

-

-

2,000

2,000 

Shares issued pursuant to consulting agreement

450,000

45

-

899,955 

900,000 

Shares issued pursuant to asset purchase agreement

2,150,000

215

-

4,299,785 

4,300,000 

Discount on Convertible Note

-

-

-

20,000 

20,000 

Net (loss) for the period

-

-

-

(4,737,670)

(4,737,670)

 

 

 

 

 

 

 

 

 

Balance December 31, 2014

$

5,786,816

$

579

$

2,000

$

6,425,151 

$

(5,547,305)

$

880,425 

 

 

 

 

 

 

 

 

 

Shares issued pursuant to consulting and service agreements

1,227,000

123

-

1,513,877 

1,514,000 

Lim Development Group Convertible Note

-

-

-

200,000 

200,000 

Capital Group Communications Warrants

-

-

-

527,500 

527,500 

$2.25m Equity Financing, net of offering costs and beneficial conversion feature

2,250 

0.225 

-

-

-

3,973,500 

(1,980,000)

1,993,500 

Conversion Preferred to Common

(625)

(0.063)

500,000

50

-

(50)

ACL License Shares Issuable

-

-

1,130,000

1,130,000 

Net (loss) for the period

-

-

-

(2,564,597)

(2,564,597)

 

 

 

 

 

 

 

 

 

Balance December 31, 2015

1,625 

$

0.163 

7,513,816

$

751

$

1,132,000

$

12,639,978 

$

(10,091,902)

$

3,680,828 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements.



F-5



ACCUREXA INC.

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2015




1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


Description of Business


Accurexa, Inc. (the “Company”) was incorporated under the laws of the state of Delaware on August 29, 2012. The Company elected its fiscal year ending on December 31. The Company is a development stage company as defined in the Accounting Standards Codification 915, Development Stage Entities. All activities of the Company to date relate to its organization, initial funding and share issuances, and research & development.


The Company is focused on developing novel neurological therapies to be directly delivered into specific regions of the brain.  As its first development program, the Company is developing its ACX-31 program to deliver two chemotherapy drugs, temozolomide in combination with BCNU, locally to brain tumor sites. The ACX-31 program is based on an issued patent licensed from Accelerating Combination Therapies LLC which is co-owned by Dr. Henry Brem, Director of the Neurosurgery Department at Johns Hopkins University (“ACL License”). The Company is collaborating in the development of its ACX-31 program with Dr. Henry Brem who built one of the largest brain tumor research and treatment centers in the world at Johns Hopkins University.  Dr. Robert Langer, who is the David H. Koch Institute Professor at MIT and the most cited engineer in history, is also advising the Company in the development of its ACX-31 program. Both Dr. Brem and Dr. Langer are pioneers in the development of local drug delivery treatments, and invented and developed Gliadel® which is a FDA approved, local chemotherapy for the treatment of glioblastoma multiforme.  The Company entered into an agreement with the Yissum Research Development Company of The Hebrew University of Jerusalem Ltd. (“Yissum”) to develop and supply a polymeric formulation of a combination of temozolomide and BCNU.  Professor Avi Domb of The Hebrew University of Jerusalem had previously worked with Dr. Langer on the formulation of Gliadel® and leads the development efforts provided by Yissum.


As its second development program, the Company is developing its BranchPoint device that can potentially deliver therapeutics through the radial deployment of a flexible delivery catheter to large and anatomically complex brain targets through a single initial brain penetration.  The BranchPoint device was originally developed at the University of California, San Francisco (UCSF) with $1.8 million in funding from the California Institute for Regenerative Medicine (CIRM).  It is based on a neurosurgical delivery platform that the Company has exclusively licensed from UCSF.  It can potentially enable new approaches to neurological therapy and be modified for the delivery of a broad range of novel therapeutics, such as stem cells to treat neurodegenerative diseases, chemotherapeutics to brain tumors and gene therapy vectors.  A 510(k) application was submitted to the FDA on June 15, 2015.  Furthermore, UCSF requested a pre-IND meeting with the FDA on November 4, 2015 to discuss a collaborative program between UCSF and the Company to evaluate a combined stem cell/gene transfer candidate therapeutic CNS10-NPC GDNF for the treatment of Parkinson's Disease using the Company’s BranchPoint delivery device. UCSF received a written response from the FDA on March 21, 2016 which provided guidance on the non-clinical activities that are necessary to enable the filing of a future potential IND application. CNS10-NPC are human fetal neural stem cells that express Glial-Derived Neurotrophic Factor (GDNF) in the treatment of Parkinson's Disease, and are expected to be supplied by the Cedars-Sinai Regenerative Medicine Institute in support of IND (Investigational New Drug) enabling studies.


Accounting Basis


These financial statements are prepared on the accrual basis of accounting in conformity with accounting principles generally accepted in the United States of America.


Use of Estimates


Management uses estimates and assumptions in preparing financial statements. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could differ from these estimates.


Cash and Cash Equivalents


Cash equivalents comprise certain highly liquid instruments with a maturity of three months or less when purchased.  





F-6



ACCUREXA INC.

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2015




Concentration of Credit Risk and Financial Instruments


Financial instruments which potentially subject the Company to concentration of credit risk consist principally of cash balances maintained at creditworthy financial institutions.  The Company maintained cash balances in bank checking and savings accounts which, at times, either may exceed insured limits set or are not insured by the Federal Deposit Insurance Corporation (FDIC).  As of December 31, 2015, $1,303,129 of the Company’s cash balances at a US domestic bank were not insured by the FDIC.  The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on its cash and cash equivalents.


Fair Value of Financial Instruments


The Company’s financial instruments consist of cash, marketable securities and accounts payable.  The carrying values of financial instruments reflected in these financial statements approximate their fair values due to the short-term maturity of the instruments.


Earnings (Loss) per Share


The basic earnings (loss) per share are calculated by dividing the Company’s net income available to common shareholders by the weighted average number of common shares outstanding during the reported period. The diluted earnings (loss) per share are calculated by dividing the Company’s net income (loss) available to common shareholders by the diluted weighted average number of shares outstanding during the year. The diluted weighted average number of shares outstanding is the basic weighted number of shares adjusted as of the first of the period for any potentially dilutive debt or equity. There are no diluted shares outstanding.


Revenue Recognition


The Company has no current source of revenue; therefore the Company has not yet adopted any policy regarding the recognition of revenue.


Start-up Cost


The Company accounts for start-up costs pursuant to the provisions of the Accounting Standard Codification 720-15. Accounting for start-up costs require all costs incurred in connection with the start-up and organization of the Company be expensed as incurred.


Research and Development Expenses


The Company expenses all of its research and development expenses in the period in which they are incurred.  At such time as the Company’s products are determined to be commercially available, the Company will capitalize those development expenditures that are related to the maintenance of the commercial products, and amortize these capitalized expenditures over the estimated life of the commercial products.  The estimated life of the commercial products will be based on management’s estimates, including estimates of current and future industry conditions.  A significant change to these assumptions could impact the estimated useful life of the Company’s commercial products resulting in a change to amortization expense and impairment charges.


Income Taxes


The Company accounts for income taxes pursuant to the provisions of the Accounting Standards Codification 740, Accounting for Income Taxes, which requires an asset and liability approach to calculate deferred income taxes. The asset and liability approach requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary difference between the carrying amounts and the tax basis of assets and liabilities. As a result of the initial period’s incurred loss the deferred tax asset has been fully reserved.




F-7



ACCUREXA INC.

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2015




Recent Accounting Pronouncements


On June 10, 2014, the FASB issued ASU 2014-10, Elimination of Certain Financial Reporting Requirements, including Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation. The content resulting from the issuance of ASU 2014-10 eliminates inception-to-date presentation and other disclosure requirements in ASC Topic 915 for entities previously considered development stage entities. Early adoption is permitted, and the Company has elected to make an early adoption of ASU 2014-10.


The Company's management has evaluated all other recently issued accounting pronouncements through the filing date of these financial statements and does not believe that any of these pronouncements will have a material impact on the Company's financial position and results of operations.


2 - GOING CONCERN


The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the accompanying financial statements, the Company has incurred net losses and negative cash flows from operating activities for the year ended December 31, 2015, and has an accumulated deficit of $10,091,902 as of December 31, 2015. The Company has relied upon raising capital through equity financings to fund its ongoing operations to date, and expects to continue to do so, as it has yet to generate cash from its operating activities. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The Company intends to raise additional capital through equity and/or debt financings as well as through entering into sub-license agreements with strategic partners in order to ensure the Company continues operations. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.


3 – PREPAID ASSETS


On January 12, 2015, the Company and the Lim Development Group (“Consultant”) entered into a consulting agreement (“Agreement”) under which the Consultant provides scientific advisory to the Company in the development, partnering and commercialization of the “Microinjection Brain Catheter” (a.k.a. BranchPoint device) that the Company exclusively licensed from the University of California San Francisco (“UCSF”) on September 16, 2014.  As consideration for provided services, the Company issued a promissory note (“Note”) in the amount of $200,000 at an interest rate of 5.00% per annum to the Consultant.  The principal amount of the Note is amortized on a straight-line basis over the 24-month term of the Agreement.


On February 18, 2015, the Company entered into a consulting agreement (“Agreement”) with the Capital Communications Group (“Consultant”) under which the Consultant assists the Company in its efforts to gain greater recognition and awareness among relevant investors in the public capital markets on a non-exclusive basis.  In connection with the Agreement, the Company issued a four-year Warrant (“Warrant”) to the Consultant under which the Consultant is entitled to purchase from the Company up to 200,000 shares of the Company’s Common Stock (“Warrant Shares”) at an exercise price of $0.50 per Share (“Exercise Price”).  The Warrant is exercisable, in whole or in part, during the term commencing on the issuance date of the Warrant on February 18, 2015 and ending on February 18, 2019 (the “Exercise Period”).  The 200,000 Warrant Shares are valued at $527,500 based on the Black-Scholes formula and are amortized on a straight-line basis over the 24-month term of the Agreement.


On February 4, 2015, the Company issued 57,000 shares of its common stock to a consultant to provide investor relations services over 3 months per its consulting agreement.  The 57,000 issued shares of common stock are valued at $2 per share, equal to the price per share paid by an investor in a prior sale of the Company’s shares of common stock on July 15, 2014, and are capitalized in the amount of $114,000 and amortized over the 3-month term of the consulting agreement.


On February 10, 2015, the Company issued 150,000 shares of its common stock to a consultant to provide media services over 6 months per its consulting agreement.  The 150,000 issued shares of common stock are valued at $2 per share, equal to the price per share paid by an investor in a prior sale of the Company’s shares of common stock on July 15, 2014, and are capitalized in the amount of $300,000 and amortized over the 6-month term of the consulting agreement.


On March 17, 2015, the Company issued 20,000 shares of its common stock to a consultant to provide investor relations services over 6 months per its consulting agreement.  The 20,000 issued shares of common stock are valued at $2 per share, equal to the



F-8



ACCUREXA INC.

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2015




price per share paid by an investor in a prior sale of the Company’s shares of common stock on July 15, 2014, and are capitalized in the amount of $40,000 and amortized over the 6-month term of the consulting agreement.


On August 11, 2015 (“Effective Date”), the Company entered into an exclusive license agreement (“ACL License”) with Accelerating Combination Therapies LLC (“ACL”) in regards to the exclusive licensing of the issued U.S. Patent No. 8,895,597 B2 Combination of Local Temozolomide with Local BCNU (“Patent Rights”).  Under the ACL License, the Company is required to pay ACL a license issue fee of 1,000,000 shares of our Company’s common stock to be issued within 6 months after the Effective Date. The 1,000,000 shares of common stock are valued at $1.13 per share, equal to the publicly traded share price on the Effective Date, are capitalized in the amount of $1,130,000 and amortized over an expected patent life of 15 years.


4 – FIXED ASSETS


The Company has purchased equipment to support the development of its prototype device which is capitalized in the amount of $166,119 as fixed assets on the Company’s balance sheet as of December 31, 2015.  The equipment is amortized on a straight-line basis over 5 years.


5 – ACCOUNTS PAYABLE


On August 18, 2015, the Company executed a License Termination Agreement (“Termination Agreement”) with the Board of Trustees of the University of Arkansas (“UofA”) acting for and on behalf of the University of Arkansas for Medical Sciences (“UAMS”) under which both parties terminated the UAMS License and Research Agreement in order to be relieved of all liability for future payments of any consideration. As a result of the Termination Agreement, a total of $144,505 in accounts payable to UAMS and related to past patent, licensing and research agreement project costs were written off, and recorded as gain from extinguishment of debt in the statement of operations for the twelve months ended December 31, 2015.


6 – INCOME TAXES


The Company provides for income taxes under ASC Topic 740 which requires the use of an asset and liability approach in accounting for income taxes. Deferred tax assets and liabilities are recorded based on the differences between the financial statement and tax bases of assets and liabilities and the tax rates in effect currently.


ASC 740 requires the reduction of deferred tax assets by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. In the Company’s opinion, it is uncertain whether they will generate sufficient taxable income in the future to fully utilize the net deferred tax asset. Accordingly, a valuation allowance equal to the deferred tax asset has been recorded. The total deferred tax asset is $893,562 which is calculated by multiplying a 34% estimated tax rate by the cumulative NOL of $2,628,123. The total valuation allowance is a comparable $893,562. Details are as follows:


 

Twelve Months Ended

December 31,

2015

Deferred Tax Asset

893,562 

Valuation Allowance

(893,562)

Current Taxes Payable

0.00 

Income Tax Expense

$

0.00 


Below is a chart showing the estimated corporate federal net operating loss (NOL) and the year in which it will expire.


Year

Amount

Expiration

2012

$

8,564

2032

2013

$

262,041

2033

2014

$

1,610,808

2034

2015

$

893,562

2035

Total NOL

$

2,774,975

 



F-9



ACCUREXA INC.

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2015









7 – RELATED PARTY TRANSACTIONS


Accounts payable includes $149,000 of accrued salary due to the Company’s Chief Executive Officer as of December 31, 2015.


8 – STOCKHOLDERS’ EQUITY


The Company has authorized 20,000,000 Common Shares and 2,000,000 Preferred Shares at a par value of $0.0001 per share.


On February 4, 2015, the Company issued 57,000 shares of its common stock to a consultant to provide investor relations services over 3 months per its consulting agreement.  These shares were issued pursuant to Regulation D under the Securities Act of 1933, as amended, are exempt from registration by reason of Section 4(2) of the Securities Act of 1933, as amended (the “Act”), and bear an appropriate restrictive legend.


On February 10, 2015, the Company issued 150,000 shares of its common stock to a consultant to provide media services over 6 months per our consulting agreement.  These shares were issued pursuant to Regulation D under the Securities Act of 1933, as amended, are exempt from registration by reason of Section 4(2) of the Securities Act of 1933, as amended (the “Act”), and bear an appropriate restrictive legend.


On March 17, 2015, the Company issued 20,000 shares of its common stock to a consultant to provide investor relations services over 6 months per our consulting agreement.  These shares were issued pursuant to Regulation D under the Securities Act of 1933, as amended, are exempt from registration by reason of Section 4(2) of the Securities Act of 1933, as amended (the “Act”), and bear an appropriate restrictive legend.


On November 12, 2015, the Company issued 1,000,000 shares of its common stock in order to access the technology know-how in connection with the service agreement that the Company entered into with the Yissum Research Development Company of The Hebrew University of Jerusalem Ltd. to develop and supply a polymeric formulation of a combination of carmustine and temozolomide for sustained local administration to a solid tumor.  These shares were issued pursuant to Regulation D under the Securities Act of 1933, as amended, are exempt from registration by reason of Section 4(2) of the Securities Act of 1933, as amended (the “Act”), and bear an appropriate restrictive legend.   


On February 8, 2016, the Company issued 1,000,000 shares of its common stock as license issue fee in connection with the exclusive license agreement (“ACL License”) that the Company entered into with Accelerating Combination Therapies LLC (“ACL”) in regards to the exclusive licensing of the issued U.S. Patent No. 8,895,597 B2 Combination of Local Temozolomide with Local BCNU on August 11, 2015 (“Effective Date”).  The license issue fee is to be issued within 6 months after the Effective Date. These shares are issued pursuant to Regulation D under the Securities Act of 1933, as amended, are exempt from registration by reason of Section 4(2) of the Securities Act of 1933, as amended (the “Act”), and bear an appropriate restrictive legend.   


On March 18, 2016, the Company issued 67,000 shares of our Company’s common stock to a consultant to provide media services over 3 months per our consulting agreement.  These shares were issued pursuant to Regulation D under the Securities Act of 1933, as amended, were exempt from registration by reason of Section 4(2) of the Securities Act of 1933, as amended (the “Act”), and bear an appropriate restrictive legend.


There were no underwriters employed in connection with any of the transactions described above.


9 – CONVERTIBLE PREFERRED STOCK


On June 22, 2015, the Company closed a private placement of 2,250 shares of the Company's convertible preferred stock for gross proceeds to the Company of $2,250,000 and net proceeds of $1,993,500.  The convertible preferred stock is convertible into shares of common stock of the Company at a conversion price of $1.25 per share. The Preferred Stock has no dividend rights or liquidation preference. If dividends are declared on the Common Stock, the holders of the Preferred Stock shall be entitled to participate in such dividends on an as-converted-to-common stock basis. The Company recorded a beneficial conversion feature



F-10



ACCUREXA INC.

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2015




of $1,980,000 based on the fair value of the common stock and the conversion rate as of the date of the offering.  This amount was recorded as a deemed distribution during the period of the offering.  


10 - FORM S-1 REGISTRATION STATEMENT


On July 6, 2015, the Company filed a Form S-1 registration statement that relates to the offer and resale of up to 3,762,000 shares of the Company’s common stock, par value $0.0001 per share, by the selling stockholders (“Selling Stockholders”) listed in the Form S-1 registration statement (“Selling Stockholders”), issuable to such stockholders upon the conversion of shares of the Company’s preferred stock or exercise of an aggregate of 1,800,000 warrants which the Company sold to investors in a private placement, or exercise of an aggregate of 162,000 warrants which the Company issued to its placement agent. In that private placement the Company sold an aggregate of 2,250 shares of its Series A convertible preferred stock, par value $0.0001 per share (“Preferred Stock”) for gross proceeds to the Company of $2,250,000. Each share of the Preferred Stock is convertible into 800 shares of the Company’s common stock (“Common Stock”) which results in an effective conversion price of $1.25 per share. The Preferred Stock has no dividend rights or liquidation preference. If dividends are declared on the Common Stock, the holders of the Preferred Stock shall be entitled to participate in such dividends on an as-converted-to-common stock basis. In addition, in the private placement the Company issued to the investors warrants (“Investor Warrants”) to purchase up to 1,800,000 shares of Common Stock. The Warrants have an exercise price of $1.50 per share and are exercisable through June 21, 2019. The shares of the Company’s common stock issuable on exercise of the Investor Warrants are registered under the Company’s Form S-1. H.C. Wainwright & Co., LLC (“Placement Agent”) acted as the exclusive placement agent for the placement of the Company’s Preferred Stock and Investor Warrants.  The Placement Agent purchased securities in the offering on the same terms and conditions as the other investors.  In addition, the Placement Agent and its designees received an aggregate of 162,000 warrants to purchase the Company’s common stock at a price of $1.50 per share through June 21, 2019 (“Agent Warrants”).  The shares underlying the Agent Warrants are registered under the Company’s Form S-1. The Company will not receive any proceeds from the sale of shares sold by the Selling Stockholders or from the conversion of Preferred Stock.  However, the Company will receive proceeds of $1.50 per share upon the exercise of any Investor Warrants or Agent Warrants.  The Company’s Form S-1 registration statement became effective on August 10, 2015.


On August 11, 2015, the Selling Stockholders converted an aggregate of 375 convertible preferred stock into 300,000 shares of common stock that were issued by the Company to the Selling Stockholders.


On September 1, 2015, the Placement Agent converted an aggregate of 250 convertible preferred stock into 200,000 shares of common stock that were issued by the Company to the Placement Agent.


11 - WARRANTS


In connection with the private placement of 2,250 shares of the Company's convertible preferred stock on June 22, 2015, the Company issued to the investors warrants to purchase up to 1,800,000 shares of common stock. The warrants have an exercise price of $1.50 per share and are exercisable for 4 years. The Company also issued an aggregate of 162,000 warrants that were similar to the warrants issued to investors and are exercisable at $1.50 per share for 4 years, to our placement agent and its designees.


The following is a summary of the status of all of the Company’s stock warrants as of September 30, 2015 and changes during the periods ended on that date:


 

Number

of Warrants

 

Weighted-Average

Exercise Price

Outstanding at January 1, 2015

-

 

$     0.00

Granted

2,162,000

 

$     1.41

Exercised

-

 

$     0.00

Cancelled

-

 

$     0.00

Outstanding at December 31, 2015

2,162,000

 

$     1.41

Warrants exercisable at December 31, 2015

2,162,000

 

$     1.41





F-11



ACCUREXA INC.

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2015




12 - CONVERTIBLE NOTES


On July 25, 2013, the Company entered into a secured convertible note (“Note”) under which the Company received $350,000 from the convertible note holder (“Holder”) and is obligated to pay to the Holder the full principal amount after 36 months from the date of the Note, plus an interest at the rate of 10.0% per year payable at the end of each year from the date of the Note.  The Holder has the right to convert the Note, in whole or in part, into shares of common stock of the Company (“Common Stock”) at a fixed rate of $2.00 per share (the “Conversion Price”) at any time.  The number of shares issuable on full conversion was 175,000 and their fair market value exceeded the principal amount of the Note by $210,000 as of December 31, 2014.  The Company may prepay the Note in whole or in part at any time for cash on 15 business days’ prior written notice, subject to the right of the Holder to convert into shares of Common Stock of the Company prior to any prepayment.  The Note agreement was filed on August 14, 2013 as an exhibit to Form 10-Q for the three months ended September 30, 2013.


On July 15, 2014, the Company entered into a secured convertible note (“Note”) under which the Company received $20,000 from the convertible note holder (“Holder”) and is obligated to pay to the Holder the full principal amount after 36 months from the date of the Note.  The Holder has the right to convert the Note, in whole or in part, into shares of common stock of the Company (“Common Stock”) at a "Variable Conversion Price" of 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price” means the average of the Closing Trading Prices for the Common Stock during the ten (10) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. The Company may prepay the Note in whole or in part at any time for cash on 15 business days’ prior written notice, subject to the right of the Holder to convert into shares of Common Stock of the Company prior to any prepayment. The Company has determined the value associated with the beneficial conversion feature in connection with the notes to be $20,000. The aggregate beneficial conversion feature was accreted and charged to interest expense in the amount of $9,726 as of December 31, 2015, and will be amortized until July 15, 2017.


On January 12, 2015, the Company and the Lim Development Group (“Consultant”) entered into a consulting agreement (“Agreement”) under which the Consultant provides scientific advisory to the Company in the development, partnering and commercialization of the “Microinjection Brain Catheter” (a.k.a. BranchPoint device) that the Company exclusively licensed from the University of California San Francisco (“UCSF”) on September 16, 2014.  The Consultant will also serve as a member of the Company’s newly formed Scientific Advisory Board.  The term of the Agreement shall be two years and may be extended by mutual agreement of both parties. As consideration for provided services during the term of the Agreement, the Consultant shall receive either a project fee or an hourly rate, either of which will be determined and agreed upon by both parties prior to commencement of any work or project.  Under the Agreement, the Company also issued a promissory note (“Note”) in the amount of $200,000 and at an interest rate of 5.00% per annum to the Consultant.  Under the Note, the Consultant shall have the right, exercisable at any time at the Consultant’s sole discretion, to convert all or a portion of the outstanding principal amount of and all accrued interest under the Note, in whole or in part, into shares of common stock of the Company (the “Shares”) at a conversion price of $0.20 per share.  The Shares are issuable pursuant to Regulation D under the Securities Act of 1933, as amended, are to be exempt from registration by reason of Section 4(2) of the Securities Act of 1933, as amended (the “Act”), and are to bear an appropriate restrictive legend.  A full description of the Agreement was filed as exhibit 10.1 and of the Note was filed as exhibit 10.2 to the Form 8-K as of January 13, 2015.


13 – SUBSEQUENT EVENTS


On February 8, 2016, the Company issued 1,000,000 shares of its common stock as license issue fee in connection with the exclusive license agreement (“ACL License”) that the Company entered into with Accelerating Combination Therapies LLC (“ACL”) in regards to the exclusive licensing of the issued U.S. Patent No. 8,895,597 B2 Combination of Local Temozolomide with Local BCNU on August 11, 2015 (“Effective Date”).  The license issue fee is to be issued within 6 months after the Effective Date. These shares are issued pursuant to Regulation D under the Securities Act of 1933, as amended, are exempt from registration by reason of Section 4(2) of the Securities Act of 1933, as amended (the “Act”), and bear an appropriate restrictive legend.   


On March 18, 2016, we issued 67,000 shares of our Company’s common stock to a consultant to provide media services over 3 months per our consulting agreement.  These shares were issued pursuant to Regulation D under the Securities Act of 1933, as amended, were exempt from registration by reason of Section 4(2) of the Securities Act of 1933, as amended (the “Act”), and bear an appropriate restrictive legend.




F-12





ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES


None


ITEM 9A. CONTROLS AND PROCEDURES


Regulations under the Securities Exchange Act of 1934 (the “Exchange Act”) require public companies to maintain “disclosure controls and procedures,” which are defined as controls and other procedures that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.


We conducted an evaluation, with the participation of our Chief Executive Officer who is also our Principal Financial Officer, of the effectiveness of our disclosure controls and procedures as of December 31, 2015.  Based on that evaluation, our Chief Executive Officer and Principal Financial Officer has concluded that as of December 31, 2015, our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses described below.


In light of the material weaknesses described below, we performed additional analysis and other post-closing procedures to ensure our financial statements were prepared in accordance with generally accepted accounting principles.  Accordingly, we believe that the financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.


A material weakness is a control deficiency (within the meaning of the Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 2) or combination of control deficiencies that result in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.  Management has identified the following two material weaknesses which have caused management to conclude that, as of December 31, 2015, our disclosure controls and procedures were not effective at the reasonable assurance level:


1.  We do not have written documentation of our internal control policies and procedures.  Written documentation of key internal controls over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act which is applicable to us for the year ending December 31, 2015. Management evaluated the impact of our failure to have written documentation of our internal controls and procedures on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.


2.  We do not have sufficient segregation of duties within accounting functions, which is a basic internal control.  Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible.  However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals.  Management evaluated the impact of our failure to have segregation of duties on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.


To address these material weaknesses, management performed additional analyses and other procedures to ensure that the financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented.


Management's Report on Internal Control Over Financial Reporting


Our management is responsible for establishing and maintaining adequate internal control over financial reporting.  Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the issuer’s principal executive and principal financial officers and effected by the issuer’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America and includes those policies and procedures that:



37






 

1.

Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer;

 

 

 

 

2.

Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the issuer; and

 

 

 

 

3.

Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer’s assets that could have a material effect on the financial statements.


Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.  All internal control systems, no matter how well designed, have inherent limitations.  Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.  Because of the inherent limitations of internal control, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting.  However, these inherent limitations are known features of the financial reporting process.  Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.


As of the end of our most recent quarter, management assessed the effectiveness of our internal control over financial reporting based on the criteria for effective internal control over financial reporting established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") and SEC guidance on conducting such assessments. Based on that evaluation, management concluded that, as of December 31, 2015, such internal control over financial reporting was not effective.  This was due to deficiencies that existed in the design or operation of our internal control over financial reporting that adversely affected our internal controls and that may be considered to be material weaknesses.


The matters involving internal control over financial reporting that our management considered to be material weaknesses under the standards of the Public Company Accounting Oversight Board were: (1) lack of a functioning audit committee due to a lack of a majority of independent members and a lack of a majority of outside directors on our board of directors, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures; and (2) inadequate segregation of duties consistent with control objectives of having segregation of the initiation of transactions, the recording of transactions and the custody of assets.  The aforementioned material weaknesses were identified by our Chief Executive Officer in connection with the review of our financial statements as of December 31, 2015.


Management believes that the material weaknesses set forth in items (1) and (2) above did not have an effect on our financial results.  However, management believes that the lack of a functioning audit committee and the lack of a majority of outside directors on our board of directors results in ineffective oversight in the establishment and monitoring of required internal controls and procedures, which could result in a material misstatement in our financial statements in future periods.


This annual 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 SEC that permit the Company to provide only the management's report in this annual report.


Management's Remediation Initiatives


In an effort to remediate the identified material weaknesses and other deficiencies and enhance our internal controls, we have initiated, or plan to initiate, the following series of measures:


We will increase our personnel resources and technical accounting expertise within the accounting function when funds are available to us. First, we will create a position to segregate duties consistent with control objectives of having separate individuals perform (i) the initiation of transactions, (ii) the recording of transactions and (iii) the custody of assets.  Second, we will create a senior position to focus on financial reporting and standardizing and documenting our accounting procedures with the goal of increasing the effectiveness of the internal controls in preventing and detecting misstatements of accounting information.  Third, we plan to appoint one or more outside directors to our board of directors who shall be appointed to an audit committee resulting



38





in a fully functioning audit committee who will undertake the oversight in the establishment and monitoring of required internal controls and procedures such as reviewing and approving estimates and assumptions made by management when funds are available to us.


Management believes that the appointment of one or more outside directors, who shall be appointed to a fully functioning audit committee, will remedy the lack of a functioning audit committee and a lack of a majority of outside directors on our Board.  Due to our small size and limited resources we could experience delays in implementation.


ITEM 9B. OTHER INFORMATION


On June 16, 2015, we filed a Certificate of Designation with the Delaware Secretary of State that authorized the issuance of up to two thousand two hundred fifty (2,250) shares of a new series designated “Series A Convertible Preferred Stock,” and established the rights, preferences and limitations thereof.  Each share of Preferred Stock has a par value of $0.0001 per share and a stated value equal to $1,000.  Each share of Preferred Stock shall be convertible, at any time at the option of the Holder thereof, into that number of shares of Common Stock determined by dividing the Stated Value of such share of Preferred Stock ($1,000.00) by the Conversion Price of $1.25 per share. There are no dividend rights or liquidation preference associated with the Series A Convertible Preferred Stock. The summary of the rights, privileges and preferences of the Series A Convertible Preferred Stock described above is qualified in its entirety by reference to the Certificate of Designation, a copy of which is attached as Exhibit 2.1 to our Form 8-K, filed on June 18, 2015.



PART III


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS


Our directors and executive officers, and their respective ages, positions and offices, are as follows:



Name

Age

 Position(s)


George Yu

43

President & CEO and Director


Anchie Kuo

56

Chairman of the Board and Director


William Callahan

57

Director



Our Chief Executive Officer is also serving as our principal financial officer for the Company.


George Yu


(age 43) has been the President and Chief Executive Officer of the Company since inception.  He has over 15 years of experience in healthcare and technology growth companies, finance, operations, corporate development and the medical field.  His well-rounded background allowed him to start the Company as a founder and raise two equity financings for the Company.  He has the experience to manage product development, clinical trials and to raise additional funding that is critical for the success of the Company. Previously, Dr. Yu served in various operational management and corporate development roles in small healthcare companies and has worked at the management consulting firm Bain & Company, with small-cap hedge funds and in investment banking at Lehman Brothers. Dr. Yu holds a Medical Doctor Degree from the University of Tuebingen, Germany, and a Master in Business Administration in Finance and Economics from Columbia Business School.


Anchie Kuo


(age 56) is a physician, venture capitalist and entrepreneur with over 25 years of experience in the US healthcare industry, serving on the board of over 15 companies. In addition, he has significant experience in the healthcare industry in Asia as the owner and CEO of the first FDA registered suture manufacturer in China.  He has an extensive network of international relationships that could the assist the Company in exploring strategic collaboration partnerships and fundraising.  He could also assist the Company in identifying assets or other small companies that would allow the Company to accelerate its growth through licensing or M&A



39





transactions.  His background as the CEO of an FDA registered suture manufacturer could allow him to provide valuable regulatory insights to the Company.  Dr. Kuo is currently the CEO of Landbridge, based in San Francisco, since January 2012, a company dedicated to helping companies in the US and China with licensing, business development, and financing opportunities.  Previously, Dr. Kuo was the CEO of Arc Medical Supplies Co., Ltd., a medical products manufacturer that distributed products in China, Europe, and the US.  Prior to that, Dr. Kuo was a Managing Partner and co-Founder of Genaissance Capital Group, a top quartile healthcare focused hedge fund.  Prior to that, Dr. Kuo co-founded and became a Managing Director of BankAmerica Ventures (Scale Ventures Partners), a venture group that managed approximately $1.2 billion of assets. Prior to that, Dr. Kuo began in business development at Pfizer Hospital Products Group, a subsidiary of Pfizer Inc., where he was a manger responsible for acquisitions and venture investments. Dr. Kuo received his Bachelors or Arts (Economics) from Dartmouth College in Hanover, New Hampshire. Then Dr. Kuo received his M.D. from Dartmouth Medical School in Hanover, New Hampshire.


William Callahan


(age 57) has spent most of his more than 30-year career in emerging growth companies in the medical device, drug delivery and pharmaceutical industry, establishing and growing operations groups, and participating in the launch of numerous new products.  Mr. Callahan has experience in the translation of research and development projects into commercially viable products, commercial development of new products, set-up of quality control procedures and documentation, and operations.  He has been Senior Director Manufacturing Operations at AcelRx since March 2014.  He was a director of the Company’s board from January 2013 until March 2014, and was a consultant to the pharmaceutical and medical technology industries from February 2012 until March 2014.  From October 2009 until February 2012, he was Vice President Operations for Depomed, Inc. His previous tasks have included establishing GMP manufacturing operations and engineering groups whose responsibilities covered product assembly/manufacturing, process and product development, scale up and technology transfer activities, equipment and process qualification and validation execution, and support of regulatory FDA submissions. Commercial products that he worked on include in-vitro diagnostic devices (Lifescan and Avocet Medical Inc.), medical equipment (Applied Biosystems), transdermal pharmaceutical products (Cygnus Therapeutics), and solid oral drug delivery products (Depomed, Inc).  Throughout his career he has held positions of increasing responsibility in engineering and operations groups at Lifescan – a Johnson & Johnson Co., Applied Biosystems, Cygnus Therapeutics, Avocet Medical, and Depomed, Inc.  He received a B.S. degree in Chemistry from San Francisco State University.


Scientific Advisors


Daniel A. Lim, MD PhD, is Assistant Professor of Neurological Surgery at the University of California, San Francisco (UCSF) and the lead inventor of the BranchPoint technology. He has over 18 years of research experience in the neural stem cell field and is also a board-qualified neurosurgeon at the University of California, San Francisco and the San Francisco Veterans Affairs Medical Center. Dr. Lim was the principal investigator of a $1.8 million California Institute for Regenerative Medicine (CIRM) project that funded the development of the BranchPoint technology. In 2009, he edited a book describing the use of interventional MRI (iMRI) in neurosurgery. From 2010 to 2011, he served as co-surgeon in a Phase 1 clinical trial of neural cell transplantation to the brain of patients with Pelizaeus-Merzbacher disease (PMD). In 2012, he served as the local chairman of the biannual conference of the American Association of Stereotactic and Functional Neurosurgeons (ASSFN), and there he presented his work on the development of the BranchPoint technology, which was published in 2013 as an article featured on the cover of Stereotactic and Functional Neurosurgery. Ongoing work on iMRI for RBD-based cell delivery was reported in a news article online at Nature (http://www.nature.com/news/devices-aim-to-deliver-on-stem-cell-therapies-1.12532). The iMRI-compatible version of BranchPoint was published in Molecular Therapy in 2014. His basic science research on neural stem cells has resulted in over 50 peer-reviewed articles and book chapters. Dr. Lim serves as a member of the advisor board of the Rosenman Institute (http://qb3.org/rosenman), a non-profit organization whose mission is to drive medical device innovation for improvements in patient care by helping drive research concepts into innovation. For his basic science research, Dr. Lim received an NIH Director's New Innovator Award (2009-2014) and in 2010, he was a Kavli Fellow of the U.S. National Academy of Sciences.


Professor Robert Langer is the David H. Koch Institute Professor at the Massachusetts Institute of Technology (“MIT”).  There are 11 Institute Professors at MIT; being an Institute Professor is the highest honor that can be awarded to a faculty member.  Dr. Langer has written over 1,300 articles.  He also has over 1,080 patents worldwide.  Dr. Langer’s patents have been licensed or sublicensed to over 300 pharmaceutical, chemical, biotechnology and medical device companies.  He is the most cited engineer in history (h-index 213).


Dr. Langer has received over 220 major awards.  He is one of 4 living individuals to have received both the United States National Medal of Science (2006) and the United States National Medal of Technology and Innovation (2011).  He also received the 2002 Charles Stark Draper Prize, considered the equivalent of the Nobel Prize for engineers, the 2008 Millennium Prize, the



40





world’s largest technology prize, the 2012 Priestley Medal, the highest award of the American Chemical Society, the 2013 Wolf Prize in Chemistry, the 2014 Breakthrough Prize in Life Sciences and the 2014 Kyoto Prize.  He is also the only engineer to receive the Gairdner Foundation International Award; 82 recipients of this award have subsequently received a Nobel Prize.  In 2015, Dr. Langer received the Queen Elizabeth Prize for Engineering.  Among numerous other awards Langer has received are the Dickson Prize for Science (2002), Heinz Award for Technology, Economy and Employment (2003), the Harvey Prize (2003), the John Fritz Award (2003) (given previously to inventors such as Thomas Edison and Orville Wright), the General Motors Kettering Prize for Cancer Research (2004), the Dan David Prize in Materials Science (2005), the Albany Medical Center Prize in Medicine and Biomedical Research (2005), the largest prize in the U.S. for medical research, induction into the National Inventors Hall of Fame (2006), the Max Planck Research Award (2008), the Prince of Asturias Award for Technical and Scientific Research (2008), the Warren Alpert Foundation Prize (2011) and the Terumo International Prize (2012).  In 1998, he received the Lemelson-MIT prize, the world’s largest prize for invention for being “one of history’s most prolific inventors in medicine.”  In 1989 Dr. Langer was elected to the Institute of Medicine of the National Academy of Sciences, and in 1992 he was elected to both the National Academy of Engineering and to the National Academy of Sciences, and in 2012 he was elected to the National Academy of Inventors.


Forbes Magazine (1999) and Bio World (1990) have named Dr. Langer as one of the 25 most important individuals in biotechnology in the world.  Discover Magazine (2002) named him as one of the 20 most important people in this area.  Forbes Magazine (2002) selected Dr. Langer as one of the 15 innovators worldwide who will reinvent our future.  Time Magazine and CNN (2001) named Dr. Langer as one of the 100 most important people in America and one of the 18 top people in science or medicine in America (America’s Best).  Parade Magazine (2004) selected Dr. Langer as one of 6 “Heroes whose research may save your life.”  Dr. Langer has received honorary doctorates from Harvard University, the Mt. Sinai School of Medicine, Yale University, University of Western Ontario (Canada), the ETH (Switzerland), the Technion (Israel), the Hebrew University of Jerusalem (Israel), the Universite Catholique de Louvain (Belgium), Rensselaer Polytechnic Institute, Willamette University, the University of Liverpool (England), Bates College, the University of Nottingham (England), Albany Medical College, Pennsylvania State University, Northwestern University, Uppsala University (Sweden), Tel Aviv University (Israel), Boston University, Ben Gurion University (Israel), Drexel University, Hanyang University (South Korea), University of New South Wales (Australia) and the University of California – San Francisco Medal.  He received his Bachelor’s Degree from Cornell University in 1970 and his Sc.D. from the Massachusetts Institute of Technology in 1974, both in Chemical Engineering.


Family Relationships


There are no family relationships, or other arrangements or understandings between or among any of the directors, executive officers or other person pursuant to which such person was selected to serve as a director or officer.  


Involvement in certain legal proceedings


Our directors, executive officers and control persons have not been involved in any of the following events during the past five years:


·

any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;

·

any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);

·

being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or

·

being found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.


Indemnification of Directors and Officers


Our certificate of incorporation provides to the fullest extent permitted by Delaware law, that our directors or officers shall not be personally liable to us or our stockholders for damages for breach of such director’s or officer’s fiduciary duty. The effect of this provision of our certificate of incorporation is to eliminate the right of us and our stockholders (through stockholders’ derivative



41





suits on behalf of our company) to recover damages against a director or officer for breach of the fiduciary duty of care as a director or officer (including breaches resulting from negligent or grossly negligent behavior, except under certain situations defined by statute). We believe that the indemnification provisions in our certificate of incorporation are necessary to attract and retain qualified persons as directors and officers.


In addition to the indemnification provided by our certificate of incorporation permitted by Delaware law, the Company agrees in the employment agreement with our Chief Executive Officer (“Executive”) to indemnify the Executive from and against any and all losses, claims, damages and liabilities, joint and several (collectively, “Losses”), to which the Executive may become subject under any applicable federal or state law, arising from or related to the Executive’s positions, conducts, activities, duties, or omissions at the Company; provided that the Company will not be liable to the extent that any Loss is found in a final judgment in a court to have resulted primarily from the Executive’s intentional violation of the law.  The Company will reimburse the Executive for all expenses (including reasonable counsel fees and expenses) as such may be incurred in connection with the investigation of or preparation for or defense of any pending or threatened claim or any action or proceeding arising thereof, whether or not such the Company is a party.  The indemnification provided for in the employment agreement shall be in addition to any rights that the Executive may have at common law or otherwise.


Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the Securities Act) may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suite or proceeding) is asserted by such director officer or controlling person in connection with the securities being registered, we will submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.


ITEM 11.  EXECUTIVE COMPENSATION


Summary Compensation Table


The following table sets forth information concerning all cash and non-cash compensation awarded to, earned by or paid to the named persons for services rendered in all capacities during the noted periods. No other executive officer received total annual salary and bonus compensation in excess of $100,000:


Name and Principal Position

Year

Salary

($)

Bonus

($)

Stock Awards

($)

Option Awards

($)

Non-Equity Incentive Plan Compensation ($)

Nonqualified Deferred

Compensation

Earnings

($)

All Other

Compensation

($)

Total

($)

George Yu

President & CEO

2015

2014

74,000 (#)

60,000 (##)

-

-

-

-

-

-

-

-

-

-

-

-

74,000

60,000


Note:

(#) $30,000 were paid out as salary while $44,000 has accrued and will be paid upon the Company having adequate resources without interest and penalty as determined by the Company’s Board of Directors.

(##) This salary has accrued and will be paid upon the Company having adequate resources without interest and penalty as determined by the Company’s Board of Directors.

 



Narrative Disclosure to Summary Compensation Table


On September 1, 2012, we entered into an employment agreement with George Yu, our president and CEO, which expired August 31, 2014, but renews for subsequent one year terms unless terminated by either party at least 60 days before the expiration of a term. Mr. Yu’s salary under his agreement is $5,000 per month and contains typical clauses with respect to non-disclosure, confidentiality and non-disparagement.  On September 1, 2015, we renewed the employment agreement with a salary of $8,500 per month, without changes to any other clauses of the agreement.



42






Retirement Benefits and Change of Control


Not Applicable.


Director Compensation


The following table discloses the compensation of the directors of the Company for the Company’s fiscal year ended December 31, 2015 and 2014, respectively:


Name

Fees Earned or Paid in Cash

($)

Stock Awards

($)

Option Awards

($)

Non-Equity Incentive Plan Compensation ($)

Nonqualified Deferred

Compensation Earnings

($)

All Other Compensation

($)

Total

($)

George Yu

2015

2014

-

-

-

-

-

-

-

-

-

-

-

-

Anchie Kuo

2015

2014

-

-

-

-

-

-

-

-

-

-

-

-

William Callahan

2015

2014

-

-

-

-

-

-

-

-

-

-

-

-



ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.


The following table sets forth certain information as of December 31, 2015, with respect to our officers and directors and any person (including any “group” as that term is used in Section 13(d)(3) of the Exchange Act) who is known to us to be the beneficial owner of more than five percent of our common stock, being our only class of voting securities, under the current rules of the Securities and Exchange Commission regarding beneficial ownership:


Name of beneficial owner

Position

Number of shares owned

Percent of Class (2)

George Yu

President, CEO and Director

200,000

2.3%

Anchie Kuo

Director

60,000

0.7%

William Callahan

Director

52,000

0.6%

Abazu Ltd.

Shareholder

2,667,000 (1)

31.1%

Luneel Ltd.

Shareholder

1,450,000

16.9%

Accelerating Combination Therapies LLC

Shareholder

1,000,000

11.7%

Sabby Healthcare Master Fund, Ltd. (3)

Shareholder

366,010

4.3%

Sabby Volatility Warrant Master Fund, Ltd. (3)

Shareholder

150,000

1.8%

All officers and directors as a group (3 persons)

 

2,979,000

34.7%


Notes:

(1)

These shares are deemed to be indirectly controlled and owned by George Yu in his capacity as a director of Abazu Ltd.

(2)

Applicable percentage ownership is based on 8,580,816 shares of our common stock outstanding as of March 30, 2016. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities.

(3)

The address of these entities is 10 Mountainview Road – Suite 205, Upper Saddle River, New Jersey 07458. Sabby Management, LLC serves as the investment manager of Sabby Healthcare Master Fund, Ltd. and Sabby Volatility Warrant Master Fund, Ltd. Hal Mintz is the manager of Sabby Management, LLC.  Each of Sabby Management, LLC and Hal Mintz disclaims beneficial ownership over the securities except to the extent of its pecuniary interest therein.




43






Changes in control


There are no arrangements, including any pledge by any person of our securities, known to us the operation of which may at a subsequent date result in a change in control of our company.  


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.


Upon our incorporation we issued 2,000,000 founder shares.  George Yu received 200,000 founder shares and Anchie Kuo received 60,000 shares.  All of such transactions with the Company’s founders were exempt from registration by reason of Section 4(2) of the Securities Act of 1933, as amended (the “Act”). All of the shares issued in such transactions bear an appropriate restrictive legend.  


Under his retainer agreement with the Company in October 2012, Mr. Hariton, our counsel, was issued 10,000 shares in a transaction exempt under Section 4(2) of the Securities Act.  The certificate for these shares bears a restrictive legend.  The shares were expensed by us at $10,000.


No underwriter participated in the foregoing transactions, and no underwriting discounts or commissions were paid, nor was any general solicitation or general advertising conducted. The securities bear a restrictive legend and stop transfer instructions are noted on our stock transfer records.


As disclosed under Item 6. Executive Compensation, Mr. Yu has an employment agreement with the Company.


Director Independence


We believe that the following directors of our company are considered “independent” under Rule 400(a)(15) of the National Association of Securities Dealers listing standards:  Anchie Kuo and William Callahan.


ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES


The following table discloses the fees billed by our auditor in connection with the audit of the Company’s annual financial statements for the year ended December 31, 2015 and 2014.


Financial Statements for Year Ended December 31

Audit Fees(1)

Audit Related Fees(2)

Tax Fees(3)

All Other Fees(4)

2015

$11,500

-

-

-

2014

$10,750

-

-

-


Notes:

(1)

The aggregate fees billed for the fiscal year for professional services rendered by the principal accountant for the audit of the Company’s annual financial statements and review of financial statements included in the Company’s Form 10-Qs or services that are normally provided by the accountant in connection with statutory and regulatory engagements for that fiscal years.

(2)

The aggregate fees billed in the fiscal year for assurance and related services by the principal accountants that are reasonably related to the performance of the audit or review of the Company’s financial statements and are not reported in Note 1.

(3)

The aggregate fees billed in the fiscal year for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning.

(4)

The aggregate fees billed in the fiscal year for the products and services provided by the principal accountant, other than the services reported in Notes (1), (2) and (3).

 





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PART IV


ITEM 15.  FINANCIAL STATEMENTS AND EXHIBITS


(a)  Financial Statements.  See Index to Financial Statements on page F-1.


(b)  Exhibits:


Exhibit No.

 

Description

  

  

  

3.1

  

Certificate of Incorporation, August 29, 2012 (incorporated by reference to Form 10 of the Company filed on February 27, 2013)

3.2

  

Amended and Restated Certificate of Incorporation, dated December 12, 2012 (incorporated by reference to Form 10 of the Company filed on February 27, 2013)

3.3

  

By –Laws (incorporated by reference to Form 10, Amendment No. 2 of the Company filed on April 23, 2013)

3.4

 

Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock (incorporated by reference to Form 8-K of the Company filed on June 18, 2015)

4.1

  

Form of Stock Certificate  (incorporated by reference to Form 10, Amendment No. 2 of the Company filed on April 23, 2013)

5.1

 

Opinion of Frank J. Hariton, Esq. regarding Legality (incorporated by reference to Form S-1, Amendment No. 1 of the Company filed on July 29, 2015)

10.1

  

Virtual Office Lease (incorporated by reference to Form 10 of the Company filed on February 27, 2013)

10.2

  

UAMS License (incorporated by reference to Form 10 of the Company filed on February 27, 2013)

10.3

  

Employment Agreement with George Yu (incorporated by reference to Form 10 of the Company filed on February 27, 2013)

10.4

  

Form of Subscription Agreement (incorporated by reference to Form 10 of the Company filed on February 27, 2013)

10.5

 

U.S. Patent Application 12/334,217 – (incorporated by reference to Form 10, Amendment No. 4 of the Company filed on June 5, 2013)

10.6

 

U.S. Patent Application 12/945,576 – (incorporated by reference to Form 10, Amendment No. 4 of the Company filed on June 5, 2013)

10.7

 

U.S. Patent Application 13/253,767 – (incorporated by reference to Form 10, Amendment No. 4 of the Company filed on June 5, 2013)

10.8

 

Convertible Note Agreement – (incorporated by reference to Form 10-Q of the Company filed on August 14, 2013)

10.9

 

Rejection and abandonment of U.S. Patent Application Serial No. 12/334,217 by the United States Patent and Trademark Office prior to date of UAMS License – (incorporated by reference to Form 8-K of the Company filed on February 24, 2014)

10.10

 

Certificate of Amendment to Certificate of Incorporation – (incorporated by reference to Appendix A filed to Schedule 14C Information Statement of the Company as of August 4, 2014)

10.11

 

UCSF License Agreement with the Regents of the University of California, dated as of September 16, 2014 – (incorporated by reference to Form 8-K of the Company filed on September 17, 2014)

10.12

 

Consulting Agreement between the Company and the Lim Development Group, dated as of January 12, 2015, and Promissory Note issued to the Lim Development Group, dated as of January 12, 2015 – (incorporated by reference to Form 8-K of the Company filed on January 13, 2015)

10.13

 

Consulting and Warrant Agreement between the Company and Capital Group Communications, Inc., dated as of February 18, 2015 – Filed herewith

10.14

 

Form of Registration Rights Agreement dated as of June 16, 2015, by and among the Company and the purchasers (incorporated by reference to Form 8-K of the Company filed on June 18, 2015)

10.15

 

Form of Common Stock Purchase Warrant (incorporated by reference to Form 8-K of the Company filed on June 18, 2015)

10.16

 

Form of Securities Purchase Agreement dated as of June 16, 2015, by and among the Company and the purchasers (incorporated by reference to Form 8-K of the Company filed on June 18, 2015)

10.17

 

Exclusive License Agreement with Accelerating Combination Therapies LLC, dated as of August 11, 2015. (incorporated by reference to Form 8-K of the Company filed on August 12, 2015)



45








10.18

 

License Termination Agreement, dated August 18, 2015, by and between the Board of Trustees of the University of Arkansas acting for and on behalf of the University of Arkansas for Medical Sciences and Accurexa Inc. (incorporated by reference to Form 8-K of the Company filed on August 20, 2015)

10.19

 

Form of Service Agreement, dated November 1, 2015, by and between Yissum Research Development Company of the Hebrew University of Jerusalem Ltd. and Accurexa Inc. (incorporated by reference to Form 8-K of the Company filed on November 2, 2015)

22.1

  

Subsidiaries:  None

23.1

   

Consent of Auditors (incorporated by reference to Form 10 of the Company filed on February 27, 2013)

24.1

 

Consent of Auditors to Form S-1, Amendment No. 1 (incorporated by reference to Form S-1, Amendment No. 1 of the Company filed on July 29, 2015)

31.1

 

Certifications of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

 

Certifications of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

 

Certifications of Principal Executive Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

 

Certifications of Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



46






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.


Accurexa, Inc.

(Registrant)


Date:

March 30, 2016

By:

/s/ George Yu

Name:

George Yu

Title:

President and Chief Executive Officer



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