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 year ended December 31, 2010
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 001-34584
HARBOR BIOSCIENCES, INC.
(Exact name of Registrant as specified in its charter)
| Delaware | 13-3697002 | |
| (State or other jurisdiction | (I.R.S. Employer | |
| of incorporation or organization) | Identification No.) | |
| 9171 Towne Centre Drive, Suite 180 | ||
| San Diego, CA | 92122 | |
| (Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code: (858) 587-9333
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
Title of Class
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ¨ NO x
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 ¨ NO x
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 requirement for the past 90 days. YES x NO ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ¨ NO ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the 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
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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2. (Check One).
| Large accelerated filer ¨ |
Accelerated filer ¨ | Non-accelerated filer ¨ | Smaller Reporting Company x |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). YES ¨ NO x
The aggregate market value of the voting stock held by nonaffiliates of the Registrant as of June 30, 2010, the end of the Company’s most recently completed second fiscal quarter, was approximately $9,475,550 based on the closing stock price of $0.27 for the Registrant’s Common Stock as reported by the NASDAQ Capital Market*.
As of March 25, 2011, there were outstanding 35,465,838 shares of the Registrant’s Common Stock, $.01 par value per share.
* Excludes the common stock held by executive officers, directors and stockholders whose ownership exceeded 10% of the Registrant’s common stock outstanding at June 30, 2010. This calculation does not reflect a determination that such persons are affiliates for any other purposes.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Harbor BioSciences, Inc.
Form 10-K
For the Fiscal Year Ended December 31, 2010
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| Item 1. | 3 | |||||
| Item 1A. | 19 | |||||
| Item 1B. | 28 | |||||
| Item 2. | 28 | |||||
| Item 3. | 28 | |||||
| Item 4. | 28 | |||||
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 29 | ||||
| Item 6. | 30 | |||||
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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| Item 7A. | 35 | |||||
| Item 8. | 36 | |||||
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
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| Item 9A(T). | 75 | |||||
| Item 9B. | 76 | |||||
| Item 10. | 77 | |||||
| Item 11. | 82 | |||||
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters | 91 | ||||
| Item 13. | Certain Relationships and Related Transactions, and Director Independence |
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| Item 14. | 93 | |||||
| Item 15. | 94 | |||||
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K, and the information incorporated herein, contains forward-looking statements that involve and are subject to risks and uncertainties. In particular, statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance are contained or incorporated by reference in this Annual Report on Form 10-K. We have based these forward-looking statements on our current expectations about future events. While we believe these expectations reflected in this Annual Report on Form 10-K are reasonable, the inclusion of any forward-looking statements should not be regarded as a representation that any of our plans will be achieved and such forward-looking statements are inherently subject to risks and uncertainties, many of which are beyond our control. Such forward-looking statements include, but are not limited to, statements preceded by, followed by or that otherwise include the words, “believe,” “may,” “might,” “can,” “could,” “will,” “would”, “should,” “estimate,” “continue,” “anticipate,” “intend,” “seek,” “plan,” “project,” “expect,” or similar expressions. The actual future results for Harbor BioSciences, Inc. may differ materially from those discussed here for various reasons, including those discussed in this Annual Report in Part 1, Item 1A under the heading “Risk Factors,” Part II, Item 7 entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere throughout this Annual Report on Form 10-K. Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included in this Annual Report are made only as of the date hereof. We do not undertake any obligation to update any such statements or to publicly announce the results of any revisions to any of such statements as a result of new information, to reflect future events or developments. When used in this Annual Report, unless otherwise indicated, “we,” “our” and “us” refers to Harbor BioSciences, Inc.
| Item 1. | Business |
GENERAL OVERVIEW
Harbor BioSciences, Inc. (“Harbor BioSciences” or “the Company”), a clinical-stage pharmaceutical company, is engaged in the discovery and development of products for the treatment of diseases related to aging. Our current development efforts are primarily focused on a series of steroid hormone analogs that are derived from the human adrenal metabolome.
We are a development-stage company with two product candidates which recently completed Phase I/IIa clinical trials: Apoptone® (HE3235) in patients with late-stage prostate cancer, and Triolex® (HE3286) in obese type 2 diabetes mellitus patients. Apoptone and Triolex represent two of the lead candidates from Harbor BioSciences’ small molecule platform based on metabolites or synthetic analogs of endogenous human steroids.
Drawn from our unique and proprietary platform, our research program has identified additional lead candidates active in preclinical models of cancer, metabolic conditions, autoimmune conditions, lung inflammation, bone degeneration and organ regeneration.
Our principal executive offices are located at 9171 Towne Centre Drive, Suite 180, San Diego, California 92122, and our telephone number is (858) 587-9333. We incorporated in Delaware in 1992.
On March 26, 1997, Hollis-Eden, Inc., a Delaware corporation, was merged with and into us, then known as Initial Acquisition Corp. (IAC), a Delaware corporation. Upon consummation of the merger of Hollis-Eden, Inc. with IAC, Hollis-Eden, Inc. ceased to exist and IAC changed its name to Hollis-Eden Pharmaceuticals, Inc.
Effective February 9, 2010, we changed our name from Hollis-Eden Pharmaceuticals, Inc. to Harbor BioSciences, Inc. The name change was effected pursuant to Section 253 of the General Corporation Law of the State of Delaware by the merger of our wholly owned subsidiary into us. We were the surviving corporation and, in connection with the merger, we amended our Amended and Restated Certificate of Incorporation to change our name to Harbor BioSciences, Inc.
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Effective February 18, 2010, our common stock began trading under a new NASDAQ symbol, “HRBR” and CUSIP number “41150V 103”. The Company’s common stock was then delisted from the NASDAQ Stock Market at the opening of business on September 23, 2010. The Company's shares now trade on the OTC Markets (“OTC”).
In November 2010, we received notice from the U.S. Internal Revenue Service (IRS) that the Company had been awarded approximately $489,000 in grants under the Qualifying Therapeutic Discovery Project Program. This program was created under the Patient Protection and Affordable Care Act of 2010 to provide tax credits or grants representing up to 50 percent of eligible qualified investments in therapeutic discovery projects during tax years 2009 and 2010.
After a determination by U.S. Department of Health and Human Services that Apoptone and Triolex projects met the definition of a “qualifying therapeutic discovery project,” the IRS certified the qualifying investment and approved the award amount of approximately $244,479 per project. The qualified investments represent 2009 research and development expenses; there are no future performance obligations related to these grants.
Harbor BioSciences, Triolex Apoptone, and the Harbor BioSciences stylized logo are trademarks of Harbor BioSciences, Inc. This filing also includes trademarks owned by other parties. All other trademarks mentioned are the property of their respective owners. Use or display by us of other parties’ trademarks or products is not intended to and does not imply a relationship with, or endorsements or sponsorship of, us by the trademark or product owners.
Our periodic and current reports that we file with the Securities and Exchange Commission, or SEC, are available free of charge, on our website, as soon as reasonably practicable after we have electronically filed them with, or furnished them to, the SEC. Our Internet address is www.harborbiosciences.com. The reference to our website does not constitute incorporation by reference of the information contained on our website.
Harbor BioSciences’ Approach
Under conditions of stress, chronic infections or systemic inflammation, changes to adrenal products themselves, their metabolism, and perturbations of signaling pathways in peripheral tissues, may drive the growth of certain tumors and be causative to diseases of advancing age, including metabolic syndrome, autoimmune diseases, immune mediated inflammatory disease and an impaired ability to fight infections. Our development strategy is based on the hypothesis that hormone derived products are critical to the regulation of the body’s complex biological systems. We believe that in young, healthy adults, products such as cortisol, progesterone, dehydroepiandrosterone (DHEA) and its metabolome which include estrogen and testosterone, provide important signals that determine whether biological pathways are engaged to properly regulate the biological processes in our body.
Today, most drug developers are taking a ground up approach, first striving to intellectualize and identify critical components in the intricate functional biochemical cascades, and then attempting to design drugs that can successfully block or stimulate those specific pathways resulting in “validated molecular targets” for specific diseases. While this approach has resulted in a number of successful drugs, frequently their use is limited by serious side effects. In contrast, ours is a top down “forward pharmacology” approach, beginning with the discovery of new members of the human steroid metabolome. Then, by applying traditional pharmaceutical development methodology, our goal is to discover and develop compounds that modify critical endocrine pathways based on the intrinsic activity of native endogenous molecule. The methodology we use is based on an approach to drug discovery and development with a successful history as applied to early discoveries in human hormones. We have now applied this approach to new discoveries being made in the vast unexplored human metabolome and it has the potential to produce new pharmaceutical product candidates to treat a myriad of diseases associated with advancing age, including certain cancers, metabolic and autoimmune diseases as well as immune-mediated inflammatory diseases such as that which results in tissue destruction resulting from chronic
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infections. We believe that by applying these drug development principles we have the potential to produce pharmaceuticals that may address a number of large and important markets, including many with unmet medical needs.
TECHNOLOGY
Platform
Our primary technology development efforts are focused on a series of steroid hormones and their synthetic analogs that promise to be useful in treating a wide variety of medical conditions if successfully developed. Many of these compounds are known to either depleted or elevated during advancing age, a process accelerated by infectious diseases and chronic systemic disorders. In certain indications, high plasma concentrations of these hormones are positively correlated with attenuated disease and the maintenance of youthful blood concentrations is often associated with good health with advancing age.
The chemistry and biochemistry of steroids have been extensively studied and utilized in the development of various drugs, especially for hormonal imbalances, for the treatment of infections and cancer as well as inflammatory conditions. Harbor BioSciences’ inventory of greater than 700 steroid compounds is a targeted synthesized chemical library intended for medicinal chemistry applications. The compound library considers components of the mammalian metabolome as existing drug leads and generates chemical neighbors (analogues) as potential pharmaceutical candidates. Many of the library compounds are previously undiscovered metabolic products as well as novel structural analogues with potentially improved pharmaceutical properties. We believe this library contains the largest sample of compounds associated with the DHEA metabolome and may contain many unique chemical structures with diverse biological properties.
The unifying theme of our focused library is to make drug-like molecules that have unique target recognition characteristics that can be used to explore a structure-activity relationship in order to optimize pharmaceutical properties for a selected target. Design features may include oral bioavailability so that the compound may be given orally, and selected for features of both metabolic and chemical stability with a chemical composition that is novel to gain intellectual property protection for patent purposes. In addition the synthesis of the selected compound is optimally facile and cost-effective in consideration of commercialization.
OUR DRUG CANDIDATES IN DEVELOPMENT
We are currently focused on the development of proprietary synthetic steroid derivatives derived from the human 19-carbon steroid scaffold of the mammalian steroid metabolome. We have conducted clinical trials with our lead drug development candidates: Apoptone® (HE3235), for late-stage prostate cancer: Triolex® (HE3286), for the treatment of obese type 2 diabetes, metabolic and autoimmune disorders; Neumune (HE2100), for the treatment of sepsis a condition that rises with excess radiation exposure; and HE2000, for the prevention of opportunistic infections in immune suppressed patients. Each of these compounds is described in more detail below. In addition, our research program focused on the identification and characterization of new steroid hormones in the human metabolome and has potentially identified new human hormones that may become future pharmaceutical candidates or nutraceutical products.
Apoptone (HE3235)
Prostate Cancer
Apoptone is a second-generation compound we have selected for clinical development in the area of hormone driven cancers, such as prostate cancer. Apoptone was discovered by screening our proprietary steroid chemical library against a prostate cancer LNCaP cell line. It was selected based on a combination of its potency against cancer and desirable pharmaceutical properties. It has been tested in a number of preclinical cancer models and has shown indications of activity in controlling the incidence, growth and development of new tumors in these models. We believe that Apoptone is a disease-modifying agent that may directly induce apoptosis, or cell death, in tumor cells, a result that differs from traditional hormone blockade therapies that
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interrupt the tumor cell growth signal through direct androgen or estrogen receptor mediated mechanisms. While hormone blockade therapy can effectively control prostate cancer for a period of time, it often fails and the cancer growth resumes spreading to other organs, usually the bone.
In 2008, we initiated a Phase I/IIa clinical trial with Apoptone in late-stage castrate resistant prostate cancer (“CRPC”) patients who have failed hormone therapy and at least one round of chemotherapy. In December 2009, the trial was amended to include a group of CRPC patients with progressive disease that have not been previously treated with chemotherapy. The open-label dose ranging clinical trial is complete and was conducted in various clinical sites including some within the Prostate Cancer Clinical Trial Consortium (“PCCTC”). It evaluated the safety, tolerance, pharmacokinetics and potential activity of Apoptone when administered twice daily in late-stage prostate cancer patients. The potential activity of the compound was measured by the effect on time to disease progression, as determined by prostate-specific antigen (“PSA”) blood tests, computerized tomography (“CT”), magnetic resonance imaging (“MRI”), or bone scintigraphy, and its effect on circulating tumor cells (“CTC”). Activity was found at the lowest dose studied (10 mg) and no frank toxicity was observed at the highest dose tested (700 mg) which is 70 times greater. The dose escalation algorithm was halted due to a drug-drug interaction observation with a patient’s concomitant medication that presented safety concerns with the use of yet higher doses. The compound is staged for Phase IIb clinical trials. Approximately 234,000 patients are diagnosed each year with prostate cancer, and global sales for leading prostate cancer drugs range approximately from $500 million to $1 billion annually.
Breast Cancer
We are also exploring the potential of Apoptone in breast cancer. In pre-clinical models of MNU-induced breast cancer, Apoptone successfully treated established tumors and prevented the formation of new tumors. It appeared to be synergistic when given in combination with concurrent taxane chemotherapy. A report on the pre-clinical activity in breast cancer has recently appeared in the peer-reviewed scientific literature.
Apoptone Development Status
Apoptone is manufactured using several organic synthesis steps from the starting material androsterone. The active pharmaceutical ingredient is formulated to an oral dosage form using commonly used excipients in approved (oral dosage) products. Non-clinical toxicology studies have been done that enable the use of Apoptone in clinical studies in late-stage prostate cancer and breast cancer patients using 28-day cycles of therapy. Encouraging data were first reported from the Phase I/IIa clinical trial for in castration resistant prostate cancer – also referred to as hormone resistant prostate cancer—at the ASCO Genitourinary Cancers Symposium in San Francisco, March 6, 2010. Preliminary results from the study, conducted in part with which included participating member sites of the PCCTC, were first reported on November 16, 2009. The phase I/IIa trial was an open-label study with the primary objectives of assessing safety, tolerability, pharmacokinetics and activity of Apoptone in men with CRPC and an ECOG performance status score of less than or equal to 2 (ambulatory and capable of at least self-care). Patient cohorts are defined by oral daily doses of 10 mg, 20 mg, 30 mg, 50 mg, 100 mg, 200 mg, 350 mg and 700 mg. Subjects were treated until toxicity or disease progression; CT and bone scans were obtained every two cycles to assess progression. Based on encouraging signs of activity, the PCCTC recommended an extension of the current trial into CRPC patients that had not been treated with chemotherapy. Accordingly, the subject eligibility criteria were amended to include earlier-stage, chemotherapy-naïve patients in 100 mg and 350 mg expansion cohorts. The clinical trial is now complete. There were 68 patients enrolled in the trial on an intent-to-treat basis. There were 42 taxane-resistant prostate cancer patients entered into the clinical trial at 7 dose levels. Of these 28 (67%) reached their first reassessment (two 28-day cycles), 15 (58%) of these had stable disease on scans or imaging and have received up to 9 additional treatment cycles before disease progression. The Kaplan-Meier estimate for the median time to progression is 15.9 weeks (range 8-24) for this trial. Due to early signs of activity, the 20 mg dose group was expanded to include 14 taxane resistant patients. Eleven of these were evaluable with an actual median time to progression of 19.7 weeks (range 8-24). The 100 mg and 350 mg dose groups were each expanded to include 11 additional pre-chemotherapy patients in order to gain information on the healthier pre-chemotherapy patients and the tolerability of Apoptone
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at higher dose levels. The Kaplan-Meier estimate for the median time to progression for the 10 patients that completed 2 or more cycles in each cohort was 24 weeks in the 100 mg cohort; (21, > 24) and 24 weeks (16, 35). in the 350 mg cohort. Changes in PSA levels were consistent with the properties of a tumor-differentiating agent. The drug was well tolerated and no overt dose-limiting toxicities were reported. The mechanism of action has been partially elucidated and the biochemical molecular points of interaction have been found in prostate cancer cells. Apoptone is a molecular entity that represents a new therapeutic approach for the treatment of hormone dependent cancers with perhaps a more favorable side effect profile than found with presently approved treatments. Several patents have been obtained for the pharmaceutical formulation of Apoptone and its use for the treatment of prostate cancer, breast cancer and benign prostate hypertrophy.
Competition
Two forms of taxotere chemotherapy are presently approved therapies to treat castrate resistant prostate cancer. Despite current treatments, there is an ongoing need for novel oral agents that can control the growth of prostate cancer that is progressing on conventional therapies or hormone treatments. Accordingly, there are a number of companies with drug candidates in development targeting late-stage castration resistant prostate cancer, including compounds already in Phase III clinical trials. Abiraterone® produced by Cougar Biotechnology, Inc. (acquired by Johnson & Johnson) is an agent that impedes the synthesis of androgens by inhibition of an enzyme that transforms precursor molecules into the hormone testosterone. Many forms of prostate cancer are dependent on the presence of androgens in order to grow. MDV-3100, produced by Medivation, Inc., is also an agent that blocks the action of androgens on prostate cancer cells through interference at the androgen receptor and stopping their growth. PROVENGE®, produced by Dendreon, Inc., is an autologous immune cell therapy that primes the patient’s cells against prostate cancer and was recently approved. Apoptone is believed to be a disease modification agent with a mechanism of action that distinguishes it from these competitive drug candidates.
Triolex (HE3286)
Inflammatory Processes in Chronic Diseases
One of our primary focus areas is diseases that result from chronic inflammatory processes. Properly regulated, inflammation is a protective, life saving response to invading pathogens. However, chronic and unproductive inflammation can cause devastating tissue damage and loss of organ function. Chronic inflammation can arise from over-stimulation of the immune system, often resulting in the release of destructive products such as reactive oxygen species, destructive proteolytic enzymes as well as additional pro-inflammatory mediators. The over-production of these dangerous biochemical products is often due to the presence of persistent low-grade infections, conditions in which the body’s surveillance system is unable to differentiate between itself and invasion of foreign substances and biochemical dysregulation that occurs with advancing age. Chronic inflammation has been implicated in the pathogenesis of many diseases ranging from autoimmune conditions, such as arthritis and psoriasis, to infectious diseases, including human immunodeficiency virus (HIV), malaria and tuberculosis, lung inflammation such as asthma, cystic fibrosis and chronic obstructive pulmonary disease, neuroinflammatory conditions such as Parkinson’s and Alzheimer’s disease, to metabolic diseases, including diabetes and cardiovascular diseases as well as a number of different cancer types.
Current Treatments for Chronic Inflammation
Some of the most widely used drugs for reducing inflammation belong to the corticosteroid class of compounds, which are also derived from the mammalian steroid metabolome. Market research indicates that U.S. physicians issue tens of millions of new prescriptions for corticosteroids each year for a wide range of conditions. While these drugs are highly effective, chronic use leads to immune suppression, bone loss, tissue necrosis and other serious side effects including mental depression.
Over the last decade, a number of new drugs have been introduced that are focused on inhibiting specific components of the pro-inflammatory cascade, including agents that bind and neutralize specific inflammatory
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cytokines, such as TNF-alpha and IL-1 beta, as well as drugs that inhibit specific enzymes, such as COX-2, that produce pro-inflammatory mediators. While these drugs have demonstrated significant activity in a number of clinical trials involving chronic inflammatory diseases, such as arthritis, inflammatory bowel disease and psoriasis, most have also demonstrated significant untoward limitations. Many cause dangerous immune suppression and other serious side effects that limit their utility. Most focus on a specific inflammatory mediator, which means they may not remain perpetually effective due to redundancies and compensatory effects in biological pathways. Our goal has been to develop compounds that mediate homeostasis to regain control of the inflammatory process and restore homeostasis.
Obesity, Chronic Inflammation, Insulin Resistance and Diabetes
Diabetes is a disease of insulin signaling that is comprised of a constellation of syndromes. Insulin is a hormone needed to transport glucose from the blood into cells, where it can either be stored or converted to the energy needed by the cell to perform its biochemical processes. When insulin is insufficient or when insulin signaling functions improperly, the result is high blood glucose levels, which over time can lead to a host of severe medical conditions including nerve disease, blindness, limb amputation, heart attack, stroke and death. There are two forms of diabetes: type 1, a chronic condition in which little or no insulin is produced, and type 2, a condition in which the body becomes resistant to the effects of insulin or the body produces some, but not enough, insulin to maintain a normal blood sugar level.
Epidemiological studies have clearly defined risk factors for the development or progression of type 2 diabetes, including genetics, and prenatal and postnatal environmental factors, including low birth weight, obesity, nutrient excess, inactivity, gestational diabetes, metabolic dysregulation with advancing age and obesity. Obesity in some individuals, through recently elucidated mechanisms, can lead to insulin resistance, hyper-glycemia, beta-cell dysfunction and ultimately overt diabetes. In turn, diabetes-related hyperglycemia and associated metabolic abnormalities can further alter signal transduction and gene-expression thus contributing to a forward feeding cycle that results in disease progression.
The need for new classes of agents to treat type 2 diabetes is significant. There are over 25 million Americans with type 2 diabetes, 92 million in China and 220 million worldwide. Obese diabetes is a syndrome that is increasing rapidly as a result of advancing age and the rising incidence of obesity. Clinical data indicates only 36% of type 2 diabetics are currently able to maintain the American Diabetes Association maximum recommended HbA1c, (a form of hemoglobin that is primarily used to identify the average plasma glucose concentration over a prolonged period of time), glucose level of less than 7.0 %. Large clinical studies have shown that failure to achieve these glucose targets, especially in obese patients, can progressively lead to severe health consequences including neuropathy, blindness, amputation, heart attack, stroke and death. Patients in large clinical trials consistently have a median BMI of 32 indicating that over half the population of T2DM is obese.
Academic researchers have increasingly linked obesity-induced chronic inflammation with type 2 diabetes and elucidated its potential role in potentiating insulin resistance. In the setting of type 2 diabetes, evidence suggests that the pathology may arise through perturbations in NFkB signaling, particularly via the TLR4 and TNFa receptors. TLR4 is a receptor expressed on the surface of macrophages and other cells and is stimulated by dietary fatty acids as well as certain pathogens such as bacteria from the gut flora. Stimulation of the TLR4 receptor induces a cascade of pro-inflammatory signals including the production of TNFa, which in turn results in activation events that stimulates a complex network of signaling pathways that culminates in the activation of NFkB and the expression of a number of genes under its control involved in inflammation and the cellular stress response. Persistent stimulation can lead to the chronic inflammatory state and produce the associated pathologies that typifies the “metabolic syndrome” condition.
The development of widely effective agents to treat obese-type 2 diabetes has elusive and safety concerns have arisen from the chronic administration of many of the currently available medications. Advances in genomic, proteomic and metabolomic sciences over the last decade, however, have led to the development of “targeted” diagnostics and therapeutics. These leverage knowledge of the basis for an individual’s pathology to create a more personalized approach to healthcare. Diagnostic testing is envisioned to enable identification of an
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individual’s susceptibility to disease, predict how a given patient will respond to a particular drug, and match patients to the right medication. These new sciences of personalized medicine has the potential to improve the design of clinical trials, eliminate unnecessary treatments, reduce the incidence of adverse reactions to drugs, increase the efficacy of treatments and through identifying the right drug for the right patient, ultimately improve health outcomes.
Current Treatments for Type 2 Diabetes
There are several pharmaceutical approaches to treating type obese-2 diabetes. These include drugs designed to increase insulin production by the pancreas, reduce glucose production by the liver, and drugs, referred to as insulin sensitizers, designed to increase the body’s sensitivity to insulin, thereby improving glucose disposal from the bloodstream. Metformin is usually the first intervention prescribed by physicians when an individual is diagnosed with type 2 diabetes. Frequently clinicians will combine drugs that assert different metabolic actions to control the disease in an effort to achieve target levels of glucose control.
Triolex to Treat Chronic Inflammation in Type 2 Diabetes
Triolex is a next-generation compound that we are developing for the treatment of individuals diagnosed with certain chronic inflammatory processes.
In the setting of obese-type 2 diabetes, evidence suggests that the mechanism of action for Triolex may be through regulation of the MAPK and NFkB pathways, particularly when it’s stimulated through the TLR4 and TNFa receptors. Triolex may be the first in a new class of insulin sensitizers to target obesity-mediated dysregulated metabolism. This is a major component of the type 2 diabetes syndrome that is characterized by the presence of a chronic inflammatory state. Through regulation of the MAPK and NFkB pathways, our scientists believe potential mechanisms of action for Triolex involve control of genes whose products are involved in the inflammatory signaling pathway that includes TNFa and IL-6. These cytokines are also thought to be critically involved in the pathogenesis of certain autoimmune diseases such as ulcerative colitis and rheumatoid arthritis, and are also implicated in the pathogenesis of metabolic diseases such as non-alcoholic steatohepatitis, cardiovascular disorders, neuroinflammatory disease, cancer and in general, diseases associated with advancing age.
Based on biochemical experiments, Triolex has been shown to act on the NFkB pathway and is independent from the PPARg pathway that is targeted by other insulin sensitizers. Instead, the action of Triolex is associated with down-regulation of the pro-inflammatory JNK, IKK and p38 kinase pathways that cross-over into the NFkB pathway. Chronic activation of these kinase pathways lead to impairment of the insulin receptor substrate-1 protein (IRS-1) function, an important cellular mediator of insulin signaling and glucose transport.
A single-dose Phase I clinical trial conducted during 2007 demonstrated that Triolex is orally bioavailable in humans, with significant drug concentrations detected in the blood at the lowest dose tested. The findings also showed that all doses of Triolex tested appear to be safe and well tolerated in healthy volunteers with no reported drug related serious adverse side effects to date.
A Phase I/II double-blind, placebo-controlled, multi-dose ranging clinical trial with Triolex in obese insulin-resistant subjects was initiated in 2007 and evaluated the safety, tolerance and pharmacokinetics of Triolex when administered for 28 days to obese adult subjects. The potential activity of Triolex to decrease insulin resistance was assessed. In addition, an open-label cohort of six patients with type 2 diabetes mellitus was studied.
Triolex was found to be safe and increased insulin sensitivity in insulin resistant subjects. There was no trend in adverse events to differentiate between placebo- and treated-subjects, nor was there an increase in adverse events with dose escalation. Baseline and day 29 hyperinsulinemic-euglycemic clamp studies were performed on 36 subjects dosed twice daily. To test the hypothesis that HE3286 would improve insulin sensitivity in insulin-resistant subjects, these subjects were stratified by the median baseline value of 5; 21 subjects had M values < 5 (operationally defined as insulin-resistant), and 13 had M values of > 5 (operationally
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defined as insulin-sensitive). Pretreatment, insulin resistant subjects had significantly higher fasting insulin, HOMA2 %B, HOMA2 IR, and LPS-stimulated PBMC MCP-1, TNFa, and IL-6, and a trend for increased IL-1b confirming greater insulin resistance, inflammatory responses and beta cell function than insulin sensitive subjects.
After 29 days of treatment, there were significant differences in changes from baseline for M values between all Triolex-treated and placebo subjects, and for C-reactive protein. In order to test the hypothesis that Triolex would benefit insulin resistant, but not insulin sensitive subjects, the day 29 changes in M-values were compared in Triolex-treated subjects. M values increased in insulin resistant, and decreased in insulin sensitive subjects, and this difference was highly significant. When compared to placebo, insulin resistant Triolex treated subjects also showed significant improvement in M and a trend for decreased C-reactive protein, whereas insulin sensitive subjects did not. When an additional subset of 6 insulin resistant subjects with baseline insulin >10 µU/mL were tested for serum cytokine changes using a 20 mg Triolex dose, significant decreases in serum TNFa and increases in adiponectin at day 29.
During 2008, a Phase IIa clinical trial was initiated with Triolex seeking early signs of activity in type 2 diabetes patients. The clinical trial proceeded in two stages. Stage 1 was a double-blinded placebo controlled 12-week dosing trial that was exploratory in nature and enrolled 96 patients who were on a stable dose of metformin with hemoglobin A1c (HbA1c) level in excess of 7.5 percent. The primary objectives of the study were to evaluate the change in HbA1c from baseline to week 12 and to evaluate the safety and tolerance of Triolex given 10 mg per day (5 mg BID) as compared to placebo. A final analysis for activity (HbA1c) in the clinical study of unaudited data was performed on all subjects that completed day 84 of the study (72 patients). There was no statistical difference between treatment and placebo for HbA1c in the overall patient population. However, a retrospective analysis of unaudited data was performed on the subpopulation of patients that represented the inflamed, obese, insulin-resistant, diabetic subgroup according to FDA guidance. This group is reflective of the impaired glucose tolerance subjects that responded to treatment in the company’s Phase I study. The analysis included patients divided into two strata with baseline values either less than or greater than (or equal to) the following criteria: BMI at least 27.3; fasting plasma insulin levels at least 3 µU/mL; and serum monocyte chemotactic protein-1 (MCP-1) levels at least 400 pg/mL. This phenotype represented 42% of all subjects (90 patients) with values for these parameters at baseline. Twenty-seven individuals in the high BMI strata completed 84 days of dosing. Those patients treated with Triolex (13) were showed improvements in their clinical parameters compared to the corresponding placebo patients (14). These included significantly decreased HbA1c (-0.53 %, p = 0.01), fasting plasma glucose (-26.80 mg/dL, p < 0.02), body weight (-2.0 kg, p = 0.0005) and significantly increased anhydroglucitol (+0.7 µg/mL, p = 0.03), which signifies decreased post prandial glucose excursions. More HE3286 subjects decreased weight (12/13 vs. 8/14, Fisher’s Exact Test p < 0.08) and increased 1,5 anhydroglucitol (8/9 vs. 4/10, Fisher’s Exact Test p < 0.04). The low BMI strata had a significant increase in HBA1c (+0.7%, p < 0.005) but with no detectable changes in any other parameter. There were significant differences between the high BMI and low BMI patients in their response to Triolex. The strata differed significantly in HbA1c (1.15 %, p < 0.002), glucose (26.8 mg/dL, p < 0.02), body weight (2.2 kg, p < 0.0001) and cholesterol (23.5 mg/dL, p < 0.006) and significant trends were detected for differences in LDL cholesterol (14.8 mg/dL, p = 0.08), triglycerides (21.8 mg/dL, p < 0.09) and HOMA2 %B (25 %, p < 0.06).
Stage 2 of the Phase IIa clinical trial was in treatment naïve patients (no metformin) with inclusion criteria that restricted the lower limit of BMI to 28, insulin ³ 4 µU/mL, C-peptide ³ 2 ng/mL and MCP-1 ³ 400 pg/mL. There was no significant overall treatment effect on day 84 HbA1c in Cohort 2 treatment-naïve subjects, despite restrictive inclusion criteria. Subjects were again stratified by BMI. Higher BMI subjects were defined as BMI ³ 31.3 kg/m2. At baseline, higher BMI subjects (32 of 69 subjects, 46%) had significantly higher resistin and statistical trends for higher CRP, C-peptide, HOMA2 %B, leptin, and lower fructosamine when compared to the low BMI subjects. HB HE3286-treated subjects showed a statistically significant decrease in HbA1c at day 112 when compared to the corresponding placebo group (-1.1 %, p < 0.05). In this group there was a higher proportion of subjects with decreased HbA1c (8/9 vs. 6/13, Fisher’s Exact Test p < 0.08), and a higher portion with > 1% decrease (5/9 vs. 2/13, Fisher’s Exact Test p < 0.08). The HE3286 treated subjects had a significantly greater frequency in decreased CRP (8/9 vs. 5/14; Fisher’s Exact Test p < 0.03), and a statistical trend for a day
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84 decrease (-1.1 mg/L, p = 0.08). Post prandial glucose excursions were decreased as evidenced by the greater frequency of subjects with increased day 84 1,5-anhydroglucitol (median, + 1.4 µg/mL; 7/8 vs. 6/14 placebos, Fisher’s Exact Test p < 0.03). In contrast, low BMI patients (28 kg/m2 – 31.3 kg/m2) treated with HE3286 had significantly higher day 84 HbA1c change (p < 0.005) from baseline (+0.18 %) when compared to the placebo group (-0.93 % ) due to a large placebo effect in these patients. There was also a statistical trend for decreased day 84 fructosamine (-11.75 µmol, p < 0.08) in the placebo but with an absence of a significant difference in day 84 fasting plasma glucose.
Overall Triolex has demonstrated a good safety profile with no consistent pattern of adverse events associated with its use. The side effects associated with the use of currently approved thiazolidenedione insulin sensitizers, have not been observed with Triolex.
Competition in Diabetes
Given the large market opportunities for products that treat the indications for which we are currently developing our compounds, most major pharmaceutical companies and many biotechnology companies have programs directed toward finding drugs to treat the indications that we are exploring and the competition in these markets is intense. In metabolism and type 2 diabetes, there are a number of drugs, such as Actos® from Takeda Pharmaceuticals and Avandia® from GlaxoSmithKline (already approved for improving insulin sensitivity), glucagon-like peptide-1 (such as Victoza by Novo Nordisk), dipeptidyl peptidase-4 inhibitors (such as Januvia® by Merck & Cp., Inc. and Onglyza® by Bristol Myers Squibb) and numerous other drugs in various stages of development. While Actos® and Avandia® currently account for a significant share of the market for insulin sensitizers to treat type 2 diabetes, they are known to cause the unwanted side effects of weight gain and edema and were recently either restricted (Avandia) or given black box warning (Actos) by the FDA because of increased treatment-related heart failure risk with the use of the medication.
Autoimmune Disease and Chronic Inflammation
Current Treatments for Autoimmune Diseases
Immune modulators that correct immune dysregulation and chronic inflammatory conditions by inhibition or enhancement of single cytokine targets such as TNFa and IL-1ß or their receptors have been developed by a number of companies. For example, Amgen’s Enbrel® targets TNFa as does Johnson & Johnson’s Remicade®. Other immune-modulating drugs such as Celebrex® from Pfizer target COX-2. While these targeted approaches have shown clinical benefit and have generated significant sales volumes, redundancy in the immune system can limit their effectiveness. In addition, side effects, health care costs and reimbursement issues are limiting their long-term global utility. We have shown our compounds affect cytokine cascades through direct interactions in the endocrine system. This may make them more attractive drug candidates than those currently available as they directly interact through the endocrine system. This pharmaceutical candidate may represent the first in a new class of agent to treat these diseases assuming they are successfully developed and commercialized.
Rheumatoid Arthritis
Rheumatoid arthritis is a type of chronic arthritis that occurs in joints on the extremities of the body (such as hands, wrists or knees). In rheumatoid arthritis, the immune system attacks the joints and sometimes other organs. According to the Centers for Disease Control and Prevention, or (CDCP), an estimated 50 million people were treated for some form of arthritis and other rheumatic conditions in 2009, 22% of the US adult population.
Based upon the published studies in rodent models of collagen-induced and collagen antibody-induced arthritis, where Triolex demonstrated activity, a Phase I clinical trial was initiated in rheumatoid arthritis patients in 2008. A 28-day oral dose ranging study assessed the safety, pharmacokinetics and potential for drug-drug interactions in stable rheumatoid arthritis patients also receiving methotrexate. Triolex was found to be safe and well tolerated. No drug-drug interaction was found. Triolex is now positioned to enter clinical studies in patients with active rheumatoid arthritis.
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Ulcerative Colitis
Inflammatory bowel disease is comprised of ulcerative colitis, a chronic inflammation of the large intestine, or colon, and Crohns disease, a condition of inflammation of the small intestines. Ulcerative colitis and Crohns disease together affect approximately 500,000 to 2 million people in the United States.
Based upon published observations with Triolex in preclinical models widely used by both the pharmaceutical industry and academia to test agents as potential treatments for ulcerative colitis, we commenced a Phase I/II clinical trial in ulcerative colitis patients in 2008. This Phase I/II dose ranging study evaluated the safety, tolerance, pharmacokinetics and activity of Triolex when administered orally for 28 days to patients with active, mild-to-moderate ulcerative colitis. Triolex at the doses studied was found to be safe and well tolerated but offered no indication of a treatment advantage in this acute inflammatory setting when compared to placebo. Triolex is staged for long-term clinical trials directed towards the control of the chronic inflammatory processes associated with this disease, a clinical setting believed to be consistent with the pharmacological properties of the compound.
Neuroinflammation
The Company is investigating the use of Triolex® as a treatment for Parkinson’s disease (PD) with funding from The Michael J. Fox Foundation. The terms of the collaboration call for MJFF to fund up to approximately $150,000 toward pre-clinical development of Triolex in rodents. If these studies are successful, additional funding may be awarded by MJFF to continue the clinical development of Triolex for the treatment of PD.
Pulmonary Diseases and other Autoimmune Diseases
The Company is also interested in exploring the potential for Triolex and other new compounds from our technology platform in a variety of pulmonary diseases including, cystic fibrosis, chronic pulmonary disease and asthma. In addition Triolex has shown utility in pre-clinical models of multiple sclerosis and lupus erythematosus.
Triolex Development Status
Triolex is manufactured economically using a multi-step organic synthesis from the widely abundant and inexpensive starting material, DHEA. It is formulated for oral administration with commonly used excipients in approved (oral dosage) products. Diseases associated with chronic inflammation are thought to require drug exposures of extended duration to observe definitive treatment effects. Long term toxicology studies have been completed that qualify Triolex for use in clinical studies of 6 months duration or longer. There were no untoward side effects detected. Patent claims have been allowed for the composition, pharmaceutical formulations and methods of use to treat a variety of inflammatory diseases including type 2 diabetes and autoimmune conditions such as rheumatoid arthritis and ulcerative colitis in the United States, Europe and elsewhere. Applications with pending claims are filed to extend patent coverage in regions of economic interest including China, Japan and Korea.
NEUMUNE (HE2100)
Neumune as treatment for acute radiation exposure; an ERß selective agonist.
In December 2010, The Company reported on the safety, tolerability and signs of hematologic activity in four double-blinded, randomized, placebo-controlled studies of NEUMUNE in healthy human subjects, published in The Journal of Radiological Protection. Those studies demonstrated that Neumune has the potential to directly enhance innate immunity in humans and defined the compound as a highly selective ERß ligand. ERß ligand treatment has been suggested as a potentially safe anti-inflammatory and neuroprotective strategy in multiple sclerosis and other neurodegenerative diseases. In May of 2010, the Company reported that Neumune could ameliorate neuroinflammation in mice and has the potential to limit relapses in patients with multiple sclerosis. The Company is actively soliciting partnerships to develop an orally bioavailable, metabolically.
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HE2000
HE2000 in Infectious Disease
The Company conducted clinical trials in HIV, AIDS and malaria from the late 1990’s and early 2002. While the primary market opportunities for pharmaceuticals have traditionally been in the U.S., Europe and Japan, our adrenal steroid hormones have a number of attributes that make them potentially useful globally. Included are the potential broad-spectrum activity in multiple infectious diseases, the attractive safety profile to date, the low likelihood of resistance and the relative ease of manufacture. Increasing focus on the infectious disease crises around the world such as those represented by HIV, malaria and tuberculosis has led to a number of recent third party initiatives designed to provide funding for effective approaches to these diseases.
HE2000 has been tested in a series of Phase I/II and Phase II clinical trials in HIV/AIDS patients in the U.S. and South Africa. In all of these studies, HE2000 treatment appeared to be generally well tolerated with mild to moderate pain at the injection site as the most common adverse event. In addition to assessing the safety profile of HE2000 in clinical trials, we have also assessed the effect of HE2000 on a wide variety of immune and inflammatory markers that are associated with HIV disease progression.
Results from a study employing intermittent subcutaneous dosing of HE2000 in South African HIV patients that received no other therapy demonstrated long-lasting, statistically significant declines in a number of key inflammatory mediators, including TNFa, IL-1 and IL-6 when compared to placebo-treated patients. In this study, we also observed significant durable increases in a wide variety of immune cell subsets associated with innate and cell-mediated immunity following treatment with HE2000. In addition, patients that received HE2000 in this trial experienced a decline in virus levels in the blood over the course of the study, which correlated with an increase in HIV specific T cell mediated immunity. HE2000 was then tested as a monotherapy in late-stage AIDS patients. During this study, patients experienced a statistically significant reduction in the number of opportunistic infections compared to those treated with placebo and the life-threatening tuberculosis infections were completely quelled after 4-months of treatment.
The ability of HE2000 to reduce pro-inflammatory mediators while stimulating innate and cell-mediated immunity has potential implications for the treatment of a number of other infectious diseases, including parasitic infections such as malaria. Based on multiple pre-clinical studies performed by collaborators at the Walter Reid Naval Hospital and the University of Vermont, we performed two Phase II clinical studies in malaria patients at Mahidol University in Bangkok, Thailand. Results indicated that HE2000 was effective in reducing parasite count and cleared malarial parasites in most patients within seven days.
In a series of animal model studies, we have also shown of tuberculosis that HE2000 is effective when given as a monotherapy in either the acute or chronic phase of this bacterial infection and it HE2000 appears to have a synergistic effect when combined with the current three-drug regimen considered the standard of care for antibiotic treatment of the TB infection.
Government Regulation
General
The manufacturing and marketing of our proposed drug candidates and our research and development activities are, and will continue to be, subject to regulation by federal, state and local governmental authorities in the U.S. and other countries. In the U.S., pharmaceuticals are subject to rigorous regulation by the Food and Drug Administration, (‘FDA”), which reviews and approves the marketing of drugs. The Federal Food, Drug and Cosmetic Act, the regulations promulgated thereunder, and other federal and state statutes and regulations govern, among other things, the testing, manufacturing, labeling, storage, record keeping, advertising and promotion of our potential products.
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Approval Process
The process of obtaining FDA approval for a new drug may take many years and generally involves the expenditure of substantial resources. The steps required before a new drug can be produced and marketed for human use include clinical trials and the approval of a New Drug Application.
Preclinical Testing. In the preclinical phase of development, the promising compound is subjected to extensive laboratory and animal testing to determine if the compound is biologically active and safe.
Investigational New Drug, or IND. Before human tests can start, the drug sponsor must file an IND application with the FDA, showing how the drug is made and the results of animal testing. An IND becomes effective 30 days following receipt by the FDA.
Human Clinical Testing. The human clinical testing program usually involves three phases which generally are conducted sequentially, but which, particularly in the case of anti-cancer and other life-saving drugs, may overlap or be combined. Clinical trials are conducted in accordance with protocols that detail the objectives of the study, the parameters to be used to monitor safety and the efficacy criteria to be evaluated. Each protocol is submitted to the FDA as part of the IND filing. Each clinical study is conducted under the auspices of an independent Institutional Review Board, or IRB, for each institution at which the study will be conducted. The IRB will consider, among other things, the design of the clinical trial, ethical factors, the risk to human subjects and the potential benefits of therapy relative to the risk.
In Phase I clinical trials, studies usually are conducted on healthy volunteers or, in the case of certain terminal illnesses such as AIDS or cancer patients with disease that have failed to respond to other treatment, to determine the maximum tolerated dose, side effects and pharmacokinetics of a product. Phase II studies are conducted on a small number of patients having a specific disease to determine initial efficacy in humans for that specific disease, the most effective doses and schedules of administration, and possible adverse effects and safety risks. Phase II/III differs from Phase II in that the trials involved may include more patients and, at the sole discretion of the FDA, be considered the “pivotal” trials, or trials that will form the basis for FDA approval. Phase III normally involves the pivotal drug trials consisting of broad scope of studies on diseased patients, in order to evaluate the overall benefits and risks of the drug for the treated disease compared with other available therapies. The FDA continually reviews the clinical trial plans and results and may suggest design changes or may discontinue the trials at any time if significant safety or other issues arise.
New Drug Application, or NDA. Upon successful completion of Phase III clinical trials, the drug sponsor files an NDA with the FDA for approval containing details of the chemistry, manufacture and quality control information that has been developed, nonclinical data, results of human tests, and proposed labeling.
The testing and approval process is likely to require substantial time, from several months to years, and there can be no assurance that any FDA approval will be granted on a timely basis, if at all. The approval process is affected by a number of factors, primarily the side effects of the drug (safety) and its therapeutic benefits (efficacy). Additional preclinical or clinical trials may be required during the FDA review period and may delay marketing approval. The FDA may also deny an NDA if applicable regulatory criteria are not met.
Outside the U.S., we will be subject to foreign regulatory requirements governing human clinical trials and marketing approval for our products. The “requirements” governing human clinical trials ex-US usually follow International Conference on Harmonization of Technical Requirements for Registration of Pharmaceuticals for Human Use (“ICH”) Good Clinical Practices (“GCP”) or country-specific GCPs which are based on the ICH GCPs. Regulatory approval outside the U.S. typically includes the risks and costs associated with obtaining FDA approval but may also include additional risks and costs.
Post Approval. If the FDA approves an NDA, the drug sponsor is required to submit reports periodically to the FDA containing adverse reactions, production, quality control and distribution records. The FDA may also require post-marketing testing to support the conclusion of efficacy and safety of the product, which can involve significant expense. After FDA approval is obtained for initial indications, further clinical trials may be necessary to gain approval for the use of the product for additional indications.
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Manufacturing
We do not have, and do not intend to establish, manufacturing facilities to produce our drug candidates or any future products. We plan to control our capital expenditures by using contract manufacturers to make our products. We believe that there are a sufficient number of high-quality FDA-approved contract manufacturers available, and we have had discussions, and in some cases established relationships, to fulfill our near-term production needs for both clinical and commercial applications.
The manufacture of our drug candidates or any future products, whether done by outside contractors as planned or internally, will be subject to rigorous regulations, including the need to comply with the FDA’s current Good Manufacturing Practice regulations. As part of obtaining FDA approval for each product, each of the manufacturing facilities must be inspected, approved by and registered with the FDA. In addition to obtaining FDA approval of the prospective manufacturer’s manufacturing and quality control procedures, domestic and foreign manufacturing facilities are subject to periodic inspection by the FDA and/or foreign regulatory authorities.
Patents
We currently own or have obtained licenses to a number of U.S. and foreign patents and patent applications. We consider the protection of our technology, whether owned or licensed, to the exclusion of use by others, to be vital to our business. While we intend to focus primarily on patented or patentable technology, we may also rely on trade secrets, unpatented property, know-how, regulatory exclusivity, patent extensions and continuing technological innovation to develop our competitive position. In the U.S. and certain foreign countries, the exclusivity period provided by patents covering pharmaceutical products may be extended by a portion of the time required to obtain regulatory approval for a product.
In certain countries, some pharmaceutical-related technology such as disease treatment methods are not patentable or only recently have become patentable, and enforcement of intellectual property rights in many countries has been limited or non-existent. Future enforcement of patents and proprietary rights in many countries can be expected to be problematic or unpredictable. We cannot guarantee that any patents issued or licensed to us will provide us with competitive advantages or will not be challenged by others. Furthermore, we cannot be certain that others will not independently develop similar products or will not design around patents issued or licensed to us.
In most cases, patent applications in the U.S. are maintained in secrecy until 18 months after the earliest filing or priority date. Publication of discoveries in the scientific or patent literature, if made, tends to lag behind actual discoveries by at least several months. U.S. patent applicants can elect to prevent publication until the application issues by agreeing not to file the application outside the U.S. This option is rarely used for pharmaceutical patent applications. Consequently, we cannot be certain that a patent owner or licensor of its intellectual property was the first to invent the technology or compounds covered by pending patent applications or issued patents or that it was the first to file patent applications for such inventions. In addition, the patent positions of biotechnology and pharmaceutical companies, including our own, are generally uncertain, partly because they involve complex legal and factual questions.
In addition to the considerations discussed above, companies that obtain patents claiming products, uses or processes that are necessary for, or useful to, the development of our drug candidates or future products could bring legal actions against us claiming infringement. Patent litigation is typically costly and time consuming, and if such an action were brought against us, it could result in significant cost and diversion of our attention. We may be required to obtain licenses to other patents or proprietary rights, and we cannot guarantee that licenses would be made available on terms acceptable to us. If we do not obtain such licenses, we could encounter delays in product market introductions while we attempt to develop or license technology designed around such patents, or we could find that the development, manufacture or sale of products requiring such licenses is foreclosed.
Further, we cannot guarantee that patents that are issued will not be challenged, invalidated or infringed upon or designed around by others, or that the claims contained in such patents will not interfere with the patent
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claims of others, or provide us with significant protection against competitive products, or otherwise be commercially valuable. To the extent that we are unable to obtain patent protection for our products or technology, our business may be materially adversely affected by competitors who develop substantially equivalent technology.
For a discussion of the risks associated with patent and proprietary rights, see below under Item 1A “Risk Factors”.
Technology Agreements
PHARMADIGM
In August 2002, we entered into a Sublicense Agreement with Pharmadigm, Inc. (currently known as Inflabloc Pharmaceuticals, Inc.). Under the agreement, we obtained exclusive worldwide rights to certain intellectual property of Pharmadigm and the University of Utah and we agreed to make aggregate payments of $0.9 million in cash or in shares of our common stock, at our option, over the following year. We elected to make such payments in equity and have issued a total of 168,921 shares of our common stock in complete satisfaction of this requirement. We will also make additional milestone and royalty payments to Pharmadigm if we meet specified development and commercialization milestones for products covered by its patents. No such milestones have been met to date. The principal patents licensed under the agreement, originally licensed to Pharmadigm from the University of Utah, relate to inventions by Dr. Raymond Daynes and Dr. Barbara A. Areneo. Dr. Daynes served as a scientific consultant for the Company from 1999 to mid-2003.
AESON THERAPEUTICS
In October 2000, we acquired a 21% equity stake in Aeson Therapeutics Inc. (“Aeson”) and an exclusive worldwide sublicense to three issued patents in the area of adrenal steroids in exchange for $2.0 million in cash and 208,672 shares of our common stock valued at $2 million. As part of the transaction, Aeson and its stockholders granted us an exclusive option to acquire the remainder of Aeson at a predetermined price. In March 2002, we amended certain aspects of our agreements with Aeson. Under the amendments, we paid Aeson $1.2 million, which extended the initial date by which we could exercise our option to acquire the remainder of Aeson to September 30, 2002. We also received additional equity securities of Aeson as a result of this payment. We elected not to exercise the option to acquire the remainder of Aeson by September 30, 2002. On June 7, 2006, we acquired substantially all of the assets of Aeson. As consideration for Aeson’s assets, we agreed (i) to issue a total of 35,000 shares of our common stock to Aeson at the closing of the acquisition and (ii) to issue to Aeson’s stockholders up to a total of 165,000 additional shares of our common stock if certain development milestones are achieved. We have not achieved any of the development milestones to date.
CHINA
In January of 2011, the Company announced that it had licensed the research and development and commercialization rights for three of its products, exclusively in the People’s Republic of China and Hong Kong, to China State Institute of Pharmaceutical Industry (“CIPI”), a subsidiary of China National Pharmaceutical Group Corporation. Harbor BioSciences retains the rights to these products in the U.S. and the rest of the world, and CIPI will make available to the Company all pre-clinical and clinical data it generates. Under the terms of the agreement, CIPI will advance HE2000, Apoptone and Triolex forward through development simultaneously without any financial support from Harbor BioSciences. The agreements provide the opportunity for Harbor BioSciences to capture value for our research and development efforts completed to date, while retaining U.S. and other world-markets rights.
China National Pharmaceutical Group Corporation
China National Pharmaceutical Group Corporation (“Sinopharm Group”) is the largest pharmaceutical and healthcare group under State-Owned Assets Supervision and Administration Commission of the State Council (“SASAC”) in China. The group has 22 wholly-owned subsidiaries and holding companies, one H-share
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company trading on the Hong Kong stock exchange, Sinopharm Group Co., Ltd., and three A-share companies trading on the Shainghai stock exchange, Beijing Tiantan Biological Products Corporation Limited, China National Medicines Co., Ltd. and Shenzhen Accord Pharmaceutical Co., Ltd.
Sinopharm Group researches and develops, manufactures, distributes, and markets medicine and other healthcare products. Sinopharm Group manages factories, research laboratories, traditional Chinese medicine plantations, and marketing and distribution networks that extend throughout the country. Sinopharm Group also runs about a dozen retail pharmacy chains. Sinopharm Group has operations in Africa, France, Germany, Hong Kong, the US, and Vietnam.
In 2009, the group’s sale revenue had reached 65 billion Yuan (approximately $10 billion). Among the 129 enterprises under SASAC, Sinopharm Group is ranked 50th and 38th in terms of sales revenue and total profit respectively. In 2010, Sinopharm Group’s revenue is estimated to be 80 billion Yuan (approximately $12.3 billion). During the period form 2003 to 2009, it is reported that their sales revenue, gross profit and total assets grew at an annual average rate of 30%, 51% and 33% respectively.
The Sinopharm Group has agreed to supply the licensed products to Harbor BioSciences for use in clinical studies and sales outside of China and Hong Kong. Harbor BioSciences can also elect to distribute these compounds in countries that accept the State Food and Drug Administration’s (“SFDA”) drug approval process. Therefore, we believe that CIPI is uniquely positioned to advance these compounds, placing Harbor Biosciences on the forefront of the increasingly globalized pharmaceutical industry.
The International Conference on Harmonization
The International Conference on Harmonization of Technical Requirements for Registration of Pharmaceuticals for Human Use (“ICH”). Since its inception in 1990, ICH has evolved, through its ICH Global Cooperation Group, to respond to the increasingly global face of drug development, so that the benefits of international harmonization for better global health can be realized. Harmonization ensures that safe, effective, and high quality medicines are developed and registered in the most resource-efficient manner worldwide. Specifically, China has been steadily improving its regulatory regime governing food and pharmaceutical industries in recent years, aligning the country with international standards of practice. Regional Harmonization Initiatives (“RHI”) include Asia-Pacific Economic Cooperation (“APEC”), Association of Southeast Asian Nations (“ASEAN”), Gulf Cooperation Council (“GCC”), Pan American Network on Drug Regulatory Harmonization (“PANDRH”) and the Southern African Development Community (“SADC”). Development in each of these regions may or may not require bridge studies, depending on the genetic diversity within each population, but in any event, costs for such studies would be borne by each regional partner.
Business Strategy
We believe that our agreement with CIPI places Harbor Biosciences on the forefront of a rapidly evolving global pharmaceutical industry. China offers relatively rapid product development, especially in the context of Phase II and III studies, diluted risk (defrayed costs), low cost supply and validation of technology, as well as huge, expanding and increasingly affluent markets for our specific indications. As the R&D arm of the Sinopharm Group, CIPI is uniquely qualified and positioned to develop our small molecules. By the terms of our agreement, CIPI will bear all development costs for each candidate compound and Harbor BioSciences will retain the rights to all its products in the U.S. and the rest of the world. This will afford us several exciting opportunities to capitalize on regional licensing and partnership agreements as well as agreements with Health Ministries of individual governments, including socialized medicine countries. Our partnership with CIPI includes a low cost supply agreement by which China will supply API or finished products into the rest of the world, in accordance with specific agreements and regulatory requirements. Such agreements may include payments of up front fees to Harbor Biosciences with additional payments for milestones achieved in China. Concurrently, Harbor Biosciences is actively attempting to develop partnerships and/or licensing agreements in order to monetize its other assets, including Neumune and several novel, naturally occurring steroid hormones that may be suitable for either pharmaceutical or nutraceutical development. All together, Harbor Biosciences
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seeks to capitalize on at least six compounds in various stages of development, including Apoptone, Triolex, HE2000, Neumune, HE3413 and HE3177. In addition, our pipeline contains potential pre-clinical candidates with improved pharmaceutical properties aimed at pharmaceutically accepted targets including ERß. It is the Company’s intention to reduce its burn rate to match revenue recognition from milestones achieved in China and the execution of potential licenses and partnerships with the rest of the world.
Employees
As of March 25, 2011, we had 14 full-time equivalent, non-union employees. We believe that our relations with our employees are good.
Executive Officers and Senior Management
Our executive officers and senior management and their ages as of March 25, 2011 are as follows:
| Name |
Age | Position | ||||
| James M. Frincke, Ph.D. |
60 | Chief Executive Officer | ||||
| Christopher L. Reading, Ph.D. |
63 | Chief Scientific Officer | ||||
| Dwight R. Stickney, M.D. |
68 | Chief Medical Officer | ||||
| Robert W. Weber |
60 | Chief Financial Officer and Secretary | ||||
James M. Frincke, Ph.D. joined Harbor BioSciences as Vice President, Research and Development in November 1997, was promoted to Executive Vice President in March 1999, to Chief Scientific Officer in December 2001, to Chief Operating Officer in February 2008 and to Chief Executive Officer in 2009. Dr. Frincke joined Harbor BioSciences, Inc. from Prolinx, Inc., where he served as Vice President, Therapeutics Research and Development from 1995 to 1997. During his 30 years in the biotechnology industry, Dr. Frincke has managed major development programs including drugs, biologicals, and cellular and gene therapy products aimed at the treatment of cancer, infectious diseases, organ transplantation, autoimmune disease and type 2 diabetes. Since joining the biotechnology industry, Dr. Frincke has held vice president, research and development positions in top tier biotechnology companies including Hybritech/Eli Lilly and SyStemix Inc. (acquired by Novartis). In various capacities, he has been responsible for all aspects of pharmaceutical development including early stage research programs, product evaluation, pharmacology, manufacturing, and the management of regulatory and clinical matters for lead product opportunities. Dr. Frincke has authored or co-authored more than 100 scientific articles, abstracts and regulatory filings. Dr. Frincke received his B.S. in Chemistry and his Ph.D. in Chemistry from the University of California, Davis. Dr. Frincke performed his postdoctoral work at the University of California, San Diego.
Christopher L. Reading, Ph.D. joined Harbor BioSciences as Vice President of Scientific Development in January 1999, was promoted to Executive Vice President, Scientific Development in March 2002 and to Chief Scientific Officer in February 2008. Before Harbor BioSciences, Inc., Dr. Reading was Vice President of Product and Process Development at Novartis Inc.-owned SyStemix Inc. During this time, he successfully filed three investigational new drug applications (INDs) in the areas of stem cell therapy technology and stem cell gene therapy for HIV/AIDS. Prior to joining SyStemix, Dr. Reading served on the faculty of the M.D. Anderson Cancer Center in Houston for nearly 13 years. His positions there included Associate and Assistant Professor of Medicine in the Departments of Hematology and Tumor Biology. During his career, Dr. Reading has given more than 25 national and international scientific presentations, published more than 100 peer-reviewed journal articles and 15 invited journal articles as well as written nearly 20 book chapters, and received numerous grants and contracts which supported his research activities. Dr. Reading has served on the National Science Foundation Advisory Committee for Small Business Innovative Research Grants (SBIR) as well as on the editorial boards of Journal of Biological Response Modifiers and Molecular Biotherapy. He holds a number of patents for his work with monoclonal antibodies and devices. Dr. Reading received his Ph.D. in Biochemistry at the University of California at Berkeley and completed postdoctoral study in tumor biology at The University of California at Irvine. He earned his B.A. in cell biology at the University of California at San Diego.
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Dwight R. Stickney, M.D. joined Harbor BioSciences as Medical Director, Oncology in May 2000, was appointed Vice President, Medical Affairs in March 2003 and was promoted to Chief Medical Officer in February 2008. Dr. Stickney joined Harbor BioSciences, Inc. from the Radiation Oncology Division of Radiological Associates of Sacramento Medical Group, Inc., in Sacramento, California, where he served as a Radiation Oncologist since 1993. While at Radiological Associates, he served as Chairman of the Radiation Oncology Division from 1997 to 1999 and was a member of the Radiation Study section of the National Institute of Health’s Division of Research Grants from 1993 to 1997. He also served as the Director of Radiation Research for Scripps Clinic and Research Foundation in La Jolla, California. Dr. Stickney has taught in medical academia as Associate Professor of Radiation Medicine at Loma Linda University School of Medicine and has served as Director of the International Order of Forresters Cancer Research Laboratory and on the Board of Directors of the California Division of the American Cancer Society. Earlier in his career, Dr. Stickney held positions with Burroughs Wellcome and the Centers for Disease Control, and academic teaching appointments at The University of California at Los Angeles and The University of California at Riverside. He has also served as a consultant for a number of biotechnology companies on the design and conduct of clinical trials. Dr. Stickney has authored or co-authored over 80 scientific articles, abstracts and book chapters. He is named inventor on numerous issued patents and patent applications. Dr. Stickney holds a Bachelor of Science in Microbiology, a Masters of Science in Immunology, and a M.D. from Ohio State University. In addition, he is certified as a Diplomat of the American Board of Internal Medicine and Hematology and a Diplomat of the American Board of Radiology, Therapeutic Radiology.
Robert W. Weber joined Harbor BioSciences in March 1996 and currently serves as the Chief Financial Officer and Secretary. Mr. Weber has over thirty years of experience in financial management. He has been employed at executive levels by multiple start-up companies and contributed to the success of several turnaround situations. He previously served as Vice President of Finance at Prometheus Products, a subsidiary of Sierra Semiconductor (now PMC Sierra), from 1994 to 1996, and Chief Financial Officer for Amercom, a personal computer telecommunications software publishing company, from 1993 to 1994. From February 1988 to August 1993, Mr. Weber served as Chief Financial Officer of Instromedix, a company that develops and markets medical devices and software. Mr. Weber brings a broad and expert knowledge of many aspects of financial management. In various capacities, he has been responsible for all aspects of finance and accounting including cost accounting, cash management, SEC filings, treasury, investor relations, private and venture financing, corporate legal matters, acquisitions/divestitures as well as information technology, human resources and facilities. Mr. Weber received a B.S. from GMI Institute of Technology (now Kettering University) and a MBA from the Stanford Graduate School of Business.
| Item 1A. | Risk Factors |
In evaluating our business, you should consider the following discussion of risks, in addition to other information contained in this Annual Report on Form 10-K, as well as our other public filings with the Securities and Exchange Commission. Any of the following risks could materially adversely affect our business, financial condition, results of operations and prospects and, as a result, the market price of our common stock could decline, and you may lose all or part of the money you paid to buy our common stock.
We are still a development stage company.
We have never had any revenues from sales of products. None of our drug candidates has been approved for commercial sale and we do not expect that any of our present or future drug candidates will be commercially available for a number of years, if at all. We have incurred losses since our inception and we expect to continue to incur significant additional operating losses for the foreseeable future as we fund clinical trials and other expenses in support of regulatory approval of our drug candidates.
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We need to raise additional money before we achieve profitability; if we fail to raise additional money, it could be difficult or impossible to continue our business.
As of December 31, 2010, our cash and cash equivalents totaled approximately $5.9 million. Based on our current plans, we believe these financial resources, and interest earned thereon, will be sufficient to meet our operating expenses and capital requirements into the late 2011. However, changes in our research and development plans or other events affecting our operating expenses may result in the expenditure of such cash before that time. We will require substantial additional funds in order to finance our drug discovery and development programs, fund operating expenses, pursue regulatory clearances, develop manufacturing, marketing and sales capabilities, and prosecute and defend our intellectual property rights. We may seek additional funding through public or private financing or through collaborative arrangements with strategic partners.
You should be aware that in the future:
| • | we may not obtain additional financial resources when necessary or on terms favorable to us, if at all; and |
| • | any available additional financing may not be adequate. |
If we cannot raise additional funds when needed, or on acceptable terms, we will not be able to continue to develop our drug candidates.
We may need to liquidate the Company in a voluntary dissolution under Delaware law or seek protection under the provisions of the U.S. Bankruptcy Code, and in either event, it is unlikely that stockholders would receive any value for their shares.
We have not generated any revenues from product sales, and have incurred losses in each year since our inception in 1994. We expect that it will be very difficult to raise capital to continue our operations and our independent registered public accounting firm has issued an opinion with an explanatory paragraph to the effect that there is substantial doubt about our ability to continue as a going concern. We do not believe that we could succeed in raising additional capital needed to sustain our operations without some strategic transaction, such as a partnership or merger. If we are unable to consummate such a transaction, we expect that we would need to cease all operations and wind down. Although we are currently evaluating our strategic alternatives with respect to all aspects of our business, we cannot assure you that any actions that we take would raise or generate sufficient capital to fully address the uncertainties of our financial position. As a result, we may be unable to realize value from our assets and discharge our liabilities in the normal course of business. If we are unable to settle our obligations to our creditors or if we are unable to consummate a strategic transaction, we would likely need to liquidate the Company in a voluntary dissolution under Delaware law or seek protection under the provisions of the U.S. Bankruptcy Code. In that event, we, or a trustee appointed by the court, may be required to liquidate our assets. In either of these events, we might realize significantly less from our assets than the values at which they are carried on our financial statements. The funds resulting from the liquidation of our assets would be used first to satisfy obligations to creditors before any funds would be available to pay our stockholders, and any shortfall in the proceeds would directly reduce the amounts available for distribution, if any, to our creditors and to our stockholders. In the event we are required to liquidate under Delaware law or the federal bankruptcy laws, it is highly unlikely that stockholders would receive any value for their shares. See “Liquidity and Capital Resources” in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 1 to our financial statements.
We may be unable to obtain a quorum for meetings of our stockholders or obtain necessary stockholder approvals and therefore be unable to take certain actions
Our bylaws require that a quorum, consisting of a majority of the outstanding shares of voting stock, be represented in person or by proxy in order to transact business at a meeting or our stockholders. In addition, amendments to our amended and restated certificate of incorporation, such as an amendment to increase our authorized capital stock, require the approval of a majority of our outstanding shares. Under Rule 452 of the New
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York Stock Exchange, the U.S. broker-dealer may vote shares absent direction from the beneficial owner on certain matters, such as an amendment to our amended and restated articles of incorporation to increase authorized shares that are to be used for general corporate purposes and the ratification of our auditors. As a result, unless more stockholders elect to be presented in person or by proxy in future annual or special meetings of stockholders, we may be unable to obtain a quorum at such meetings or obtain stockholder approval of proposals when needed.
If we are unable to obtain a quorum at our stockholders meeting and thus fail to get stockholder approval of corporate actions, such failure could have a materially adverse effect on us. In addition, brokers may only vote on those matters for which broker discretionary voting is allowed under Rule 452 of the New York Stock Exchange, and we may not be able to obtain the required number of votes to approve certain proposals that require a majority of all outstanding share to approve the proposal due to our reliance on broker discretionary voting. Therefore, it is possible that even if we are able to obtain a quorum for our meetings of the stockholders we still may not receive enough votes to approve proxy proposals presented at such meeting and, depending on the proposal in question, such failure could have a material adverse effect on us.
If we do not obtain government regulatory approval for our products, we cannot sell our products and we will not generate revenues.
Our principal efforts are currently centered on a proprietary class of small compounds that we believe shows promise for the treatment of several diseases and disorders. However, all drug candidates require approval by the U.S. Food and Drug Administration (“FDA”) before they can be commercialized in the United States as well as approval by various foreign government agencies before they can be commercialized in other countries. These regulations change from time to time and new regulations may be adopted. While limited clinical trials of our drug candidates have been conducted to date, significant additional trials are required, and we may not be able to demonstrate that our drug candidates are safe or effective. In addition, success in early development does not mean that later development will be successful because, for example, drug candidates in later-stage clinical trials may fail to demonstrate sufficient safety and efficacy despite having progressed through initial clinical testing. Our clinical experience with our drug candidates is limited, and to date our drug candidates have been tested in less than the number of patients that will likely need to be studied to gain regulatory approval. The data collected from clinical trials with larger patient populations may not demonstrate sufficient safety and efficacy to support regulatory approval of these drug candidates. In addition, we do not know whether early results from any of our ongoing clinical trials will be predictive of final results of any such trial. If we are unable to demonstrate the safety and effectiveness of a particular drug candidate to the satisfaction of regulatory authorities, the drug candidate will not obtain required government approval and we will experience potentially significant delays in, or be required to abandon, development of the drug candidate. If we do not receive FDA or foreign approvals for our drug candidates, we will not be able to sell products and will not generate revenues. If we receive regulatory approval of one of our drug candidates, such approval may impose limitations on the indicated uses for which we may market the resulting product, which may limit our ability to generate significant revenues. Further, U.S. or foreign regulatory agencies could change existing, or promulgate new, regulations at any time, which may affect our ability to obtain approval of our drug candidates or require significant additional costs to obtain such approvals. In addition, if regulatory authorities determine that we or a partner conducting research and development activities on our behalf have not complied with regulations in the research and development of one of our drug candidates, then they may not approve the drug candidate and we will not be able to market and sell it. If we were unable to market and sell our drug candidates, our business and results of operations would be materially and adversely affected.
Recent publicity concerning the safety of certain drug products has resulted in heightened scrutiny by the FDA in the process of approving new drugs, which could delay or limit any regulatory approvals we may obtain for our drug candidates.
In light of widely publicized events concerning the safety risk of certain drug products, the FDA, members of Congress, the Government Accountability Office, medical professionals and the general public have raised concerns about potential drug safety issues. These events have resulted in the withdrawal of drug products,
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revisions to drug labeling that further limit use of the drug products and establishment of risk management programs that may, for instance, restrict distribution of drug products after approval. In addition, the Food and Drug Administration Amendments Act of 2007, or FDAAA, grants significant expanded authority to the FDA, much of which is aimed at improving the safety of drug products before and after approval. In particular, the new law authorizes the FDA to, among other things, require post-approval studies and clinical trials, mandate changes to drug labeling to reflect new safety information and require risk evaluation and mitigation strategies for certain drugs, including certain currently approved drugs. It also significantly expands the federal government’s clinical trial registry and results databank, which we expect will result in significantly increased government oversight of clinical trials. Under the FDAAA, companies that violate these and other provisions of the new law are subject to substantial civil monetary penalties, among other regulatory, civil and criminal penalties. The increased attention to drug safety issues may result in a more cautious approach by the FDA in its review of data from our clinical trials. Data from clinical trials may receive greater scrutiny, particularly with respect to safety, which may make the FDA or other regulatory authorities more likely to require additional preclinical studies or clinical trials by drug development companies. As a result, the FDA may require us to conduct additional preclinical studies or clinical trials during the clinical development of one or more of our drug candidates as a condition precedent to approval which could potentially delay our development plans, limit the indications for which our drug candidates are ultimately approved, and otherwise adversely impact us.
If we do not successfully commercialize our products, we may never achieve profitability.
We have experienced significant operating losses to date because of the substantial expenses we have incurred to acquire and fund development of our drug candidates. We have never had significant operating revenues and have never commercially introduced a product. Our accumulated deficit was approximately $258.4 million as of December 31, 2010. Our net losses for fiscal years 2010, 2009 and 2008 were approximately $6.6 million, $15.6 million and $21.6 million, respectively. Many of our research and development programs are at an early stage. Potential drug candidates are subject to inherent risks of failure. These risks include the possibilities that no drug candidate will be found safe or effective, meet applicable regulatory standards or receive the necessary regulatory clearances. Even if we were ultimately to receive regulatory approval for one or more of our drug candidates, we may be unable to commercialize them successfully for a variety of reasons. These include, for example, the availability of alternative treatments, lack of cost effectiveness, the cost of manufacturing the product on a commercial scale, the effect of competition with other drugs, or because we may have inadequate financial or other resources to pursue one or more of our drug candidates through commercialization. If we are unable to develop safe, commercially viable drugs, we may never achieve profitability. If we become profitable, we may not remain profitable.
As a result of our intensely competitive industry, we may not gain enough market share to be profitable.
The biotechnology and pharmaceutical industries are intensely competitive. We have numerous competitors in the U.S. and elsewhere. Because we are pursuing potentially large markets, our competitors include major multinational pharmaceutical companies, specialized biotechnology firms as well as academic institutions, government agencies and private and public research institutions. Several of these entities have already successfully marketed and commercialized products that will compete with our drug candidates, assuming that our drug candidates gain regulatory approval. A large number of companies including Merck & Co., Inc., GlaxoSmithKline, Takeda Pharmaceuticals, Amylin Pharmaceuticals, Inc., AstraZeneca, Novartis, Novo Nordisk, Pfizer Inc., Sanofi-Aventis and Eli Lilly and Co. are developing and marketing new drugs for the treatment of type 2 diabetes. Similarly, a large number of companies, including Merck & Co., Inc., Pfizer Inc., Johnson & Johnson Inc. and Amgen Inc., are developing and marketing new drugs for the treatment of chronic inflammatory conditions. In addition, there are also a number of other companies with drug candidates in development targeting late-stage prostate cancer, including compounds already in Phase 3 clinical trials. One or more such compounds may be approved before any of our drug candidates could potentially be approved. Many, if not all, of these competing drug development programs are being conducted by pharmaceutical and biotechnology companies with considerably greater financial resources, human resources and experience than ours.
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All of these competitors have greater financial and other resources, larger research and development staffs and more effective marketing and manufacturing organizations than we do. In addition, academic and government institutions have become increasingly aware of the commercial value of their research findings. These institutions are now more likely to enter into exclusive licensing agreements with commercial enterprises, including our competitors, to develop and market commercial products.
Our competitors may succeed in developing or licensing technologies and drugs that are more effective or less costly than any we are developing. Our competitors may succeed in obtaining FDA or other regulatory approvals for drug candidates before we do. If competing drug candidates prove to be more effective or less costly or better-marketed than our drug candidates, our drug candidates, even if approved for sale, may not be able to compete successfully with our competitors’ existing products or new products under development. Similarly, we cannot predict whether any of our drug candidates, if approved, will have sufficient advantages to cause healthcare professionals to adopt our products over competing products. If we are unable to compete successfully, we may never be able to sell enough products at a price sufficient to permit us to generate profits.
Our common stock has a very limited trading market
Our common stock was recently delisted from the NASDAQ Stock Market. Our common stock is now traded on the OTC Markets, an inter-dealer quotation system that provides significantly less liquidity than the NASDAQ Stock Market or any other national securities exchange. In addition, trading in our common stock has historically been extremely limited. Because of the thinness of the market for our stock, the price of our common stock may be subject to manipulation. This limited trading may adversely affect the liquidity of our common stock, not only in terms of the number of shares that can be bought and sold at a given price, but also through delays in the timing of transactions and reduction in security analysts' and the media's coverage of us. As a result, there could be a larger spread between the bid and the ask prices of our common stock and you may not be able to sell shares of our common stock when or at prices you desire.
Substantial sales of our stock may impact the market price of our common stock.
As evidenced by the completion of our registered direct offering completed in June 2010, future sales of substantial amounts of our common stock, including shares that we may issue upon exercise of options and warrants or conversion of convertible securities, could adversely affect the market price of our common stock. Further, if we raise additional funds through the issuance of common stock or securities convertible into or exercisable for common stock, the percentage ownership of our stockholders will be reduced and the price of our common stock may fall.
Issuing preferred stock with rights senior to those of our common stock could adversely affect holders of common stock.
Our charter documents give our board of directors the authority to issue shares of preferred stock without a vote or action by our stockholders. The board also has the authority to determine the terms of preferred stock, including price, preferences and voting rights. The rights granted to holders of preferred stock may adversely affect the rights of holders of our common stock. For example, a series of preferred stock may be granted the right to receive a liquidation preference – a pre-set distribution in the event of liquidation – that would reduce the amount available for distribution to holders of common stock. In addition, the issuance of preferred stock could make it more difficult for a third party to acquire a majority of our outstanding voting stock. As a result, common stockholders could be prevented from participating in transactions that would offer an optimal price for their shares.
If we were to lose the services of members of our management team, or fail to attract or retain qualified personnel in the future, our business objectives would be more difficult to implement, adversely affecting our operations.
Our ability to successfully implement our business strategy depends upon the continued services of our management team. If we lose the services of one or more of these individuals, replacement could be difficult and may take an extended period of time and could impede significantly the achievement of our business objectives.
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Our results of operations and liquidity needs could be materially negatively affected by market fluctuations and economic downturn.
Our results of operations could be materially negatively affected by economic conditions generally, both in the U.S. and elsewhere around the world. Continuing concerns over inflation, energy costs, geopolitical issues, the availability and cost of credit, the U.S. mortgage market and a declining residential real estate market in the U.S. have contributed to increased volatility and diminished expectations for the economy and the markets going forward. These factors, combined with volatile oil prices, declining business and consumer confidence and increased unemployment, precipitated an economic recession from which the global economy is in stages of recovery. Domestic and international equity markets continue to experience heightened volatility and turmoil. These events and the continuing market upheavals may have an adverse effect on us. In the event of a market downturn, our results of operations could be adversely affected by those factors in many ways, including making it more difficult for us to raise funds if necessary and our stock price may further decline.
Failure to protect our proprietary technology could impair our competitive position.
We own or have obtained a license to a number of U.S. and foreign patents and patent applications. Our success depends in part on our ability to obtain and defend patent rights and other intellectual property rights that are important to our ability to commercialize our drug candidates, if approved and our ability to operate our business without infringing the proprietary rights of third parties. We place considerable importance on obtaining patent protection for significant new technologies, products and processes. Legal standards relating to the validity of patents covering pharmaceutical and biotechnology inventions and the scope of claims made under such patents are still developing. In some of the countries in which we intend to market our drug candidates, if approved, pharmaceuticals are either not patentable or have only recently become patentable. Past enforcement of intellectual property rights in many of these countries has been limited or non-existent. Future enforcement of patents and proprietary rights in many other countries may be problematic or unpredictable. Moreover, the issuance of a patent in one country does not assure the issuance of a similar patent in another country. Claim interpretation and infringement laws vary by nation, so the extent of any patent protection is uncertain and may vary in different jurisdictions. Our domestic patent position is also highly uncertain and involves complex legal and factual questions. The applicant or inventors of subject matter covered by patent applications or patents owned by or licensed to us may not have been the first to invent or the first to file patent applications for such inventions. Due to uncertainties regarding patent law and the circumstances surrounding our patent applications, the pending or future patent applications we own or have licensed may not result in the issuance of any patents. Existing or future patents owned by or licensed to us may be challenged, infringed upon, invalidated, found to be unenforceable or circumvented by others. Further, any rights we may have under any issued patents may not provide us with sufficient protection against similar competitive products or technologies that do not infringe our patents or otherwise cover commercially valuable products or processes.
Litigation or other disputes regarding patents and other proprietary rights may be expensive, cause delays in bringing products to market and harm our ability to operate.
The manufacture, use or sale of our drug candidates may infringe on the patent rights of others. If we are unable to avoid infringement of the patent rights of others, we may be required to seek a license, defend an infringement action or challenge the validity of the patents in court. Patent litigation is costly and time consuming and can preclude, delay or suspend commercialization of our drug candidates. We may not have sufficient resources to bring these actions to a successful conclusion. In addition, if we do not obtain a license, develop or obtain non-infringing technology, or fail to successfully defend an infringement action or have the patents we are alleged to infringe declared invalid, we may:
| • | incur substantial money damages; |
| • | encounter significant delays in bringing our drug candidates to market; |
| • | be precluded from participating in the manufacture, use or sale of our drug candidates or methods of treatment without first obtaining licenses to do so; and/or |
| • | not be able to obtain any required license on favorable terms, if at all. |
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In addition, if another party claims the same subject matter or subject matter overlapping with the subject matter that we have claimed in a U.S. patent application or patent, we may decide or be required to participate in interference proceedings in the U.S. Patent and Trademark Office in order to determine the priority of invention. Loss of such an interference proceeding would deprive us of patent protection sought or previously obtained and could prevent us from commercializing our products. Participation in such proceedings could result in substantial costs, whether or not the eventual outcome is favorable. These additional costs could adversely affect our financial results.
Litigation may be expensive and time consuming and may adversely affect our operations.
From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. Participation in such proceedings is time consuming and could result in substantial costs, whether or not the eventual outcome is favorable. These additional costs could adversely affect our financial results.
Confidentiality agreements with employees and others may not adequately prevent disclosure of trade secrets and other proprietary information.
In order to protect our proprietary technology and processes, we also rely in part on confidentiality agreements with our employees, consultants, outside scientific collaborators and sponsored researchers and other advisors. These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover trade secrets and proprietary information. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.
Existing and/or future pricing regulations and reimbursement limitations may limit our potential profits from the sale of our products.
The requirements governing product licensing, pricing and reimbursement vary widely from country to country. Some countries require approval of the sale price of a drug before it can be marketed. In many countries, the pricing review period begins after product-licensing approval is granted. As a result, we may obtain regulatory approval for a drug candidate in a particular country, but then be subject to price regulations that reduce our profits from the sale of the product. In some foreign markets pricing of prescription pharmaceuticals is subject to continuing government control even after initial marketing approval. In addition, certain governments may grant third parties a license to manufacture our product without our permission. Such compulsory licenses may be on terms that are less favorable to us and would likely have the effect of reducing our revenues.
Varying price regulation between countries can lead to inconsistent prices and some re-selling by third parties of products from markets where products are sold at lower prices to markets where those products are sold at higher prices. Any practice of exploiting price differences between countries could undermine our sales in markets with higher prices and reduce the sales of our future products, if any.
While we do not have any applications for regulatory approval of our drug candidates currently pending, any decline in the size of the markets in which we may in the future sell commercial products, assuming our receipt of the requisite regulatory approvals, could cause the perceived market value of our business and the price of our common stock to decline.
Our ability to commercialize our drug candidates successfully also will depend in part on the extent to which reimbursement for the cost of our drug candidates and related treatments will be available from government health administration authorities, private health insurers and other organizations. Third-party payers are increasingly challenging the prices charged for medical products and services. If we succeed in bringing any of our drug candidates to the market, such drug candidates may not be considered cost effective and reimbursement may not be available or sufficient to allow us to sell such drug candidates on a profitable or competitive basis.
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In March 2010. President Obama signed into law The Patient Protection and Affordable Care Act and The Health Care and Education Reconciliation Act of 2010. It is unknown what the overall effect of such legislation has on us.
Delays in the conduct or completion of preclinical or clinical studies or the analysis of the data from preclinical or clinical studies may result in delays in our planned filings for regulatory approvals, or adversely affect our ability to enter into collaborative arrangements.
The current status of our two lead drug candidates is set forth below. We have completed:
| • | Phase I and I/II clinical trials with Triolex in the United States under an IND, for the treatment of metabolic disorders; |
| • | Phase IIa clinical trial with Triolex in the United States in type 2 diabetes patients under an IND for the treatment of metabolic disorders; |
| • | Phase I/II clinical trial with Triolex in the United States under an IND for the treatment of gastrointestinal inflammatory conditions; |
| • | Phase I clinical trial with Triolex in the United States in rheumatoid arthritis patients under an IND for the treatment of inflammatory conditions; and |
| • | Phase I/IIa clinical trial with Apoptone in the United States in late-stage prostate cancer patients who have failed hormone therapy and at least one round of chemotherapy treatment or have not received chemotherapy under an IND for the treatment of hormone-sensitive cancers including prostate cancer. |
Any of the following reasons, among others, could delay or suspend the completion of our future studies:
| • | delays in enrolling volunteers; |
| • | interruptions in the manufacturing of our drug candidates or other delays in the delivery of materials required for the conduct of our studies; |
| • | we may not be able to enter collaborative arrangements besides the CIPI agreements; |
| • | we can not control the uncertainties and lack direct control over the developments of our licensed compounds in Chin; |
| • | lower than anticipated retention rate of volunteers in a clinical trial; |
| • | unfavorable efficacy results; |
| • | serious side effects experienced by study participants relating to the drug candidate; |
| • | reaching agreement on acceptable terms with prospective contract research organizations and clinical trial sites; |
| • | failure to conduct a clinical trial in accordance with regulatory requirements or clinical protocols; |
| • | inspection of a clinical trial operations or clinical trial site by regulatory authorities resulting in the imposition of a clinical hold; |
| • | new communications from regulatory agencies about how to conduct these studies; or |
| • | failure to raise additional funds resulting in lack of adequate funding to continue a clinical trial or study. |
If the manufacturers of our drug candidates do not comply with current Good Manufacturing Practices regulations, or cannot produce sufficient quantities of our drug candidates to enable us to continue our development, we will fall behind on our business objectives.
Manufacturers producing our drug candidates must follow current Good Manufacturing Practices regulations enforced by the FDA and foreign equivalents. If a manufacturer of our drug candidates does not conform to current Good Manufacturing Practices regulations and cannot be brought up to such a standard, we will be required to find alternative manufacturers that do conform. This may be a long and difficult process, and may delay our ability to receive FDA or foreign regulatory approval of our drug candidates.
We also rely on our manufacturers to supply us with a sufficient quantity of our drug candidates to conduct clinical trials. If we have difficulty in the future with obtaining our required quantity and quality of supply, we could experience significant delays in our development programs and regulatory process.
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Our ability to achieve any significant revenue may depend on our ability to establish effective sales and marketing capabilities.
Our efforts to date have focused on the development and evaluation of our drug candidates. As we continue preclinical and clinical studies and seek to commercialize our drug candidates, we may need to build a sales and marketing infrastructure. As a company, we have no experience in the sales and marketing of pharmaceutical products. If we fail to establish a sufficient marketing and sales force or to make alternative arrangements to have our drug candidates marketed and sold by others on attractive terms, it will impair our ability to commercialize our drug candidates and to enter new or existing markets. Our inability to effectively enter these markets would materially and adversely affect our ability to generate significant revenues.
We may face product liability claims related to the use or misuse of our drug candidates, which may cause us to incur significant losses.
We are currently exposed to the risk of product liability claims due to administration of our drug candidates in clinical trials, since the use or misuse of our drug candidates during a clinical trial could potentially result in injury or death. If we are able to commercialize our products, we will also be subject to the risk of losses in the future due to product liability claims in the event that the use or misuse of our commercial products results in injury or death. We currently maintain liability insurance on a claims-made basis. Because we cannot predict the magnitude or the number of claims that may be brought against us in the future, we do not know whether the insurance policies’ coverage limits are adequate. The insurance is expensive, difficult to obtain and may not be available in the future on acceptable terms, or at all. Any claims against us, regardless of their merit, could substantially increase our costs and cause us to incur significant losses.
Our securities could be subject to extreme price fluctuations that could adversely affect your investment.
The market prices for securities of life sciences companies are highly volatile particularly those that are not profitable. Publicized events and announcements, most of which we cannot control, may have a significant impact on the market price of our common stock, which has been, and is likely to continue to be, volatile. For example:
| • | biological or medical discoveries by competitors; |
| • | public concern about the safety of our drug candidates; |
| • | delays in the conduct or analysis of our preclinical or clinical studies; |
| • | unfavorable results from preclinical or clinical studies; |
| • | delays in obtaining or failure to obtain purchase orders of our drug candidates; |
| • | announcements in the scientific and research community; |
| • | changes in the potential commercial markets for our drug candidates; |
| • | unfavorable developments concerning patents or other proprietary rights; |
| • | unfavorable domestic or foreign regulatory or governmental developments or actions; |
| • | broader economic, industry and market trends unrelated to our performance; |
| • | issuances of new equity securities by us, pursuant to our effective shelf registration statement or otherwise; |
| • | discussion of us or our stock price by the financial and scientific press and in online investor communities; or |
| • | additions or departures of key personnel |
may have the effect of temporarily or permanently driving down the price of our common stock. In addition, the stock market from time to time experiences extreme price and volume fluctuations which particularly affect the market prices for emerging and life sciences companies, such as ours, and which are often unrelated to the operating performance of the affected companies. For example, our stock price has ranged from $0.12 to $0.98 between January 1, 2009 and March 11, 2011.
These broad market fluctuations may adversely affect the ability of a stockholder to dispose of his shares at a price equal to or above the price at which the shares were purchased. In addition, in the past, following periods
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of volatility in the market price of a company’s securities, securities class-action litigation has often been instituted against that company. Any litigation against the Company, including this type of litigation, could result in substantial costs and a diversion of management’s attention and resources, which could materially adversely affect our business, financial condition and results of operations.
| Item 1B. | Unresolved Staff Comments |
None.
| Item 2. | Properties |
Our corporate headquarters are currently located at 9171 Towne Centre Drive, Suite 180, San Diego, CA 92122, where we have leased approximately 6,377 square feet of office space through July 2011. We believe that our facilities are adequate for our current operations.
| Item 3. | Legal Proceedings |
From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. While it is impossible to predict accurately or to determine the eventual outcome of these matters, as of the date of this report, we do not believe that we are engaged in any legal proceedings that are expected, individually or in the aggregate, to have a material adverse effect on our business, financial condition or operating results.
| Item 4. | Removed and Reserved. |
28
PART II
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Our common stock was traded on the NASDAQ Capital Market under the symbol HRBR until we were delisted in September 2010. Our common stock is now traded on the OTC Bulletin Board under the symbol HRBR.OB.
The following table sets forth the quarterly high and low sales prices for our common stock from January 1, 2009 through March 11, 2011.
| 2009 |
||||||||
| First Quarter |
$ | 0.85 | $ | 0.37 | ||||
| Second Quarter |
0.76 | 0.29 | ||||||
| Third Quarter |
0.70 | 0.43 | ||||||
| Fourth Quarter |
0.67 | 0.43 | ||||||
| 2010 |
||||||||
| First Quarter |
$ | 0.75 | $ | 0.45 | ||||
| Second Quarter |
0.60 | 0.27 | ||||||
| Third Quarter |
0.33 | 0.18 | ||||||
| Fourth Quarter |
0.20 | 0.13 | ||||||
| 2011 |
||||||||
| January 1 – March 11 |
$ | 0.24 | $ | 0.14 |
On March 11, 2011, the closing price of our common stock as reported by the OTC Markets was $0.22 share. There were approximately 8,500 stockholders of record and beneficial stockholders of our common stock as of such date. We have not paid cash dividends on our common stock and do not intend to do so in the foreseeable future.
There were no unregistered sales of equity securities in 2010.
We made no repurchases of our securities during the year ended December 31, 2010.
29
| Item 6. | Selected Financial Data |
The following data summarizes certain selected financial data for each of the five years ended December 31, 2010 through 2006 and the period from inception (August 15, 1994) to December 31, 2010. The information presented should be read in conjunction with the financial statements and related notes included elsewhere in this report (in thousands, except per share amounts).
| 2010 | 2009 | 2008 | 2007 | 2006 | Period from Inception (Aug. 15, 1994) to December 31, 2010 |
|||||||||||||||||||
| Statement of Operations Data: |
||||||||||||||||||||||||
| Contract revenues |
$ | — | $ | — | $ | — | $ | 645 | $ | 444 | $ | 1,208 | ||||||||||||
| Research and development |
3,759 | 10,555 | 16,070 | 18,319 | 23,764 | (1) | 175,013 | |||||||||||||||||
| General and administrative |
2,771 | 5,140 | 6,537 | 8,150 | 9,644 | (1) | 90,688 | |||||||||||||||||
| Settlement of Dispute |
— | — | — | — | — | 3,000 | ||||||||||||||||||
| Total operating expenses |
6,530 | 15,695 | 22,607 | 26,469 | 33,408 | 268,701 | ||||||||||||||||||
| Interest income (expense) |
16 | 138 | 1,048 | 2,781 | 2,741 | 17,379 | ||||||||||||||||||
| Other income (expense) |
(83 | ) | (69 | ) | (6 | ) | (78 | ) | (8 | ) | 8,315 | |||||||||||||
| Net loss |
$ | (6.597 | ) | $ | (15,626 | ) | $ | (21,565 | ) | $ | (23,121 | ) | $ | (30,231 | ) | $ | (258,429 | ) | ||||||
| Net loss per share, basic and diluted |
$ | (0.20 | ) | $ | (0.53 | ) | $ | (0.74 | ) | $ | (0.80 | ) | $ | (1.20 | ) | |||||||||
| Weighted average number of common Shares outstanding, basic and diluted |
32,803 | 29,319 | 29,060 | 28,955 | 25,131 | |||||||||||||||||||
| Balance Sheet Data: |
||||||||||||||||||||||||
| Cash and equivalents |
$ | 5,923 | $ | 9,738 | $ | 24,152 | $ | 43,215 | $ | 67,135 | ||||||||||||||
| Total assets |
6,096 | 10,286 | 25,157 | 45,123 | 68,512 | |||||||||||||||||||
| Total current liabilities. |
1,235 | 1,286 | 1,952 | 3,018 | 6,734 | |||||||||||||||||||
| Stockholders’ equity |
$ | 4,861 | $ | 9,000 | $ | 23,205 | $ | 42,105 | $ | 61,778 | ||||||||||||||
| Share-Based Payment (ASC 718), expense was not included in financial results for any of the previous years prior to 2006. (See —“ASC 718, Share-Based Payments” in the Notes to Financial Statements). |
30
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion contains forward-looking statements that involve risks and uncertainties. See “Forward-Looking Statements” elsewhere in this Annual Report on Form 10-K. This discussion and analysis should be read in conjunction with the financial statements and notes included elsewhere in this Annual Report.
General
We are a development-stage pharmaceutical company engaged in the discovery and development of drug candidates for the treatment of diseases and disorders in which the body is unable to mount an appropriate immune or metabolic response due to disease or the process of aging. Our initial technology development efforts are primarily focused on a series of adrenal steroid hormones and hormone analogs that are derived from our Hormonal Signaling Technology Platform.
We have been unprofitable since our inception. As of December 31, 2010, we had an accumulated deficit of approximately $258.4 million. We expect to incur substantial additional operating losses for the foreseeable future as we allocate resources to activities in support of the development of our drug candidates. In addition, in the future, we may have to meet the substantial new challenge of developing the capability to market products if we are successful in obtaining regulatory approval for any of our current or future drug candidates. Accordingly, our activities to date are not as broad in depth or scope as the activities we may undertake in the future, and our historical operations and financial information are not indicative of the future operating results or financial condition or ability to operate profitably as a commercial enterprise when and if we succeed in bringing any drug candidates to market.
On March 26, 1997, Hollis-Eden, Inc., a Delaware corporation, was merged with and into us, then known as Initial Acquisition Corp. (IAC), a Delaware corporation. Upon consummation of the merger of Hollis-Eden, Inc. with IAC, Hollis-Eden, Inc. ceased to exist, and IAC changed its name to Hollis-Eden Pharmaceuticals, Inc.
Effective February 9, 2010, we changed our name from Hollis-Eden Pharmaceuticals, Inc. to Harbor BioSciences, Inc. The name change was effected pursuant to Section 253 of the General Corporation Law of the State of Delaware by the merger of our wholly owned subsidiary into us. We were the surviving corporation and, in connection with the merger, we amended our Amended and Restated Certificate of Incorporation to change our name to Harbor BioSciences, Inc.
Effective February 18, 2010, our common stock began trading under a new NASDAQ symbol, "HRBR" and CUSIP number "41150V 103". Our common stock was delisted from NASDAQ in September, 2010 and is now traded on the OTC Markets with the symbol HRBR.OB.
Results of Operations
We have devoted substantially all of our resources to the payment of research and development expenses and general and administrative expenses. From inception through December 31, 2010, we have incurred approximately $175.0 million in research and development expenses, $90.7 million in general and administrative expenses, and $3.0 million in a settlement of dispute. From inception, (August 15, 1994), through December 31, 2010 we have generated approximately $1.2 million in revenues (which resulted from providing research and development services under our Study Funding Agreement with Cystic Fibrosis Foundation Therapeutics, Inc., (CFFT). We have earned $9.1 million in other income. The other income and expense is comprised of $7.6 million in deemed discount expense, $0.4 million in interest expense and a $0.3 million loss on disposal of assets. These expenses have been offset by $17.4 million in interest income. The combination of these resulted in a net loss of $258.4 million for the period from inception, (August 15, 1994), until December 31, 2010.
Research and development and general and administrative expenses include the expense for ASC 718 share-based payments for all fiscal years starting with 2006, (See – “ASC 718 Share-Based Payments” in the Notes to Financial Statements).
Research and development expenses were $3.8 million, $10.6 million and $16.1 million in 2010, 2009 and 2008, respectively. The research and development expenses relate primarily to the ongoing development,
31
preclinical testing and clinical trials for our drug candidates. Research and development expenses decreased $6.8 million in 2010 compared to 2009; $5.5 million in 2009 compared to 2008, due primarily to a decrease in general clinical and preclinical research and development projects resulting from reduced personnel and a decline in stock option compensation expense.
General and administrative expenses were $2.8 million, $5.1 million and $6.5 million in 2010, 2009 and 2008, respectively. General and administrative expenses relate to salaries and benefits, facilities, patent fees, legal, accounting/auditing, investor relations, consultants, insurance and travel. General and administrative expenses decreased $2.3 million in 2010 compared to 2009, $1.4 million in 2009 compared to 2008 due mainly to a decreases in salaries expense resulting from reduced personnel, legal fees, Directors and Officers insurance and stock option compensation expense.
Other income and expenses were ($0.07) million, $0.07 million and $1.0 million in 2010, 2009 and 2008, respectively. The increase in expense of $0.12 million for 2010 compared to 2009 was due mainly to the disposal of assets combined with lower interest rates and lower cash balances. The $0.9 million decrease in other income and expense for 2009 compared to 2008 was due mainly to lower interest rates and lower cash balances. Included in the 2010 loss was $0.08 related to the sale of our laboratory equipment and $0.07 million for 2009.
Liquidity and Capital Resources
Our operations to date have consumed substantial capital without generating any revenues other than the amount received under our collaboration with CFFT. We have financed our operations since inception primarily through the sale of our equity securities raising a total of $205 million, net of expenses. In addition, we have received a total of $18 million from the exercise of warrants and stock options from inception. As of December 31, 2010, our cash and cash equivalents totaled approximately $5.9 million. Based upon our current plans, we believe that our existing capital resources will be sufficient to meet our operating expenses into late 2011. However, changes in our research and development plans or other events affecting our operating expenses may result in the expenditure of such cash before that time.
Our future capital requirements will depend upon many factors, including progress with preclinical testing and clinical trials, the number and breadth of our programs, the time and costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims and other proprietary rights, the time and costs involved in obtaining regulatory approvals, competing technological and market developments, and our ability to establish collaborative arrangements, effective commercialization, marketing activities and other arrangements. We may incur negative cash flows and net losses for the foreseeable future.
We expect that it will be very difficult to raise capital to continue our operations and our independent registered public accounting firm has issued an opinion with an explanatory paragraph to the effect that there is substantial doubt about our ability to continue as a going concern. We do not believe that we could succeed in raising additional capital needed to sustain our operations without some strategic transaction, such as a partnership in addition to the China license agreements or a merger. If we are unable to consummate such a transaction, we expect that we would need to cease all operations and wind down. Although we are currently evaluating our strategic alternatives with respect to all aspects of our business, we cannot assure you that any actions that we take would raise or generate sufficient capital to fully address the uncertainties of our financial position. As a result, we may be unable to realize value from our assets and discharge our liabilities in the normal course of business. If we are unable to settle our obligations to our creditors or if we are unable to consummate a strategic transaction, we would likely need to liquidate the Company in a voluntary dissolution under Delaware law or seek protection under the provisions of the U.S. Bankruptcy Code. In that event, we, or a trustee appointed by the court, may be required to liquidate our assets. In either of these events, we might realize significantly less from our assets than the values at which they are carried on our financial statements. The funds resulting from the liquidation of our assets would be used first to satisfy obligations to creditors before any funds would be available to pay our stockholders, and any shortfall in the proceeds would directly reduce the amounts available for distribution, if any, to our creditors and to our stockholders. In the event we are required to liquidate under Delaware law or the federal bankruptcy laws, it is highly unlikely that stockholders would receive any value for their shares.
32
Off-Balance Sheet Arrangements
Harbor BioSciences, Inc. currently does not have any off-balance sheet arrangements.
Contractual Obligations:
As of December 31, 2010, we had the following contractual obligations
| Payments Due by Period | ||||||||||||||||||||
| Contractual Obligations |
Total | Less than one year |
One to three years |
Three to five years |
More than Five years |
|||||||||||||||
| Operating Leases |
$ | 94 | $ | 94 | $ | — | $ | — | $ | — | ||||||||||
We may also be required to make substantial milestone or royalty payments in cash based on the terms of some of our agreements (See Note 6 to the Financial Statements).
Our operations to date have consumed substantial capital without generating any revenues other than the amount received under our collaboration with CFFT. We will continue to require substantial and increasing amounts of funds to conduct necessary research and development and preclinical and clinical testing of our drug candidates, and to market any drug candidates that receive regulatory approval. We do not expect to generate revenue from operations for the foreseeable future, and our ability to meet our cash obligations as they become due and payable may depend for at least the next several years on our ability to sell securities, borrow funds or some combination thereof. Based upon our current plans, we believe that our existing capital resources will be sufficient to meet our operating expenses and capital requirements into late 2011. However, changes in our research and development plans or other events affecting our operating expenses may result in the expenditure of such cash before that time. We may not be successful in raising necessary funds. As of December 31, 2010, our cash and cash equivalents totaled approximately $5.9 million.
Our future capital requirements will depend upon many factors, including progress with preclinical testing and clinical trials, the number and breadth of our programs, the time and costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims and other proprietary rights, the time and costs involved in obtaining regulatory approvals, competing technological and market developments, and our ability to establish collaborative arrangements, effective commercialization, marketing activities and other arrangements. We may incur increasing negative cash flows and net losses for the foreseeable future. We are seeking additional funding through public or private financing or through collaborative arrangements with strategic partners. Our auditor has stated in the opinion that there is substantial doubt about the Company’s ability to continue as a going concern.
Critical Accounting Policies
Certain of our accounting policies require the application of judgment and estimates by management, which may be affected by different assumptions and conditions. These estimates are typically based on historical experience, terms of existing contracts, trends in the industry and information available from other outside sources, as appropriate. We believe the estimates and judgments associated with our reported amounts are appropriate in the circumstances. Actual results could materially vary from those estimates under different assumptions or conditions.
All research and development costs are expensed as incurred. The value of acquired in-process research and development is charged to expense on the date of acquisition. Research and development expenses include, but are not limited to, acquired in-process technology deemed to have no alternative future use, license fees related to license agreements, preclinical and clinical trial studies, payroll and personnel expense, and lab supplies, consulting and research-related overhead. Research and development expenses paid in the form of cash and our stock to related parties aggregated $11.5 million for the period from inception (August 15, 1994) to December 31, 2003 (see Note 6, “Colthurst, Edenland and Mr. Prendergest” and “Aeson Therapeutics”). No such related party expenses were incurred in 2010, 2009 or 2008.
As of January 1, 2006, we account for share-based payments in accordance with ASC 718. Under the fair value recognition provisions of this statement, share-based payments cost is measured at the grant date based on the value of the award and is recognized as expense over the vesting period. Determining the fair value of share-based awards at the grant date requires judgment, including estimating our stock price volatility and employee
33
stock option exercise behavior. If actual results differ significantly from these estimates, stock-based compensation expense and our results of operations could be materially impacted.
Our expected volatility is based upon the historical volatility of our stock. Our expected life for our options is based on historical stock option activity. Because share-based payments expense is recognized in our statement of operations based on awards ultimately expected to vest, the amount of expense has been reduced for estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on historical experience. If factors change and we employ different assumptions in the application of ASC 718, the compensation expense that we record in future periods may differ significantly from what we have recorded in the current period.
On July 13, 2006, ASC 740-10, Accounting for Uncertainty in Income Taxes, which is effective for fiscal years beginning after December 15, 2006, which establishes recognition and measurement thresholds that must be met before a tax benefit can be recognized in the financial statements. The Company has adopted ASC 740-10 on January 1, 2007, and it has had no material impact on its financial statements.
Impact of Recently Issued Accounting Pronouncements
Effective April 1, 2009, the Company adopted three accounting standard updates that were intended to provide additional application guidance and enhanced disclosures regarding fair value measurements and impairments of securities. They also provide additional guidelines for estimating fair value in accordance with fair value accounting. The first update, as codified in ASC 820-10-65, provides additional guidelines for estimating fair value in accordance with fair value accounting. The second accounting update, as codified in ASC 820-10-65, changes accounting requirements for other-than-temporary-impairment (OTTI) for debt securities by replacing the current requirement that a holder have the positive intent and ability to hold an impaired security to recovery in order to conclude an impairment was temporary with a requirement that an entity conclude it does not intend to sell an impaired security and it will not be required to sell the security before the recovery of its amortized cost basis. The third accounting update, as codified in ASC 825-10-65, increases the frequency of fair value disclosures. These updates were effective for fiscal years and interim periods ended after June 15, 2009. The adoption of these accounting updates did not have any impact on our financial statements.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820-10 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:
| • | Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets; |
| • | Level 2, defined as inputs other than quoted prices in active markets that are directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are no active; and |
| • | Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant value drivers are observable. |
Our level 1 assets primarily include our cash and cash equivalents (mainly money market accounts). Valuations are obtained from readily available pricing sources. We do not currently have Level 2 or 3 assets.
We do not have any debt instruments as of December 31, 2010 or 2009.
In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. ASU 2010-06 amends Codification Subtopic 820-10 to add two new disclosures: (1) transfers in and out of Level 1 and 2 measurements and the reasons for the transfers, and (2) a gross presentation of activity within the Level 3 roll forward. The proposal also includes clarifications to existing disclosure requirements on the level of disaggregation and disclosures regarding inputs
34
and valuation techniques. The proposed guidance would apply to all entities required to make disclosures about recurring and nonrecurring fair value measurements. The effective date of the ASU is the first interim or annual reporting period beginning after December 15, 2009, except for the gross presentation of the Level 3 roll forward information, which is required for annual reporting periods beginning after December 15, 2010 and for interim reporting periods within those years. Early application is permitted. The Company is currently assessing the impact that the adoption will have on its financial statements.
Effective April 1, 2009, the Company adopted a new accounting standard for subsequent events, as codified in ASC Subtopic 855-10, Subsequent Events. The update modifies the names of the two types of subsequent events either as recognized subsequent events (previously referred to in practice as Type I subsequent events) or non-recognized subsequent events (previously referred to in practice as Type II subsequent events). In addition, the standard modifies the definition of subsequent events to refer to events or transactions that occur after the balance sheet date, but before the financial statements are issued (for public entities) or available to be issued (for nonpublic entities). The update did not result in significant changes in the practice of subsequent event disclosures, and therefore the adoption did not have any impact on our financial statements.
| Item 7A. | Quantitative and Qualitative Disclosures about Market Risk |
At December 31, 2010, our investment portfolio included only cash and money market accounts and did not contain fixed-income securities. There would be no material impact to our investment portfolio, in the short term, associated with any change in interest rates, and any decline in interest rates over time will reduce our interest income, while increases in interest rates over time will increase our interest income.
35
| Item 8. | Financial Statements and Supplementary Data |
| Harbor BioSciences, Inc. (A Development Stage Company)
|
Page | |||
| 37 | ||||
| 38 | ||||
| 39 | ||||
| 44 | ||||
| 45 | ||||
| 74 | ||||
36
(A Development Stage Company)
Balance Sheets
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| (In thousands, except par value) | ||||||||
| ASSETS: |
||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 5,923 | $ | 9,738 | ||||
| Prepaid expenses |
100 | 209 | ||||||
| Deposits |
28 | 48 | ||||||
| Other receivables |
1 | 81 | ||||||
| Total current assets |
6,052 | 10,076 | ||||||
| Property and equipment, net of accumulated depreciation of $273 and $906 |
44 | 176 | ||||||
| Restricted cash |
— | 34 | ||||||
| Total assets |
$ | 6,096 | $ | 10,286 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY: |
||||||||
| Current liabilities: |
||||||||
| Accounts payable |
$ | 201 | $ | 136 | ||||
| Accrued expenses |
1,005 | 1,150 | ||||||
| Other current Liabilities |
29 | — | ||||||
| Total current liabilities |
1,235 | 1,286 | ||||||
| Commitments and contingencies (Notes 6, 11, 12) |
||||||||
| Stockholders’ equity: (Notes 3, 7, 8, 9, 10) |
||||||||
| Preferred stock, $.01, 10,000 shares authorized; no shares issued or outstanding |
— | — | ||||||
| Common stock, $.01 par value, 100,000 shares authorized; 35,525 and 29,493 shares issued and 35,466 and 29,434 outstanding respectively |
355 | 294 | ||||||
| Paid-in capital |
263,281 | 260,884 | ||||||
| Cost of treasury stock (59 shares) |
(346 | ) | (346 | ) | ||||
| Deficit accumulated during development stage |
(258,429 | ) | (251,832 | ) | ||||
| Total stockholders’ equity |
4,861 | 9,000 | ||||||
| Total liabilities and stockholders’ equity |
$ | 6,096 | $ | 10,286 | ||||
The accompanying notes are an integral part of these financial statements.
37
(A Development Stage Company)
Statements of Operations
| For the year ended December 31, | Inception (Aug.15, 1994) to December 31, 2010 |
|||||||||||||||
| 2010 | 2009 | 2008 | ||||||||||||||
| (In thousands, except per share amounts) | ||||||||||||||||
| Revenue: |
||||||||||||||||
| Contract R&D revenue |
$ | — | $ | — | $ | — | $ | 1,208 | ||||||||
| Total revenue |
— | — | — | 1,208 | ||||||||||||
| Operating expenses: |
||||||||||||||||
| Research and development |
||||||||||||||||
| R & D operating expenses |
3,420 | 9,923 | 15,092 | 164,565 | ||||||||||||
| R & D costs related to common stock and stock option grants for collaborations and technology purchases |
339 | 632 | 978 | 10,448 | ||||||||||||
| Total research and development |
3,759 | 10,555 | 16,070 | 175,013 | ||||||||||||
| General and administrative |
||||||||||||||||
| G & A operating expenses |
2,484 | 4,450 | 5,025 | 71,558 | ||||||||||||
| G & A costs related to options / warrants granted |
287 | 690 | 1,512 | 19,130 | ||||||||||||
| Total general and administrative |
2,771 | 5,140 | 6,537 | 90,688 | ||||||||||||
| Settlement of dispute |
— | — | — | 3,000 | ||||||||||||
| Total operating expenses |
6,530 | 15,695 | 22,607 | 268,701 | ||||||||||||
| Other income (expense): |
||||||||||||||||
| Loss on disposition of assets |
(83 | ) | (69 | ) | (6 | ) | (300 | ) | ||||||||
| Non-cash amortization of deemed discount and deferred issuance costs on convertible debentures |
— | — | — | (7,627 | ) | |||||||||||
| Interest income |
16 | 138 | 1,048 | 17,379 | ||||||||||||
| Interest expense |
— | — | — | (388 | ) | |||||||||||
| Total other income, net |
(67 | ) | 69 | 1,042 | 9,064 | |||||||||||
| Net loss |
$ | (6,597 | ) | $ | (15,626 | ) | $ | (21,565 | ) | $ | (258,429 | ) | ||||
| Net loss per share, basic and diluted |
$ | (0.20 | ) | $ | (0.53 | ) | $ | (0.74 | ) | |||||||
| Weighted average number of common shares outstanding, basic and diluted |
32,803 | 29,319 | 29,060 | |||||||||||||
The accompanying notes are an integral part of these financial statements
38
(A Development Stage Company)
Statements of Stockholders’ Equity
| Preferred stock at par value |
Common stock at par value |
Capital in excess of par value |
Cost of Repurchased Common Stock |
Deficit accumulated during development stage |
Total | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||||||
| Contribution by stockholder |
— | $ | — | — | $ | — | $ | 103 | — | — | $ | — | $ | 103 | ||||||||||||||||||||||
| Common stock issued for cash |
— | — | 2,853 | — | 25 | — | — | — | 25 | |||||||||||||||||||||||||||
| Common stock issued as consideration for the license agreements (Note 6) |
— | — | 543 | — | 5 | — | — | — | 5 | |||||||||||||||||||||||||||
| Net loss |
— | — | — | — | — | — | — | (1,277 | ) | (1,277 | ) | |||||||||||||||||||||||||
| Balance at December 31, 1994 |
— | — | 3,396 | — | 133 | — | — | (1,277 | ) | (1,144 | ) | |||||||||||||||||||||||||
| Common stock issued for cash |
— | — | 679 | — | 250 | — | — | — | 250 | |||||||||||||||||||||||||||
| Common stock issued as consideration for amendments to the license agreements (Note 6) |
— | — | 76 | — | 28 | — | — | — | 28 | |||||||||||||||||||||||||||
| Net loss |
— | — | — | — | — | — | — | (672 | ) | (672 | ) | |||||||||||||||||||||||||
| Balance at December 31, 1995 |
— | — | 4,151 | — | 411 | — | — | (1,949 | ) | (1,538 | ) | |||||||||||||||||||||||||
| Common stock issued in conversion of debt (Note 7) |
— | — | 165 | — | 371 | — | — | — | 371 | |||||||||||||||||||||||||||
| Common stock issued for cash, net of |
— | — | ||||||||||||||||||||||||||||||||||
| expenses (Note 7) |
— | — | 580 | — | 1,234 | — | — | — | 1,234 | |||||||||||||||||||||||||||
| Common stock issued as consideration for termination of a finance agreement |
— | — | 15 | — | 34 | — | — | — | 34 | |||||||||||||||||||||||||||
| Warrants issued to consultants for services rendered |
— | — | — | — | 24 | — | — | — | 24 | |||||||||||||||||||||||||||
| Net loss |
— | — | — | — | — | — | — | (692 | ) | (692 | ) | |||||||||||||||||||||||||
| Balance at December 31, 1996 |
— | — | 4,911 | — | 2,074 | — | — | (2,641 | ) | (567 | ) | |||||||||||||||||||||||||
| Recapitalization of Company upon the merger with Initial Acquisition Corp. |
— | — | 883 | 58 | 6,213 | — | — | — | 6,271 | |||||||||||||||||||||||||||
| Warrants issued to a certain director upon the successful closure of the merger |
— | — | — | — | 570 | — | — | — | 570 | |||||||||||||||||||||||||||
| Exercise of warrants, net of expenses |
— | — | 978 | 10 | 5,619 | — | — | — | 5,629 | |||||||||||||||||||||||||||
| Amortization of deferred compensation |
— | — | — | — | 282 | — | — | — | 282 | |||||||||||||||||||||||||||
| Exercise of stock options |
— | — | — | — | 1 | — | — | — | 1 | |||||||||||||||||||||||||||
| Net loss |
— | — | — | — | — | — | — | (5,253 | ) | (5,253 | ) | |||||||||||||||||||||||||
| Balance at December 31, 1997 |
— | — | 6,772 | 68 | 14,759 | — | — | (7,894 | ) | 6,933 | ||||||||||||||||||||||||||
| Exercise of warrants |
— | — | 399 | 4 | 1,196 | — | — | — | 1,200 | |||||||||||||||||||||||||||
| Exercise of stock options |
— | — | 53 | 1 | 155 | — | — | — | 156 | |||||||||||||||||||||||||||
| Private Placement, net of expenses (Note 7) |
4 | — | 1,329 | 13 | 19,877 | — | — | — | 19,890 | |||||||||||||||||||||||||||
| Warrants issued for services in lieu of cash (Note 10) |
— | — | — | — | 408 | — | — | — | 408 | |||||||||||||||||||||||||||
| Stock issued for license fee (Note 6) |
— | — | 33 | — | 500 | — | — | — | 500 | |||||||||||||||||||||||||||
| Stock issued for services in lieu of cash |
— | — | 6 | — | 95 | — | — | — | 95 | |||||||||||||||||||||||||||
| Options issued for services in lieu of cash (Note 9) |
— | — | — | — | 240 | — | — | — | 240 | |||||||||||||||||||||||||||
| Amortization of deferred compensation |
— | — | — | — | 308 | — | — | — | 308 | |||||||||||||||||||||||||||
| Net loss |
— | — | — | — | — | — | — | (5,427 | ) | (5,427 | ) | |||||||||||||||||||||||||
39
Harbor BioSciences, Inc.
(A Development Stage Company)
Statements of Stockholders’ Equity—(Continued)
| Preferred stock at par value |
Common stock at par value |
Capital in excess of par value |
Cost of Repurchased Common Stock |
Deficit accumulated during development stage |
Total | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||||||
| Balance at December 31, 1998 |
4 | — | 8,592 | 86 | 37,538 | — | — | (13,321 | ) | 24,303 | ||||||||||||||||||||||||||
| Exercise of warrants |
— | — | 755 | 8 | 5,136 | — | — | — | 5,144 | |||||||||||||||||||||||||||
| Exercise of stock options |
— | — | 10 | — | 75 | — | — | — | 75 | |||||||||||||||||||||||||||
| Private Placement, net of expenses (Note 7) |
— | — | 1,368 | 14 | 24,759 | — | — | — | 24,773 | |||||||||||||||||||||||||||
| Preferred Stock Conversion (Note 7,8) |
(4 | ) | — | 346 | 3 | (3 | ) | — | — | — | — | |||||||||||||||||||||||||
| Deferred compensation-Options forfeited (Note 9) |
— | — | — | — | 51 | — | — | — | 51 | |||||||||||||||||||||||||||
| Amortization of non-employee options |
— | — | — | — | 559 | — | — | — | 559 | |||||||||||||||||||||||||||
| Warrants issued for services in lieu of cash (Note 10) |
— | — | — | — | 2,140 | — | — | — | 2,140 | |||||||||||||||||||||||||||
| Options accelerated vesting (Note 9) |
— | — | — | — | 4,900 | — | — | — | 4,900 | |||||||||||||||||||||||||||
| Net loss |
— | — | — | — | — | — | — | (15,320 | ) | (15,320 | ) | |||||||||||||||||||||||||
| Balance at December 31, 1999 |
— | — | 11,071 | 111 | 75,155 | — | — | (28,641 | ) | 46,625 | ||||||||||||||||||||||||||
| Exercise of warrants |
— | — | 133 | 2 | 758 | — | — | — | 760 | |||||||||||||||||||||||||||
| Exercise of stock options |
— | — | 1 | — | 5 | — | — | — | 5 | |||||||||||||||||||||||||||
| Common Stock issued for 401(k)/401(m) plan |
— | — | 6 | — | 63 | — | — | — | 63 | |||||||||||||||||||||||||||
| Common Stock issued for In-Process R&D (Note 6) |
— | — | 209 | 2 | 1,998 | — | — | — | 2,000 | |||||||||||||||||||||||||||
| Options granted for license fee |
— | — | 38 | — | 598 | — | — | — | 598 | |||||||||||||||||||||||||||
| Amortization of non-employee options |
— | — | — | — | 79 | — | — | — | 79 | |||||||||||||||||||||||||||
| Common Stock issued for purchase of technology |
— | — | 132 | 1 | 1,847 | — | — | — | 1,848 | |||||||||||||||||||||||||||
| Net loss |
— | — | — | — | — | — | — | (19,515 | ) | (19,515 | ) | |||||||||||||||||||||||||
| Balance at December 31, 2000 |
— | — | 11,590 | 116 | 80,503 | — | — | (48,156 | ) | 32,463 | ||||||||||||||||||||||||||
| Exercise of stock options |
— | — | 10 | — | 22 | — | — | — | 22 | |||||||||||||||||||||||||||
| Common Stock issued for 401(k)/401(m) plan |
— | — | 16 | — | 96 | — | — | — | 96 | |||||||||||||||||||||||||||
| Private Placement, net of expenses (Note 7) |
— | — | 1,280 | 13 | 10,644 | — | — | — | 10,657 | |||||||||||||||||||||||||||
| Warrants issued for services in lieu of cash (Note 10) |
— | — | — | — | 80 | — | — | — | 80 | |||||||||||||||||||||||||||
| Amortization of non-employee options |
— | — | — | — | 96 | — | — | — | 96 | |||||||||||||||||||||||||||
| Warrants issued for services |
— | — | — | — | 208 | — | — | — | 208 | |||||||||||||||||||||||||||
| Net loss |
— | — | — | — | — | — | — | (15,762 | ) | (15,762 | ) | |||||||||||||||||||||||||
| Balance at December 31, 2001 |
— | — | 12,896 | 129 | 91,649 | — | — | (63,918 | ) | 27,860 | ||||||||||||||||||||||||||
| Exercise of stock options |
— | — | — | — | 2 | — | — | — | 2 | |||||||||||||||||||||||||||
| Common Stock issued for 401(k)/401(m) plan |
— | — | 26 | — | 137 | — | — | — | 137 | |||||||||||||||||||||||||||
| Common Stock issued for sublicense agreement (Note 6) |
— | — | 50 | 1 | 204 | — | — | — | 205 | |||||||||||||||||||||||||||
| Common Stock issued to consultants |
— | — | — | — | 17 | — | — | — | 17 | |||||||||||||||||||||||||||
| Amortization of non-employee options |
— | — | — | — | 66 | — | — | — | 66 | |||||||||||||||||||||||||||
| Warrants issued for services |
— | — | — | — | 247 | — | — | — | 247 | |||||||||||||||||||||||||||
| Net loss |
— | — | — | — | — | — | — | (17,502 | ) | (17,502 | ) | |||||||||||||||||||||||||
| Balance at December 31, 2002 |
— | — | 12,972 | 130 | 92,322 | — | — | (81,420 | ) | 11,032 | ||||||||||||||||||||||||||
40
Harbor BioSciences, Inc.
(A Development Stage Company)
Statements of Stockholders’ Equity—(Continued)
| Preferred stock at par value |
Common stock at par value |
Capital in excess of par value |
Cost of Repurchased Common Stock |
Deficit accumulated during development stage |
Total | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||||||
| Common Stock issued for 401(k)/401(m) plan |
— | — | 32 | — | 223 | — | — | — | 223 | |||||||||||||||||||||||||||
| Exercise of warrants |
— | — | 467 | 5 | 3,323 | — | — | — | 3,328 | |||||||||||||||||||||||||||
| Exercise of stock options |
— | — | 85 | 1 | 955 | — | — | — | 956 | |||||||||||||||||||||||||||
| Stock options issued |
— | — | — | — | 561 | — | — | — | 561 | |||||||||||||||||||||||||||
| Private Placement, net of expenses |
— | — | 1,283 | 13 | 14,290 | — | — | — | 14,303 | |||||||||||||||||||||||||||
| Common Stock issued for sublicense agreement (Note 6) |
— | — | 119 | 1 | 644 | — | — | — | 645 | |||||||||||||||||||||||||||
| Common Stock issued for milestone payment |
— | — | 50 | 1 | 281 | — | — | — | 282 | |||||||||||||||||||||||||||
| Debt Conversion |
— | — | 1,755 | 17 | 9,983 | — | — | — | 10,000 | |||||||||||||||||||||||||||
| Common Stock issued in lieu of cash / interest |
— | — | 9 | — | 142 | — | — | — | 142 | |||||||||||||||||||||||||||
| Public Offering, net of expenses |
— | — | 2,500 | 25 | 58,576 | — | — | — | 58,601 | |||||||||||||||||||||||||||
| Deemed discount on convertible debentures |
— | — | — | — | 6,470 | — | — | — | 6,470 | |||||||||||||||||||||||||||
| Warrants issued for services |
— | — | — | — | 1,398 | — | — | — | 1,398 | |||||||||||||||||||||||||||
| Amortization of non-employee options |
— | — | — | — | 128 | — | — | — | 128 | |||||||||||||||||||||||||||
| Purchase of treasury stock |
— | — | — | — | — | (59 | ) | (346 | ) | — | (346 | ) | ||||||||||||||||||||||||
| Net loss |
— | — | — | — | — | — | — | (25,671 | ) | (25,671 | ) | |||||||||||||||||||||||||
| Balance at December 31, 2003 |
— | — | 19,272 | 193 | 189,296 | (59 | ) | (346 | ) | (107,091 | ) | 82,052 | ||||||||||||||||||||||||
| Common Stock issued for 401(k) plan |
— | — | 17 | — | 147 | — | — | — | 147 | |||||||||||||||||||||||||||
| Exercise of warrants |
— | — | 6 | — | 11 | — | — | — | 11 | |||||||||||||||||||||||||||
| Exercise of stock options |
— | — | 4 | — | 16 | — | — | — | 16 | |||||||||||||||||||||||||||
| Common Stock issued for In-Process R&D (Note 6) |
— | — | 48 | — | 629 | — | — | — | 629 | |||||||||||||||||||||||||||
| Amortization of non-employee options |
— | — | — | — | 136 | — | — | — | 136 | |||||||||||||||||||||||||||
| Net loss |
— | — | — | — | — | — | — | (24,757 | ) | (24,757 | ) | |||||||||||||||||||||||||
| Balance at December 31, 2004 |
— | — | 19,347 | 193 | 190,235 | (59 | ) | (346 | ) | (131,848 | ) | 58,234 | ||||||||||||||||||||||||
| Common Stock issued for 401(k) plan |
— | — | 25 | — | 151 | — | — | — | 151 | |||||||||||||||||||||||||||
| Exercise of warrants |
— | — | 42 | 1 | 260 | — | — | — | 261 | |||||||||||||||||||||||||||
| Exercise of stock options |
— | — | 35 | 1 | 123 | — | — | — | 124 | |||||||||||||||||||||||||||
| Public Offering, net of expenses (Note 7) |
— | — | 1,333 | 13 | 9,502 | — | — | — | 9,515 | |||||||||||||||||||||||||||
| Amortization of non-employee options |
— | — | — | — | 30 | — | — | — | 30 | |||||||||||||||||||||||||||
| Net loss |
— | — | — | — | — | — | — | (29,441 | ) | (29,441 | ) | |||||||||||||||||||||||||
| Balance at December 31, 2005 |
— | — | 20,782 | 208 | 200,301 | (59 | ) | (346 | ) | (161,289 | ) | 38,874 | ||||||||||||||||||||||||
41
Harbor BioSciences, Inc.
(A Development Stage Company)
Statements of Stockholders’ Equity—(Continued)
| Preferred stock at par value |
Common stock at par value |
Capital in excess of par value |
Cost of Repurchased Common Stock |
Deficit accumulated during development stage |
Total | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||||||
| Common Stock issued for 401(k) plan |
— | — | 45 | 1 | 224 | — | — | — | 225 | |||||||||||||||||||||||||||
| Exercise of warrants |
— | — | 10 | — | 1 | — | — | — | 1 | |||||||||||||||||||||||||||
| Warrants issued to consultants |
— | — | — | — | 226 | — | — | — | 226 | |||||||||||||||||||||||||||
| Exercise of stock options |
— | — | 34 | — | 86 | — | — | — | 86 | |||||||||||||||||||||||||||
| Private Placements, net of expenses |
— | — | 8,000 | 80 | 48,697 | — | — | — | 48,777 | |||||||||||||||||||||||||||
| Stock-Based Compensation Expense |
— | — | — | — | 3,534 | — | — | — | 3,534 | |||||||||||||||||||||||||||
| Amortization of non-employee warrants |
— | — | — | — | 13 | — | — | — | 13 | |||||||||||||||||||||||||||
| Restricted stock grant, net of forfeitures |
— | — | 65 | 1 | 401 | — | — | — | 402 | |||||||||||||||||||||||||||
| Common Stock issued for In-Process R&D |
— | — | 35 | — | 180 | — | — | — | 180 | |||||||||||||||||||||||||||
| Deferred Compensation |
— | — | — | — | (309 | ) | — | — | — | (309 | ) | |||||||||||||||||||||||||
| Net loss |
— | — | — | — | — | — | — | (30,231 | ) | (30,231 | ) | |||||||||||||||||||||||||
| Balance at December 31, 2006 |
— | — | 28,971 | 290 | 253,354 | (59 | ) | (346 | ) | (191,520 | ) | 61,778 | ||||||||||||||||||||||||
| Common Stock issued for 401(k) plan |
— | — | 96 | 1 | 192 | — | — | — | 193 | |||||||||||||||||||||||||||
| Exercise of stock options |
— | — | 9 | — | 20 | — | — | — | 20 | |||||||||||||||||||||||||||
| Stock-Based Compensation Expense |
— | — | — | — | 3,128 | — | — | — | 3,128 | |||||||||||||||||||||||||||
| Restricted Stock Forfeitures |
— | — | (12 | ) | — | (33 | ) | — | — | — | (33 | ) | ||||||||||||||||||||||||
| Amortization of non-employee warrants |
— | — | — | — | 17 | — | — | — | 17 | |||||||||||||||||||||||||||
| Deferred Compensation |
— | — | — | — | 123 | — | — | — | 123 | |||||||||||||||||||||||||||
| Net loss |
— | — | — | — | — | — | — | (23,121 | ) | (23,121 | ) | |||||||||||||||||||||||||
| Balance at December 31, 2007 |
— | — | 29,064 | 291 | 256,801 | (59 | ) | (346 | ) | (214,641 | ) | 42,105 | ||||||||||||||||||||||||
| Common Stock issued for 401(k) plan |
— | — | 164 | 1 | 174 | — | — | — | 175 | |||||||||||||||||||||||||||
| Stock-Based Compensation Expense |
— | — | — | — | 2,404 | — | — | — | 2,404 | |||||||||||||||||||||||||||
| Deferred Compensation |
— | — | — | — | 86 | — | — | — | 86 | |||||||||||||||||||||||||||
| Net loss |
— | — | — | — | — | — | — | (21,565 | ) | (21,565 | ) | |||||||||||||||||||||||||
| Balance at December 31, 2008 |
— | — | 29,228 | 292 | 259,465 | (59 | ) | (346 | ) | (236,206 | ) | 23,205 | ||||||||||||||||||||||||
| Common Stock issued for 401(k) plan |
— | — | 271 | 2 | 96 | — | — | — | 98 | |||||||||||||||||||||||||||
| Restricted Stock Forfeitures |
— | — | (6 | ) | — | (3 | ) | (3 | ) | |||||||||||||||||||||||||||
| Stock-Based Compensation Expense |
— | — | — | — | 1,240 | — | — | — | 1,240 | |||||||||||||||||||||||||||
| Deferred Compensation |
— | — | — | — | 86 | — | — | — | 86 | |||||||||||||||||||||||||||
| Net loss |
— | — | — | — | — | — | — | (15,626 | ) | (15,626 | ) | |||||||||||||||||||||||||
| Balance at December 31, 2009 |
— | — | 29,493 | $ | 294 | $ | 260,884 | (59 | ) | $ | (346 | ) | $ | (251,832 | ) | $ | 9,000 | |||||||||||||||||||
42
Harbor BioSciences, Inc.
(A Development Stage Company)
Statements of Stockholders’ Equity—(Continued)
| Preferred stock at par value |
Common stock at par value |
Capital in excess of par value |
Cost of Repurchased Common Stock |
Deficit accumulated during development stage |
Total | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||||||
| Common Stock issued for 401(k) plan |
— | — | 137 | 2 | 41 | — | — | — | 43 | |||||||||||||||||||||||||||
| Net Proceeds from Financing |
— | — | 5,895 | 59 | 1,730 | 1,789 | ||||||||||||||||||||||||||||||
| Stock-Based Compensation Expense |
— | — | — | — | 612 | — | — | — | 612 | |||||||||||||||||||||||||||
| Deferred Compensation |
— | — | — | — | 14 | — | — | — | 14 | |||||||||||||||||||||||||||
| Net loss |
— | — | — | — | — | — | — | (6,597 | ) | (6,597 | ) | |||||||||||||||||||||||||
| Balance at December 31, 2010 |
— | — | 35,525 | $ | 355 | $ | 263,281 | (59 | ) | $ | (346 | ) | $ | (258,429 | ) | $ | 4,861 | |||||||||||||||||||
The accompanying notes are an integral part of these financial statements.
43
(A Development Stage Company)
Statements of Cash Flows
| 2010 | 2009 | 2008 | Period from Inception (Aug. 15, 1994) to December 31, 2010 |
|||||||||||||
| ( In thousands ) | ||||||||||||||||
| Cash flows from operating activities: |
||||||||||||||||
| Net loss |
$ | (6,597 | ) | $ | (15,626 | ) | $ | (21,565 | ) | $ | (258,429 | ) | ||||
| Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||||||||||
| Depreciation |
21 | 208 | 315 | 2,243 | ||||||||||||
| Disposal of assets |
85 | 69 | 6 | 316 | ||||||||||||
| Compensation expense related to equity awards |
626 | 1,323 | 2,490 | 11,284 | ||||||||||||
| Amortization of deemed discount on convertible debentures |
— | — | — | 6,470 | ||||||||||||
| Amortization of deferred issuance cost |
— | — | — | 1,157 | ||||||||||||
| Common stock issued for 401k/401m plan |
43 | 98 | 174 | 1,550 | ||||||||||||
| Common stock issued as consideration for amendments to the license / finance agreements |
— | — | — | 67 | ||||||||||||
| Common stock and options issued as consideration for license fees, milestone payment, interest, note repayment and services |
— | — | — | 2,859 | ||||||||||||
| Expense related to warrants issued as consideration to consultants |
— | — | — | 4,369 | ||||||||||||
| Expense related to warrants issued to a director for successful closure of merger |
— | — | — | 570 | ||||||||||||
| Expense related to stock options issued |
— | — | — | 5,718 | ||||||||||||
| Expense related to common stock issued for the purchase of technology |
— | — | — | 1,848 | ||||||||||||
| Common stock issued as consideration for In-Process R&D |
— | — | — | 2,809 | ||||||||||||
| Deferred compensation expense related to options issued |
— | — | — | 1,210 | ||||||||||||
| Changes in assets and liabilities: |
||||||||||||||||
| Prepaid expenses |
109 | 53 | 7 | (100 | ) | |||||||||||
| Deposits |
20 | 20 | — | (28 | ) | |||||||||||
| Other receivable |
80 | (81 | ) | 645 | (1 | ) | ||||||||||
| Other Receivable from related party |
— | — | — | — | ||||||||||||
| Accounts payable |
65 | (187 | ) | (132 | ) | 892 | ||||||||||
| Accrued expenses |
(145 | ) | (479 | ) | (933 | ) | 959 | |||||||||
| Other Liabilities |
29 | 29 | ||||||||||||||
| Net cash used in operating activities |
(5,664 | ) | (14,602 | ) | (18,993 | ) | (214,208 | ) | ||||||||
| Cash flows provided by investing activities: |
||||||||||||||||
| Proceeds from sale of property and equipment |
26 | 197 | — | 223 | ||||||||||||
| Purchase of property and equipment |
— | (9 | ) | (70 | ) | (2,825 | ) | |||||||||
| Net cash provided by (used in) investing activities |
26 | 188 | (70 | ) | (2,602 | ) | ||||||||||
| Cash flows from financing activities: |
||||||||||||||||
| Restricted Cash |
34 | — | — | — | ||||||||||||
| Contributions from stockholder |
— | — | — | 104 | ||||||||||||
| Net proceeds from sale of preferred stock |
— | — | — | 4,000 | ||||||||||||
| Net proceeds from sale of common stock |
1,789 | — | — | 185,323 | ||||||||||||
| Net proceeds from issuance of convertible debentures and warrants |
— | — | — | 9,214 | ||||||||||||
| Purchase of treasury stock |
— | — | — | (346 | ) | |||||||||||
| Proceeds from issuance of debt |
— | — | — | 371 | ||||||||||||
| Net proceeds from recapitalization |
— | — | — | 6,271 | ||||||||||||
| Net proceeds from warrants/options exercised |
— | — | — | 17,796 | ||||||||||||
| Net cash provided by financing activities |
1,823 | — | — | 222,733 | ||||||||||||
| Net increase (decrease) in cash and equivalents |
(3,815 | ) | (14,414 | ) | (19,063 | ) | 5,923 | |||||||||
| Cash and equivalents at beginning of period |
9,738 | 24,152 | 43,215 | — | ||||||||||||
| Cash and equivalents at end of period |
$ | 5,923 | $ | 9,738 | $ | 24,152 | $ | 5,923 | ||||||||
| Supplemental disclosure of cash flow information: |
||||||||||||||||
| Interest paid |
$ | — | $ | — | $ | — | $ | 388 | ||||||||
| Conversion of debt to equity |
— | — | — | 10,371 | ||||||||||||
| Warrants issued to consultants in lieu of cash, no vesting |
— | — | — | 559 | ||||||||||||
| Warrants issued in lieu of cash, commissions on private placement |
— | — | — | 733 | ||||||||||||
| Warrants issued in connection with convertible debentures |
— | — | — | 371 | ||||||||||||
The accompanying notes are an integral part of these financial statements.
44
(A Development Stage Company)
Notes to Financial Statements
| 1. | The Company |
Harbor BioSciences, Inc., (“Harbor BioSciences” or the “Company”), a development stage pharmaceutical company, is engaged in the discovery, development and commercialization of products for the treatment of diseases related to aging. From inception (August 15, 1994) through March 1997, the Company's efforts were directed toward organizing, licensing technology and preparing for offerings of shares of its common stock. Since 1997, the Company has been expanding its intellectual property, developing its lead drug candidates, performing preclinical tests and has entered into and completed multiple clinical studies. Our primary technology development efforts are focused on a series of adrenal steroid hormones and synthetic analogs that may be useful in treating a wide variety of medical conditions, if successfully developed. These adrenal hormones are depleted during advancing age, a process accelerated by infectious diseases and chronic immune system disorders. High plasma concentrations of these hormones are positively correlated with attenuated disease, in certain indications, and their maintenance is often associated with healthy aging.
During the past three years, the Company has devoted substantially all of its research, development and clinical efforts and financial resources toward the development of Apoptone and Triolex. The Company has incurred a net loss of $6.6 million in 2010, has had cumulative net losses of $258.4 million from inception to date and has limited financial resources at December 31, 2010.
These events raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. This basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of liabilities in the normal course of business and does not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. In an effort to preserve cash, the Company initiated steps during 2009 to significantly reduce its operating costs including a substantial reduction in personnel, closure of its laboratory, sale of equipment and reduction of leased space. Expense reduction and cash preservation activities continued during 2010 and will continue into 2011.
The Company is seeking to maximize the value of its remaining assets. The Company is currently evaluating its strategic alternatives, which include the following:
| • | Pursue potential strategic transactions, which could include mergers, license agreements or other collaborations, with third parties; |
| • | Sell or out-license the Company’s remaining assets, including the Company’s library of compounds; or |
| • | Implement an orderly wind down of the Company if other alternatives are not deemed viable and in the best interests of the Company. |
If we do not raise additional cash, the Company will be out of cash to fund further operations into late 2011.
| 2. | Summary of Accounting Policies |
Cash Equivalents
The Company considers any liquid investments with maturity of three months or less when purchased to be cash equivalents. At December 31, 2010 the Company's cash equivalents are approximately $5.9 million and are deposited primarily in a money market account with a financial institution.
Property and Equipment
Property and equipment are stated at cost. The Company provides for depreciation using the straight-line method over the estimated useful lives of the assets. The cost of major additions and improvements is capitalized,
45
HARBOR BIOSCIENCES, Inc.
(A Development Stage Company)
Notes to Financial Statements—(Continued)
while maintenance and repair costs that do not improve or extend the lives of the respective assets are charged to operations as incurred.
Property and equipment balances and corresponding lives were as follows:
| December 31 | Lives | |||||||||||
| 2010 | 2009 | |||||||||||
| (in thousands) | ||||||||||||
| Machinery, equipment and information systems |
110 | 864 | 5-7 years | |||||||||
| Equipment held for sale |
21 | — | ||||||||||
| Furniture and fixtures |
186 | 218 | 5-7 years | |||||||||
| Total |
317 | 1,082 | ||||||||||
| Less: Accumulated depreciation |
(273 | ) | (906 | ) | ||||||||
| $ | 44 | $ | 176 | |||||||||
Depreciation expense associated with property and equipment was approximately $21,000, $208,000 and $315,000 in 2010, 2009 and 2008, respectively.
In accordance with ASC Topic 360, Property, Plant and Equipment, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. Recoverability measurement and estimating of undiscounted cash flows is done at the lowest possible level for which there are identifiable assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. The Company had no impairments in 2010, 2009 and 2008.
Accrued Expenses
Accrued expenses include approximately $0.3 million and $0.3 million in accrued vacation expense, $0.7 million and $0.9 million in other research and development / general and administrative expenses as of December 31, 2010 and 2009, respectively.
Revenue Recognition
In December 2003, the Securities and Exchange Commission (“SEC”) issued ASC Topic 605, Revenue Recognition, which updates and summarizes the Commission’s views on the application of generally accepted accounting principles to revenue recognition in financial statements. The Company believes that its revenue recognition policies conform to the requirements of ASC Topic 605.
Contract revenue is recognized as the services are performed on a cost reimbursement basis. Revenue associated with development milestones, if any, is recognized based upon the achievement of the milestones, as defined in the respective agreements. Overall, revenue is considered to be realized or realizable and earned when there is persuasive evidence of a revenue arrangement in the form of a contract or purchase order, the services have been performed, the price is fixed or determinable and collectability is reasonably assured.
Research and Development
All research and development costs are expensed as incurred. The value of acquired in-process research and development is charged to expense on the date of acquisition. Research and development expenses include, but
46
HARBOR BIOSCIENCES, Inc.
(A Development Stage Company)
Notes to Financial Statements—(Continued)
are not limited to, acquired in-process technology deemed to have no alternative future use, license fees related to license agreements, preclinical and clinical trial studies, payroll and personnel expense, lab supplies, consulting and research-related overhead. Research and development expenses paid in the form of cash and Company stock to related parties aggregated $11.5 million for the period from inception (August 15, 1994) to December 31, 2003 (see Note 6, “Colthurst, Edenland and Mr. Prendergest” and “Aeson Therapeutics”). No such related party expenses were incurred in 2010, 2009 or 2008.
Accounting for Share-Based Payments
The Company has an equity-based incentive compensation plan known as “The 2005 Equity Incentive Plan” (the “Plan”). The Plan allows us to grant stock options and other stock or stock-based awards, including stock appreciation rights, stock purchase awards, restricted stock awards and restricted stock units awards. The Plan also allows us to provide equity compensation to non-employee directors and consultants. The exercise price for an option granted under the Plan is typically not less than the fair market value of the common stock subject to such option. The term of any options granted under the Plan may not exceed 10 years from the date of the grant. Options issued to employees generally vest over a four-year period, with 25% vesting on the first anniversary date and the balance vesting monthly during years two, three and four.
Prior to (ASC Topic 718), Compensation-Stock Compensation, all stock options for employees (with the exception of three grants) have been granted at or above the market price where the exercise price of the option equaled or exceeded the market price of the stock on the date of the grant. As a result, under previous rules, there was no stock-based compensation expense for those grants. Compensation expense was taken for the three options granted at below market value (see “2005 Annual Report on Form 10-K, Notes to Financial Statements – No. 9 Stock Options” for more detail). As of December 31, 2010 the Plan has 8,235,608 shares of common stock reserved for issuance.
Effective January 1, 2006, we adopted ASC Topic 718, requiring us to recognize expense related to the fair value of our stock-based compensation awards. We elected the modified prospective transition method as permitted by ASC Topic 718; accordingly, results from prior periods have not been restated. Under this transition method, stock-based compensation expense for the fiscal year ended December 31, 2010, 2009 and 2008 includes:
| a) | compensation expense for all stock-based compensation awards granted prior to January 1, 2006 but not yet vested, based on the grant date fair value estimated in accordance with the original provisions of ASC Topic 718, and |
| b) | compensation expense for all stock-based compensation awards granted subsequent to December 31, 2005 based on the grant-date fair value estimated in accordance with the provisions of ASC Topic 718. |
The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option-pricing model. The assumptions used to calculate the fair value of options granted are evaluated and revised, as necessary, to reflect the Company’s experience. Compensation expense is recognized using the straight-line method for all stock-based awards issued after January 1, 2006. Compensation expense is recognized only for those options expected to vest, with forfeitures estimated at the date of grant based on the Company’s historical experience and future expectations. Prior to the adoption of ASC Topic 718, the effect of forfeitures on the pro forma expense amounts was not recognized. ASC Topic 718, requires forfeitures to be estimated at the time of the grant and revised as necessary in subsequent periods if actual forfeitures differ from those estimates.
47
HARBOR BIOSCIENCES, Inc.
(A Development Stage Company)
Notes to Financial Statements—(Continued)
Black-Scholes Option Valuation Assumptions (1)
| Fiscal Years Ended | ||||||||||||
| December 31, 2010 |
December 31, 2009 |
December 31, 2008 |
||||||||||
| Risk-free interest rate |
4.35 | % | 4.5 | % | 3.75 | % | ||||||
| Expected dividend yield |
0 | % | 0 | % | 0 | % | ||||||
| Expected life(2) |
6.32 years | 7.04 years | 6.60 years | |||||||||
| Expected volatility(3) |
88 | % | 85 | % | 75 | % | ||||||
| (1) | Forfeitures are estimated as 7.78% for 2010, 7.88% for 2009 and 6.20% for 2008 because of the Company’s restructuring in 2009, there were greater than normal forfeitures of stock options. |
| (2) | The 2010, 2009 and 2008 expected life is based on historical experience |
| (3) | The expected stock price volatility is estimated based on historical experience. |
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of the Company’s options.
401(k) Matching Contributions
Our Company sponsors a 401(k) savings plan, to which eligible domestic employees may voluntarily contribute a portion of their income, subject to statutory limitations. In addition to the participant’s own contributions to these 401(k) savings plans, we match such contributions up to a designated level. Total matching contributions related to employee savings plans were approximately $76,000, $120,000 and $175,000 in 2010, 2009 and 2008, respectively.
Income Taxes
The Company provides for income taxes under the principles of ASC Topic 740, Income Taxes, which requires that provision be made for taxes currently due and for the expected future tax effects of temporary differences between book and tax bases of assets and liabilities.
On July 13, 2006 ASC Topic 740 was issued, Accounting for Uncertainty in Income Taxes, which establishes recognition and measurement thresholds that must be met before a tax benefit can be recognized in the financial statements. The Company adopted ASC Topic 740 on January 1, 2007, and it has had no material impact on its financial statements.
Financial Instruments
The Company's financial instruments consist primarily of cash and accounts payable. These financial instruments are stated at their respective carrying values, which approximate their fair values, due to their short-term nature.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported
48
HARBOR BIOSCIENCES, Inc.
(A Development Stage Company)
Notes to Financial Statements—(Continued)
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates.
Concentrations of Risk
Financial instruments, which potentially expose the Company to concentrations of credit risk, consist primarily of cash and cash equivalents. The Company places its cash with high quality financial institutions.
Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits. We have never experienced any losses related to these balances. All of our non-interest bearing cash balances were fully insured at December 31, 2010 due to a temporary federal program in effect from December 31, 2010 through December 31, 2012. Under the program, there is no limit to the amount of insurance for eligible accounts. Beginning 2013, insurance coverage will revert to $250,000 per depositor at each financial institution, and our non-interest bearing cash balances may again exceed federally insured limits. At December 31, 2010 the Company had no interest-bearing amounts on deposit in excess of federally insured limits.
Net Loss per Share
Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed in a manner consistent with basic net loss per share after giving effect to potentially dilutive securities. Potential common shares of 7,379,164, 5,010,334 and 9,466,150 related to the Company’s outstanding stock option and warrants were excluded from the computation of diluted net loss per share for the years ended December 31, 2010, 2009 and 2008 because their effect on net loss per share is anti-dilutive.
Recent Accounting Pronouncements
Effective April 1, 2009, the Company adopted three accounting standard updates which were intended to provide additional application guidance and enhanced disclosures regarding fair value measurements and impairments of securities. They also provide additional guidelines for estimating fair value in accordance with fair value accounting. The first update, as codified in ASC Subtopic 820-10-65, Financial Instruments, provides additional guidelines for estimating fair value in accordance with fair value accounting. The second accounting update, as codified in ASC Subtopic 820-10-65, changes accounting requirements for other-than-temporary-impairment (OTTI) for debt securities by replacing the current requirement that a holder have the positive intent and ability to hold an impaired security to recovery in order to conclude an impairment was temporary with a requirement that an entity conclude it does not intend to sell an impaired security and it will not be required to sell the security before the recovery of its amortized cost basis. The third accounting update, as codified in ASC Subtopic 825-10-65, increases the frequency of fair value disclosures. These updates were effective for fiscal years and interim periods ended after June 15, 2009. The adoption of these accounting updates did not have any impact on our financial statements.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Subtopic 820-10 establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement). Our level 1 assets primarily include our cash and cash equivalents (mainly money market accounts). Valuations are obtained from readily available pricing sources. We do not currently have Level 2 or 3 assets.
In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. ASU 2010-06 amends Codification Subtopic
49
HARBOR BIOSCIENCES, Inc.
(A Development Stage Company)
Notes to Financial Statements—(Continued)
820-10 to add two new disclosures: (1) transfers in and out of Level 1 and 2 measurements and the reasons for the transfers, and (2) a gross presentation of activity within the Level 3 roll forward. The proposal also includes clarifications to existing disclosure requirements on the level of disaggregation and disclosures regarding inputs and valuation techniques. The proposed guidance would apply to all entities required to make disclosures about recurring and nonrecurring fair value measurements. The effective date of the ASU is the first interim or annual reporting period beginning after December 15, 2009, except for the gross presentation of the Level 3 roll forward information, which is required for annual reporting periods beginning after December 15, 2010 and for interim reporting periods within those years. Early application is permitted. The Company is currently assessing the impact that the adoption will have on its financial statements.
Effective April 1, 2009, the Company adopted a new accounting standard for subsequent events, as codified in ASC Subtopic 855-10, Subsequent Events. The update modifies the names of the two types of subsequent events either as recognized subsequent events (previously referred to in practice as Type I subsequent events) or non-recognized subsequent events (previously referred to in practice as Type II subsequent events). In addition, the standard modifies the definition of subsequent events to refer to events or transactions that occur after the balance sheet date, but before the financial statements are issued (for public entities) or available to be issued (for nonpublic entities). The update did not result in significant changes in the practice of subsequent event disclosures, and therefore the adoption did not have any impact on our financial statements.
| 3. | Recapitalization |
During March 1997, Hollis-Eden Inc. was merged (the “Merger”) with and into the Company (then known as Initial Acquisition Corp. (IAC)). Upon consummation of the Merger, Hollis-Eden Inc. ceased to exist, and IAC changed its name to Hollis-Eden Pharmaceuticals, Inc. IAC (now called Hollis-Eden Pharmaceuticals, Inc.) was the continuing legal entity and registrant for SEC reporting purposes. The IAC Merger was accounted for as a recapitalization of Hollis-Eden Inc. by an exchange of Common Stock of Hollis-Eden Inc., for the net assets of IAC, consisting primarily of $6.5 million in cash and other receivables.