UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
[x] Quarterly Report Pursuant To SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT of 1934
For The Quarterly Period Ended September 30, 2006
( ) 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 001-32287
Samaritan Pharmaceuticals, Inc.
(Exact name of registrant as specified in charter)
Nevada 88-043153
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
101 Convention Center Drive, Suite 310, Las Vegas, Nevada 89109
(Address of principal executive offices) (Zip)
(702) 735-7001
Issuer's telephone number, including area code
Former Name, Former Address and Former Fiscal Year, if changed Since Last Report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, during the preceding twelve (12) months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes[x] No[ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [x]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes[x] No[ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes[ ] No[x]
The number of shares of common stock issued and outstanding as of November 13,
2006 was 156,652,708.
SAMARITAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Page No.
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of September 30, 2006 and December 31,
2005........................................................................3
Consolidated Statements of Operations for the period from Inception
(September 5, 1994) to September 30, 2006, and for the Nine (9)
Months and Three (3) Months Ended September 30, 2006 and 2005...............4
Consolidated Statements of Shareholder's Equity (Deficit) for the
period from Inception (September 5, 1994) to September 30, 2006.............5
Consolidated Statements of Cash Flows for the period from Inception
(September 5, 1994) to September 30, 2006 and for the Nine (9) Months
Ended September 30, 2006 and 2005 ..........................................6
Notes to Interim Financial Statements.......................................7
Item 2. Management's Discussion and Analysis and Plan of Operation.........13
Item 3. Controls and Procedures............................................20
x
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................20
Item 1A. Risk Factors.....................................................20
x
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds........29
Item 3. Defaults Upon Senior Securities....................................29
Item 4. Submission of Matters to a Vote of Security Holders................29
Item 5. Other Information..................................................29
Item 6. Exhibits...........................................................30
Signatures
SAMARITAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
September 30, December 31,
2006 2005
-------------------- ------------------
CURRENT ASSETS:
Cash and cash equivalents $ 2,125,558 $ 456,463
Grants receivable - 51,117
Marketable securities - 496,068
Note receivable 250,000 250,000
Interest receivable 63,534 42,861
Prepaid expenses 22,219 10,587
-------------------- ------------------
TOTAL CURRENT ASSETS 2,461,311 1,307,096
PROPERTY AND EQUIPMENT 147,500 206,803
-------------------- ------------------
OTHER ASSETS:
Patent registration costs 826,446 700,798
Purchased technology rights 11,811 19,983
Organization costs-Samaritan Europe 3,605 -
Deposits 2,779 2,779
-------------------- ------------------
TOTAL OTHER ASSETS 844,641 723,560
-------------------- ------------------
$ 3,453,452 $ 2,237,459
==================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 155,181 $ 267,945
Accrued officers' salaries 517,314 247,856
Common stock to be issued - 46,259
-------------------- ------------------
TOTAL CURRENT LIABILITIES 672,495 562,060
-------------------- ------------------
SHAREHOLDERS' EQUITY:
Preferred stock, 5,000,000 shares authorized
at $.001 par value, -0- issued and
outstanding - -
Common stock, 250,000,000 shares authorized
at $.001 par value, 156,006,838 and 136,866,274
issued and outstanding at September 30,2006 and
December 31, 2005, respectively 156,007 136,866
Additional paid-in capital 41,804,687 35,589,683
Deferred compensation - (40,034)
Treasury stock (250,248) (250,248)
Accumulated other comprehensive income 32,609 (24,472)
Accumulated deficit during development stage (38,962,098) (33,736,396)
-------------------- ------------------
TOTAL SHAREHOLDERS' EQUITY 2,780,957 1,675,399
-------------------- ------------------
$ 3,453,452 $ 2,237,459
==================== ==================
See accompanying notes to the consolidated financial statements (unaudited)
3
SAMARITAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE INCOME
(UNAUDITED)
From
Inception
(09/05/94) Nine months ended September 30, Three months ended September 30,
To -------------------------------- --------------------------------
September 30, 2006 2006 2005 2006 2005
-------------------- --------------- ---------------- ---------------- ---------------
REVENUES:
Consulting $ 300,000 $ - $ - $ - $ -
Government research grants 289,226 32,379 135,429 10,586 120,179
-------------------- --------------- ---------------- ---------------- ---------------
589,226 32,379 135,429 10,586 120,179
-------------------- --------------- ---------------- ---------------- ---------------
EXPENSES:
Research and development 12,893,031 3,153,260 2,365,103 1,053,552 824,204
Interest, net (70,881) (24,136) (47,878) (7,622) (13,401)
General and administrative 25,741,273 2,017,875 1,844,385 701,144 628,357
Depreciation and amortization 1,353,871 107,922 50,286 38,100 25,534
Other (income)loss (365,970) 3,160 - - -
-------------------- --------------- ---------------- ---------------- ---------------
39,551,324 5,258,081 4,211,896 1,785,174 1,464,694
-------------------- --------------- ---------------- ---------------- ---------------
NET LOSS (38,962,098) (5,225,702) (4,076,467) (1,774,588) (1,344,515)
Other Comprehensive loss
Unrealized loss on marketable securities - 3,933 9,342 - 3,647
Foreign currency translation adjustment 32,609 53,149 (16,904) 43,620 (1,528)
-------------------- --------------- ---------------- ---------------- ---------------
Total Comprehensive loss $ (38,929,489) $ (5,168,620) $ (4,084,029) $ (1,730,968) $ (1,342,396)
==================== =============== ================ ================ ===============
Loss per share, basic and diluted $ (0.04) $ (0.03) $ (0.01) $ (0.01)
=============== ================ ================ ===============
Weighted average number of shares outstanding:
Basic and diluted 143,932,392 134,034,155 151,018,029 135,767,894
=============== ================ ================ ===============
See accompanying notes to the consolidated financial statements (unaudited)
4
SAMARITAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
Shares
Number Par Value Reserved Additional
of Common for Paid in
Shares Stock Conversion Capital Warrants
------------- ---------- ---------- ------------ -----------
Inception at September 5, 1994 - $ - $ - - $ -
Shares issued for cash, net of
offering costs 6,085,386 609 - 635,481 -
Warrants issued for cash - - - - 5,000
Shares issued as compensation
for services 714,500 71 - 1,428,929 -
Net loss - - - - -
------------- ---------- ---------- ------------ -----------
December 31, 1996 (Unaudited) 6,799,886 680 - 2,064,410 5,000
Issuance of stock, prior to
acquisition 206,350 21 - 371,134 -
Acquisition of subsidiary for
stock 1,503,000 150 - 46,545 -
Shares of parent redeemed, par
value $.0001 (8,509,236) (851) - 851 -
Shares of public subsidiary
issued, par value $.001 7,689,690 7,690 820 (8,510) -
Net loss - - - - -
------------- ---------- ---------- ------------ -----------
December 31, 1997 (Audited) 7,689,690 7,690 820 2,474,430 5,000
Conversion of parent's shares 696,022 696 (696) - -
Shares issued for cash, net of
offering costs 693,500 694 - 605,185 -
Shares issued in cancellation
of debt 525,000 525 - 524,475 -
Shares issued as compensation 400,000 400 - 349,600 -
Net loss - - - - -
------------- ---------- ---------- ------------ -----------
December 31, 1998 (Audited) 10,004,212 10,005 124 3,953,690 5,000
Conversion of parent's shares 13,000 13 (13) - -
Shares issued in cancellation
of debt 30,000 30 - 29,970 -
Shares issued for cash, net of
offering costs 45,000 45 - 41,367 -
Shares issued as compensation 3,569,250 3,569 - 462,113 -
Detachable warrants issued - - - - 152,125
Detachable warrants exercised 100,000 100 - 148,900 (149,000)
Debentures converted to stock 1,682,447 1,682 - 640,438 -
Net loss - - - - -
------------- ---------- ---------- ------------ -----------
December 31, 1999 (Audited) 15,443,909 15,444 111 5,276,478 8,125
Conversion of parent's shares 128,954 129 (111) (18) -
Shares issued for cash, net of
offering costs 1,575,192 1,575 - 858,460 -
Shares issued in cancellation
of debt 875,000 875 - 660,919 -
Shares issued in cancellation
of accounts payable 100,000 100 - 31,165 -
Shares issued as compensation 3,372,945 3,373 - 2,555,094 -
Warrants exercised 38,807 39 - 3,086 (3,125)
Warrants expired - - - 5,000 (5,000)
Net loss - - - - -
------------ --------- --------- ------------ -----------
December 31, 2000 (Audited) 21,534,807 21,535 - 9,390,184 -
See accompanying notes to the consolidated financial statements (unaudited)
5
Shares issued for cash, net of
offering cost 6,497,088 6,497 - 1,257,758 -
Shares issued as compensation 9,162,197 9,162 - 1,558,599 -
Shares issued for previously
purchased shares 342,607 342 - 188,208 -
Shares issued in cancellation
of accounts payable 200,000 200 - 68,880 -
Amortization of deferred
compensation - - - - -
Stock options issued for
services - - - 439,544 -
Net loss - - - - -
------------ ---------- -------- ------------ -----------
December 31, 2001 (Audited) 37,736,699 37,736 - 12,903,173 -
Shares issued for cash, net of
offering costs 18,657,500 18,658 - 2,077,641 -
Shares issued as compensation 3,840,525 3,841 - 1,044,185 -
Shares issued for previously
purchased shares 50,000 50 - 4,950 -
Shares issued in cancellation
of accounts payable 4,265,184 4,265 - 539,291 -
Amortization of deferred
compensation - - - -
Shares issued in cancellation
of notes payable - - - - -
Stock options issued for
services - - - 225,000 -
Net loss - - - - -
------------ ---------- --------- ------------ -----------
December 31, 2002 (Audited) 64,549,908 64,550 16,794,240
Shares issued for cash, net of
offering costs 17,493,664 17,493 - 2,392,296 -
Shares issued as compensation 4,062,833 4,063 - 549,779 -
Shares issued for previously
purchased shares 1,160,714 1,161 - 161,339 -
Shares issued in cancellation
of accounts payable and
accrued compensation 9,615,870 9,616 - 3,448,950 -
Shares issued in cancellation
of notes payable - - - - -
Shares issued in connection
with equity financing 3,125,000 3,125 (3,125) -
Exercise of stock options 7,770,892 7,771 - 1,112,077 -
Shares reacquired in settlement
of judgement (1,564,048) (1,564) - 251,812 -
Stock options issued for
services - - - 145,000 -
Net loss - - - -
------------ ---------- --------- ------------ -----------
December 31, 2003 (Audited) 106,214,833 106,214 - 24,852,369 -
Shares issued for cash, net
of offering costs 11,426,733 11,427 - 4,289,511 -
Shares issued as compensation,
expensed 2,081,249 2,081 - 1,788,397 -
Amortization of deferred
compensation - - - - -
Shares issued for previously
purchased shares 83,332 83 - 12,417 -
Exercise of stock options 16,950,468 16,951 - 4,841,869 -
Exercise of warrants 635,000 635 - 449,365 -
Shares issued in connection
with equity financing 8,758,240 8,758 - 3,091,243 -
Stock retired in settlement of
subscriptions receivable (13,869,656) (13,870) - (5,964,798) -
Shares reacquired in settlement
of judgement (250,000) (250) - (231,100) -
Stock options issued for services - - - 567,771 -
Other comprehensive income (loss) - - - - -
Net Loss - - - - -
------------ ---------- --------- ------------ -----------
December 31, 2004 (Audited) 132,030,199 132,030 - 33,697,043 -
Shares issued as compensation,
expensed 398,900 399 - 196,785 -
Amortization of deferred
compensation - - - - -
Exercise of stock options 170,000 170 31,330
Shares issued in connection
with equity financing 4,267,175 4,267 - 1,599,473 -
Stock options issued for services - - - 65,052 -
Other comprehensive income (loss) - - - - -
Net loss - - - - -
------------ ---------- --------- ------------ -----------
December 31, 2005 (Audited) 136,866,274 136,866 - 35,589,683 -
Shares issued for cash, net of
offering cost 7,212,500 7,213 - 2,037,787 -
Amortization of deferred
compensation - - - - -
Exercise of stock options 450,926 451 - 64,050 -
Shares issued in connection with
equity financing 11,477,138 11,477 - 4,003,296 -
Stock options issued for services - - - 109,871 -
Other comprehensive income (loss) - - - - -
Net loss - - - - -
------------ ---------- --------- ------------ -----------
September 30, 2006 (Unaudited) 156,006,838 $ 156,007 $ - $41,804,687 $ -
============ ========== ========= ============ ===========
See accompanying notes to the consolidated financial statements (unaudited)
5
SAMARITAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STATE COMPANY)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
Accumulated
Other Stock Total
Deferred Comprehensive Subscriptions Treasury Accumulated Shareholders'
Compensation Income Receivable Shares Deficit Deficit
------------- ------------ ------------ ----------- ------------- ---------------
Inception at September 5, 1994 $ - - $ - $ - $ - $ -
Shares issued for cash, net of
offering costs - - - - - 636,090
Warrants issued for cash - - - - - 5,000
Shares issued as compensation
for services - - - - - 1,429,000
Net loss - - - - (2,152,843) (2,152,843)
------------ ------------- ------------ ----------- ------------- ---------------
December 31, 1996 (Unaudited) - - - - (2,152,843) (82,753)
Issuance of stock, prior to
acquisition - - - - - 371,155
Acquisition of subsidiary
for stock - - - - - 46,695
Shares of parent redeemed,
par value $.0001 - - - - - -
Shares of public subsidiary
issued, par value $.001 - - - - - -
Net loss - - - - (979,635) (979,635)
------------ ------------- ------------ ----------- ------------- ---------------
December 31, 1997 (Audited) - - - - (3,132,478) (644,538)
Conversion of parent's shares - - - - - -
Shares issued for cash, net
of offering costs - - - - - 605,879
Shares issued in cancellation
of debt - - - - - 525,000
Shares issued as compensation - - - - - 350,000
Net loss - - - - (1,009,945) (1,009,945)
------------ ------------- ------------ ----------- ------------- ---------------
December 31, 1998 (Audited) - - - - (4,142,423) (173,604)
Conversion of parent's shares - - - - - -
Shares issued in cancellation
of debt - - - - - 30,000
Shares issued for cash, net of
offering costs - - - - - 41,412
Shares issued as compensation - - - - - 465,682
Detachable warrants issued - - - - - 152,125
Detachable warrants exercised - - - - - -
Debentures converted to stock - - - - - 642,120
Net loss - - - - (1,671,255) (1,671,255)
------------ ------------- ------------ ----------- ------------- ---------------
December 31, 1999 (Audited) - - - - (5,813,678) (513,520)
Conversion of parent's shares - - - - - -
Shares issued for cash, net of
offering costs - - - - - 860,035
Shares issued in cancellation
of debt - - - - - 661,794
Shares issued in cancellation
of accounts payable - - - - - 31,265
Shares issued as compensation (759,560) - - - - 1,798,907
Warrants exercised - - - - - -
Warrants expired - - - - - -
Net loss - - - - (3,843,308) (3,843,308)
------------ ------------- ------------ ----------- ------------- ---------------
December 31, 2000 (Audited) (759,560) - - - (9,656,986) (1,004,827)
See accompanying notes to the consolidated financial statements (unaudited)
5
Shares issued for cash, net
of offering costs - - - - - 1,264,255
Shares issued as compensation (230,512) - - - - 1,337,249
Shares issued for previously
purchased shares - - - - - 188,550
Shares issued in cancellation
of accounts payable - - - - - 69,080
Amortization of deferred
compensation 495,036 - - - - 495,036
Stock options issued for
services - - - - - 439,544
Net loss - - - - (4,079,806) (4,079,806)
------------ ------------- ------------ ----------- ------------- ---------------
December 31, 2001 (Audited) (495,036) - - - (13,736,792) (1,290,919)
Shares issued for cash, net
of offering costs - - - - - 2,096,299
Shares issued as compensation - - - - - 1,048,026
Shares issued for previously
purchased shares - - - - - 5,000
Shares issued in cancellation
of accounts payable - - - - - 543,556
Amortization of deferred
compensation 495,036 - - - - 495,036
Shares issued in cancellation
of notes payable - - - - - -
Stock options issued for
services - - - - - 225,000
Net loss - - - - (4,057,153) (4,057,153)
------------ ------------- ------------ ----------- ------------- ---------------
December 31, 2002 (Audited) - - - - (17,793,945) (935,155)
Shares issued for cash, net of
offering costs - - - - - 2,409,789
Shares issued as compensation - - - - - 553,842
Shares issued for previously
purchased shares - - - - - 162,500
Shares issued in cancellation
of accounts payable and
accrued compensation - - - - - 3,458,566
Shares issued in cancellation
of notes payable - - -
Shares issued in connection
with equity financing - - - - - -
Exercise of stock options - - (1,119,848) - - -
Shares reacquired in settlement
of judgement - - - (250,248) - -
Stock options issued for
services - - - - - 145,000
Net loss - - - - (5,520,531) (5,520,531)
------------ ------------- ------------ ----------- ------------- ---------------
December 31, 2003 (Audited) - - (1,119,848) (250,248) (23,314,476) 274,011
Shares issued for cash, net
of offering costs - - - - - 4,300,938
Shares issued as compensation,
expensed (544,416) - - - - 1,246,062
Amortization of deferred
compensation 240,000 - - - - 240,000
Shares issued for previously
purchased shares - - - - - 12,500
Exercise of stock options - - (4,858,820) - - -
Exercise of warrants - - - - - 450,000
Shares issued in connection
with equity financing - - - - - 3,100,001
Stock retired in settlement of
subscriptions receivable - - 5,978,668 - - -
Shares reacquired in settlement
of judgement - - - - (231,350)
Stock options issued for services - - - - 567,771
Other comprehensive income (loss) - (16,580) - - (16,580)
Net Loss - - - - (4,864,361) (4,864,361)
------------ ------------- ----------- ---------- ------------ ----------------
December 31, 2004 (Audited) (304,416) (16,580) 0 (250,248) (28,178,837) 5,078,992
Shares issued as compensation,
expensed (128,034) - - - - 69,150
Amortization of deferred
compensation 392,416 - - - - 392,416
Exercise of stock options - - - - 31,500
Shares issued in connection
with equity financing - - - - - 1,603,740
Stock options issued for services - - - - - 65,052
Other comprehensive income (loss) - (7,892) - - - (7,892)
Net loss - - - - (5,557,559) (5,557,559)
------------ ------------ ----------- ---------- ------------ ----------------
December 31, 2005 (Audited) (40,034) (24,472) - (250,248) (33,736,396) 1,675,399
Shares issued for cash, net of
offering cost - - - - - 2,045,000
Amortization of deferred
compensation 40,034 - - - - 40,034
Exercise of stock options - - - - - 64,501
Shares issued in connection with
equity financing - - - - - 4,014,773
Stock options issued for services - - - - - 109,871
Other comprehensive income (loss) - 57,081 - - - 57,081
Net loss - - - - (5,225,702) (5,225,702)
------------ ------------ ----------- ---------- ------------ ----------------
September 30, 2006 (Unaudited) $ - $ 32,609 $ - $(250,248) $(38,962,098) $ 2,780,957
============ ============ =========== ========== ============ ================
See accompanying notes to the consolidated financial statements (unaudited)
5
SAMARITAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
From
Inception
(September 5, 1994) Nine Months Ended September30,
To --------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES: September 30, 2006 2006 2005
--------------------- --------------- --------------
Net loss $ (38,962,098) $ (5,225,702) $ (4,076,467)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 1,353,871 107,922 50,286
Stock based compensation 9,659,280 - 7,650
Stock options issued for services 1,552,238 109,871 65,052
Amortization of deferred compensation 1,662,522 40,034 416,912
Foreign currency (loss) gain 32,610 53,150 (16,904)
(Gains) losses on disposition of assets - 3,160 -
Other income (231,350) - -
(Increase) decrease in assets:
Accounts receivable - 51,117 (5,661)
Interest receivable and prepaids (98,993) (32,305) 6,270
Deposits 12,941 - -
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 2,533,309 156,694 162,091
--------------------- --------------- --------------
NET CASH USED IN OPERATING ACTIVITIES (22,485,670) (4,736,059) (3,390,771)
--------------------- --------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of technology (108,969) - -
Purchase of furniture and equipment (342,310) (3,814) (208,791)
Organization costs, Samaritan-Europe (4,243) (4,243) -
Note receivable (250,000) - -
(Purchase) liquidation of marketable securities - 496,840 750,000
Patent registration costs (906,129) (161,643) (138,793)
--------------------- --------------- --------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (1,611,651) 327,140 402,416
--------------------- --------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from warrants/options 703,125 64,500 -
Proceeds from debentures 642,120 - -
Proceeds from stock issued for cash 14,628,569 2,045,000 -
Proceeds from equity financing 8,672,256 3,968,514 1,399,999
Common stock to be issued 252,309 - -
Short-term loan repayments (288,422) - -
Short-term loan proceeds 1,612,922 - -
--------------------- --------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 26,222,879 6,078,014 1,399,999
--------------------- --------------- --------------
INCREASE (DECREASE) IN CASH 2,125,558 1,669,095 (1,588,356)
CASH AT BEGINNING OF PERIOD - 456,463 2,438,451
--------------------- --------------- --------------
CASH AT END OF PERIOD $ 2,125,558 $ 2,125,558 $ 850,095
===================== =============== ==============
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 5,098 $ - $ 468
NON-CASH FINANCING & INVESTING ACTIVITIES:
Purchase of net, non-cash assets of subsidiary
for stock $ 195,000 $ - $ -
Short-term debt retired through issuance
of stock $ 1,890,695 $ - $ -
Issuance of common stock, previously subscribed $ 226,259 $ 46,259 $ -
Treasury stock acquired through settlement
of judgement $ 250,248 $ - $ -
Stock subscriptions receivable $ 1,119,848 $ - $ -
Stock received in settlement $ (231,350) $ - $ -
Stock as compensation for services $ 6,533,527 $ - $ 1,352,034
Stock issued in cancellation of accounts payable $ 4,248,938 $ - $ -
Exercise of stock options $ 4,858,820 $ - $ -
See accompanying notes to the consolidated financial statements (unaudited)
6
SAMARITAN PHARMACEUTICALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 2006 and 2005
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial statements and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all the information and
disclosures required for annual financial statements. These consolidated
financial statements should be read in conjunction with the consolidated
financial statements and related footnotes for the year ended December 31, 2005,
included in the Form 10-K for the year then ended.
In the opinion of the Company's management, all adjustments (consisting of
normal recurring accruals) necessary to fairly present the Company's financial
position as of September 30, 2006, and the results of operations and cash flows
for the nine (9) month period ending September 30, 2006 have been included. The
results of operations for the nine (9) month period ended September 30, 2006 are
not necessarily indicative of the results to be expected for the full year. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Form 10-K/A as filed with the U.S.
Securities and Exchange Commission on November 2, 2006 for the year ended
December 31, 2005.
Note 2. Summary of Significant Accounting Policies
General
Samaritan Pharmaceuticals, Inc. (the "Company") was formed in September 1994 and
became public in October 1997. The principle executive offices are located in
Las Vegas, Nevada.
The Company trades on the American Stock Exchange under the symbol "LIV."
The Company is working to ensure a longer and better life for patients suffering
with AIDS, Alzheimer's, cancer and cardiovascular disease. We are a
pipeline-driven biopharmaceutical company with a clear focus on advancing early
stage innovative drugs through clinical development, with the ultimate goal of
bringing novel therapeutics and diagnostic products to market.
Basis of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All inter-company balances and
transactions have been eliminated in consolidation.
Cash Equivalents
The Company considers all highly liquid temporary cash investments with an
original maturity of six (6) months or less to be cash equivalents. The Company
maintains its cash in bank accounts at high credit quality financial
institutions. The balances at times may exceed federally insured limits.
Revenue Recognition
The Company follows the guidance of the Securities and Exchange Commission's
Staff Accounting Bulletin 104 for revenue recognition. The Company recognizes
revenue when persuasive evidence of a final agreement exists, delivery has
occurred, the selling price is fixed or determinable and the ability to collect
on the final agreement is reasonably assured. Government research revenue,
consisting of grant income was recognized when the qualifying expenditure was
incurred.
7
Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided using the
straight line method over the estimated useful lives of the assets.
Intangibles
a) Legal fees associated with filing patents are recorded at cost and amortized
over 17 years. The Company has one (1) issued U.S. patent and thirteen (13)
pending patent applications in the U.S. to protect its proprietary methods and
processes. The Company also filed corresponding foreign patent applications for
certain of these U.S. patent applications. As of September 30, 2006, its patent
portfolio outside the U.S. comprised of two (2) issued patents and fifty-two
(52) pending patent applications. The issued U.S. patents and pending patent
applications relate to Alzheimer's, cancer, cardiovascular and HIV indications.
Certain U.S. patents may be eligible for patent term extensions under the
Hatch-Waxman Act and may be available to the Company for the lost opportunity to
market and sell the invention during the regulatory review process.
The Company reviews patent costs for impairment by comparing the carrying value
of the patents with the fair market value. The Company believes it will recover
the full amount of the patent costs based on forecasts of sales of the products
related to the patents. Patent registration costs are amortized over seventeen
(17) years once approved. Patent amortization expense was $35,995 and $14,091
for the nine months and three months ended September 30, 2006. Amortization for
the three months and nine months ended September 30, 2005 was zero. Expected
amortization projected for the next five years is as follows:
------------- -----------
2006 $47,993
------------- -----------
2007 $47,909
------------- -----------
2008 $45,091
------------- -----------
2009 $42,438
------------- -----------
2010 $39,942
------------- -----------
b) Purchased technology rights are recorded at cost and are being amortized
using the straight line method over the estimated useful life of the technology.
Amortization was $8,172 and $2,724 for the nine months and three months ended
September 30, 2006 and 2005. Accumulated amortization at September 30, 2006 and
December 31, 2005 was $97,158 and $88,986, respectively. Expected amortization
projected is $2,724 for 2006 and $9,087 for 2007.
Loss Per Share
The Company reports loss per common share in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." The per
share effects of potential common shares such as warrants, options, convertible
debt and convertible preferred stock have not been included, as the effect would
be antidilutive. The Company had 25,238,518 options outstanding at September 30,
2006 and 24,076,018 at September 30, 2005, which were not included in the
calculation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
affecting the reported amounts of assets and liabilities, and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
8
Income Taxes
Pursuant to the Statement of Financial Accounting Standards, No. 109 (SFAS 109)
"Accounting for Income Taxes," the Company accounts for income taxes under the
liability method. Under the liability method, a deferred tax asset or liability
is determined based upon the tax effect of the differences between the financial
statement and tax basis of assets and liabilities as measured by the enacted
rates, which will be in effect when these differences reverse.
Research and Development Costs
Research and development costs are expensed when incurred. Research and
development costs for the nine (9) months and three (3) months ended September
30, 2006 and 2005, were $3,153,260 and $2,365,103 and $1,053,552 and $824,204,
respectively.
Impairment of Long-Lived Assets
The Company reviews long-lived assets and certain identifiable assets related to
those on a quarterly basis for impairment whenever circumstances and situations
change, such that there is an indication that the carrying amounts may not be
recovered. At September 30, 2006 the Company does not believe any impairment has
occurred.
Fair Value of Financial Instruments
Statement of Financial Accounting Standard No.107, "Disclosures about Fair Value
of Financial Instruments" (SFAS 107) requires the disclosure of fair value
information about financial instruments whether or not recognized on the balance
sheet, for which it is practicable to estimate the value. Where quoted, market
prices are not readily available, fair values are based on quoted market prices
of comparable instruments. The carrying amount of cash, grants receivable,
marketable securities, accounts payable and accrued officers' salaries
approximates fair value because of the short maturity of those instruments.
Marketable Securities
At December 31, 2005, the Company held a brokered Certificate of Deposit with a
total market value of $496,068. It originally cost $500,000. Unrealized gains
and losses, determined by the difference between historical purchase price and
the market value at each balance sheet date, are recorded as a component of,
"Accumulated Other Comprehensive Loss in Shareholder's Equity." Realized gains
and losses will be determined by the difference between historical purchase
price and gross proceeds received when the marketable securities are sold.
During the first quarter of 2006, Samaritan sold the brokered Certificate of
Deposit and currently does not hold any brokered Certificates of Deposit.
Foreign Currency Translation
Assets and liabilities of subsidiaries operating in foreign countries are
translated into U.S. dollars, using the exchange rate in effect at the balance
sheet date of historical rate, as applicable. Results of operations are
translated using the average exchange rates prevailing throughout the year. The
effects of exchange rate fluctuations on translating foreign currency assets and
liabilities into U.S. dollars are included in shareholders' equity (Accumulated
other comprehensive loss), while gains and losses resulting from foreign
currency transactions are included in operations.
Accrued Officers' Compensation
Accrued officer's compensation consists of the unpaid portion of the respective
officer's contract salary.
9
Common Stock To Be Issued
Unissued stock consists of proceeds received by year-end or period-end for stock
yet to be issued. Such amounts were or will be retired through the issuance of
shares subsequent to the balance sheet date. These shares were issued in April
2006.
Stock Based Compensation
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment," which
replaces SFAS No. 123 and supersedes APB Opinion No. 25. Under SFAS No. 123(R),
companies are required to measure the compensation costs of share-based
compensation arrangements based on the grant-date fair value and recognize the
costs in the financial statements over the period during which employees are
required to provide services. Share-based compensation arrangements include
stock options, restricted share plans, performance-based awards, share
appreciation rights and employee share purchase plans. In March 2005 the
Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No.
107, or (SAB 107). SAB 107 expresses views of the Staff regarding interaction
between SFAS No. 123(R) and certain SEC rules and regulations. It also provides
the Staff's views regarding the valuation of share-based payment arrangements
for public companies. SFAS No. 123(R) permits public companies to adopt its
requirements using one of two methods. On April 14, 2005, the SEC adopted a new
rule amending the compliance dates for SFAS 123R. Companies may elect to apply
this statement either prospectively, or on a modified version of retrospective
application under which financial statements for prior periods are adjusted on a
basis consistent with the pro forma disclosures required for those periods under
SFAS 123. Effective January 1, 2006, the Company has fully adopted the
provisions of SFAS No. 123R and related interpretations as provided by SAB 107.
As such, compensation cost is measured on the date of the grant as the excess of
the current market price of the underlying stock over the exercise price. Such
compensation amounts, if any, are amortized over the respective vesting periods
of the option grant. The Company applies this statement prospectively.
New Accounting Pronouncements
In February 2006, the FASB issued FASB Statement No. 155, which is an amendment
of FASB Statements No. 133 and 140. This Statement; a) permits fair value
remeasurement for any hybrid financial instrument containing an embedded
derivative that otherwise would require bifurcation; b) clarifies which
interest-only strip and principal-only strip are not subject to the requirements
of Statement 133; c) establishes a requirement to evaluate interests in
securitized financial assets to identify interests that are freestanding
derivatives or hybrid financial instruments containing an embedded derivative
requiring bifurcation; d) clarifies concentrations of credit risk in the form of
subordination are not embedded derivatives; and e) amends Statement 140 to
eliminate the prohibition on a qualifying special-purpose entity from holding a
derivative financial instrument pertaining to a beneficial interest other than
another derivative financial instrument. This Statement is effective for
financial statements for fiscal years beginning after September 15, 2006.
Management believes this Statement will have no impact on the financial
statements of the Company once adopted.
In March 2006, the FASB issued FASB Statement No. 156, which amends FASB
Statement No. 140. This Statement establishes, among other things, the
accounting for all separately recognized servicing assets and servicing
liabilities. This Statement amends Statement 140 to require all separately
recognized servicing assets and servicing liabilities be initially measured at
fair value, if practicable. This Statement permits, but does not require, the
subsequent measurement of separately recognized servicing assets and servicing
liabilities at fair value. An entity using derivative instruments to mitigate
the risks inherent in servicing assets and servicing liabilities is required to
account for those derivative instruments at fair value. Under this Statement, an
entity may elect subsequent fair value measurement to account for its separately
recognized servicing assets and servicing liabilities. By electing that option,
an entity may simplify its accounting because this Statement permits income
statement recognition of the potential offsetting changes in fair value of those
servicing assets and servicing liabilities and derivative instruments in the
same accounting period. This Statement is effective for financial statements for
fiscal years beginning after September 15, 2006. Earlier adoption of this
Statement is permitted as of the beginning of an entity's fiscal year, provided
the entity has not yet issued any financial statements for that fiscal year.
Management believes this Statement will have no impact on the financial
statements of the Company once adopted.
10
In September 2005, the FASB issued FASB Statement No. 157. This Statement
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles (GAAP), and expands disclosures about
fair value measurements. This Statement applies under other accounting
pronouncements that require or permit fair value measurements, the Board having
previously concluded in those accounting pronouncements that fair value is a
relevant measurement attribute. Accordingly, this Statement does not require any
new fair value measurements. However, for some entities, the application of this
Statement will change current practices. This Statement is effective for
financial statements for fiscal years beginning after November 15, 2007. Earlier
application is permitted provided that the reporting entity has not yet issued
financial statements for that fiscal year. Management believes this Statement
will have no impact on the financial statements of the Company once adopted.
Note 3. Stock-Based Compensation
Prior to the adoption of SFAS No. 123 (R) for 2006 , "Share-Based Payment",
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123) encouraged, but did not require, companies to record
compensation cost for stock-based employee compensation plans at fair value.
Therefore, the Company chose to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No.
25,"Accounting for Stock Issued to Employees," and related interpretations. The
Company used the "disclosure only" alternative described in SFAS 123 and SFAS
148, which requires pro forma disclosures of net income and earnings per share
as if the fair value method of accounting had been applied. The following
disclosures are not required in the current year due to adoption of SFAS 123R as
described in the accounting policies.
Stock Options
The following table summarizes the Company's stock options outstanding at
September 30, 2006:
------------------------------------------------- ------------- ---------------
Weighted
average
Shares exercise price
------------------------------------------------- ------------- ---------------
Outstanding and exercisable at December 31, 2005 23,856,018 $ 0.60
------------------------------------------------- ------------- ---------------
Granted 2,137,500 0.86
------------------------------------------------- ------------- ---------------
Exercised (525,000) (0.20)
------------------------------------------------- ------------- ---------------
Expired (230,000) (1.11)
------------------------------------------------- ------------- ---------------
Outstanding and exercisable at September 30, 2006 25,238,518 $ 0.63
------------------------------------------------- ============= ===============
During the nine months ended September 30, 2006, the Company issued 525,000
stock options for services rendered. The options were valued under SFAS 123R.
Expense recorded pursuant to such issuances was $109,871. Pursuant to a private
placement that occurred during the quarter ended September 30, 2006, there were
1,612,500 non-detachable warrants issued expiring through May 2009.
During 2005, had the Company determined compensation cost based on the fair
value at the grant date for its stock options under SFAS No. 123, "Accounting
for Stock-Based Compensation," the Company's net loss would have been reported
as follows:
11
Three Months Nine Months
Ended Ended
September 30, September 30,
2005 2005
Net Loss:
As reported $ (1,344,515) $ (4,076,467)
Pro Forma $ (1,344,515) $ (5,406,298)
Basic & diluted loss per common
share
As reported $ (0.01) $ (0.03)
Pro Forms $ (0.01) $ (0.04)
The Company utilizes the Black-Scholes option-pricing model to calculate the
fair value of each individual issuance of options. The per-share weighted
average fair value of stock options granted for compensation during the nine
months ended September 30, 2006 and 2005 was $0.21 and $0.43, respectively. On
the date of grant, using the Black-Scholes pricing model, the following
assumptions were used for options granted during the nine (9) months ended
September 30, 2006 and 2005:
September 30, September 30,
2006 2005
Expected dividend yield 0% 0%
Risk-free interest rate 4.30-5.26% 5%
Volatility 95% 44%
At September 30, 2006, the range of exercise price for all of the Company's
outstanding stock options was $0.10 to $1.26, with an average remaining life of
5 years and an average exercise price of $0.63.
Note 4. Shareholders' Deficit
Stock as Compensation and Settlement of Debt
The Company issues stock as compensation for services valuing such issues
premised upon the fair market value of the stock. During the nine (9) months
ended September 30, 2006 and the year ended December 31, 2005, the Company
issued 11,477,138 and 4,267,175 shares, respectively, in connection with the
common stock purchase agreement with Fusion Capital and private placements. The
gross proceeds for these shares were $4,014,773 and $1,603,740, respectively,
for the nine months ended September 30, 2006 and the year ended December 31,
2005.
Authorized Capital Stock
The Company has 250,000,000 authorized shares of common stock and 5,000,000
authorized shares of preferred stock.
The Company completed one (1) private placement during the third quarter: On
September 30, 2006, the Company received a qualified subscription for 1,600,000
shares of common stock at a purchase price of $0.25 per share with no warrants
for total proceeds equal to $400,000.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION
Introduction - Forward Looking Statements
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 (the Reform Act), Samaritan Pharmaceuticals, Inc.,
(the "Company" or "Samaritan") is hereby providing cautionary statements
identifying important factors that could cause the Company's actual results to
differ materially from those projected in forward-looking statements made
herein. Any statements expressing, or involving discussions as to expectations,
beliefs, plans, objectives, assumptions of future events or performance are not
statements of historical facts and may be forward-looking. These forward-looking
statements are based largely on Samaritan's expectations and are subject to a
number of risks and uncertainties, including but not limited to, economic,
competitive, regulatory, growth strategies, available financing and other
factors discussed elsewhere in this report and in documents filed by Samaritan
with the SEC. Many of these factors are beyond Samaritan's control. Actual
results could differ materially from the forward-looking statements made. In
light of these risks and uncertainties, there can be no assurance the results
anticipated in the forward-looking information contained in this report will, in
fact, occur.
Any forward-looking statement speaks only to the date on which such statement is
made, and Samaritan undertakes no obligation to update any forward-looking
statement or statements to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time, and it is not possible for
management to predict all of such factors. Nor can management assess the impact
of each such factor on the business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements.
General
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements (unaudited) and the Notes included herein. The
information contained below includes statements of Samaritan's or management's
beliefs, expectations, hopes, goals and plans that, if not historical, are
forward-looking statements subject to certain risks and uncertainties that could
cause actual results to differ materially from those anticipated in the
forward-looking statements.
Overview
Samaritan is a small cap biopharmaceutical company focused on the development
of novel therapeutic and diagnostic products. We have devoted substantially all
of our resources to undertaking drug discovery and development programs.
The majority of our resources have been expended in the pursuit of Food and Drug
Administration (FDA) required preclinical studies and Phase II/III clinical
trials for Samaritan's HIV drug, SP-01A (Sphirewall), an oral entry inhibitor.
In a previous Phase I/II study, SP-01A was observed to significantly lower the
amount of HIV in the blood, improve quality of life (how well subjects have
felt), have a favorable safety profile (minimal side effects) and be
well-tolerated. Moreover, in vitro testing of SP-01A: (a) demonstrated
comparable or greater efficacy than currently approved anti-HIV drugs in
preventing HIV virus replication; (b) was observed to have minimal toxic effect
on human cells; and (c) demonstrated significant efficacy in preventing virus
replication of HIV virus strains resisting currently approved anti-HIV
treatments. The goal of our SP-01A monotherapy study is to look further at the
dose response, efficacy and safety of SP-01A as monotherapy, given as a capsule
to be swallowed, in the treatment of HIV-infected subjects. We are no longer
recruiting patients for this study but are in the process of completing the
trial.
In addition, and at the same time, Samaritan has devoted major resources to its
Alzheimer's technology, which features: (a) three (3) therapeutics: SP-04, SP-08
and SP-233; (b) two (2) stem cell, neuron differentiation therapies: SP-sc4 and
SP-sc7; (c) a predictive Alzheimer's diagnostic; and (d) an Alzheimer's animal
model. Samaritan has also devoted resources to its cancer drug, SP-C007, a
breast cancer diagnostic and its cholesterol recognition peptide, which plays a
role in transforming and binding LDL cholesterol while subsequently raising HDL.
13
Samaritan has established its European headquarters in Athens, Greece, which we
believe will allow access to the markets of Eastern Europe, Asia and Africa,
regions with a high proportion of HIV patients and a target population for our
most advanced drug, SP-01A. Samaritan Pharmaceuticals Europe ("Samaritan
Europe") is currently seeking to build a sales and marketing infrastructure
through distribution agreements for niche, high valued products from other
companies in the fields of HIV/infectious diseases, CNS, cancer/oncology and
cardiovascular diseases for the normally undeveloped regions of Greece, Turkey,
Bulgaria, Romania, Croatia, Serbia, Bosnia and Slovenia.
Samaritan Europe: (a) has established a manufacturing arm in Ireland with
Pharmaplaz, LTD; (b) plans to develop its pipeline of drugs through clinical
trials in preparation for European approval; (c) plans to increase its
university research collaborations and (d) plans to apply for applicable
European grants.
On November 14, 2006, Samaritan Pharmaceuticals Inc. announced that Samaritan
has reached a definitive agreement to acquire all of the stock of Metastatin
Pharmaceuticals Inc., a privately held company headquartered in Bethesda, MD.
This acquisition marks Samaritan's further expansion into cancer research. The
acquisition agreement was signed following its unanimous approval by Samaritan's
Board of Directors. The aggregate purchase price payable by Samaritan for
Metastatin Pharmaceuticals will be five hundred thousand (500,000) restricted
shares of Samaritan Pharmaceuticals common stock. The transaction is expected to
close upon approval of Metastatin shareholders. For additional information about
the definitive agreement, see exhibit 10.17 of the this Form 10-Q. Metastatin
Pharmaceuticals is a development stage biopharmaceutical company engaged in the
development of cytostatic and anti-metastatic therapies for the management of
cancer. The company is positioned on the cusp of emerging cancer therapeutic
strategies focused on controlling tumor progression and metastasis using
molecularly targeted compounds.
On November 6 2006, Samaritan Pharmaceuticals Inc. and Samaritan Pharma Ireland,
Inc. announced it had submitted an Investigational New Drug (IND) application to
evaluate its lead compound Caprospinol (SP-233) as a potentially new and novel
pharmaceutical treatment for Alzheimer's disease. This is an important first
step, to test Caprospinol's future in humans, as a potential memory-saving
Alzheimer's drug.
Unlike drugs currently used to treat Alzheimer's that just alleviate symptoms,
Caprospinol might potentially be a viable treatment for the disease itself.
Preclinical studies have shown that Caprospinol targets and binds to the
beta-amyloid protein, washing out beta-amyloid plaque from the brain. Today, the
beta-amyloid protein is what most researchers believe is the cause of
Alzheimer's disease.
Scientists at Samaritan Laboratories, Georgetown University, led the preclinical
studies for Caprospinol, while Samaritan's Drug Development executives amassed
the seven thousand pages of data to formulate the IND submitted to the FDA.
PharmaPlaz, Ireland, Samaritan's collaborative manufacturing partner, led the
chemistry, manufacturing and controls (CMC) section of the submitted IND.
Samaritan Pharmaceuticals Inc. also announced that on November 6, 2006, it
received a notice from the American Stock Exchange, Inc. (``AMEX'') informing
the Company it is not in compliance with certain AMEX continued listing
standards. Specifically, the Company is not in compliance with Section
1003(a)(ii) of the Company Guide, that currently requires that we have
shareholders' equity of not less than $4,000,000, and losses from continuing
operations, and/or net losses in three out of four of its most recent fiscal
years; and Section 1003(a)(iii) of the Company Guide with shareholders' equity
of not less than $6,000,000, and losses from continuing operations, and/or net
losses in its five most recent fiscal years.
In order to maintain our AMEX listing, we are required to submit a plan by
December 6, 2006 advising the AMEX of the action the Company is taking, or plans
to take in order to regain compliance with the AMEX continuing listing
requirements, within 18 months. The Company intends to submit a plan to submit
to the AMEX staff prior to December 6, 2006. This plan is subject to the review
and approval by AMEX. If we fail to timely submit this plan, AMEX does not
accept the plan, or we fail to perform in accordance with the plan, we will be
subject to delisting procedures
On Nov. 3, 2006, Samaritan Pharmaceuticals Inc. announced we have received
notice of the publication of its novel anti-amyloidal Alzheimer's drug
Caprospinol (SP-233) by the World Intellectual Property Organization (``WIPO'').
The WIPO Patent Application Number is WO2006107902 and is entitled: USE OF
SPIROSTENOLS TO TREAT MITOCHONDRIAL DISORDERS. The publication covers several
unique features of Caprospinol's (SP-233) anti-amyloid properties; i.e.
protecting neuronal cells against neurotoxicity by protecting mitochondria
functions against the toxic effects of beta-amyloid.
On August 29, 2006, Samaritan announced its Alzheimer's research compound
Caprospinol (SP-233) demonstrated no toxicity, when administered orally in an
Acute Toxicity Study. Preclinical studies suggest Caprospinol (SP-233) exhibits
neuroprotective properties against beta- amyloid-induced toxicity which could be
indicative of a promising treatment for Alzheimer's disease.
14
See Caprospinol (SP-233) peer reviewed journal publications on:
http://www.samaritanpharma.com/html/respublications.html
This new study, conducted in animals, supports the previous preclinical assay
safety studies where Caprospinol also showed no toxic effects. In this study
Caprospinol (SP-233), was given at doses of 1, 3, 10, or 30 mg/kg/day, once
daily, for three consecutive days, in male and female mice, and showed no acute
toxicity at the concentrations tested; and the no-observed-effect level (NOEL)
was found to be 30 mg/kg, for both male and female mice.
On August 23, 2006, Samaritan announced it is strengthening its business
development capability with the promotion of Kristi Eads to Vice President of
Business Development. Eads has been with Samaritan since 2000 serving as Vice
President of Investor Relations since January 2004. In her former position, Eads
was primarily responsible for overseeing all communications with the investment
community, public and private. In her new role as Vice President of Business
Development, Eads will work with Samaritan's business development team by
focusing her efforts on in-licensing and partnering opportunities to grow and
advance Samaritan's product pipeline. Eads obtained her juris doctorate from
Concord University and has a bachelor of arts from the University of Oregon.
On July 11, 2006, Samaritan announced that its Alzheimer's drug SP-233
(Caprospinol), not only stops amyloid plaque formation in the brain of an animal
model for Alzheimer's disease but also shows that treatment with Caprospinol,
results in the complete disappearance of amyloid plaques in the brain. This new
study, conducted in a rat animal model of Alzheimer's disease and led by
Samaritan collaborating researchers at Georgetown University, found that rats
exhibiting an Alzheimer's disease-like phenotype treated with a placebo solution
retained amyloid plaques formed in the hippocampus and cortex of the brain,
whereas, rats treated with Caprospinol found no detectable amyloid plaques.
Caprospinol is a novel drug that demonstrates neuroprotective properties in
preclinical studies. In-vitro studies have demonstrated that caprospinol
directly binds to beta-amyloid peptide, inhibits the formation of neurotoxic
amyloid-derived diffusible ligands, and protects the mitochondria function by a
direct action of the peptide on the organelle, thus protecting neuronal cells
from beta-amyloid-induced toxicity.
On June 26, 2006, Samaritan announced that it is continuing to expand its broad
worldwide patent portfolio in support of its proprietary product development
programs. The U.S. Patent office has notified Samaritan that it has issued
Patent No. 7,056,694 to Samaritan's research collaborator Georgetown University,
and Samaritan holds the worldwide exclusive license for this patent through its
collaboration. The issued patent identifies peripheral-type benzodiazepine
receptor associated proteins, such as PAP7, and its ability to interact with and
regulate the function of the peripheral-type benzodiazepine receptor, a key
mitochondrial protein involved in steroid biosynthesis, cell proliferation,
cancer progression, and Alzheimer's disease pathology.
On June 20, 2006, Samaritan has received a notice of allowance of claims for
European patent application No. 99912635.2 which relates to Samaritan's drug
SP-1000 for the treatment of cardiovascular disease. Previously, on May 22,
2006, Samaritan announced that its collaborating scientists in two preclinical
animal studies found that SP-1000 reduces blood cholesterol, clears clogged
arteries of atheroma; raises HDL, the good cholesterol; and lastly, reduces CK
enzyme elevation, a marker for heart suffering. The patent will be awarded to
Georgetown University and is exclusively licensed to Samaritan.
On, April 3, 2006, Samaritan Pharmaceuticals Europe, S.A. received notification
by the National Pharmaceuticals Organization, (EOF) for a new marketing
authorization for Amphocil (an amphotericin B cholesteryl sulfate complex for
injection indicated for the treatment of invasive aspergillosis, a fungal
infection that occurs in immuno-compromised patients). Samaritan In-Licensed
from Three Rivers Pharmaceuticals the Greece & Cyprus Marketing Rights for
Amphocil. The National Pharmaceutical Organization, (EOF), is the government
authority for granting approval to market pharmaceutical and medical products in
Greece, similar to the FDA in the United States. Samaritan Europe has submitted
all the necessary documents to make a pricing application with the Minister of
Development who issues official prices with the consent of the Minister of
Health. Once price approval is obtained, Samaritan will launch the product in
the Greek market. Currently, Samaritan Pharmaceuticals Europe is trying to
contract with other pharmaceutical companies to sell and distribute niche,
high-valued products in the undeveloped regions of Greece, Turkey, Bulgaria,
Romania, Croatia, Serbia, Bosnia and Slovenia.
Plan and Results of Operations
We have used the proceeds from private placements of our capital stock,
primarily to expand our preclinical and clinical efforts, as well as for general
working capital. At this time, we are beginning to commit additional resources
to the development of SP-01A, as well as for the development of our other drugs.
Additional details regarding the human trials and INDs the Company plans to file
may be found in the section entitled "Description of Business" in the Company's
Annual Report on Form 10-K/A filed with the SEC on November 2, 2006 for the
fiscal year ended December 31, 2005.
Results of Operations For The Three (3) Months Ended September 30, 2006 As
Compared To The Three (3) Months Ended September 30, 2005
15
During the quarter ended September 30, 2006, we incurred research expenditures
pursuant to a grant received from the U.S. Department of Health and Human
Services. We recognized grant revenue of $10,586, the extent of such qualifying
expenditures.
We incurred research and development expenses of $1,053,552 for the three months
ended September 30, 2006, as compared to $824,204 for the three months ended
September 30, 2005. This increase of $229,348 or twenty-eight percent (28%), was
primarily attributable to fluctuations and timing of the costs associated with
our Phase IIb HIV clinical trial. We expect research and development
expenditures relating to drug discovery and development will increase during the
remainder of the 2006 and into subsequent years due to the expanding
requirements of FDA clinical trials for: (a) for our HIV drug program; (b) our
Alzheimer's drug program; (c) the initiation of trials for other potential
indications; and (d) additional study expenditures for potential pharmaceutical
candidates. Research and development expenses may fluctuate from period to
period, depending upon the stage of certain projects and the level of
preclinical testing and clinical trial-related activities.
General and administrative expenses increased to $701,144 for the three months
ended September 30, 2006, as compared to $628,357 for the three months ended
September 30, 2005. This increase of $72,787 or twelve percent (12%), was
primarily attributable to an increase in cost of payroll as offset by decreases
in consulting.
Depreciation and amortization amounted to $38,100 for the three months ended
September 30, 2006, as compared to $25,534 for the three months ended September
30, 2005. This increase of $12,566, or forty-nine percent (49%), was primarily
attributable to amortization on approved patents that began later in 2005.
Net interest income amounted to $(7,622) and $(13,401) for the three (3) months
ended September 30, 2006 and 2005, respectively. The credit balance in the
interest expense account is attributable to offsetting interest earned from
holding our cash in marketable securities and certificates of deposits. Interest
income was $7,622 and $14,348, for the three (3) months ended September 30, 2006
and 2005, respectively. Interest expense was $-0- and $947, for the three (3)
months ended September 30, 2006 and 2005, respectively.
We had a net loss of $1,774,588 for the three months ended September 30, 2006,
as compared to $1,344,515 for the three months ended September 30, 2005. The
loss per share was $.01 and $.01 per share, for the three months ended September
30, 2006 and 2005, respectively. The increased net loss of $430,073 or
thirty-two percent (32%) relates primarily to increased research expenditures,
payroll, and decreased grant revenues.
Results of Operations For The nine (9) Months Ended September 30, 2006 As
Compared To The nine (9) Months Ended September 30, 2005
During the nine months ended September 30, 2006, we incurred research
expenditures pursuant to a grant received from the U.S. Department of Health and
Human Services. We recognized grant revenue of $32,379, the extent of such
qualifying expenditures.
We incurred research and development expenses of $3,153,260 for the nine months
ended September 30, 2006, as compared to $2,365,103 for the nine months ended
September 30, 2005. This increase of $788,157, or thirty-three percent (33%),
was primarily attributable to fluctuations and timing of the costs associated
with our Phase IIb HIV clinical trial. We expect research and development
expenditures relating to drug discovery and development will increase during the
remainder of 2006 and into subsequent years due to the expanding requirements of
FDA clinical trials for: (a) our HIV drug program; (b) our Alzheimer's drug
program; (c) the initiation of trials for other potential indications; and (d)
additional study expenditures for potential pharmaceutical candidates. Research
and development expenses may fluctuate from period to period, depending upon the
stage of certain projects and the level of preclinical testing and clinical
trial-related activities.
General and administrative expenses increased to $2,017,875 for the nine months
ended September 30, 2006, as compared to $1,844,385 for the nine months ended
September 30, 2005. This increase of $173,490 or nine percent (9%), was
primarily attributable to an increase in cost of advertising and payroll as
offset by decreases in consulting fees.
Depreciation and amortization amounted to $107,922 for the nine months ended
September 30, 2006, as compared to $50,286 for the nine months ended September
30, 2005. This increase of $57,636, or one hundred-fifteen percent (115%), was
primarily attributable to the inception of amortization on approved patents
later in 2005.
Net interest income amounted to $24,136 and $47,878 (reflected as a
contra-expense) for the nine (9) months ended September 30, 2006 and 2005,
respectively. The credit balance in the interest expense account is attributable
to offsetting interest earned from holding our cash in marketable securities and
certificates of deposits. Interest income was $24,143 and $49,294, for the nine
(9) months ended September 30, 2006 and 2005, respectively. Interest expense was
$7 and $1,416.00, for the nine (9) months ended September 30, 2006 and 2005,
respectively.
16
We had a net loss of $5,225,702 for the nine months ended September 30, 2006, as
compared to $4,076,467 for the nine months ended September 30, 2005. The loss
per share was $.04 and $.03 per share, for the nine months ended September 30,
2006 and 2005, respectively. The increased net loss of $1,1449,235 relates
primarily to increased research expenditures and decreases in governmental grant
revenue.
The net loss since our inception on September 5, 1994 through September 30, 2006
was $38,962,098. We expect losses to continue for the near future, and such
losses will likely increase as human clinical trials are undertaken in the
United States. Future profitability will be dependent upon our ability to
complete the development of our pharmaceutical products, obtain necessary
regulatory approvals and effectively market such products. In addition, future
profitability will require the Company to establish agreements with other
parties for clinical testing, manufacturing, commercialization and sale of its
products.
Liquidity and Capital Resources
As of September 30, 2006, the Company's cash position was $2,125,558. We are
continuing efforts to raise additional capital and to execute our research and
development plans. Even if we are successful in raising sufficient money to
carry out these plans, additional clinical development is necessary to bring our
products to market, which will require a significant amount of additional
capital.
Cash used in operating activities during the nine (9) month period ended
September 30, 2006 was $(4,736,059), as compared to $(3,390,771) for the nine
month period ended September 30, 2005, an increase of $1,345,288 or forty (40%).
This increase is primarily attributable to fluctuations and timing of the cost
with our Phase IIb HIV clinical trial and decreases in governmental grant
revenue.
Cash provided by investing activities was $327,140 for the nine (9) month
period ended September 30, 2006, as compared to cash provided of $402,416 for
the nine (9) month period ended September 30, 2005, a decrease of $75,276 or
nineteen (19%). Each period reflects proceeds from the liquidation of
certificates of deposit offset by investing activity such as the purchase of
equipment patent registration costs. There were fewer marketable securities to
liquidate during 2006.
Cash provided by financing activities was $6,078,014 for the nine (9) month
period ended September 30, 2006, as compared to $1,399,999 for the nine (9)
month period ended September 30, 2005, an increase of $4,678,015 or three
hundred thirty-four percent (334%). This year's results include proceeds of
$2,045,000 from private placements, and $64,500 from exercise of warrants.
Furthermore, proceeds from the equity financing agreement increased this year
through September 30 by $2,568,515.
Current assets as of September 30, 2006 were $2,461,311 as compared to
$1,307,096 as of December 31, 2005. This increase of $1,154,215 or eighty-eight
percent (88%), was primarily attributable to the receipt of proceeds from the
private placement. Augmenting the private placement funds are the increased
proceeds received through our equity financing arrangement with Fusion Capital
II, LLC ("Fusion Capital") as offset by the increased research expenditures.
Current liabilities as of September 30, 2006 were $672,495 as compared to
$562,060 as of December 31, 2005, an increase of $110,435, primarily in accrued
compensation.
On April 22, 2003, the Company entered into a common stock purchase agreement
("Purchase Agreement I") with Fusion Capital, pursuant to which Fusion Capital
has agreed to purchase shares of our common stock from time to time at the
Company's option up to an aggregate amount of $10,000,000. The SEC declared
effective the Company's registration statement on Form SB-2, Commission
Registration No. 333-105818 on October 9, 2003.
On May 12, 2005, we entered into a common stock purchase agreement ("Purchase
Agreement II") with Fusion Capital, pursuant to which Fusion Capital has agreed
to purchase our common stock from time to time, at our option, up to an
aggregate amount of $40,000,000 over fifty (50) months commencing on the date
the SEC declared effective our registration statement covering the shares of
common stock to be purchased by Fusion Capital pursuant to such Purchase
Agreement II. On December 29, 2005 (Commission Registration No. 333-130356), the
registration statement on Form SB-2 was declared effective by the SEC. The
number of registered, yet not issued shares remaining under that registration
statement as of September 30, 2006, was 3,975,242.
The Company's dependence on raising additional capital will continue, at least,
until it is able to commercially market one (1) of its products at significant
sales level. Depending on profit margins and other factors, the Company may
still need additional funding to continue research and development efforts. The
Company's future capital requirements and the adequacy of its financing depend
upon numerous factors including: the successful commercialization of the
Company's drug candidates, progress in its product development efforts, progress
with preclinical studies and clinical trials, the cost and timing of production
arrangements, the development of effective sales and marketing activities, the
cost of filing, prosecuting, defending and enforcing intellectual property
rights, competing technological and market developments, and the development of
strategic alliances for the marketing of its products.
17
We do not believe debt financing from financial institutions will be available
until at least one (1) of our products is approved for commercial production. To
date, we have in licensed one drug (Amphocil) that has reached commercial stage,
and hence, we do anticipate revenue in the near future. We have been
unprofitable since our inception and have incurred significant losses. We will
continue to have significant general and administrative expenses, including
expenses related to clinical studies, our research collaboration with Georgetown
University and patent registration costs. We have funded our operations through
a series of private placements and purchase agreements with Fusion Capital,
which we believe will assist the Company in meeting its cash needs over the next
12 months. Except for our Purchase Agreements with Fusion Capital, no commitment
exists for continued investments, or for any underwriting.
Even with our financing arrangements with Fusion Capital (as discussed above),
we may require substantial additional funds to sustain our operations and to
grow our business. The amount will depend, among other things, on (a) the rate
of progress and cost of our research and product development programs and
clinical trial activities; (b) the cost of preparing, filing, prosecuting,
maintaining and enforcing patent claims and other intellectual property rights;
and (c) the cost of developing manufacturing and marketing capabilities, if we
decide to undertake those activities. The clinical development of a therapeutic
product is a very expensive and lengthy process which may be expected to utilize
$5 to $20 million over a three (3) to six (6) year development cycle. Although
we believe we could license the manufacturing and marketing rights to our
products in return for up-front licensing and other fees and royalties on any
sales, there can be no assurance we will be able to do so in the event we seek
to do so. We need to obtain additional funds to develop our therapeutic products
and our future access to capital is uncertain. The allocation of limited
resources is an ongoing issue for us as we move from research activities into
the more costly clinical investigations required to bring therapeutic products
to market.
The extent to which we rely on Fusion Capital as a source of funding will depend
on a number of factors, including the prevailing market price of our common
stock and the extent to which we are able to secure working capital from other
sources. Even if we are able to access the full amounts under Purchase Agreement
II with Fusion Capital, we may still need additional capital to fully implement
our business, operating and development plans. If we are unable to obtain
additional financing, we might be required to delay, scale back or eliminate
selected research and product development programs or clinical trials, or be
required to license third parties to commercialize products or technologies that
we would otherwise undertake ourselves, or cease certain operations all
together. However, any of these options might have a material adverse effect
upon the Company. If we raise additional funds by issuing equity securities,
dilution to stockholders may result, and new investors could have rights
superior to existing holders of shares. Should the financing we require to
sustain our working capital needs be unavailable or prohibitively expensive when
we require it, the consequences would have a material adverse effect on our
business, operating results, financial condition and prospects.
We have been able to meet our cash needs during the past twelve (12) months
through a combination of funds received through private placements and funds
received under the Purchase Agreements. We intend to continue to explore avenues
to obtain the capital needed for our operations through private placements and
by the sale of our shares to Fusion Capital.
Quantitative and Qualitative Information About Market Risk
We do not engage in trading market-risk sensitive instruments and do not
purchase hedging instruments or "other than trading" instruments likely to
expose us to market risk, whether interest rates, foreign currency exchange,
commodity price or equity price risk. We have no outstanding debt instruments,
have not entered into any forward or future contracts, have purchased no
options, and entered into no swaps. We have no credit lines or other borrowing
facilities, and do not view ourselves as subject to interest rate fluctuation
risk at the present time.
18
Exchange Risk
We are a multinational business operating in a number of countries with the U.S.
dollar as the primary currency in which we conduct business. The U.S. dollar is
used for planning and budgetary purposes and as the presentation currency for
financial reporting. We do, however, have costs, assets and liabilities
denominated in currencies other than U.S. dollars. Consequently, we may enter
into derivative financial instruments to manage our non-U.S. dollar foreign
exchange risk. We may use derivative financial instruments primarily to reduce
exposures to market fluctuations in foreign exchange rates. We do not enter into
derivative financial instruments for trading or speculative purposes. All
derivative contracts entered into will be in liquid markets with credit-approved
parties. The treasury function operates within strict terms of reference that
have been approved by our board of directors (the "Board").
The U.S. dollar is the base currency against which all identified transactional
foreign exchange exposures are managed and hedged. The principal risks to which
we are exposed are movements in the exchange rates of the U.S. dollar against
the Euro. The main exposures are net costs in Euro arising from a manufacturing
and research presence in Ireland, the sourcing of raw materials in European
markets and marketing and sales in South Eastern Europe.
Recently Issued Accounting Standards
In February 2006, the FASB issued FASB Statement No. 155, which is an amendment
of FASB Statements No. 133 and 140. This Statement: a) permits fair value
remeasurement for any hybrid financial instrument containing an embedded
derivative that otherwise would require bifurcation; b) clarifies which
interest-only strip and principal-only strip are not subject to the requirements
of Statement 133; c) establishes a requirement to evaluate interests in
securitized financial assets to identify interests that are freestanding
derivatives or hybrid financial instruments containing an embedded derivative
requiring bifurcation; d) clarifies concentrations of credit risk in the form of
subordination are not embedded derivatives; and e) amends Statement 140 to
eliminate the prohibition on a qualifying special-purpose entity from holding a
derivative financial instrument pertaining to a beneficial interest other than
another derivative financial instrument. This Statement is effective for
financial statements for fiscal years beginning after September 15, 2006.
Earlier adoption of this Statement is permitted as of the beginning of an
entity's fiscal year, provided the entity has not yet issued any financial
statements for that fiscal year. Management believes this Statement will have no
impact on the financial statements of the Company once adopted.
In March 2006, the FASB issued FASB Statement No. 156, which amends FASB
Statement No. 140. This Statement establishes, among other things, the
accounting for all separately recognized servicing assets and liabilities. This
Statement amends Statement 140 to require all separately recognized servicing
assets and liabilities be initially measured at fair value, if practicable. This
Statement permits, but does not require, the subsequent measurement of
separately recognized servicing assets and liabilities at fair value. An entity
using derivative instruments to mitigate the risks inherent in servicing assets
and liabilities is required to account for those derivative instruments at fair
value. Under this Statement, an entity can elect subsequent fair value
measurement to account for its separately recognized servicing assets and
liabilities. By electing that option, an entity may simplify its accounting
because this Statement permits income statement recognition of the potential
offsetting changes in fair value of those servicing assets and liabilities and
derivative instruments in the same accounting period. This Statement is
effective for financial statements for fiscal years beginning after September
15, 2006. Earlier adoption of this Statement is permitted as of the beginning of
an entity's fiscal year, provided the entity has not yet issued any financial
statements for that fiscal year. Management believes this Statement will have no
impact on the financial statements of the Company once adopted.
Opinion 20 previously required most voluntary changes in accounting principles
be recognized by including in the net income of the period of change the
cumulative effect of changing to the new accounting principle. This Statement
requires retrospective application to the prior periods' financial statements of
changes in the accounting principle, unless it is impracticable to determine
either the period-specific effects or the cumulative effect of the change. When
it is impracticable to determine the period-specific effects of an accounting
change on one or more individual prior period presented, this Statement requires
the new accounting principle be applied to the balances of assets and
liabilities as of the beginning of the earliest period for which retrospective
application is practicable and a corresponding adjustment be made to the opening
balance of retained earnings (or other appropriate components of equity or net
assets in the statement of financial position) for that period rather than being
reported in an income statement. When it is impracticable to determine the
cumulative effect of applying a change in accounting principle to all prior
periods, this Statement requires the new accounting principle be applied as if
it were adopted prospectively from the earliest date practicable. This Statement
shall be effective for accounting changes and corrections of errors made in
fiscal years beginning after December 15, 2005. The Company does not believe
that the adoption of SFAS 154 will have a significant effect on its financial
statements.
19
Other accounting standards issued or proposed by the FASB, or other
standards-setting bodies, that do not require adoption until a future date, are
not expected to have a material impact on the consolidated financial statements
upon adoption.
ITEM 3. CONTROLS AND PROCEDURES
(A) Evaluation of Disclosure Controls And Procedures
As of the end of the period covered by this Quarterly Report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's Principal Executive Officer and Principal Accounting and Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. The Company's disclosure controls and
procedures are designed to provide a reasonable level of assurance of achieving
the Company's disclosure control objectives. The Company's Principal Executive
Officer and Principal Accounting and Financial Officer have concluded the
Company's disclosure controls and procedures are, in fact, effective at this
reasonable assurance level as of the period covered. In addition, the Company
reviewed its internal controls, and there have been no significant changes in
its internal controls or in other factors that could significantly affect those
controls subsequent to the date of their last evaluation or from the end of the
reporting period to the date of this Quarterly Report on Form 10-Q.
(B) Changes in Internal Controls Over Financial Reporting
In connection with the evaluation of the Company's internal controls during the
Company's last fiscal quarter covered by this Quarterly Report, the Company's
Principal Executive Officer and Principal Accounting and Financial Officer have
determined there are no changes to the Company's internal controls over
financial reporting that has materially affected, or is reasonably likely to
materially effect, the Company's internal controls over financial reporting.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are, from time to time, involved in various legal proceedings in the ordinary
course of our business. While it is impossible to predict accurately or to
determine the eventual outcome of these matters, the Company believes the
outcome of these proceedings will not have a material adverse effect on the
financial statements of the Company.
ITEM 1A. RISK FACTORS
You should carefully consider the risks described below before purchasing our
common stock ("Common Stock"). Our most significant risks and uncertainties are
described below; however, they are not the only risks we face. If any of the
following risks actually occur, our business, financial condition, or results or
operations could be materially adversely affected, the trading of our Common
Stock could decline, and you may lose all or part of your investment therein.
You should acquire shares of our Common Stock only if you can afford to lose
your entire investment.
We Have A Limited Operating History With Significant Losses And Expect Losses To
Continue For The Foreseeable Future
We have yet to establish any history of profitable operations. We had a net loss
of $5,225,702 for the nine months ended September 30, 2006, as compared to
$4,076,467 for the nine months ended September 30, 2005. The net loss since our
inception on September 5, 1994 through September 30, 2006 was $38,962,098. Our
revenues have not been sufficient to sustain our operations. We expect that our
revenues will not be sufficient to sustain our operations for the near future.
Our profitability will require the successful commercialization of one or more
of drugs for AIDS, Alzheimer's, Cancer and Cardiovascular disease. No assurances
can be given when this will occur or that we will ever be profitable.
20
We Will Require Additional Financing To Sustain Our Operations And Without It We
Will Not Be Able To Continue Operations
We do not currently have sufficient financial resources to fund our operations.
Current assets as of September 30, 2006 were $2,461,311 as compared to
$1,307,096 as of December 31, 2005. Therefore, we need additional funds to
continue operations.
We only have the right to receive $40,000 per trading day under the Purchase
Agreement II with Fusion Capital unless our stock price equals or exceeds $1.50
per share, in which case the daily amount may be increased under certain
conditions as the price of our Common Stock increases. Since we have 16,700,000
registered shares to be offered for sale from time to time by Fusion Capital,
the selling price of our Common Stock to Fusion Capital will have to average at
least $2.67 per share for us to receive the maximum proceeds of $40,000,000
without registering additional shares of Common Stock. Assuming a purchase price
of $0.31 per share (the last reported market sale price of our Common Stock on
September 29, 2006) and the purchase by Fusion Capital of the remaining
3,975,342 shares under the Purchase Agreement II as of September 30, 2006
(excluding the 1,700,000 shares previously issued as a commitment fee), proceeds
to us would only be $1,232,356 unless we choose to register more than 15,000,000
shares, which we have the right, but not the obligation, to do. Subject to
approval by our Board of Directors, we have the right but not the obligation to
issue more than 15,000,000 shares to Fusion Capital. In the event we elect to
issue more than 15,000,000 shares, we will be required to file a new
registration statement and have it declared effective by the SEC. In order to be
in compliance with the rules and regulations of the American Stock Exchange, the
Company would be required to obtain shareholder approval to sell more than
26,643,192 shares of our Common Stock (i.e., 19.9% of our issued and outstanding
shares as of May 12, 2005, the date of the Purchase Agreement II).
To the extent we rely on Fusion Capital as a source of funding will depend on a
number of factors including, the prevailing market price of our Common Stock and
the extent to which we are able to secure working capital from other sources.
Specifically, Fusion Capital shall not have the right or the obligation to
purchase any shares of our Common Stock on any trading days that the market
price of our Common Stock is less than $0.25. If obtaining sufficient financing
from Fusion Capital were to prove unavailable or prohibitively dilutive, we will
need to secure another source of funding in order to satisfy our working capital
needs. Even if we are able to access the full $40,000,000 under the Purchase
Agreement II, we may still need additional capital to fully implement our
business, operating and development plans. Should the financing we require to
sustain our working capital needs be unavailable or prohibitively expensive when
we require it, the consequences would have a material adverse effect on our
business, operating results, financial condition and prospects.
We Have An Accumulated Deficit
The Company had an accumulated deficit of $38,962,098 as of September 30, 2006.
Since the Company presently has no source of revenues and is committed to
continuing its product research and development program, significant
expenditures and losses will continue until development of new products is
completed and such products have been clinically tested, approved by the FDA and
successfully marketed. In addition, the Company has funded its operations
primarily through the sale of Company securities, its working capital for its
product development and other activities. We do not believe that debt financing
from financial institutions will be available until at least the time that one
of our products is approved for commercial production.
We Have A Limited Amount of Revenues Or Profits
The Company has devoted its resources to developing a new generation of
therapeutic drug products, but such products cannot be marketed until clinical
testing is completed and governmental approvals have been obtained. Accordingly,
there is a small amount of revenue from grants, much less profits, to sustain
the Company's present activities. A substantial amount of revenue will not
likely be available until, and unless, the new products are clinically tested,
approved by the FDA and successfully marketed, either by the Company or a
marketing partner, an outcome the Company is not able to guarantee.
21
The Sale Of Our Common Stock To Fusion Capital May Cause Dilution And The Sale
Of The Shares Of Common Stock Acquired By Fusion Capital Could Cause The Price
Of Our Common Stock To Decline
The purchase price for the Common Stock to be sold to Fusion Capital pursuant to
the Purchase Agreement II will fluctuate based on the price of our Common Stock.
Fusion Capital may sell none, some or all of the shares of Common Stock
purchased from us at any time. Depending upon market liquidity at the time, a
sale of shares at any given time could cause the trading price of our Common
Stock to decline. The sale of a substantial number of shares of our Common Stock
under the offering, or anticipation of such sales, could make it more difficult
for us to sell equity or equity-related securities in the future at a time and
at a price when we might otherwise wish to effect sales.
The sale of shares to Fusion Capital pursuant to the Purchase Agreement II will
have a dilutive impact on our shareholders. The sale of shares may result in our
net income per share decreasing in future periods, and the market price of our
Common Stock could decline. In addition, the lower our stock price is, the more
shares of Common Stock we will have to issue under the Purchase Agreement II to
draw down the full amount. If our stock price is lower, then our existing
shareholders would experience greater dilution.
Existing Shareholders Will Experience Significant Dilution From Our Sale Of
Shares Under The Purchase Agreement II With Fusion Capital And Any Other Equity
Financing
The sale of shares pursuant to the Purchase Agreement II with Fusion Capital or
any other future equity financing transaction will have a dilutive impact on our
shareholders. As a result, our net loss per share could decrease in future
periods, and the market price of our Common Stock could decline. In addition,
the lower our stock price is, the more shares of Common Stock we will have to
issue under the Purchase Agreement II in order to draw down the full amount. If
our stock price is lower, then our existing shareholders would experience
greater dilution. We cannot predict the actual number of shares of Common Stock
that will be issued pursuant to the Purchase Agreement II or any other future
equity financing transaction, in part, because the purchase price of the shares
will fluctuate based on prevailing market conditions and we do not know the
exact amount of funds we will need.
The Market Price of Our Common Stock Is Highly Volatile, Which Could Hinder Our
Ability to Raise Additional Capital
The market price of our Common Stock has been and is expected to continue to be
highly volatile. Factors, including regulatory matters, concerns about our
financial condition, operating results, litigation, government regulation,
developments or disputes relating to agreements, title to our properties or
proprietary rights, may have a significant impact on the market price of our
stock. The range of the high and low bid prices of our Common Stock over the
last calendar year ending on October 31, 2006 has been between $0.26 and $0.91.
In addition, potential dilutive effects of future sales of shares of Common
Stock by shareholders and by the Company, and subsequent sale of Common Stock by
the holders of warrants and options could have an adverse effect on the price of
our securities, which could hinder our ability to raise additional capital to
fully implement our business, operating and development plans.
Penny Stock Regulations Affect Our Stock Price, Which May Make It More Difficult
For Investors to Sell Their Stock
Broker-dealer practices in connection with transactions in penny stocks are
regulated by certain penny stock rules adopted by the SEC. Penny stocks
generally are equity securities with a price of less than $5.00 (other than
securities registered on certain national securities exchanges or quoted on the
NASDAQ system, providing current price and volume information, with respect to
transactions in such securities is released by the exchange or system). The
penny stock rules require a broker-dealer, prior to a transaction in a penny
stock not otherwise exempt from the rules, to deliver a standardized risk
disclosure document that furnishes information about penny stocks and the risks
in the penny stock market. The broker-dealer must also supply the customer with
current bid and offer quotations for the penny stock, the compensation of the
broker-dealer and its salesperson in the transaction, and monthly account
statements showing the market value of each penny stock held in the customer's
account. In addition, the penny stock rules generally require that prior to a
transaction in a penny stock, the broker-dealer make a special written
determination that the penny stock is a suitable investment for the purchaser
and receive the purchaser's written agreement to the transaction. These
disclosure requirements may have the effect of reducing the level of trading
activity in the secondary market for a stock that becomes subject to the penny
stock rules. Our securities are subject to the penny stock rules, and investors
may find it more difficult to sell their securities.
22
It Is Uncertain That The Company Will Have Access To Future Capital Or
Government Grants
It is not expected that the Company will generate positive cash flow from
operations for at least the next several years. As a result, substantial
additional equity or debt financing or the receipt of one or more government
grants for research and development and/or clinical development will be required
to fund our activities. We cannot be certain that we will be able to consummate
any such financing on favorable terms, if at all, or receive any such government
grants or that such financing or government grants will be adequate to meet our
capital requirements. Any additional equity financing could result in
substantial dilution to shareholders, and debt financing, if available, will
most likely involve restrictive covenants which preclude the Company from making
distributions to shareholders and taking other actions beneficial to
shareholders. If adequate funds are not available, the Company may be required
to delay or reduce the scope of our drug development program or attempt to
continue development by entering into arrangements with collaborative partners
or others that may require the Company to relinquish some or all of our rights
to proprietary drugs. The inability to fund our capital requirements would have
a material adverse effect on the Company.
The Company Is Not Certain That It Will Be Successful In The Development Of Its
Drug Candidates
The successful development of any new drug is highly uncertain and is subject to
a number of significant risks. Our drug candidates, all of which are in a
development stage, require significant, time-consuming and costly development,
testing and regulatory clearance. This process typically takes several years and
can require substantially more time. Risks include, among others, the
possibility that a drug candidate will: (a) be found to be ineffective or
unacceptably toxic, (b) have unacceptable side effects, (c) fail to receive
necessary regulatory clearances, (d) not achieve broad market acceptance, (e) be
subject to competition from third parties who may market equivalent or superior
products or (f) be affected by third parties holding proprietary rights that
will preclude the Company from marketing a drug product. There can be no
assurance that the development of drug candidates will demonstrate the efficacy
and safety of a drug candidate as a therapeutic drug, or, even if demonstrated,
that there will be sufficient advantages to its use over other drugs or
treatments so as to render the drug product commercially viable. In the event
the Company is not successful in developing and commercializing one or more drug
candidates, investors are likely to realize a loss of their entire investment.
Positive Results In Preclinical And Early Clinical Trials Do Not Ensure Future
Clinical Trials Will Be Successful Or Drug Candidates Will Receive Any Necessary
Regulatory Approvals For The Marketing, Distribution Or Sale Of Such Drug
Candidates.
Success in preclinical and early clinical trials does not ensure that
large-scale clinical trials will be successful. Clinical results are frequently
susceptible to varying interpretations, delaying, limiting or preventing
regulatory approvals. The length of time necessary to complete clinical trials
and submit an application for marketing approval for a final decision by a
regulatory authority varies significantly and may be difficult to predict.
The Company Will Face Intense Competition From Other Companies In The
Pharmaceutical Industry
The Company is engaged in a segment of the pharmaceutical industry that is
highly competitive and rapidly changing. If successfully developed and approved,
any of our drug candidates will likely compete with several existing therapies.
In addition, other companies are pursuing the development of pharmaceuticals
that target the same diseases as are targeted by the drugs being developed by
the Company. We anticipate that we will face intense and increasing competition
in the future as new products enter the market and advanced technologies become
available. We cannot guarantee existing products or new products developed by
competitors will not be more effective, or more effectively marketed and sold
than those by the Company. Competitive products may render our drugs obsolete or
noncompetitive prior to the Company's recovery of development and
commercialization expenses.
23
Many of our competitors also have significantly greater financial, technical and
human resources and will likely be better equipped to develop, manufacture and
market products. In addition, many of these competitors have extensive
experience in preclinical testing and clinical trials, obtaining FDA and other
regulatory approvals and manufacturing and marketing pharmaceutical products. A
number of these competitors also have products that have been approved or are in
late-stage development and operate large, well-funded research and development
programs. Smaller companies may also prove to be significant competitors,
particularly through collaborative arrangements with large pharmaceutical and
biotechnology companies. Furthermore, academic institutions, government agencies
and other public and private research organizations are becoming increasingly
aware of the commercial value of their inventions and are actively seeking to
commercialize the technology they have developed. Accordingly, competitors may
succeed in commercializing products more rapidly or effectively than the
Company, which would have a material adverse effect on the Company.
There Is No Assurance That Our Products Will Have Market Acceptance
The success of the Company will depend in substantial part on the extent to
which a drug product, once approved, achieves market acceptance. The degree of
market acceptance will depend upon a number of factors, including (a) the
receipt and scope of regulatory approvals, (b) the establishment and
demonstration in the medical community of the safety and efficacy of a drug
product, (c) the product's potential advantages over existing treatment methods
and (d) reimbursement policies of government and third party payers. We cannot
predict or guarantee physicians, patients, healthcare insurers, maintenance
organizations, or the medical community in general, will accept or utilize any
drug product of the Company.
Health care reimbursement for any of our products is uncertain. Moreover, the
unavailability of health care reimbursement for any of our products will likely
adversely impact our ability to effectively market such products.
Our ability to commercialize our technology successfully will depend in part on
the extent to which reimbursement for the costs of such products and related
treatments will be available from government health administration authorities,
private health insurers and other third-party payors. Significant uncertainty
exists as to the reimbursement status of newly-approved medical products. We
cannot guarantee adequate third-party insurance coverage will be available to
establish and maintain price levels sufficient for realization of an appropriate
return on investments in developing new therapies. Government, private health
insurers, and other third-party payors are increasingly attempting to contain
health care costs by limiting both coverage and the level of reimbursement for
new therapeutic products approved for marketing by the FDA. Accordingly, even if
coverage and reimbursement were provided by government, private health insurers,
and third-party payers for uses of the Company's products, the market acceptance
of these products would be adversely affected if the amount of reimbursement
available proved to be unprofitable for health care providers.
Uncertainties Related To Health Care Reform Measures May Affect The Company's
Success
There have been a number of federal and state proposals during the last few
years to subject the pricing of health care goods and services, including
prescription drugs, to government control and to make other changes to the U.S.
health care system. It is uncertain which legislative proposals will be adopted
or what actions federal, state, or private payors for health care treatment and
services may take in response to any health care reform proposals or
legislation. We cannot predict the effect health care reforms may have on our
business, and there is no guarantee any such reforms will not have a material
adverse effect on the Company.
Further Testing Of Our Drug Candidates Will Be Required And There Is No
Assurance Of FDA Approval
The FDA and comparable agencies in foreign countries impose substantial
requirements upon the introduction of medical products, through lengthy and
detailed laboratory and clinical testing procedures, sampling activities and
other costly and time-consuming procedures. Satisfaction of these requirements
typically takes several years or more and varies substantially based upon the
type, complexity, and novelty of the product.
The effect of government regulation and the need for FDA approval will delay
marketing of new products for a considerable period of time, impose costly
procedures upon the Company's activities, and provide an advantage to larger
companies considered competitors of the Company. There can be no assurance that
FDA or other regulatory approval for any products developed by the Company will
be granted on a timely basis or at all. Any such delay in obtaining or failure
to obtain, such approvals would materially and adversely affect the marketing of
any contemplated products and the ability to earn product revenue. Further,
regulation of manufacturing facilities by state, local, and other authorities is
subject to change. Any additional regulation could result in limitations or
restrictions on our ability to utilize any of its technologies, thereby
adversely affecting the Company's operations.
24
Human pharmaceutical products are subject to rigorous preclinical testing,
clinical trials, and other approval procedures mandated by the FDA and foreign
regulatory authorities. Various federal and foreign statutes and regulations
also govern or influence the manufacturing, safety, labeling, storage, record
keeping and marketing of pharmaceutical products. The process of obtaining these
approvals and the subsequent compliance with appropriate U.S. and foreign
statutes and regulations is time-consuming and require the expenditure of
substantial resources. In addition, these requirements and processes vary widely
from country to country.
Among the uncertainties and risks of the FDA approval process are the
following: (a) the possibility that studies and clinical trials will fail to
prove the safety and efficacy of the drug, or that any demonstrated efficacy
will be so limited as to significantly reduce or altogether eliminate the
acceptability of the drug in the marketplace, (b) the possibility that the costs
of development, which can far exceed the best of estimates, may render
commercialization of the drug marginally profitable or altogether unprofitable
and (c) the possibility that the amount of time required for FDA approval of a
drug may extend for years beyond that which is originally estimated. In
addition, the FDA or similar foreign regulatory authorities may require
additional clinical trials, which could result in increased costs and
significant development delays. Delays or rejections may also be encountered
based upon changes in FDA policy and the establishment of additional regulations
during the period of product development and FDA review. Similar delays or
rejections may be encountered in other countries.
The Company's Success Will Be Dependent Upon The Licenses And Proprietary Rights
It Receives From Other Parties, And On Any Patents It May Obtain
Our success will depend in large part on the ability of the Company and its
licensors to (a) maintain license and patent protection with respect to their
drug products, (b) defend patents and licenses once obtained, (c) maintain trade
secrets, (d) operate without infringing upon the patents and proprietary rights
of others and (e) obtain appropriate licenses to patents or proprietary rights
held by third parties if infringement should otherwise occur, both in the United
States and in foreign countries. We have obtained licenses to patents and other
proprietary rights from Georgetown University.
The patent positions of pharmaceutical companies, including those of the
Company, are uncertain and involve complex legal and factual questions. There is
no guarantee the Company or its licensors have or will develop or obtain the
rights to products or processes that are patentable, that patents will issue
from any of the pending applications or that claims allowed will be sufficient
to protect the technology licensed to the Company. In addition, we cannot be
certain that any patents issued to or licensed by the Company will not be
challenged, invalidated, infringed or circumvented, or that the rights granted
thereunder will provide competitive disadvantages to the Company.
Litigation, which could result in substantial cost, may also be necessary to
enforce any patents to which the Company has rights, or to determine the scope,
validity and unenforceability of other parties' proprietary rights, which may
affect the rights of the Company. U.S. patents carry a presumption of validity
and generally can be invalidated only through clear and convincing evidence.
There can be no assurance that our licensed patents would be held valid by a
court or administrative body or an alleged infringer would be found to be
infringing. The mere uncertainty resulting from the institution and continuation
of any technology-related litigation or interference proceeding could have a
material adverse effect on the Company pending resolution of the disputed
matters.
We may also rely on unpatented trade secrets and expertise to maintain our
competitive position, which we seek to protect, in part, by confidentiality
agreements with employees, consultants and others. There can be no assurance
these agreements will not be breached or terminated, that we will have adequate
remedies for any breach or that trade secrets will not otherwise become known or
be independently discovered by competitors.
25
The Company's License Agreements May Be Terminated In The Event Of A Breach
The license agreements pursuant to which the Company has licensed its core
technologies for its potential drug products permit the licensors, including
Georgetown University, to terminate such agreements under certain circumstances,
such as the failure by the licensee to use its reasonable best efforts to
commercialize the subject drug or the occurrence of any uncured material breach
by the licensee. The license agreements also provide that the licensor is
primarily responsible for obtaining patent protection for the licensed
technology, and the licensee is required to reimburse the licensor for costs it
incurs in performing these activities. The license agreements also require the
payment of specified royalties. Any inability or failure to observe these terms
or pay these costs or royalties may result in the termination of the applicable
license agreement in certain cases. The termination of any license agreement
would have a material adverse effect on the Company.
Protecting Our Proprietary Rights Is Difficult and Costly
The patent positions of pharmaceutical and biotechnology companies can be
highly uncertain and involve complex legal and factual questions. Accordingly,
we cannot predict the breadth of claims allowed in these companies' patents or
whether the Company may infringe or be infringing on these claims. Patent
disputes are common and could preclude the commercialization of our products.
Patent litigation is costly in its own right and could subject us to significant
liabilities to third parties. In addition, an adverse decision could force us to
either obtain third-party licenses at a material cost or cease using the
technology or product in dispute.
The Company's Success Is Dependent On Our Key Personnel
The Company is dependent on a small management group and on independent
researchers, some of whom are inventors of the patents licensed to the Company
for core technologies and drugs developed at Georgetown University. Scientific
personnel may from time to time serve as consultants to the Company and may
devote a portion of their time to the Company's business, as well as continue to
devote substantial time to the furtherance of the Company's sponsored research
at Georgetown University and at other affiliated institutions, as may be agreed
to in the future. Such personnel are not employees of the Company and are not
bound under written employment agreements. The services of such persons are
important to the Company, and the loss of any of these services may adversely
affect the Company.
Our success is dependent upon the continued services and performance of Dr.
Janet Greeson, our Chief Executive Officer, President and Chairman of the Board
of Directors, and Dr. Vassilios Papadopoulos, Chief Scientist of the Science of
Technology Advisory Committee and our Key Consultant. We do not maintain key man
insurance on either of these individuals. We are currently negotiating a written
employment agreement with Dr. Greeson and have a consulting arrangement with Dr.
Papadopoulos. The loss of their services could delay our product development
programs and our research and development efforts at Georgetown University. In
addition, the loss of Dr. Greeson is grounds for our Research Collaboration with
Georgetown University to terminate. In addition, competition for qualified
employees among companies in the biotechnology and biopharmaceutical industry is
intense and we cannot be assured that we would be able to recruit qualified
personnel on commercially acceptable terms, or at all, to replace them.
We May Be Unable To Retain Skilled Personnel And To Maintain Key Relationships
The success of our business depends, in large part, on our ability to attract
and retain highly qualified management, scientific and other personnel, and on
our ability to develop and maintain important key relationships with leading
research institutions, consultants and advisors. Competition for these types of
personnel and relationships is intense from numerous pharmaceutical and
biotechnology companies, universities and other research institutions. There can
be no assurance that we will be able to attract and retain such individuals on
commercially acceptable terms or at all, and the failure to do so would have a
material adverse effect on the Company.
We Have Sales or Marketing Capabilities to Cover Our Currently Approved Products
Depending on the drug product that is in-licensed or developed through our own
pipeline, the company may have to increase its sales force or rely on marketing
partners or other arrangements with third parties for marketing, distribution
and sale of any drug product that is ready for distribution. There is no
guarantee that we will establish marketing, distribution or sales capabilities
or arrange with third parties to perform those activities on terms satisfactory
to the Company, or that any internal capabilities or third party arrangements
will be cost-effective.
26
In addition, any third parties with which the Company may establish marketing,
distribution or sales arrangements may have significant control over important
aspects of the commercialization of a drug product, including market
identification, marketing methods, pricing, composition of sales force and
promotional activities. There can be no assurance the Company will be able to
control the amount and timing of resources that any third party may devote to
the products of the Company or prevent any third party from pursuing alternative
technologies or products that could result in the development of products that
compete with, and/or the withdrawal of support for, the products of the Company.
The Company Does Not Have Internal Manufacturing Capabilities And May Not Be
Able To Develop Efficient Manufacturing Capabilities Or Contract For Such
Services From Third Parties, Such As Pharmaplaz, LTD, On Commercially Acceptable
Terms
We do not have any manufacturing capacity. When required, we will seek to
establish relationships with third party manufacturers for the manufacture of
clinical trial material and the commercial production of a drug product just as
we have with Pharmaplaz, LTD in Ireland. There can be no assurance that we will
be able to establish relationships with third party manufacturers on
commercially acceptable terms or that third party manufacturers will be able to
manufacture a drug product on a cost-effective basis in commercial quantities
under good manufacturing practices as mandated by the FDA.
The dependence upon third parties for the manufacture of products may adversely
affect future costs and the ability to develop and commercialize a drug product
on a timely and competitive basis. Further, there can be no assurance that
manufacturing or quality control problems will not arise in connection with the
manufacture of the drug product or that third party manufacturers will be able
to maintain the necessary governmental licenses and approvals to continue
manufacturing such products. Any failure to establish relationships with third
parties for its manufacturing requirements on commercially acceptable terms
would have a material adverse effect on the Company.
The Company Does Not Have Its Own Research Facilities and Will Be Dependent On
Third Parties For Drug Development Which Could Subject Us To Product Liability
Claims
We do not have our own research and development facilities and engage
consultants and independent contract research organizations to design and
conduct clinical trials in connection with the development of a drug. As a
result, these important aspects of a drug's development will be outside the
direct control of the Company. In addition, there can be no assurance that such
third parties will perform all of their obligations under arrangements with the
Company or will perform those obligations satisfactorily.
In the future, we anticipate that we will need to obtain additional or
increased product liability insurance coverage and it is uncertain that such
increased or additional insurance coverage can be obtained on commercially
reasonable terms.
The business of the Company will expose us to potential product liability risks
inherent in the testing, manufacturing and marketing of pharmaceutical products.
There can be no assurance that product liability claims will not be asserted
against the Company. We intend to obtain additional limited product liability
insurance for our clinical trials, directly or through its marketing development
partners or CRO (Contract Research Organization) partners, when they begin in
the U.S. and to expand our insurance coverage if and when the Company begins
marketing commercial products. However, there can be no assurance the Company
will be able to obtain product liability insurance on commercially acceptable
terms or the Company will be able to maintain such insurance at a reasonable
cost or in sufficient amounts to protect against potential losses. A successful
product liability claim or series of claims brought against the Company could
have a material adverse effect on the Company.
27
Insurance Coverage Is Increasingly More Difficult To Obtain or Maintain
Obtaining insurance for our business, property and products is increasingly more
costly and narrower in scope, and we may be required to assume more risk in the
future. If we are subject to third party claims or suffer a loss or damage in
excess of our insurance coverage, we may be required to share that risk in
excess of our insurance limits. Furthermore, any first-or-third-party claims
made on any of our insurance policies may impact our ability to obtain or
maintain insurance coverage at reasonable costs or at all in the future.
The Market Price of Our Shares, Like That Of Many Biotechnology Companies, Is
Highly Volatile
Market prices for our Common Stock and the securities of other medical and
biomedical technology companies have been highly volatile and may continue to be
highly volatile in the future. Factors such as announcements of technological
innovations or new products by the Company or its competitors, government
regulatory action, litigation, patent or proprietary rights developments and
market conditions for medical and high technology stocks in general can have a
significant impact on any future market for our Common Stock.
We Are Not Paying Dividends On Our Common Stock
The Company has never paid cash dividends on its Common Stock and does not
intend to do so in the near future.
The Issuance of More Common Shares Or Our Preferred Stock May Adversely Affect
Our Common Stock
The Board of Directors is authorized to issue additional shares of Common Stock
and to designate one (1) or more series of preferred stock and to fix the
rights, preferences, privileges and restrictions thereof. The designation and
issuance of such shares of our preferred stock may adversely affect the Common
Stock if the rights, preferences and privileges of such preferred stock (a)
restrict the declaration or payment of dividends on our Common Stock, (b) dilute
the voting power of our Common Stock, (c) impair the liquidation rights of our
Common Stock or (d) delay or prevent a change in control of the Company from
occurring, among other possibilities.
Under Provisions Of The Company's Articles Of Incorporation, Bylaws And Nevada
Law, The Company's Management May Be Able To Block Or Impede A Change In Control
The issuance of preferred stock may make it more difficult for a third party to
acquire, or may discourage a third party from acquiring, a majority of our
voting stock. These and other provisions in our Articles of Incorporation
(restated as last amended June 10, 2005) and in our Bylaws (restated as last
amended April 18, 2005), as well as certain provisions of Nevada law, could
delay or impede the removal of incumbent Directors and could make it more
difficult to effect a merger, tender offer or proxy contest involving a change
of control of the Company, even if such events could be beneficial to the
interest of the shareholders as a whole. Such provisions could limit the price
that certain investors might be willing to pay in the future for our Common
Stock.
Officers and Directors Liabilities Are Limited Under Nevada Law
Pursuant to the Company's Articles of Incorporation (restated as last amended
June 10, 2005) and Bylaws (restated as last amended April 18, 2005), and as
authorized under applicable Nevada law, Directors are not liable for monetary
damages for breach of fiduciary duty, except in connection with a breach of the
duty of loyalty for (a) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (b) for dividend payments
or stock repurchases illegal under applicable Nevada law or (c) any transaction
in which a Director has derived an improper personal benefit. The Company's
Articles of Incorporation (restated as last amended June 10, 2005) and Bylaws
(restated as last amended April 18, 2005) provide that the Company must
indemnify its officers and Directors to the fullest extent permitted by
applicable Nevada law for all expenses incurred in the settlement of any actions
against such persons in connection with their having served as officers or
Directors.
28
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Securities Unregistered, were sold by the Company in the third quarter of 2006
under an exemption from registration. These shares of common stock were sold for
cash, unless otherwise noted in this section, and were sold in private
transactions to persons believed to be of a class of private investors acting on
their own comprised of accredited investors (as such term is defined in
Regulation D of the SEC) and a limited number of non-accredited investors. All
investors, to the best knowledge of the Company, are not affiliated with the
Company and purchased the shares with apparent investment intent. The Company
relied upon, among other possible exemptions, Section 4(2) of the Securities Act
of 1933 (the "Securities Act"), as amended. Its reliance on said exemption was
based upon the fact no public solicitation was used by the Company in the offer
or sale, and the securities were legended shares, along with a notation at the
respective transfer agent, restricting the shares from sale or transfer as is
customary with reference to Rule 144 of the Securities Act.
The Company completed one (1) private placement during the third quarter: On
September 30, 2006, the Company received a qualified subscription for 1,600,000
shares of common stock at a purchase price of $0.25 per share with no warrants
for total proceeds equal to $400,000.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
The Company has formed, by the determination of the Board, an Audit Committee
with Independent Director Mr. H. Thomas Winn as Chairman. Mr. Winn is a
qualified financial expert, such a term is used in Item 7(d)(3)(iv) of Schedule
14A (240.14a-101 of this chapter) under the Exchange Act of 1934, as amended,
(the "Exchange Act"). The Company has also formed a Compensation and Governance
Committee, with Independent Director, Ms. Cynthia C. Thompson as Chairman; a
Nomination Committee with Independent Director Mr. Welter Holden as Chairman;
and a Science and Technology Advisory Committee with Dr. Vassilios Papadopoulos
as Chief Scientist and Key Consultant to the Board. It should also be noted that
no director or executive officer, key employee or key consultant of the Company
has any family relationships with any other director, executive officer, key
employee or key consultant of the Company, except Mr. Eugene Boyle, our Chief
Financial Officer and Chief Operating Officer, is the son of Dr. Janet Greeson.
On May 30, 2006 the Board of Directors of Samaritan approved and adopted the
Change in Control Severance Plan for Certain Covered Executives and Employees of
Samaritan Pharmaceuticals (the "Plan"), effective May 30, 2006. The Plan is
intended to help avoid the loss and distraction of certain key employees of the
Company in the event of a change in control. The Plan has an initial term of
three years with automatic three-year extensions, unless terminated by the Board
at least six (6) months prior to the end of the then current term.
The Chief Executive Officer, Chief Operating Officer, Senior Vice Presidents,
Vice Presidents, and Directors are eligible to participate in the Plan, and the
Board may designate other employees of the Company as Plan participants. The
Company shall pay or cause to be paid to the participant a cash severance
calculated based on a multiplier of four (4) months of base salary for every
year of service up to maximum in of either twenty four (24) months or thirty six
(36) months depending on the participants job title or job category. The
severance amount equals the applicable multiplier times the sum of (A) the
Participant's highest annual rate of base salary as reported on the
participant's W-2 for employee or on the participant's 1099 for directors within
the thirty six (36) month period immediately preceding the Effective Date of the
change in control and (B) the participant's maximum annual target bonus in
effect upon the date of the change in control under the Company's bonus plan or
the Participant's actual earned commission incentive for the last two quarters,
which will be annualized, prior to the change in Control, not to exceed the
target at 100% of achievement as defined in the Company's Sales Incentive Plan
in effect upon the date of the change in control.
The Plan provides that, if, within three years following a "change in control"
(as defined in the Plan), a participant's employment is terminated by the
Company without "cause" (as defined in the Plan) or by the participant for "good
reason" (as defined in the Plan), the participant is eligible for severance
benefits equal to a multiple of the sum of the participant's base salary and the
higher of the participant's target bonus opportunity during the year in which
the change in control occurs or his or her target bonus opportunity following
the change in control. Each participant will also receive his or her salary
through the date of termination, a pro rata target bonus payment for the year in
which the termination occurs, a pro rata long-term incentive payment to the
extent provided in the Company's Long Term Incentive Plan, and any earned but
unpaid long-term incentive payments or annual bonuses. In the event that a
participant becomes subject to an excise tax under section 280G of the Internal
Revenue Code of 1986, as amended, the participant will generally be entitled to
receive an additional amount such that the participant is placed in the same
after-tax position as if no excise tax had been imposed. The plan may be amended
by the Board at any time, except that no amendment that adversely affects the
rights or potential rights of a participant will be effective in the event that
a change in control occurs within three (3) year of such amendment.
29
On May 30, 2006, the Board of Directors of Samaritan approved and adopted
indemnification agreement forms for certain covered executives and employees of
Samaritan. The Company has entered into indemnification agreements with each of
its current directors and certain of its executive officers and intends to enter
into such Indemnification Agreements with each of its other executive officers
to give such directors and executive officers additional contractual assurances
regarding the scope of the indemnification set forth in the Company's
Certificate of Incorporation and Amended and Restated Bylaws and to provide
additional procedural protections. At present, there is no pending litigation or
proceeding involving a director, officer or employee of the Company regarding
which indemnification is sought, nor is the Company aware of any threatened
litigation that may result in claims for indemnification.
ITEM 6. EXHIBITS AND CURRENT REPORTS ON FORM 8-K
Listed below are all exhibits filed as part of this Quarterly Report on Form
10-Q. Some exhibits are filed by the Company with the SEC pursuant to Rule
12b-32 under the Exchange Act.
EXHIBIT NO. DESCRIPTION LOCATION
2.1 Agreement and Plan of Reorganization Incorporated by reference to Exhibit 2.1 to the
Company's Form 10-SB12G as filed with the SEC on
July 21, 1999
3.1 Articles of Incorporation, restated as last Incorporated by reference to Exhibit 3.1 to the
amended June 10, 2005 Company's Current Report on Form 8-K as filed with
SEC on July 8,2005
3.2 Bylaws, restated as last amended April 18, 2005 Incorporated by reference to Exhibit 3.2 to the
Company's Current Report on Form 8-K as filed with
the SEC on July 21, 1999
4.1 Form of Common Stock Certificate Incorporated by reference to Schedule 14-A
Information Statement as filed with SEC on April
29, 2005 and approved by the shareholders on June
10, 2005
4.2 Amended Samaritan Pharmaceuticals, Inc. 2001 Incorporated by reference to Exhibit 4.2 to the
Stock Option Plan Company's Quarterly Report on Form 10-QSB as filed
with the U.S. Securities
4.3 Samaritan Pharmaceuticals, Inc. 2005 Stock Incorporated by reference to Schedule 14-A
Option Plan Information Statement as filed with the SEC on
April 19, 2005 and approved by the shareholders on
June 10, 2005
10.1 Assignment of Invention, dated September 6, Incorporated by reference to Exhibit 10.1 to the
2000, by and between Linda Johnson and the Company's Quarterly Report on Form-QSB as filed
Company with the SEC on August 14, 2002
10.2 Assignment of Invention, dated May 14, 2999, by Incorporated by reference to Exhibit 10.2 to the
and between Linda Johnson and Spectrum Company's Quarterly Report on Form 10-QSB as filed
Pharmaceuticals Corporation with the SEC on August 14, 2002
10.3 Assignment of Invention, dated May 22, 1990, by Incorporates by reference to Exhibit 10.3 to the
and between Alfred T. Sapse and Spectrum Company's Current Report on form 10-QSB as filed
Pharmaceutical Corporation with the SEC on April 14, 2002
30
10.4 Common Stock Purchase Agreement (Purchase Incorporates by reference to Exhibit 10.1 to the
Agreement I), dated April 22, 2003, by and Company's Current Report on Form 8-K as filed with
between the Company and Fusion Capital Fund II, the SEC on April 25, 2003
LLC
10.5 Registration Rights Agreement, dated April 22, Incorporates by reference to Exhibit 10.2 to the
2003, by and between the Company and Fusion Company's Current Report on Form 8-K as filed with
Capital Fund II, LLC the SEC on April 25, 2003
10.6 Employment Agreement dated as of January 1, Incorporated by reference t Exhibit 10.6 to the
2001, by and between Samaritan Pharmaceuticals, Company's Quarterly Report on Form 10-QSB as filed
Inc. and Mr. Thomas Lang with the SEC on August 16, 2004
10.7 Form of Trust Under Samaritan Pharmaceuticals, Incorporated by reference to Exhibit 10.10 to the
Inc. Deferred Compensation Plan Company's Quarterly Report on Form 10-QSB as filed
with the U.S. Securities and Exchange Commission
on August 14, 2002
10.8 Employment Agreement, dated as of June 1, 2004, Incorporated by reference to Exhibit 10.8 to the
by and between Samaritan Pharmaceuticals, Inc. Company's Quarterly Report on Form 10-QSB as filed
and Eugene Boyle with the SEC on August 14, 2002
10.9 Employment Agreement, dated as of January 1, Incorporated by reference to Exhibit 10.9 to the
2001, by and between Samaritan Pharmaceuticals, Company's Quarterly Report on Form 10-QSB as filed
Inc. and Janet Greeson with the SEC on August 14, 2002
10.10 Master Clinical Trial and Full Scale Incorporated by reference to Exhibit 10.10 to the
Manufacturing Agreement, dated October 5, 2004, Company's Quarterly Report on Form 10-QSB as filed
by and between the Company and Pharmaplaz, LTD with the SEC on November 15, 2004
10.11 Common Stock Purchase Agreement (Purchase Incorporated by reference to Exhibit 10.11 to the
Agreement II), dated May 12, 2005, by and Company's Quarterly Report on Form 10-QSB as filed
between the Company and Fusion Capital Fund II, with the SEC on May 13, 2005
LLC
10.12 Amendment to Common Stock Purchase Agreement, Incorporated by reference to Exhibit 10.12 to the
dated December 19, 2005, by and between the Company's Registration Statement on Form SB-2 as
Company and Fusion Capital Fund II, LLC filed with the SEC on December 15, 2005
10.13 Registration Rights Agreement, dated May 12, Incorporates by reference to Exhibit 10.12 to the
2005, by and between the Company and Fusion Company's Quarterly Report on Form 10-QSB as filed
Capital Fund II, LLC with the SEC on May 13, 2005
10.14 Norbrook Supply Agreement Incorporated by reference to Exhibit 1 to the
Company's Current Report on Form 8-K as filed with
the SEC on September 27, 2005
10.15 Research Collaboration and Licensing Agreement, Incorporated by reference to Exhibit 10.10 to the
dated June 8, 2001, by and between the Company Company's Registration Statement on Form SB-2 as
and Georgetown University filed with the SEC on July 30, 2003
10.16 Change in Control Severance Plan for Certain Incorporated by reference to Exhibit 10.16 to the
Covered Executives and Employees of Samaritan Company's Quarterly Report on Form 10-Q as filed
Pharmaceuticals, Inc. with the SEC on August 14, 2006
10.17 Samaritan Pharmaceuticals, Inc.'s Incorporated by reference to Exhibit 10.17 to the
Director/Officer's Indemnification Agreement Company's Quarterly Report on Form 10-Q as filed
with the SEC on August 14, 2006
10.18 Stock Purchase Agreement among: Samaritan, Provided herewith
Metastatin and Metastatin Shareholders
14.1 The Samaritan Pharmaceuticals, Inc. Code of Incorporated by reference to Exhibit 14.1 to the
Conduct Company's Annual Report on Form 10-KSB as filed
with the SEC on April 15, 2003
16.1 Letter Regarding Change in Certifying Accountant Incorporated by reference to Exhibit 16.1 to the
Company's Quarterly Report on Form 8-K as filed
with the SEC on September 27, 2002
21 List of Subsidiaries Incorporated by reference to Exhibit 21 to the
Company's Quarterly Report on Form 10-Q as filed
with the SEC on May 15, 2006
31
31.1 Certification of Chief Executive Officer re: Provided herewith
Section 302
31.2 Certification of Chief Financial Officer re: Provided herewith
Section 302
32.1 Certification of Chief Executive Officer re: Provided herewith
Section 906
32.2 Certification of Chief Financial Officer re: Provided herewith
Section 906
(B) Current Reports on Form 8-K Filed During The Quarter Ended
September 30, 2006
None.
SIGNATURES
In accordance with Section 13 OR 15 (d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SAMARITAN PHARMACEUTICALS, INC
Dated: November 14, 2006
By: /s/ Eugene Boyle
--------------------------
Eugene Boyle,
Chief Financial Officer,
Director