VICP 10-K
Vicapsys Life Sciences, Inc. (VICP)
UNITED STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C. 20549
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| 2834 | ||||
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Documents Incorporated by Reference
Table of Contents
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K contains forward-looking statements. The Securities and Exchange Commission (the “SEC”) encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This annual report on Form 10-K and other written and oral statements that we make from time to time contain such forward-looking statements that set out anticipated results based on management’s plans and assumptions regarding future events or performance. We have tried, wherever possible, to identify such statements by using words such as “project”, “believe”, “anticipate”, “plan”, “expect”, “estimate”, “intend”, “should”, “would”, “could”, or “may”, or other such words, verbs in the future tense and words and phrases that convey similar meaning and uncertainty of future events or outcomes to identify these forward–looking statements. There are a number of important factors beyond our control that could cause actual results to differ materially from the results anticipated by these forward–looking statements. While we make these forward–looking statements based on various factors and using numerous assumptions, there is no assurance the factors and assumptions will prove to be materially accurate when the events they anticipate actually occur in the future. Factors that could cause our actual results of operations and financial condition to differ materially are discussed in greater detail under Item 1A, “Risk Factors” of this annual report on Form 10-K.
The forward–looking statements are based upon our beliefs and assumptions using information available at the time we make these statements. We caution you not to place undue reliance on our forward–looking statements as (i) these statements are neither predictions nor guaranties of future events or circumstances, and (ii) the assumptions, beliefs, expectations, forecasts and projections about future events may differ materially from actual results. We undertake no obligation to publicly update any forward–looking statement to reflect developments occurring after the date of this annual report on Form 10-K.
PART I
Item 1. Business
ORGANIZATION
Vicapsys Life Sciences, Inc. (“VLS” or the “Company”) was incorporated in the State of Florida on July 8, 1997 under the name All Product Distribution Corp. On August 19, 1998, the Company changed its name to Phage Therapeutics International, Inc. On November 13, 2007, the Company changed its name to SSGI, Inc. On September 13, 2017, the Company changed its name to Vicapsys Life Sciences, Inc., effected a 1-for-100 reverse stock split of its outstanding common stock, increased the Company’s authorized capital stock to 300,000,000 shares of common stock, par value $0.001 per share, and 20,000,000 shares of “blank check” preferred stock, par value $0.001 per share. On December 22, 2017, pursuant to a Share Exchange Agreement (the “Exchange Agreement”) by and among VLS, Michael W. Yurkowsky, ViCapsys, Inc. (“VI”) and the shareholders of VI, VI became a wholly owned subsidiary of VLS. We refer to VLS and VI together as the “Company”. VLS serves as the holding company for VI. Other than its interest in VI, VLS does not have any material assets or operations.
The Company’s strategy is to develop and commercialize, on a worldwide basis, various intellectual property rights (patents, patent applications, know how, etc.) relating to a series of encapsulated product candidates that incorporate proprietary derivatives of the chemokine CXCL12 for creating a zone of immunoprotection around cells, tissues, organs and devices for therapeutic purposes. The product name VICAPSYN™ is the Company’s line of proprietary product candidates that is applied to transplantation therapies and related stem-cell applications in the transplantation field. The lead product candidate embodiment in transplantation therapy to treat Type 1 Diabetes (“T1D”) is an encapsulated human islet cell cluster that is intended to restore normal glucose control when implanted into the peritoneal cavity of a patient. During the research and development process in transplantation, the Company and its related academic researchers had a novel and unexpected finding. The transplanted islet clusters were absolutely free of any signs of fibrotic encapsulation. This anti-fibrotic effect was reconfirmed in additional research studies and the Company has now moved into the development of another product candidate line based on CXCL12 with the trade name of VYBRIN™. The clinical applications of VYBRIN™ are being explored in several areas including (1) prevention of post-surgical adhesions in abdominal surgery, (2) coating of implantable medical devices and other implants to eliminate fibrosis and (3) wound healing with a focus on diabetic ulcers.
MGH License Agreement
On May 8, 2013, VI and MGH, a principal stockholder (see Note 6), entered into the License Agreement, pursuant to which MGH granted to the Company, in the field of coating and transplanting cells, tissues and devices for therapeutic purposes, on a worldwide basis: (i) an exclusive, royalty-bearing license under its rights in Patent Rights (as defined in the License Agreement) to make, use, sell, lease, import and transfer Products and Processes (each as defined in the License Agreement); (ii) a non-exclusive, sub-licensable (solely in the License Field and License Territory (each as defined in the License Agreement)) royalty-bearing license to Materials (as defined in the License Agreement) and to make, have made, use, have used, Materials for only the purpose of creating Products, the transfer of Products and to use, have used and transfer processes; (iii) the right to grant sublicenses subject to and in accordance with the terms of the License Agreement, and (iv) the nonexclusive right to use technological information (as defined in the License Agreement) disclosed by MGH to the Company under the License Agreement, all subject to and in accordance with the License Agreement (the “License”).
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As amended by the Eighth Amendment to the License Agreement on March 14, 2022 (“Effective Date”), which replaces the prior pre-sales due diligence requirements in their entirety, the License Agreement requires that the Company satisfy the following requirements prior to the first sale of Products (“MGH License Milestones”), by certain dates.
Pre-Sales Diligence Requirement:
| (x) | The Company shall provide a detailed business plan and development plan by June 1st, 2022. As of the date of this filing the Company has yet to submit the business and development plan and is negotiating the extension of this requirement with MGH. | |
| (xi) | The Company shall raise $2 million in financing by December 1st, 2022. As of the date of this filing the Company has yet to raise $2 million and is negotiating the extension of this requirement with MGH. | |
| (xii) | The Company shall raise an additional $8 million in financing by December 1st, 2023. | |
| (xiii) | The Company shall initiate research regarding the role of CXCL12 in beta cell function and differentiation by January 1st, 2023. | |
| (xiv) | The Company shall initiate diabetic non-human primate studies using cadaveric islets encapsulated in the CXCL12 technology by March 1st, 2023. | |
| (xv) | The Company shall initiate research regarding other applications of the CXCL12 platform by June 1st, 2023. | |
| (xvi) | The Company shall initiate a Phase I clinical trial of a Product or Process by March 1st, 2024. | |
| (xvii) | The Company shall initiate a Phase II clinical trial of a Product or Process within thirteen (13) years from Effective Date. | |
| (xviii) | The Company shall initiate Phase III clinical trial of a Product or Process within sixteen (16) years from Effective Date. |
Additionally, as amended by the Eighth Amendment to the License Agreement on March 14, 2022, which replaces the prior post-sales due diligence requirements in their entirety, the License Agreement requires that the Company satisfy the following requirements post-sales of Products (“MGH License Milestones”), by certain dates.
Post-Sales Diligence Requirements:
| (i) | The Company shall itself or through an Affiliate or Sublicensee make a First Commercial Sale within the following countries and regions in the License Territory within eighteen (18) years after the Effective Date of this Agreement: US and Europe and China or Japan. | |
| (ii) | Following the First Commercial Sale in any country in the License Territory, Company shall itself or through its Affiliates and/or Sublicensees use commercially reasonable efforts to continue to make Sales in such country without any elapsed time period of one (1) year or more in which such Sales do not occur due to lack such efforts by Company. |
In consideration of the update to the diligence milestones, the Company shall pay the following Annual Minimum Royalty payments:
| (i) | Prior to the First Commercial Sale, the Company shall pay to MGH a non-refundable annual license fee of ten thousand dollars ($10,000) by June 30, 2022, and on each subsequent anniversary of the Eighth Amendment Effective Date thereafter. The non-refundable annual license fee was paid on July 1, 2022. | |
| (ii) | Following the First Commercial Sale, Company shall pay MGH a non-refundable annual minimum royalty in the amount of one hundred thousand dollars United States Dollars ($100,000) per year within sixty (60) days after each annual anniversary of the Effective Date. The annual minimum royalty shall be credited against royalties subsequently due on Net Sales made during the same calendar year, if any, but shall not be credited against royalties due on Net Sales made in any other year. |
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The License Agreement also requires VI to pay to MGH a 1% royalty rate on net sales related to the first license sub-field, which is the treatment of Type 1 Diabetes (“T1D”). Future sub-fields shall carry a reasonable royalty rate, consistent with industry standards, to be negotiated at the time the first such royalty payment shall become due with respect to the applicable Products and Processes (as defined in the License Agreement).
The License Agreement additionally requires VI to pay to MGH a $1.0 million “success payment” within 60 days after the first achievement of total net sales of Product or Process equal to or to exceed $100,000,000 in any calendar year and $4,000,000 within 60 days after the first achievement of total net sales of Product or Process equal or exceed $250,000,000 in any calendar year. The Company is also required to reimburse MGH’s expenses in connection with the preparation, filing, prosecution and maintenance of all Patent Rights.
The License Agreement expires on the later of (i) the date on which all issued patents and filed patent applications within the Patent Rights have expired (November 2033) or have been abandoned, and (ii) one year after the last sale for which a royalty is due under the License Agreement.
The License Agreement also grants MGH the right to terminate the License Agreement if VI fails to make any payment due under the License Agreement or defaults in the performance of any of its other obligations under the License Agreement, subject to certain notice and rights to cure set forth therein. MGH may also terminate the License Agreement immediately upon written notice to VI if VI: (i) shall make an assignment for the benefit of creditors; or (ii) or shall have a petition in bankruptcy filed for or against it that is not dismissed within 60 days of filing. As of the date of this filing, this License Agreement remains active and the Company has not received any termination notice from MGH.
VI may terminate the License Agreement prior to its expiration by giving 90 days’ advance written notice to MGH, and upon such termination shall, subject to the terms of the License Agreement, immediately cease all use and sales of Products and Processes.
As of the date hereof, there have not been any sales of product or process under this License Agreement.
Manufacturing
We intend to contract primarily with small and medium-sized manufacturers that are subject to FDA compliance and approval standards. These manufacturers are highly innovative and cost effective because of their streamlined sales infrastructures. All of our manufacturing partners will be qualified to manufacture under the FDA’s Quality System Regulations/ISO 13485 standards. The Company intends to retain in-house the quality assurance function so that we can approve all products prior to their release to market. We also intend to utilize high quality software in an effort to assure that our products remain compliant throughout all operations. The Company believes that there are no significant issues with availability of needed materials that would prevent us from meeting the projected market demand for our initial products in a timely manner. Packaging design and manufacturing will be outsourced to one or more experienced medical device packaging companies. The Company believes that this will allow for accelerated time to market and optimizing the shelf life of those products that are pre-packaged sterile.
Our Market
We intend to develop therapeutic products for treatment of T1D. A 2020 report from Centers for Disease Control and Prevention (the “CDC”) shows a nearly 30% increase in T1D diagnoses in the United States, with youth cases growing most sharply among diverse populations. The CDC’s 2020 National Diabetes Statistics Report cites that in the United States, T1D diagnoses included 1.4 million adults, 20 years and older, and 187,000 children younger than 20.
That totals nearly 1.6 million Americans with T1D—up from 1.25 million people—or nearly 30% from 2017.
A separate CDC report, focused on T1D in youth, showed that T1D is growing most sharply in African American and Hispanic youth populations. As the reason is unknown, the CDC is advocating for continued “surveillance” of T1D in today’s youth populations.
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According to the report, between 2002 and 2015:
| ● | T1D cases among African American children increased by 20% with 20.8 children diagnosed per 100,000 | |
| ● | T1D cases among Hispanic children increased nearly 20% with 16.3 per 100,000 | |
| ● | T1D cases among Asian / Pacific Island children increased 19% with 9.4 per 100,000 | |
| ● | White children are the slowest growing demographic with a 14% increase, yet remain the most impacted group with 27.3 T1D cases per 100,000 |
The report also showed that diagnoses occurred most frequently between the ages of 5 and 14.
| ● | 33.5% were ages 10-14 | |
| ● | 27% were 5-9 |
The latest CDC data further demonstrates that despite all the progress in managing the disease, our community’s needs are growing and the need to respond is even more urgent today.
Competition
We are engaged in rapidly evolving industries. Competition from other pharmaceutical companies and from other research and academic institutions is intense and expected to increase. Many of these companies have substantially greater financial and other resources and development capabilities than we do, have substantially greater experience in undertaking pre-clinical and clinical testing of products, and are commonly regarded in the pharmaceutical industries as very aggressive competitors. In addition to competing with universities and other research institutions in the development of products, technologies and processes, we compete with other companies in acquiring rights to products or technologies from universities. There can be no assurance that we can develop products that are more effective or achieve greater market acceptance than competitive products, that we can convince physicians, hospitals and patients of the benefits of our technology, or that our competitors will not succeed in developing products and technologies that are more effective than those being developed by us and that would therefore render our products and technologies less competitive or even obsolete.
Several companies are developing therapies to treat T1D. The companies listed below are select competitors that are specifically developing competitively or potentially competitive transplant technologies for treatment of T1D.
| ● | ViaCyte Inc. develops human embryonic stem cells that differentiate into pancreatic progenitor cells. We believe they are one of our most significant and advanced competitors, as they announced on August 1, 2017 that the first patients have been implanted with the PEC-Direct™ product candidate, an islet cell replacement therapy in development as a functional cure for patients with T1D who are at high risk for acute life-threatening complications. ViaCyte has established a collaboration with W.L. Gore & Associates, the makers of Goretex to created devices for implantation and protection of transplanted islets. ViacCte is currently recruiting for a Phase 1/II clinical trial (NCT03163511). | |
| ● | Sernova Corp. is a microcap company trading on the Toronto, Canada exchange that has developed a macro-cell pouch system for encapsulating cadaveric (allo-) islets that is currently in a Phase 1/II clinical trial. In July 2019, Sernova reported interim analysis demonstrating the cell pouch transplanted with islet cells showed initial safety as well as key efficacy measures. | |
| ● | Beta O2 Technologies Ltd. (Rosh-Haayin, Israel). A biomedical company developing an implantable device, the BetaAir, to encapsulate islet cells for the treatment of T1D. They are in the process of changing from a device that requires external infusion of oxygen into their encapsulation device containing islet cells. Last public information was in 2015. The current status of Beta O2 Technologies Ltd. is unclear. | |
| ● | DefyMed (Strasbourg, France): Defymed was founded in 2011 to develop implantable bio-artificial medical devices for diverse therapeutic applications, with a first focus on T1D. The diabetes product, named MAILPAN® (Macro- encapsulation of PANcreatic Islets), is a result of work done by the Centre Europeen d’etude du Diabete (CeeD), STATICE and the Centre de Transfert de Technologies du Mans (CTTM). The Mailpan system which is still in preclinical development uses non-biodegradable, biocompatible membranes for selective diffusion of insulin and glucose while protecting implanted stem-cell derived beta cells. |
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| ● | Sigilon Therapeutics is a discovery-based platform combines cell engineering and its proprietary Afibromer™ technology, a new class of implantable biomaterials that do not trigger fibrosis. The company will develop products that emerge from its discovery platform to treat serious hematologic, enzyme deficiency and endocrine disorders –including T1D. Sigilon partnered with Lilly on the T1D indication in April 2018 but no recent information is available on the status of the partnership. | |
| ● | Novo Nordisk has a stem cell line that differentiates into beta cells and one of the largest diabetes franchises in the world. In collaboration with Cornell researchers they have developed a hydrogel-based nanofiber encapsulation device with macroscopic dimensions. Currently appears to be in pre-clinical development. | |
| ● | Sanofi and Evotec formed a partnership to jointly develop a beta cell replacement therapy for the treatment of diabetes in a deal that could reach more than 300 million Euros in potential milestone payments. Evotec achieved a milestone in 2018 for a manufacturing process for generation of iPSC-derived beta cells including scale-up. Collaboration is still in the pre-clinical phase. |
Several companies have developed and are continuing to develop products and treatments to treat scar formation and/or internal adhesions resulting from the fibrosis process, which may compete with the products and treatments that we develop.
The following selected companies are developing products to treat scar formation and/or internal adhesions:
| ● | Baxter Healthcare has been marketing Adept®, a liquid solution for adhesion reduction, for gynecologic laparoscopic adhesiolysis indications since 2006.. Baxter’s Adept solution has been extensively studied and its ability to prevent adhesions is controversial. Baxter Healthcare also markets COSEAL®, a synthetic hydrogel used in patients undergoing cardiac or abdomino-pelvic surgery to prevent or reduce the incidence, severity and extent of postsurgical adhesion formation. In February 2020, Baxter acquired the Sanofi franchise for Seprafilm Adhesion Barrier, a mechanical bioresorbable adhesion barrier that is indicated for the reduction in the incidence, extent, and severity of postoperative adhesions in patients undergoing abdominal or pelvic laparotomy. While Seprafilm is regarded as an effective barrier, challenges with respect to placement remain and limit its widespread use. | |
| ● | Gynecare Worldwide, a division of Ethicon, Inc., a Johnson & Johnson company, markets Interceed®, a sheet adhesion barrier similar in intended use to Seprafilm but is indicated only for selected open gynecological indications. | |
| ● | FzioMed, Inc. has received CE Mark approval in the European Union for Oxiplex®/AP Gel, an adhesion barrier for abdominal/pelvic surgery, and is conducting a clinical trial in the U.S., which is expected to be completed by December 2020. Fziomed has announced a global distribution agreement with Ethicon for distribution of Oxiplex/AP Gel. | |
| ● | Covidien introduced SprayShield®, an adhesion barrier used in abdominopelvic procedures, that is approved for sale in Europe. In 2013, Covidien sold the SprayShield product line to Integra Life Sciences. |
Research and Development
The Company is primarily engaged in preclinical testing of CXCL12 and delivery systems associated with the treatment of T1D. Costs and expenses that can be clearly identified as research and development are charged to expense as incurred. For the years ended December 31, 2022, and 2021, the Company recorded $13,097 and $17,698, respectively, of research and development expenses to a related party.
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Intellectual Property
We strive to protect and enhance the proprietary technology, inventions and improvements that we believe are commercially important to our business by seeking, maintaining, and defending patent rights, whether developed internally or licensed from third parties existing and planned therapeutic programs. We also rely on trade secret protection and confidentiality agreements to protect our proprietary technologies and know-how to protect aspects of our business that are not amenable to, or that we do not consider appropriate for, patent protection, as well as continuing technological innovation and in-licensing opportunities to develop, strengthen and maintain our proprietary position in the field of cellular therapies.
We will additionally rely on trademark protection, copyright protection and regulatory protection available via orphan drug designations, data exclusivity, market exclusivity, and patent term extensions. Our success will depend significantly on our ability to defend and enforce our intellectual property rights and our ability to operate without infringing any valid and enforceable patents and proprietary rights of third parties.
Patents and Copyrights
We do not currently own any patents or copyrights. Pursuant to our License Agreement with MGH, MGH granted us, in the field of coating and transplanting cells, tissues and devices for therapeutic purposes, on a worldwide basis: (i) an exclusive, royalty-bearing license under its rights in Patent Rights (as defined in the License Agreement) to make, use, sell, lease, import and transfer Products and Processes (each as defined in the License Agreement); (ii) a non-exclusive, sub-licensable (solely in the License Field and License Territory (each as defined in the License Agreement)) royalty- bearing license to Materials (as defined in the License Agreement) and to make, have made, use, have used, Materials for only the purpose of creating Products, the transfer of Products and to use, have used and transfer Processes; (iii) the right to grant sublicenses subject to and in accordance with the terms of the License Agreement, and (iv) the nonexclusive right to use Technological Information (as defined in the License Agreement) disclosed by MGH to the Company under the License Agreement, all subject to and in accordance with the License Agreement.
Trademarks
The table below sets forth information about our two trademarks:
| Trademark: | Serial No: | Status: | Owner: | Issue Date: | Filing Date: | Published for Opposition: | Goods and Services: | |||||||
| VICAPSYN | 87608595 | 731 - Second Extension - Granted | Vicapsys, Inc. | 4/10/2019 | 9/14/2017 | 2/23/2018 | Cells for medical or clinical use, namely, implantable and insulin producing pancreatic cells | |||||||
| VYBRIN | 87657573 | First Extension - Granted 7/15/2019 | Vicapsys, Inc. | 10/24/2017 | 7/31/2018 | Pharmaceutical preparations, namely, liquid compositions for application to human tissue for reducing fibrosis, scarring and keloid formation for use by medical professionals, namely, surgeons |
Government Regulation
Government authorities in the United States, at the federal, state and local level, and in other countries and jurisdictions, including the European Union, extensively regulate, among other things, the research, development, testing, manufacture, quality control, approval, packaging, storage, recordkeeping, labeling, advertising, promotion, distribution, marketing, post-approval monitoring and reporting, and import and export of pharmaceutical products, including biological products. Some jurisdictions outside of the United States also regulate the pricing of such products. The processes for obtaining marketing approvals in the United States and in other countries and jurisdictions, along with subsequent compliance with applicable statutes and regulations and other regulatory authorities, require the expenditure of substantial time and financial resources.
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Licensure and Regulation of Biologics in the United States
In the United States, our product candidates are regulated as biological products, or biologics, under the Public Health Service Act or PHSA, and the Federal Food, Drug, and Cosmetic Act, or FDCA, and their implementing regulations. The failure to comply with the applicable U.S. requirements at any time during the product development process, including nonclinical testing, clinical testing, the approval process or post-approval process, may subject an applicant to delays in the conduct of a study, regulatory review and approval, and/or administrative or judicial sanctions.
These sanctions may include, but are not limited to, the FDA’s refusal to allow an applicant to proceed with clinical testing, refusal to approve pending applications, license suspension or revocation, withdrawal of an approval, untitled or warning letters, adverse publicity, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, and civil or criminal investigations and penalties brought by the FDA or the Department of Justice, or DOJ, or other governmental entities. An applicant seeking approval to market and distribute a new biologic in the United States generally must satisfactorily complete each of the following steps:
| ● | preclinical laboratory tests, animal studies and formulation studies all performed in accordance with the FDA’s Good Laboratory Practice, or GLP, regulations; | |
| ● | submission to the FDA of an Investigational New Drug, or IND, application for human clinical testing, which must become effective before human clinical trials may begin; | |
| ● | approval by an independent institutional review board, or IRB, representing each clinical site before each clinical trial may be initiated, or by a central IRB if appropriate; | |
| ● | performance of adequate and well-controlled human clinical trials to establish the safety, potency, and purity of the product candidate for each proposed indication, in accordance with the FDA’s Good Clinical Practice, or GCP, regulations; | |
| ● | preparation and submission to the FDA of a Biologics License Application, or BLA, for a biologic product requesting marketing for one or more proposed indications, including submission of detailed information on the manufacture and composition of the product and proposed labeling; | |
| ● | review of the product by an FDA advisory committee, where appropriate or if applicable; | |
| ● | satisfactory completion of one or more FDA inspections of the manufacturing facility or facilities, including those of third parties, at which the product, or components thereof, are produced to assess compliance with cGMP requirements and to assure that the facilities, methods, and controls are adequate to preserve the product’s identity, strength, quality, and purity, and, if applicable, the FDA’s current good tissue practice, or CGTP, for the use of human cellular and tissue products; | |
| ● | satisfactory completion of any FDA audits of the nonclinical study and clinical trial sites to assure compliance with GLPs and GCPs, respectively, and the integrity of clinical data in support of the BLA; | |
| ● | payment of user fees and securing FDA approval of the BLA; | |
| ● | compliance with any post-approval requirements, including the potential requirement to implement a Risk Evaluation and Mitigation Strategy, or REMS, adverse event reporting, and compliance with any post-approval studies required by the FDA; and | |
| ● | Preclinical Studies and Investigational New Drug Application. |
Before testing any biologic product candidate in humans, including a gene therapy product candidate, the product candidate must undergo preclinical testing. Preclinical tests include laboratory evaluations of product chemistry, formulation and stability, as well as studies to evaluate the potential for efficacy and toxicity in animals. The conduct of the preclinical tests and formulation of the compounds for testing must comply with federal regulations and requirements. The results of the preclinical tests, together with manufacturing information and analytical data, are submitted to the FDA as part of an IND application.
The IND automatically becomes effective 30 days after receipt by the FDA, unless before that time the FDA imposes a clinical hold based on concerns or questions about the product or conduct of the proposed clinical trial, including concerns that human research subjects would be exposed to unreasonable and significant health risks. In that case, the IND sponsor and the FDA must resolve any outstanding FDA concerns before the clinical trials can begin.
As a result, submission of the IND may result in the FDA not allowing the trials to commence or allowing the trial to commence on the terms originally specified by the sponsor in the IND. If the FDA raises concerns or questions either during this initial 30-day period, or at any time during the conduct of the IND study, including safety concerns or concerns due to non-compliance, it may impose a partial or complete clinical hold. This order issued by the FDA would delay either a proposed clinical study or cause suspension of an ongoing study, until all outstanding concerns have been adequately addressed and the FDA has notified the company that investigations may proceed or recommence but only under terms authorized by the FDA. This could cause significant delays or difficulties in completing planned clinical studies in a timely manner.
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Human Clinical Trials in Support of a BLA
Clinical trials involve the administration of the investigational product candidate to healthy volunteers or patients with the disease to be treated under the supervision of a qualified principal investigator in accordance with GCP requirements. Clinical trials are conducted under study protocols detailing, among other things, the objectives of the study, inclusion and exclusion criteria, the parameters to be used in monitoring safety, and the effectiveness criteria to be evaluated. A protocol for each clinical trial and subsequent protocol amendments must be submitted to the FDA as part of the IND.
A sponsor who wishes to conduct a clinical trial outside the United States may, but need not, obtain FDA authorization to conduct the clinical trial under an IND. If a non-U.S. clinical trial is not conducted under an IND, the sponsor may submit data from a well-designed and well-conducted clinical trial to the FDA in support of the BLA so long as the clinical trial is conducted in compliance with GCP and the FDA is able to validate the data from the study through an onsite inspection if the FDA deems it necessary.
Further, each clinical trial must be reviewed and approved by an independent institutional review board, or IRB, either centrally or individually at each institution at which the clinical trial will be conducted. The IRB will consider, among other things, clinical trial design, subject informed consent, ethical factors, and the safety of human subjects. An IRB must operate in compliance with FDA regulations. The FDA or the clinical trial sponsor may suspend or terminate a clinical trial at any time for various reasons, including a finding that the clinical trial is not being conducted in accordance with FDA requirements or the subjects or patients are being exposed to an unacceptable health risk. Similarly, an IRB can suspend or terminate approval of a clinical trial at its institution if the clinical trial is not being conducted in accordance with the IRB’s requirements or if the drug has been associated with unexpected serious harm to patients. Clinical testing also must satisfy extensive GCP rules and the requirements for informed consent. Additionally, some clinical trials are overseen by an independent group of qualified experts organized by the clinical trial sponsor, known as a data safety monitoring board or committee. This group may recommend continuation of the study as planned, changes in study conduct, or cessation of the study at designated check points based on access to certain data from the study. Finally, research activities involving infectious agents, hazardous chemicals, recombinant DNA, and genetically altered organisms and agents may be subject to review and approval of an Institutional Biosafety Committee, or IBC, a local institutional committee that reviews and oversees basic and clinical research conducted at that institution established under the National Institutes of Health, or NIH, Guidelines for Research Involving Recombinant or Synthetic Nucleic Acid Molecules, or NIH Guidelines. The IBC assess the safety of the research and identifies any potential risk to public health or the environment.
Clinical trials typically are conducted in three sequential phases, but the phases may overlap or be combined. Additional studies may be required after approval.
| ● | Phase 1 clinical trials are initially conducted in a limited population to test the product candidate for safety, including adverse effects, dose tolerance, absorption, metabolism, distribution, excretion, and pharmacodynamics in healthy humans or, on occasion, in patients, such as cancer patients. | |
| ● | Phase 2 clinical trials are generally conducted in a limited patient population to identify possible adverse effects and safety risks, evaluate the efficacy of the product candidate for specific targeted indications and determine dose tolerance and optimal dosage. Multiple Phase 2 clinical trials may be conducted by the sponsor to obtain information prior to beginning larger and costlier Phase 3 clinical trials. | |
| ● | Phase 3 clinical trials are undertaken within an expanded patient population to further evaluate dosage and gather the additional information about effectiveness and safety that is needed to evaluate the overall benefit-risk relationship of the drug and to provide an adequate basis for physician labeling. |
Progress reports detailing the results, if known, of the clinical trials must be submitted at least annually to the FDA. Written IND safety reports must be submitted to the FDA and the investigators within 15 calendar days after determining that the information qualifies for reporting. IND safety reports are required for serious and unexpected suspected adverse events, findings from other studies or animal or in vitro testing that suggest a significant risk to humans exposed to the drug, and any clinically important increase in the rate of a serious suspected adverse reaction over that listed in the protocol or investigator brochure. Additionally, a sponsor must notify FDA within 7 calendar days after receiving information concerning any unexpected fatal or life-threatening suspected adverse reaction.
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In some cases, the FDA may approve a BLA for a product candidate but require the sponsor to conduct additional clinical trials to further assess the product candidate’s safety and effectiveness after approval. Such post-approval trials are typically referred to as Phase 4 clinical trials. These studies are used to gain additional experience from the treatment of patients in the intended therapeutic indication and to document a clinical benefit in the case of biologics approved under accelerated approval regulations. Failure to exhibit due diligence with regard to conducting Phase 4 clinical trials could result in withdrawal of approval for products.
Compliance with cGMP and CGTP Requirements
Before approving a BLA, the FDA typically will inspect the facility or facilities where the product is manufactured. The FDA will not approve an application unless it determines that the manufacturing processes and facilities are in full compliance with cGMP requirements and adequate to assure consistent production of the product within required specifications. The PHSA emphasizes the importance of manufacturing control for products like biologics whose attributes cannot be precisely defined.
For a gene therapy product, the FDA also will not approve the product if the manufacturer is not in compliance with CGTP. These requirements are found in FDA regulations that govern the methods used in, and the facilities and controls used for, the manufacture of human cells, tissues, and cellular and tissue-based products, or HCT/Ps, which are human cells or tissue intended for implantation, transplant, infusion, or transfer into a human recipient. The primary intent of the CGTP requirements is to ensure that cell and tissue-based products are manufactured in a manner designed to prevent the introduction, transmission, and spread of communicable disease. FDA regulations also require tissue establishments to register and list their HCT/Ps with the FDA and, when applicable, to evaluate donors through screening and testing
Manufacturers and others involved in the manufacture and distribution of products must also register their establishments with the FDA and certain state agencies for products intended for the U.S. market, and with analogous health regulatory agencies for products intended for other markets globally. Both U.S. and non-U.S. manufacturing establishments must register and provide additional information to the FDA and/or other health regulatory agencies upon their initial participation in the manufacturing process. Any product manufactured by or imported from a facility that has not registered, whether U.S. or non-U.S., is deemed misbranded under the FDCA, and could be affected by similar as well as additional compliance issues in other jurisdictions. Establishments may be subject to periodic unannounced inspections by government authorities to ensure compliance with cGMPs and other laws. Manufacturers may also have to provide, on request, electronic or physical records regarding their establishments.
Delaying, denying, limiting, or refusing inspection by the FDA or other governing health regulatory agency may lead to a product being deemed to be adulterated.
Review and Approval of a BLA
The results of product candidate development, preclinical testing, and clinical trials, including negative or ambiguous results as well as positive findings, are submitted to the FDA as part of a BLA requesting a license to market the product. The BLA must contain extensive manufacturing information and detailed information on the composition of the product and proposed labeling as well as payment of a user fee.
The FDA has 60 days after submission of the application to conduct an initial review to determine whether it is sufficient to accept for filing based on the agency’s threshold determination that it is sufficiently complete to permit substantive review. Once the submission has been accepted for filing, the FDA begins an in-depth review of the application. Under the goals and policies agreed to by the FDA under the Prescription Drug User Fee Act, or the PDUFA, the FDA has ten months in which to complete its initial review of a standard application and respond to the applicant, and six months for a priority review of the application. The FDA does not always meet its PDUFA goal dates for standard and priority BLAs. The review process may often be significantly extended by FDA requests for additional information or clarification. The review process and the PDUFA goal date may be extended by three months if the FDA requests or if the applicant otherwise provides through the submission of a major amendment additional information or clarification regarding information already provided in the submission within the last three months before the PDUFA goal date.
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Under the PHSA, the FDA may approve a BLA if it determines that the product is safe, pure, and potent and the facility where the product will be manufactured meets standards designed to ensure that it continues to be safe, pure, and potent. On the basis of the FDA’s evaluation of the application and accompanying information, including the results of the inspection of the manufacturing facilities and any FDA audits of nonclinical study and clinical trial sites to assure compliance with GLPs and GCPs, respectively, the FDA may issue an approval letter or a complete response letter. An approval letter authorizes commercial marketing of the product with specific prescribing information for specific indications. If the application is not approved, the FDA will issue a complete response letter, which will contain the conditions that must be met in order to secure final approval of the application, and when possible will outline recommended actions the sponsor might take to obtain approval of the application. Sponsors that receive a complete response letter may submit to the FDA information that represents a complete response to the issues identified by the FDA. Such resubmissions are classified under PDUFA as either Class 1 or Class 2. The classification of a resubmission is based on the information submitted by an applicant in response to an action letter. Under the goals and policies agreed to by the FDA under PDUFA, the FDA has two months to review a Class 1 resubmission and six months to review a Class 2 resubmission. The FDA will not approve an application until issues identified in the complete response letter have been addressed. Alternatively, sponsors that receive a complete response letter may either withdraw the application or request a hearing.
The FDA may also refer the application to an advisory committee for review, evaluation, and recommendation as to whether the application should be approved. In particular, the FDA may refer applications for novel biologic products or biologic products that present difficult questions of safety or efficacy to an advisory committee. Typically, an advisory committee is a panel of independent experts, including clinicians and other scientific experts, that reviews, evaluates, and provides a recommendation as to whether the application should be approved and under what conditions. The FDA is not bound by the recommendations of an advisory committee, but it considers such recommendations carefully when making decisions.
If the FDA approves a new product, it may limit the approved indications for use of the product. It may also require that contraindications, warnings or precautions be included in the product labeling. In addition, the FDA may call for post-approval studies, including Phase 4 clinical trials, to further assess the product’s safety after approval. The agency may also require testing and surveillance programs to monitor the product after commercialization, or impose other conditions, including distribution restrictions or other risk management mechanisms, including REMS, to help ensure that the benefits of the product outweigh the potential risks. REMS can include medication guides, communication plans for healthcare professionals, and elements to assure safe use, or ETASU. ETASU can include, but are not limited to, specific or special training or certification for prescribing or dispensing, dispensing only under certain circumstances, special monitoring, and the use of patent registries. The FDA may prevent or limit further marketing of a product based on the results of post-market studies or surveillance programs.
After approval, many types of changes to the approved product, such as adding new indications, certain manufacturing changes and additional labeling claims, are subject to further testing requirements and FDA review and approval.
Fast Track, Breakthrough Therapy and Priority Review Designations
The FDA is authorized to designate certain products for expedited review if they are intended to address an unmet medical need in the treatment of a serious or life-threatening disease or condition. These programs are referred to as fast track designation, breakthrough therapy designation, and priority review designation. Our product candidates do not currently qualify under any of the foregoing programs which are also described below.
Specifically, the FDA may designate a product for fast track review if it is intended, whether alone or in combination with one or more other products, for the treatment of a serious or life-threatening disease or condition, and it demonstrates the potential to address unmet medical needs for such a disease or condition. For fast track products, sponsors may have greater interactions with the FDA and the FDA may initiate review of sections of a fast track product’s application before the application is complete. This rolling review may be available if the FDA determines, after preliminary evaluation of clinical data submitted by the sponsor, that a fast track product may be effective. The sponsor must also provide, and the FDA must approve, a schedule for the submission of the remaining information and the sponsor must pay applicable user fees. However, the FDA’s time period goal for reviewing a fast track application does not begin until the last section of the application is submitted. In addition, the fast track designation may be withdrawn by the FDA if the FDA believes that the designation is no longer supported by data emerging in the clinical trial process, or if the designated drug development program is no longer being pursued.
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Second, FDA has a new regulatory scheme allowing for expedited review of products designated as “breakthrough therapies.” A product may be designated as a breakthrough therapy if it is intended, either alone or in combination with one or more other products, to treat a serious or life-threatening disease or condition and preliminary clinical evidence indicates that the product may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development. The FDA may take certain actions with respect to breakthrough therapies, including holding meetings with the sponsor throughout the development process; providing timely advice to the product sponsor regarding development and approval; involving more senior staff in the review process; assigning a cross-disciplinary project lead for the review team; and taking other steps to design the clinical trials in an efficient manner.
Third, the FDA may designate a product for priority review if it is a product that treats a serious condition and, if approved, would provide a significant improvement in safety or effectiveness. The FDA determines, on a case-by-case basis, whether the proposed product represents a significant improvement when compared with other available therapies. Significant improvement may be illustrated by evidence of increased effectiveness in the treatment of a condition, elimination or substantial reduction of a treatment-limiting adverse reaction, documented enhancement of patient compliance that may lead to improvement in serious outcomes, and evidence of safety and effectiveness in a new subpopulation. A priority designation is intended to direct overall attention and resources to the evaluation of such applications, and to shorten the FDA’s goal for taking action on a marketing application from ten months to six months.
Accelerated Approval Pathway
The FDA may grant accelerated approval to a product for a serious or life-threatening condition that provides meaningful therapeutic advantage to patients over existing treatments based upon a determination that the product has an effect on a surrogate endpoint that is reasonably likely to predict clinical benefit. The FDA may also grant accelerated approval for such a condition when the product has an effect on an intermediate clinical endpoint that can be measured earlier than an effect on irreversible morbidity or mortality, or IMM, and that is reasonably likely to predict an effect on IMM or other clinical benefit, taking into account the severity, rarity, or prevalence of the condition and the availability or lack of alternative treatments. Products granted accelerated approval must meet the same statutory standards for safety and effectiveness as those granted traditional approval. Our product candidates do not currently qualify for accelerated approval by the FDA which is also described below.
For the purposes of accelerated approval, a surrogate endpoint is a marker, such as a laboratory measurement, radiographic image, physical sign, or other measure that is thought to predict clinical benefit but is not itself a measure of clinical benefit. Surrogate endpoints can often be measured more easily or more rapidly than clinical endpoints.
An intermediate clinical endpoint is a measurement of a therapeutic effect that is considered reasonably likely to predict the clinical benefit of a product, such as an effect on IMM. The FDA has limited experience with accelerated approvals based on intermediate clinical endpoints but has indicated that such endpoints generally could support accelerated approval where a study demonstrates a relatively short-term clinical benefit in a chronic disease setting in which assessing durability of the clinical benefit is essential for traditional approval, but the short-term benefit is considered reasonably likely to predict long-term benefit.
The accelerated approval pathway is most often used in settings in which the course of a disease is long and an extended period of time is required to measure the intended clinical benefit of a product, even if the effect on the surrogate or intermediate clinical endpoint occurs rapidly. Thus, accelerated approval has been used extensively in the development and approval of products for treatment of a variety of cancers in which the goal of therapy is generally to improve survival or decrease morbidity and the duration of the typical disease course requires lengthy and sometimes large trials to demonstrate a clinical or survival benefit.
The accelerated approval pathway is usually contingent on a sponsor’s agreement to conduct, in a diligent manner, additional post-approval confirmatory studies to verify and describe the product’s clinical benefit. As a result, a product candidate approved on this basis is subject to rigorous post-marketing compliance requirements, including the completion of Phase 4 or post-approval clinical trials to confirm the effect on the clinical endpoint. Failure to conduct required post-approval studies, or confirm a clinical benefit during post-marketing studies, would allow the FDA to withdraw the product from the market on an expedited basis. All promotional materials for product candidates approved under accelerated regulations are subject to prior review by the FDA.
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Post-Approval Regulation
If regulatory approval for marketing of a product or new indication for an existing product is obtained, the sponsor will be required to comply with all regular post-approval regulatory requirements as well as any post-approval requirements that the FDA has imposed as part of the approval process. The sponsor will be required to report certain adverse reactions and production problems to the FDA, provide updated safety and efficacy information and comply with requirements concerning advertising and promotional labeling requirements. Manufacturers and certain of their subcontractors are required to register their establishments with the FDA and certain state agencies and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with ongoing regulatory requirements, including cGMP regulations, which impose certain procedural and documentation requirements upon manufacturers. Accordingly, the sponsor and its third-party manufacturers must continue to expend time, money, and effort in the areas of production and quality control to maintain compliance with cGMP regulations and other regulatory requirements.
A product may also be subject to official lot release, meaning that the manufacturer is required to perform certain tests on each lot of the product before it is released for distribution. If the product is subject to official lot release, the manufacturer must submit samples of each lot, together with a release protocol showing a summary of the history of manufacture of the lot and the results of all of the manufacturer’s tests performed on the lot, to the FDA. The FDA may in addition perform certain confirmatory tests on lots of some products before releasing the lots for distribution. Finally, the FDA will conduct laboratory research related to the safety, purity, potency, and effectiveness of pharmaceutical products.
Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory requirements is not maintained or if problems occur after the product reaches the market. Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or with manufacturing processes, or failure to comply with regulatory requirements, may result in revisions to the approved labeling to add new safety information; imposition of post-market studies or clinical trials to assess new safety risks; or imposition of distribution or other restrictions under a REMS program.
Other potential consequences of a failure to comply with regulatory requirements include, among other things:
| ● | restrictions on the marketing or manufacturing of the product, complete withdrawal of the product from the market or product recalls; | |
| ● | fines, untitled or warning letters or holds on post-approval clinical trials; | |
| ● | refusal of the FDA to approve pending applications or supplements to approved applications, or suspension or revocation of product license approvals; | |
| ● | product seizure or detention, or refusal to permit the import or export of products; or | |
| ● | injunctions or the imposition of civil or criminal penalties. |
The FDA strictly regulates marketing, labeling, advertising and promotion of licensed and approved products that are placed on the market. Pharmaceutical products may be promoted only for the approved indications and in accordance with the provisions of the approved label. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant liability.
Orphan Drug Designation
Orphan drug designation in the United States is designed to encourage sponsors to develop products intended for rare diseases or conditions. In the United States, a rare disease or condition is statutorily defined as a condition that affects fewer than 200,000 individuals in the United States or that affects more than 200,000 individuals in the United States and for which there is no reasonable expectation that the cost of developing and making available the biologic for the disease or condition will be recovered from sales of the product in the United States.
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Orphan drug designation qualifies a company for tax credits and market exclusivity for seven years following the date of the product’s marketing approval if granted by the FDA. An application for designation as an orphan product can be made any time prior to the filing of an application for approval to market the product. A product becomes an orphan when it receives orphan drug designation from the Office of Orphan Products Development, or OOPD, at the FDA based on acceptable confidential requests made under the regulatory provisions. The product must then go through the review and approval process for commercial distribution like any other product.
A sponsor may request orphan drug designation of a previously unapproved product or new orphan indication for an already marketed product. In addition, a sponsor of a product that is otherwise the same product as an already approved orphan drug may seek and obtain orphan drug designation for the subsequent product for the same rare disease or condition if it can present a plausible hypothesis that its product may be clinically superior to the first drug. More than one sponsor may receive orphan drug designation for the same product for the same rare disease or condition, but each sponsor seeking orphan drug designation must file a complete request for designation.
The period of exclusivity begins on the date that the marketing application is approved by the FDA and applies only to the indication for which the product has been designated. The FDA may approve a second application for the same product for a different use or a second application for a clinically superior version of the product for the same use. The FDA cannot, however, approve the same product made by another manufacturer for the same indication during the market exclusivity period unless it has the consent of the sponsor or the sponsor is unable to provide sufficient quantities.
Pediatric Studies and Exclusivity
Under the Pediatric Research Equity Act of 2003, as amended, a BLA or supplement thereto must contain data that are adequate to assess the safety and effectiveness of the product for the claimed indications in all relevant pediatric subpopulations, and to support dosing and administration for each pediatric subpopulation for which the product is safe and effective. Sponsors must also submit pediatric study plans prior to the assessment data. Those plans must contain an outline of the proposed pediatric study or studies the applicant plans to conduct, including study objectives and design, any deferral or waiver requests, and other information required by regulation.
The applicant, the FDA, and the FDA’s internal review committee must then review the information submitted, consult with each other, and agree upon a final plan. The FDA or the applicant may request an amendment to the plan at any time.
The FDA may, on its own initiative or at the request of the applicant, grant deferrals for submission of some or all pediatric data until after approval of the product for use in adults, or full or partial waivers from the pediatric data requirements. Unless otherwise required by regulation, the pediatric data requirements do not apply to products with orphan designation.
Pediatric exclusivity is another type of non-patent marketing exclusivity in the United States and, if granted, provides for the attachment of an additional six months of marketing protection to the term of any existing regulatory exclusivity, including the non-patent and orphan exclusivity. This six-month exclusivity may be granted if a BLA sponsor submits pediatric data that fairly respond to a written request from the FDA for such data. The data do not need to show the product to be effective in the pediatric population studied; rather, if the clinical trial is deemed to fairly respond to the FDA’s request, the additional protection is granted. If reports of requested pediatric studies are submitted to and accepted by the FDA within the statutory time limits, whatever statutory or regulatory periods of exclusivity or patent protection cover the product are extended by six months. This is not a patent term extension, but it effectively extends the regulatory period during which the FDA cannot approve another application.
Biosimilars and Exclusivity
The Patient Protection and Affordable Care Act, which was signed into law in March 2010, included a subtitle called the Biologics Price Competition and Innovation Act of 2009 or BPCIA. The BPCIA established a regulatory scheme authorizing the FDA to approve biosimilars and interchangeable biosimilars. The FDA has issued several guidance documents outlining an approach to review and approval of biosimilars.
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Under the BPCIA, a manufacturer may submit an application for licensure of a biologic product that is “biosimilar to” or “interchangeable with” a previously approved biological product or “reference product.” In order for the FDA to approve a biosimilar product, it must find that there are no clinically meaningful differences between the reference product and proposed biosimilar product in terms of safety, purity, and potency. For the FDA to approve a biosimilar product as interchangeable with a reference product, the agency must find that the biosimilar product can be expected to produce the same clinical results as the reference product, and (for products administered multiple times) that the biologic and the reference biologic may be switched after one has been previously administered without increasing safety risks or risks of diminished efficacy relative to exclusive use of the reference biologic.
Under the BPCIA, an application for a biosimilar product may not be submitted to the FDA until four years following the date of approval of the reference product. The FDA may not approve a biosimilar product until 12 years from the date on which the reference product was approved. Even if a product is considered to be a reference product eligible for exclusivity, another company could market a competing version of that product if the FDA approves a full BLA for such product containing the sponsor’s own preclinical data and data from adequate and well-controlled clinical trials to demonstrate the safety, purity, and potency of their product. The BPCIA also created certain exclusivity periods for biosimilars approved as interchangeable products. At this juncture, it is unclear whether products deemed “interchangeable” by the FDA will, in fact, be readily substituted by pharmacies, which are governed by state pharmacy law.
Patent Term Restoration and Extension
A patent claiming a new biologic product may be eligible for a limited patent term extension under the Drug Price Competition and Patent Term Restoration Act of 1984, or Hatch-Waxman Amendments, which permits a patent restoration of up to five years for patent term lost during product development and FDA regulatory review. The restoration period granted on a patent covering a product is typically one-half the time between the effective date of an IND and the submission date of a marketing application, plus the time between the submission date of the marketing application and the ultimate approval date, less any time the applicant failed to act with due diligence. Patent term restoration cannot be used to extend the remaining term of a patent past a total of 14 years from the product’s approval date. Only one patent applicable to an approved product is eligible for the extension, and the application for the extension must be submitted prior to the expiration of the patent in question. A patent that covers multiple products for which approval is sought can only be extended in connection with one of the approvals. The USPTO reviews and approves the application for any patent term extension or restoration in consultation with the FDA.
Regulation and Procedures Governing Approval of Medicinal Products in the European Union
In order to market any product outside of the United States, a company must also comply with numerous and varying regulatory requirements of other countries and jurisdictions regarding quality, safety and efficacy and governing, among other things, clinical trials, marketing authorization, commercial sales and distribution of products. Whether or not it obtains FDA approval for a product, an applicant will need to obtain the necessary approvals by the comparable health regulatory authorities before it can commence clinical trials or marketing of the product in those countries or jurisdictions. Specifically, the process governing approval of medicinal products in the European Union, or EU, generally follows the same lines as in the United States. It entails satisfactory completion of preclinical studies and adequate and well-controlled clinical trials to establish the safety and efficacy of the product for each proposed indication. It also requires the submission to the European Medicines Agency, or EMA, or the relevant competent authorities of a marketing authorization application, or MAA, and granting of a marketing authorization by the EMA or these authorities before the product can be marketed and sold in the EU.
Clinical Trial Approval
Pursuant to the currently applicable Clinical Trials Directive 2001/20/EC and the Commission Directive 2005/28/EC on GCP, a system for the approval of clinical trials in the EU has been implemented through national legislation of the member states. Under this system, an applicant must obtain approval from the competent national authority of an EU member state in which the clinical trial is to be conducted, or in multiple member states if the clinical trial is to be conducted in a number of member states. Furthermore, the applicant may only start a clinical trial at a specific study site after the ethics committee has issued a favorable opinion. The CTA must be accompanied by an investigational medicinal product dossier with supporting information prescribed by Directive 2001/20/EC and Commission Directive 2005/28/EC and corresponding national laws of the member states and further detailed in applicable guidance documents.
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In April 2014, the EU adopted a new Clinical Trials Regulation (EU) No 536/2014, which is set to replace the current Clinical Trials Directive 2001/20/EC. The new Clinical Trials Regulation (EU) No 536/2014 is expected to become applicable in 2019. It will overhaul the current system of approvals for clinical trials in the EU. Specifically, the new legislation, which will be directly applicable in all member states, aims at simplifying and streamlining the approval of clinical trials in the EU. For instance, the new Clinical Trials Regulation provides for a streamlined application procedure via a single-entry point and strictly defined deadlines for the assessment of clinical trial applications.
Marketing Authorization
To obtain a marketing authorization for a product under the EU regulatory system, an applicant must submit an MAA, either under a centralized procedure administered by the European Medicines Agency, or EMA, or one of the procedures administered by competent authorities in EU Member States (decentralized procedure, national procedure, or mutual recognition procedure). A marketing authorization may be granted only to an applicant established in the EU. Regulation (EC) No 1901/2006 provides that prior to obtaining a marketing authorization in the EU, an applicant must demonstrate compliance with all measures included in an EMA-approved Pediatric Investigation Plan, or PIP, covering all subsets of the pediatric population, unless the EMA has granted a product-specific waiver, class waiver, or a deferral for one or more of the measures included in the PIP.
The centralized procedure provides for the grant of a single marketing authorization by the European Commission that is valid for all EU member states. Pursuant to Regulation (EC) No. 726/2004, the centralized procedure is compulsory for specific products, including for medicines produced by certain biotechnological processes, products designated as orphan medicinal products, advanced therapy products and products with a new active substance indicated for the treatment of certain diseases, including products for the treatment of cancer. For products that are highly innovative or for which a centralized process is in the interest of patients, the centralized procedure may be optional.
Specifically, the grant of marketing authorization in the European Union for products containing viable human tissues or cells such as gene therapy medicinal products is governed by Regulation (EC) No 1394/2007 on advanced therapy medicinal products, read in combination with Directive 2001/83/EC of the European Parliament and of the Council, commonly known as the Community code on medicinal products. Regulation (EC) No 1394/2007 lays down specific rules concerning the authorization, supervision, and pharmacovigilance of gene therapy medicinal products, somatic cell therapy medicinal products, and tissue engineered products. Manufacturers of advanced therapy medicinal products must demonstrate the quality, safety, and efficacy of their products to EMA which provides an opinion regarding the application for marketing authorization. The European Commission grants or refuses marketing authorization in light of the opinion delivered by EMA.
Under the centralized procedure, the Committee for Medicinal Products for Human Use, or the CHMP, established at the EMA is responsible for conducting an initial assessment of a product. Under the centralized procedure in the European Union, the maximum timeframe for the evaluation of an MAA is 210 days, excluding clock stops when additional information or written or oral explanation is to be provided by the applicant in response to questions of the CHMP. Accelerated evaluation may be granted by the CHMP in exceptional cases, when a medicinal product is of major interest from the point of view of public health and, in particular, from the viewpoint of therapeutic innovation. If the CHMP accepts such a request, the time limit of 210 days will be reduced to 150 days, but it is possible that the CHMP may revert to the standard time limit for the centralized procedure if it determines that it is no longer appropriate to conduct an accelerated assessment.
Regulatory Data Protection in the European Union
In the European Union, new chemical entities approved on the basis of a complete independent data package qualify for eight years of data exclusivity upon marketing authorization and an additional two years of market exclusivity pursuant to Regulation (EC) No 726/2004, as amended, and Directive 2001/83/EC, as amended. Data exclusivity prevents regulatory authorities in the European Union from referencing the innovator’s data to assess a generic (abbreviated) application for a period of eight years. During the additional two-year period of market exclusivity, a generic marketing authorization application can be submitted, and the innovator’s data may be referenced, but no generic medicinal product can be marketed until the expiration of the market exclusivity. The overall ten-year period will be extended to a maximum of eleven years if, during the first eight years of those ten years, the marketing authorization holder obtains an authorization for one or more new therapeutic indications which, during the scientific evaluation prior to authorization, is held to bring a significant clinical benefit in comparison with existing therapies. Even if a compound is considered to be a new chemical entity so that the innovator gains the prescribed period of data exclusivity, another company may market another version of the product if such company obtained marketing authorization based on an MAA with a complete independent data package of pharmaceutical tests, preclinical tests and clinical trials.
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Periods of Authorization and Renewals
A marketing authorization is valid for five years, in principle, and it may be renewed after five years on the basis of a reevaluation of the risk-benefit balance by the EMA or by the competent authority of the authorizing member state. To that end, the marketing authorization holder must provide the EMA or the competent authority with a consolidated version of the file in respect of quality, safety and efficacy, including all variations introduced since the marketing authorization was granted, at least nine months before the marketing authorization ceases to be valid. Once renewed, the marketing authorization is valid for an unlimited period, unless the European Commission or the competent authority decides, on justified grounds relating to pharmacovigilance, to proceed with one additional five-year renewal period. Any authorization that is not followed by the placement of the drug on the EU market (in the case of the centralized procedure) or on the market of the authorizing member state within three years after authorization ceases to be valid.
Regulatory Requirements after Marketing Authorization
Following approval, the holder of the marketing authorization is required to comply with a range of requirements applicable to the manufacturing, marketing, promotion and sale of the medicinal product. These include compliance with the EU’s stringent pharmacovigilance or safety reporting rules, pursuant to which post-authorization studies and additional monitoring obligations can be imposed. In addition, the manufacturing of authorized products, for which a separate manufacturer’s license is mandatory, must also be conducted in strict compliance with the EMA’s GMP requirements and comparable requirements of other regulatory bodies in the EU, which mandate the methods, facilities, and controls used in manufacturing, processing and packing of drugs to assure their safety and identity. Finally, the marketing and promotion of authorized products, including advertising directed toward the prescribers of drugs and/or the general public, are strictly regulated in the European Union under Directive 2001/83/EC, as amended.
Orphan Drug Designation and Exclusivity
Regulation (EC) No 141/2000 and Regulation (EC) No 847/2000 provide that a product can be designated as an orphan drug by the European Commission if its sponsor can establish: that the product is intended for the diagnosis, prevention or treatment of (i) a life-threatening or chronically debilitating condition affecting not more than five in ten thousand persons in the EU when the application is made, or (ii) a life-threatening, seriously debilitating or serious and chronic condition in the EU and that without incentives it is unlikely that the marketing of the drug in the EU would generate sufficient return to justify the necessary investment. For either of these conditions, the applicant must demonstrate that there exists no satisfactory method of diagnosis, prevention, or treatment of the condition in question that has been authorized in the EU or, if such method exists, the drug will be of significant benefit to those affected by that condition.
An orphan drug designation provides a number of benefits, including fee reductions, regulatory assistance, and the ability to apply for a centralized EU marketing authorization. Marketing authorization for an orphan drug leads to a ten-year period of market exclusivity. During this market exclusivity period, neither the European Commission nor the member states can accept an application or grant a marketing authorization for a “similar medicinal product.” A “similar medicinal product” is defined as a medicinal product containing a similar active substance or substances as contained in an authorized orphan medicinal product, and which is intended for the same therapeutic indication. The market exclusivity period for the authorized therapeutic indication may, however, be reduced to six years if, at the end of the fifth year, it is established that the product no longer meets the criteria for orphan drug designation because, for example, the product is sufficiently profitable not to justify market exclusivity.
For other markets in which we might in future seek to obtain marketing approval for the commercialization of products, there are other health regulatory regimes for seeking approval, and we would need to ensure ongoing compliance with applicable health regulatory procedures and standards, as well as other governing laws and regulations for each applicable jurisdiction.
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Coverage, Pricing and Reimbursement
Significant uncertainty exists as to the coverage and reimbursement status of any product candidates for which we may seek regulatory approval by the FDA or other government authorities. In the United States and markets in other countries, patients who are prescribed treatments for their conditions and providers performing the prescribed services generally rely on third-party payors to reimburse all or part of the associated healthcare costs. Patients are unlikely to use any product candidates we may develop unless coverage is provided and reimbursement is adequate to cover a significant portion of the cost of such product candidates. Even if any product candidates we may develop are approved, sales of such product candidates will depend, in part, on the extent to which third-party payors, including government health programs in the United States such as Medicare and Medicaid, commercial health insurers, and managed care organizations, provide coverage, and establish adequate reimbursement levels for, such product candidates. The process for determining whether a payor will provide coverage for a product may be separate from the process for setting the price or reimbursement rate that the payor will pay for the product once coverage is approved. Third-party payors are increasingly challenging the prices charged, examining the medical necessity, and reviewing the cost-effectiveness of medical products and services and imposing controls to manage costs. Third-party payors may limit coverage to specific products on an approved list, also known as a formulary, which might not include all of the approved products for a particular indication.
In order to secure coverage and reimbursement for any product that might be approved for sale, a company may need to conduct expensive pharmacoeconomic studies in order to demonstrate the medical necessity and cost-effectiveness of the product, in addition to the costs required to obtain FDA or other comparable marketing approvals. Nonetheless, product candidates may not be considered medically necessary or cost effective. A decision by a third-party payor not to cover any product candidates we may develop could reduce physician utilization of such product candidates once approved and have a material adverse effect on our sales, results of operations and financial condition. Additionally, a payor’s decision to provide coverage for a product does not imply that an adequate reimbursement rate will be approved. Further, one payor’s determination to provide coverage for a product does not assure that other payors will also provide coverage and reimbursement for the product, and the level of coverage and reimbursement can differ significantly from payor to payor. Third-party reimbursement and coverage may not be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in product development.
The containment of healthcare costs also has become a priority of various federal, state and/or local governments, as well as other payors, within the U.S. and in other countries globally, and the prices of pharmaceuticals have been a focus in these efforts. Governments and other payors have shown significant interest in implementing cost-containment programs, including price controls, restrictions on reimbursement, and requirements for substitution of generic products. Adoption of price controls and cost-containment measures, and adoption of more restrictive policies in jurisdictions with existing controls and measures, could further limit a company’s revenue generated from the sale of any approved products. Coverage policies and third-party reimbursement rates may change at any time. Even if favorable coverage and reimbursement status is attained for one or more products for which a company or its collaborators receive marketing approval, less favorable coverage policies and reimbursement rates may be implemented in the future.
Outside the United States, ensuring adequate coverage and payment for any product candidates we may develop will face challenges. Pricing of prescription pharmaceuticals is subject to governmental control in many countries. Pricing negotiations with governmental authorities can extend well beyond the receipt of regulatory marketing approval for a product and may require us to conduct a clinical trial that compares the cost effectiveness of any product candidates we may develop to other available therapies. The conduct of such a clinical trial could be expensive and result in delays in our commercialization efforts.
In the European Union, pricing and reimbursement schemes vary widely from country to country. Some countries provide that products may be marketed only after a reimbursement price has been agreed. Some countries may require the completion of additional studies that compare the cost-effectiveness of a particular product candidate to currently available therapies (so called health technology assessments, or HTAs) in order to obtain reimbursement or pricing approval. For example, the European Union provides options for its member states to restrict the range of products for which their national health insurance systems provide reimbursement and to control the prices of medicinal products for human use. E.U. member states may approve a specific price for a product or it may instead adopt a system of direct or indirect controls on the profitability of the company placing the product on the market. Other member states allow companies to fix their own prices for products, but monitor and control prescription volumes and issue guidance to physicians to limit prescriptions.
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Recently, many countries in the European Union have increased the amount of discounts required on pharmaceuticals and these efforts could continue as countries attempt to manage healthcare expenditures, especially in light of the severe fiscal and debt crises experienced by many countries in the European Union. The downward pressure on health care costs in general, particularly prescription products, has become intense. As a result, increasingly high barriers are being erected to the entry of new products. Political, economic, and regulatory developments may further complicate pricing negotiations, and pricing negotiations may continue after reimbursement has been obtained. Reference pricing used by various European Union Member States, and parallel trade (arbitrage between low-priced and high-priced member states), can further reduce prices. There can be no assurance that any country that has price controls or reimbursement limitations for pharmaceutical products will allow favorable reimbursement and pricing arrangements for any of our products, if approved in those countries.
Healthcare Law and Regulation
Healthcare providers and third-party payors play a primary role in the recommendation and prescription of pharmaceutical products that are granted marketing approval. Arrangements with providers, consultants, third-party payors, and customers are subject to broadly applicable fraud and abuse, anti-kickback, false claims laws, reporting of payments to physicians and teaching physicians and patient privacy laws and regulations and other healthcare laws and regulations that may constrain our business and/or financial arrangements. Restrictions under applicable federal and state healthcare laws and regulations, include the following:
| ● | the U.S. federal Anti-Kickback Statute, which prohibits, among other things, persons and entities from knowingly and willfully soliciting, offering, paying, or receiving remuneration, directly or indirectly, overtly or covertly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, order or recommendation of, any good or service, for which payment may be made, in whole or in part, under a federal healthcare program such as Medicare and Medicaid; | |
| ● | the federal civil and criminal false claims laws, including the civil U.S. False Claims Act, and civil monetary penalties laws, which prohibit individuals or entities from, among other things, knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false, fictitious, or fraudulent or knowingly making, using, or causing to be made or used a false record or statement to avoid, decrease, or conceal an obligation to pay money to the federal government. In addition, the government may assert that a claim including items and services resulting from a violation of the U.S. federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the U.S. False Claims Act; |
| ● | the federal false statements statute prohibits knowingly and willfully falsifying, concealing, or covering up a material fact or making any materially false statement in connection with the delivery of or payment for healthcare benefits, items, or services; similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation; | |
| ● | the anti-inducement law, which prohibits, among other things, the offering or giving of remuneration, which includes, without limitation, any transfer of items or services for free or for less than fair market value (with limited exceptions), to a Medicare or Medicaid beneficiary that the person knows or should know is likely to influence the beneficiary’s selection of a particular supplier of items or services reimbursable by a federal or state governmental program; | |
| ● | the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH, and their respective implementing regulations, (collectively “HIPAA”) which imposes criminal and civil liability for knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program (including private payors) or obtain, by means of false or fraudulent pretenses, representations, or promises, any of the money or property owned by, or under the custody or control of, any healthcare benefit program, regardless of the payor (e.g., public or private) and knowingly and willfully falsifying, concealing or covering up by any trick or device a material fact or making any materially false statements in connection with the delivery of, or payment for, healthcare benefits, items or services; |
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| ● | HIPAA, which impose obligations with respect to safeguarding the privacy, security, and transmission of individually identifiable information that constitutes protected health information, including mandatory contractual terms and restrictions on the use and/or disclosure of such information without proper authorization; | |
| ● | the federal transparency requirements known as the federal Physician Payments Sunshine Act, under the U.S. Patient Protection and Affordable Care Act, as amended by the U.S. Health Care and Education Reconciliation Act, collectively, the Affordable Care Act (the “ACA”), which requires certain manufacturers of drugs, devices, biologics and medical supplies to report annually to the Centers for Medicare & Medicaid Services, or CMS, within the U.S. Department of Health and Human Services, information related to payments and other transfers of value made by that entity to physicians and teaching hospitals, and requires certain manufacturers and applicable group purchasing organizations to report ownership and investment interests held by physicians or their immediate family members; | |
| ● | federal government price reporting laws, which require us to calculate and report complex pricing metrics in an accurate and timely manner to government programs; | |
| ● | federal consumer protection and unfair competition laws, which broadly regulate marketplace activities and activities that potentially harm consumers; | |
| ● | The Foreign Corrupt Practices Act, or FCPA, prohibits companies and their intermediaries from making, or offering or promising to make improper payments to non-U.S. officials for the purpose of obtaining or retaining business or otherwise seeking favorable treatment; and | |
| ● | analogous laws and regulations in other national jurisdictions and states, such as state anti-kickback and false claims laws, which may apply to healthcare items or services that are reimbursed by non-governmental third-party payors, including private insurers. |
Some state and other laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government in addition to requiring pharmaceutical manufacturers to report information related to payments to physicians and other health care providers or marketing expenditures. State and other laws also govern the privacy and security of health information in some circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.
Healthcare Reform
A primary trend in the U.S. healthcare industry and elsewhere is cost containment. There have been a number of federal and state proposals during the last few years regarding the pricing of pharmaceutical and biopharmaceutical products, limiting coverage and reimbursement for drugs and other medical products, government control and other changes to the healthcare system in the United States.
By way of example, the United States and state governments continue to propose and pass legislation designed to reduce the cost of healthcare. In March 2010, the ACA went into effect, which, among other things, includes changes to the coverage and payment for products under government health care programs. Among the provisions of the ACA of importance to our potential product candidates are:
| ● | an annual, nondeductible fee on any entity that manufactures or imports specified branded prescription drugs and biologic products, apportioned among these entities according to their market share in certain government healthcare programs, although this fee would not apply to sales of certain products approved exclusively for orphan indications; | |
| ● | expansion of eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to certain individuals with income at or below 133% of the federal poverty level, thereby potentially increasing a manufacturer’s Medicaid rebate liability; | |
| ● | expanded manufacturers’ rebate liability under the Medicaid Drug Rebate Program by increasing the minimum rebate for both branded and generic drugs and revising the definition of “average manufacturer price,” or AMP, for calculating and reporting Medicaid drug rebates on outpatient prescription drug prices and extending rebate liability to prescriptions for individuals enrolled in Medicare Advantage plans; | |
| ● | addressed a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for products that are inhaled, infused, instilled, implanted or injected; | |
| ● | expanded the types of entities eligible for the 340B drug discount program; |
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| ● | established the Medicare Part D coverage gap discount program by requiring manufacturers to provide a 50% point-of-sale-discount off the negotiated price of applicable products to eligible beneficiaries during their coverage gap period as a condition for the manufacturers’ outpatient products to be covered under Medicare Part D; | |
| ● | a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research; and | |
| ● | established the Center for Medicare and Medicaid Innovation within CMS to test innovative payment and service delivery models to lower Medicare and Medicaid spending, potentially including prescription product spending. Funding has been allocated to support the mission of the Center for Medicare and Medicaid Innovation from 2011 to 2019. |
Other legislative changes have been proposed and adopted in the United States since the ACA was enacted. For example, in August 2011, the Budget Control Act of 2011, among other things, created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2012 through 2021, was unable to reach required goals, thereby triggering the legislation’s automatic reduction to several government programs. This includes aggregate reductions of Medicare payments to providers of up to 2% per fiscal year, which went into effect in April 2013 and will remain in effect through 2024 unless additional Congressional action is taken. In January 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, which, among other things, further reduced Medicare payments to several l providers, including hospitals, imaging centers, and cancer treatment centers, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years.
Since its enactment, some of the provisions of the ACA have yet to be fully implemented, while certain provisions have been subject to judicial, Congressional, and Executive challenges. In 2012, the U.S. Supreme Court upheld certain key aspects of the legislation, including a tax-based shared responsibility payment imposed on certain individuals who fail to maintain qualifying health coverage for all or part of a year, which is commonly the requirement that all individuals maintain health insurance coverage or pay a penalty, referred to as the “individual mandate.” Though Congress has not passed repeal legislation to date, the 2017 Tax Reform Act included a provision which repealed the individual mandate effective January 1, 2019. On December 14, 2018, a U.S. District Court judge in the Northern District of Texas ruled that the individual mandate portion of the ACA is an essential and inseverable feature of the ACA, and therefore because the mandate was repealed as part of the Tax Cuts and Jobs Act, the remaining provisions of the ACA are invalid as well. On December 30, 2018 the same judge issued an order staying the judgment pending appeal. It is unclear how this decision and any subsequent appeals and other efforts to repeal and replace the ACA will impact the ACA and our business.
On January 20, 2017, then-United States President Donald Trump signed an Executive Order directing federal agencies with authorities and responsibilities under the Affordable Care Act to waive, defer, grant exemptions from, or delay the implementation of any provision of the Affordable Care Act that would impose a fiscal burden on states or a cost, fee, tax, penalty or regulatory burden on individuals, healthcare providers, health insurers, or manufacturers of pharmaceuticals or medical devices. A second Executive Order signed in 2017 terminates the cost-sharing subsidies that reimburse insurers under the ACA. Several state Attorneys General filed suit to stop the administration from terminating the subsidies, but their request for a restraining order was denied by a federal judge in California on October 25, 2017. The loss of the cost share reduction payments is expected to increase premiums on certain policies issued by qualified health plans under the ACA. Congress continues to consider subsequent legislation to replace elements of the Affordable Care Act or to repeal it entirely. It is unclear whether new legislation modifying the Affordable Care Act will be enacted, and, if so, precisely what the new legislation will provide, when it will be enacted and what impact it will have on the availability of healthcare and containing or lowering the cost of healthcare. We plan to continue to evaluate the effect that the Affordable Care Act and its possible repeal and replacement may have on our business.
Further, the Centers for Medicare & Medicaid Services, or CMS, recently proposed regulations that would give states greater flexibility in setting benchmarks for insurers in the individual and small group marketplaces, which may have the effect of relaxing the essential health benefits required under the ACA for plans sold through such marketplaces. On November 30, 2018, CMS announced a proposed rule that would amend the Medicare Advantage and Medicare Part D prescription drug benefit regulations to reduce out of pocket costs for plan enrollees and allow Medicare plans to negotiate lower rates for certain drugs. Among other things, the proposed rule changes would allow Medicare Advantage plans to use pre-authorization (PA) and step therapy (ST) for six protected classes of drugs, with certain exceptions, permit plans to implement PA and ST in Medicare Part B drugs; and change the definition of “negotiated prices” while a definition of “price concession” in the regulations. It is unclear whether these proposed changes we be accepted, and if so, what effect such changes will have on our business.
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There has also been heightened governmental scrutiny over the manner in which manufacturers set prices for their marketed products, which has resulted in several recent Congressional inquiries and proposed bills designed to, among other things, bring more transparency to product pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for pharmaceutical products. Individual states in the United States have also become increasingly active in enacting legislation and implementing regulations designed to control pharmaceutical product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing. Beyond challenges to the ACA, other legislative measures have also been enacted that may impose additional pricing and product development pressures on our business. For example, on May 30, 2018, the Right to Try Act, was signed into law. The law, among other things, provides a federal framework for certain patients to access certain investigational new drug products that have completed a Phase I clinical trial and that are undergoing investigation for FDA approval. Under certain circumstances, eligible patients can seek treatment without enrolling in clinical trials and without obtaining FDA permission under the FDA expanded access program. There is no obligation for a drug manufacturer to make its drug products available to eligible patients as a result of the Right to Try Act, but the manufacturer must develop an internal policy and respond to patient requests according to that policy. We expect that additional foreign, federal and state healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in limited coverage and reimbursement and reduced demand for our products, once approved, or additional pricing pressures.
There have been, and likely will continue to be, legislative and regulatory proposals at the national level in the U.S. and other jurisdictions globally, as well as at some regional, state and/or local levels within the U.S. or other jurisdictions, directed at broadening the availability of healthcare and containing or lowering the cost of healthcare. Such reforms could have an adverse effect on anticipated revenues from product candidates that we may successfully develop and for which we may obtain marketing approval and may affect our overall financial condition and ability to develop product candidates.
Additional Regulation
In addition to the foregoing, state, and federal laws regarding environmental protection and hazardous substances, including the Occupational Safety and Health Act, the Resource Conservation and Recovery Act, and the Toxic Substances Control Act, affect our business. These and other laws govern the use, handling, and disposal of various biologic, chemical, and radioactive substances used in, and wastes generated by, operations. If our operations result in contamination of the environment or expose individuals to hazardous substances, we could be liable for damages and governmental fines. Equivalent laws have been adopted in third countries that impose similar obligations.
Employees
As of December 31, 2022, we have two employees. None of our employees are represented by a labor union, and none of our employees has entered into a collective bargaining agreement with us. We consider our employee relations to be good.
ITEM 1A. RISK FACTORS.
Not required for smaller reporting companies.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES.
Our mailing address is 7778 Mcginnis Ferry Rd., Ste 270, Suwanee, GA 30024, which is a mailbox provided by an officer of the Company, we currently do not maintain a corporate office. Our telephone number is (972) 891-8033.
ITEM 3. LEGAL PROCEEDINGS.
We know of no legal proceedings to which we are a party or to which any of our property is the subject which are pending, threatened or contemplated or any unsatisfied judgments against us.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market
Our common stock is quoted on the OTC Pink under the symbol “VICP” and there is no established public trading market for the class of common equity.
The following table includes the high and low bids for our common stock for the fiscal years ended December 31, 2022 and 2021.
Period Fiscal Year 2022 | High | Low | ||||||
| First Quarter (January 1, 2022 – March 31, 2022) | $ | 8.00 | $ | 2.00 | ||||
| Second Quarter (April 1, 2022 – June 30, 2022) | $ | 2.60 | $ | 0.85 | ||||
| Third Quarter (July 1, 2022 – September 30, 2022) | $ | 2.52 | $ | 1.00 | ||||
| Fourth Quarter (October 1, 2022 – December 31, 2022) | $ | 1.00 | $ | 1.00 | ||||
Period Fiscal Year 2021 | High | Low | ||||||
| First Quarter (January 1, 2021 – March 31, 2021) | $ | 2.00 | $ | 1.50 | ||||
| Second Quarter (April 1, 2021 – June 30, 2021) | $ | 2.05 | $ | 1.11 | ||||
| Third Quarter (July 1, 2021 – September 30, 2021) | $ | 1.43 | $ | 0.0001 | ||||
| Fourth Quarter (October 1, 2021 – December 31, 2021) | $ | 2.00 | $ | 0.25 | ||||
These prices do not represent the fair market value of our common stock. The most recent sale of our common stock pursuant to a Private Placement Memorandum was on April 12, 2023 at a price of $0.25.
Holders
As of April 7, 2023, there are 31,188,461 shares of common stock outstanding, held by 300 record holders of our common stock.
Dividends
We have not paid any cash dividends to date and do not anticipate or contemplate paying dividends in the foreseeable future. It is the current intention of management to utilize all available funds for the development of our business.
Securities authorized for issuance under equity compensation plans
None.
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Transfer Agent and Registrar
Our Transfer Agent is Issuer Direct Corporation located at One Glenwood Avenue, Suite 1001, Raleigh, NC 27603
Recent Sales Of Unregistered Securities
The table set forth below reflects discloses all unregistered shares issued by the Company during each of the last two fiscal years, including any sales of reacquired securities, as well as new issues, securities issued in exchange for property, services, or other securities, and new securities resulting from the modification of outstanding securities.
| Date of Transaction | Transaction type | Number of shares issued | Class of Securities | Were the shares issued at a discount | Individual/Entity shares were issued to |
Reasons for issuance | ||||||
| 3/1/2021 | New | 24,000 | Common | Yes | Ronald Mitori Roth IRA | Purchased | ||||||
| 5/26/2021 | New | 600,000 | Common | Yes | YPH, LLC | Purchased | ||||||
| 6/22/2021 | New | 100,000 | Common | Yes | Ronald Mitori Roth IRA | Purchased | ||||||
| 6/30/2021 | New | 40,000 | Common | Yes | Victor Sasson | Purchased | ||||||
| 7/7/2021 | New | 140,000 | Common | Yes | Normdog, LLC | Purchased | ||||||
| 7/8/2021 | New | 100,000 | Common | Yes | Norman Esses | Purchased | ||||||
| 7/15/21 | New | 100,000 | Common | Yes | Victor Setton | Purchased | ||||||
| 7/21/21 | New | 60,000 | Common | Yes | Mark Chraime | Purchased | ||||||
| 7/25/21 | New | 320,000 | Common | Yes | YPH, LLC | Purchased | ||||||
| 8/16/2021 | New | 80.000 | Common | Yes | Harry Franco | Purchased | ||||||
| 10/20/21 | New | 100,000 | Common | Yes | NASC | Purchased | ||||||
| 10/20/21 | New | 400,000 | Common | Yes | RSG Limited Partnership | Purchased | ||||||
| 11/12/2021 | New | 100,000 | Common | Yes | John Lemak | Purchased | ||||||
| 11/15/2021 | New | 100,000 | Common | Yes | Ronald Mitori Roth IRA | Purchased | ||||||
| 1/13/2022 | New | 4,800,000 | Common | Yes | Bonderman Family Limited Partnership | Conversion | ||||||
| 1/13/2022 | New | 2,400,000 | Common | Yes | ADEC Private Equity Investments LLC | Conversion | ||||||
| 1/13/2022 | New | 180,000 | Common | Yes | John J. & Beverly P. Monaco | Conversion | ||||||
| 1/13/2022 | New | 270,000 | Common | Yes | Steve Gorlin | Conversion | ||||||
| 1/13/2022 | New | 120,000 | Common | Yes | Thomas E. Hills | Conversion | ||||||
| 1/13/2022 | New | 60,000 | Common | Yes | Neil Kleinhandler | Conversion | ||||||
| 1/13/2022 | New | 120,000 | Common | Yes | JLVA LLC | Conversion | ||||||
| 1/13/2022 | New | 60,000 | Common | Yes | Patricia Shea | Conversion | ||||||
| 1/13/2022 | New | 78,000 | Common | Yes | Elliot Bibi | Conversion | ||||||
| 1/13/2022 | New | 30,000 | Common | Yes | Frank J.B. Varallo Irrevocable Trust DTD 10/6/86 | Conversion | ||||||
| 1/13/2022 | New | 78,000 | Common | Yes | Isaac Franco | Conversion | ||||||
| 1/13/2022 | New | 30,000 | Common | Yes | Joseph F. DeCosimo | Conversion |
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| 1/13/2022 | New | 60,000 | Common | Yes | JSL Kids Partners | Conversion | ||||||
| 1/13/2022 | New | 30,000 | Common | Yes | JWP Holdings LLC | Conversion | ||||||
| 1/13/2022 | New | 24,000 | Common | Yes | Mark Poznansky | Conversion | ||||||
| 1/13/2022 | New | 240,000 | Common | Yes | NASC Investments, LLC | Conversion | ||||||
| 1/13/2022 | New | 60,000 | Common | Yes | Neil Kleinhandler | Conversion | ||||||
| 1/13/2022 | New | 60,000 | Common | Yes | Patricia Shea | Conversion | ||||||
| 1/13/2022 | New | 300,000 | Common | Yes | Peter Gerhard | Conversion | ||||||
| 1/13/2022 | New | 30,000 | Common | Yes | Robert F. DeCosimo | Conversion | ||||||
| 1/13/2022 | New | 60,000 | Common | Yes | RSG (US Holdings) Limited Partnership | Conversion | ||||||
| 1/13/2022 | New | 30,000 | Common | Yes | SSBP Corp. | Conversion | ||||||
| 1/13/2022 | New | 150,000 | Common | Yes | Stephen R. Banks | Conversion | ||||||
| 1/13/2022 | New | 30,000 | Common | Yes | Summerfield Group, GP | Conversion | ||||||
| 1/13/2022 | New | 150,000 | Common | Yes | Virginia E. Dadey | Conversion | ||||||
| 1/13/2022 | New | 1,080,000 | Common | Yes | Ypsilon Biotech, LLC | Conversion | ||||||
| 3/28/2022 | New | 600,000 | Common | Yes | ADEC Private Equity Investments LLC | Antidilution | ||||||
| 3/28/2022 | New | 1,200,000 | Common | Yes | Bonderman Family Limited Partnership | Antidilution | ||||||
| 3/28/2022 | New | 150,000 | Common | Yes | Steve Gorlin | Antidilution | ||||||
| 3/28/2022 | New | 60,000 | Common | Yes | JLVA LLC | Antidilution | ||||||
| 3/28/2022 | New | 24,000 | Common | Yes | Mark Poznansky | Antidilution | ||||||
| 3/28/2022 | New | 1,080,000 | Common | Yes | Ypsilon Biotech, LLC | Antidilution | ||||||
| 3/28/2022 | New | 300,000 | Common | Yes | Peter Gerhard | Antidilution | ||||||
| 3/28/2022 | New | 78,000 | Common | Yes | Isaac Franco | Antidilution | ||||||
| 3/28/2022 | New | 78,000 | Common | Yes | Elliot Bibi | Antidilution | ||||||
| 3/28/2022 | New | 30,000 | Common | Yes | JWP Holdings LLC | Antidilution | ||||||
| 3/28/2022 | New | 60,000 | Common | Yes | JSL Kids Partners | Antidilution | ||||||
| 3/28/2022 | New | 60,000 | Common | Yes | RSG (US Holdings) Limited Partnership | Antidilution | ||||||
| 3/28/2022 | New | 150,000 | Common | Yes | Stephen R. Banks | Antidilution | ||||||
| 3/28/2022 | New | 240,000 | Common | Yes | NASC Investments, LLC | Antidilution | ||||||
| 3/28/2022 | New | 150,000 | Common | Yes | Virginia E. Dadey | Antidilution | ||||||
| 3/28/2022 | New | 30,000 | Common | Yes | SSBP Corp. | Antidilution | ||||||
| 3/28/2022 | New | 30,000 | Common | Yes | Frank J.B. Varallo Irrevocable Trust DTD 10/6/86 | Antidilution | ||||||
| 3/28/2022 | New | 30,000 | Common | Yes | Joseph F. DeCosimo | Antidilution | ||||||
| 3/28/2022 | New | 30,000 | Common | Yes | Nonodecs, GP | Antidilution | ||||||
| 3/28/2022 | New | 30,000 | Common | Yes | Robert F. DeCosimo | Antidilution | ||||||
| 3/28/2022 | New | 30,000 | Common | Yes | Summerfield Group, GP | Antidilution | ||||||
| 7/18/2022 | New | 100,000 | Common | Yes | Harry Franco | Warrant Exercise |
The securities referend above were issued solely to “accredited investors” in reliance on the exemption from registration afforded by Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”). All proceeds received in exchange for issuance of these shares were used for general corporate working capital.
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Item 6. Reserved
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Financial Statements of our Company and notes thereto included elsewhere in this report.
Forward-Looking Statements
The following information specifies certain forward-looking statements of the management of our Company. Forward-looking statements are statements that estimate the happening of future events and are not based on historical fact. Forward-looking statements may be identified by the use of forward-looking terminology, such as “may,” “shall,” “could,” “expect,” “estimate,” “anticipate,” “predict,” “probable,” “possible,” “should,” “continue,” or similar terms, variations of those terms or the negative of those terms. The forward-looking statements in this annual report on Form 10-K have been compiled by our management on the basis of assumptions made by management and considered by management to be reasonable. Our future operating results, however, are impossible to predict and no representation, guaranty, or warranty is to be inferred from those forward-looking statements.
All forward-looking statements in this annual report on Form 10-K are based on information available to us as of the date of this annual report on Form 10-K, and we assume no obligation to update any forward-looking statements.
Business Overview
Product Distribution Corp. On August 19, 1998, the Company changed its name to Phage Therapeutics International, Inc. On November 13, 2007, the Company changed its name to SSGI, Inc. On December 22, 2017, pursuant to a Share Exchange Agreement (the “Exchange Agreement”) by and among VLS, Michael W. Yurkowsky, ViCapsys, Inc. (“VI”) and the shareholders of VI, a private company, VI became a wholly owned subsidiary of VLS. We refer to VLS and VI together as the “Company”. VLS serves as the holding company for VI. Other than its interest in VI, VLS does not have any material assets or operations.
Per the schedule 14C filed on May 17, 2022, on April 22, 2022, stockholders of the Company approved a reverse split in the range from 1-for-2 to 1-for-50, with the Board of Directors able to pick the ratio or abandon the split. The split is subject to FINRA clearance and filing with Secretary of State. As of the date of this filing, such split has not occurred.
The Company’s strategy is to develop and commercialize, on a worldwide basis, various intellectual property rights (patents, patent applications, know how, etc.) relating to a series of encapsulated products that incorporate proprietary derivatives of the chemokine CXCL12 for creating a zone of immunoprotection around cells, tissues, organs and devices for therapeutic purposes. The product name VICAPSYN™ is the Company’s proprietary product line that is applied to transplantation therapies and related stem-cell applications in the transplantation field.
Results of Operations
The Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021
Revenues
The Company did not have any revenues for the years ended December 31, 2022 and 2021.
Expenses
Operating expenses consist of personnel costs, research and development expenses, professional fees, travel expenses and general and administrative expenses. Our total operating expenses for the year ended December 31, 2022, were $984,790 compared to $336,871 for the year ended December 31, 2021, an increase of $647,919. The increase was primarily a result of the impairment loss of $340,231 recognized in connection with the write off of the intangible asset, as well as an increase in professional fees paid in connection with the Company’s efforts to complete an up listing to NASDAQ. Research and development costs decreased slightly from $13,097 for the year ended December 31, 2022 compared to $17,698 for the year ended December 31, 2021.
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Year-over year increases in general and administrative expenses of $24,408 and personnel costs of $30,956 was primarily due to the increase in costs to operate as a publicly traded company as well as stock-based compensation as a result of the issuance of stock options granted in August 2022. The negative impact of COVID-19, continued to hinder the Company’s ability to raise the additional capital necessary to maintain operating activities in 2022.
Other Income
There was no other income or other expenses for the year ended December 31, 2022. Other income for the year ended December 31, 2021 of $100,000 was the result of the sale of the Company’s equity investment in AEI, back to AEI.
Net Loss
As a result of the foregoing, the Company had a net loss of $984,790 for the year ended December 31, 2022, compared to a net operating loss of $336,871 for the year ended December 31, 2021.
Liquidity and Capital Resources
The Company is not currently generating revenues. At December 31, 2022, we had $14,097 cash on hand, a working capital deficit of $950,791 and an accumulated deficit of $15,117,963.
In July 2022, the Company received proceeds totaling $50,000 and issued 100,000 shares of common stock pursuant to the exercise of warrants at $0.50 per share. In January 2021, the Company sold its equity investment in AEI, back to AEI for $100,000, which is included in other income for the year ended December 31, 2021. During the year ended December 31, 2021, the Company entered into Securities Purchase Agreements with select accredited investors in connection with a private offering by the Company to raise a maximum of $1,000,000 through the sale of shares of common stock of the Company at $0.25 per share. During the year ended December 31, 2021, the Company has raised an aggregate amount of $560,000 from the sale of 2,240,000 shares of common stock.
In April 2023, the Company entered into Security Purchase Agreements (“SPA’s) with select accredited investors in connection with a private offering by the Company to raise a maximum of $300,000 through the sale of shares of common stock at $0.25 per share. The Company has raised an aggregate amount of $100,000 as of the date of these consolidated financial statements.
However, we will require additional capital to meet our liquidity needs and do not believe that we have enough cash on hand to operate our business during the next 12 months. We anticipate we will need to raise an additional $1 million through the issuance of debt or equity securities to sustain base operations during the next 12 months, excluding development work. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interests of our common stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholder. Debt financing, if available, may involve agreements that include conversion discounts or covenants limiting or restricting our ability to take specific actions, such as incurring debt, making capital expenditures or declaring dividends. If we raise additional funds through government or other third-party funding, marketing and distribution arrangements or other collaborations, or strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our future revenue streams, products or therapeutic candidates or to grant licenses on terms that may not be favorable to us. These conditions, as well as our recurring losses from operations, deficit in equity, and the need to raise additional capital to fund operations, raise substantial doubt about our ability to continue as a going concern. This “going concern” could impair our ability to finance our operations through the sale of debt or equity securities.
To date, we have financed our operations through our sale of equity and debt securities. Failure to generate revenue or to raise funds could cause us to go out of business, which would result in the complete loss of your investment.
We did not generate revenues from operations for the year ended December 31, 2022, and no substantial revenues are anticipated until we have implemented our full plan of operations. To implement our strategy to grow and expand per our business plan, we intend to generate working capital via private placements of equity or debt securities, or to secure one or more loans. If we are unsuccessful in raising capital, we could be required to cease business operations and investors would lose all of their investment.
Additionally, we will have to meet all the financial disclosure and reporting requirements associated with being a publicly reporting company. This additional corporate governance time required of management could limit the amount of time management has to implement our business plan and may impede the speed of our operations.
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Operating Activities
For the year ended December 31, 2022, net cash used in operating activities was $238,197, which primarily consisted of our net loss of $984,790 adjusted for non-cash expenses of $31,289 of amortization, $340,231 impairment loss, and $105,650 of stock-based compensation expense.
For the year ended December 31, 2021, net cash used in operating activities was $443,974, which primarily consisted of our net loss of $236,871 and the $100,000 gain on sale of the Company’s equity investment in AEI, adjusted for non-cash expenses of $31,329 of amortization and $4,326 of stock-based compensation expense. Net changes of $142,758 in operating assets and liabilities increased the cash used in operating activities.
Investing Activities
There were no investing activities from continuing operations for the year ended December 31, 2022. During the year ended December 31, 2021, the Company sold its equity investment in AEI, back to AEI for $100,000.
Financing Activities
For the year ended December 31, 2022, net cash used in financing activities was $34,999 and consisted of the payment of deferred offering costs of $15,001, offset by proceeds received totaling $50,000 received from the issuance of 100,000 shares of common stock pursuant to the exercise of warrants at $0.50 per share. During the year ended December 31, 2021, the Company sold 2,240,000 shares of common stock at $0.25 per share and received proceeds of $560,000.
Off-Balance Sheet Arrangements
As of December 31, 2022, there were no off-balance sheet arrangements.
Critical Accounting Policies
Our discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of these consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, expenses, and related disclosure of contingent assets and liabilities. We evaluate, on an ongoing basis, our estimates and judgments, including those related to the useful life of the assets. We base our estimates on historical experience and assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
The methods, estimates and judgments we use in applying our most critical accounting policies have a significant impact on the results that we report in our consolidated financial statements. The SEC considers an entity’s most critical accounting policies to be those policies that are both most important to the portrayal of a company’s financial condition and results of operations and those that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about matters that are inherently uncertain at the time of estimation.
We believe the following critical accounting policies, among others, require significant judgments and estimates used in the preparation of our interim condensed consolidated financial statements.
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Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements are prepared in accordance with U.S. GAAP. The consolidated financial statements of the Company include the consolidated accounts of VLS and VI, its wholly owned subsidiary. All intercompany accounts and transactions have been eliminated in consolidation.
Emerging Growth Company
The Company qualifies as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, as amended (the “JOBS Act”). Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. As an emerging growth company, the Company can delay the adoption of certain accounting standards until those standards would otherwise
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reported period. Actual results could differ from those estimates. Significant estimates for the years ended December 31, 2022 and 2021 include impairment of intangible assets, valuation allowance for deferred tax asset and non-cash equity transactions and stock-based compensation.
Cash
The Company considers all highly liquid investments with an original term of three months or less to be cash equivalents. These investments are carried at cost, which approximates fair value. The Company held no cash equivalents as of December 31, 2022, and 2021. Cash balances may, at certain times, exceed federally insured limits. If the amount of a deposit at any time exceeds the federally insured amount at a bank, the uninsured portion of the deposit could be lost, in whole or in part, if the bank were to fail.
Intangible Assets
Costs for intangible assets are accounted for through the capitalization of those costs incurred in connection with developing or obtaining such assets. Capitalized costs are included in intangible assets in the consolidated balance sheets. The Company’s intangible assets consist of costs incurred in connection with securing an Exclusive Patent License Agreement with The General Hospital Corporation, d/b/a Massachusetts General Hospital (“MGH”), as amended (the “License Agreement”). These costs are being amortized over the term of the License Agreement which is based on the remaining life of the related patents being licensed.
As of December 31, 2022, due to the combination of not having met certain due diligence requirements per the License Agreement, and the Company not raising sufficient capital necessary to maintain regular research and development activities in 2022, the Company reviewed the MGH license agreement for possible impairment. The Company concluded an impairment of the License Agreement existed due to there being no projected undiscounted future net cash flows derived from the asset (See Note 4).
Long-Lived Assets
The Company recognizes impairment losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying values. Management has reviewed the Company’s long-lived assets for the years ended December 31, 2022, and 2021, and concluded an impairment of the License Agreement existed as of December 31, 2022 due to there being no projected undiscounted future net cash flows derived from the asset (See Note 4).
Equity Method Investment
The Company accounts for investments in which the Company owns more than 20% or has the ability to exercise significant influence of the investee, using the equity method in accordance with the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 323, Investments—Equity Method and Joint Ventures. Under the equity method, an investor initially records an investment in the stock of an investee at cost and adjusts the carrying amount of the investment to recognize the investor’s share of the earnings or losses of the investee after the date of acquisition. The amount of the adjustment is included in the determination of net income by the investor, and such amount reflects adjustments similar to those made in preparing consolidated statements including adjustments to eliminate intercompany gains and losses, and to amortize, if appropriate, any difference between investor cost and underlying equity in net assets of the investee at the date of investment.
The investment of an investor is also adjusted to reflect the investor’s share of changes in the investee’s capital. Dividends received from an investee reduce the carrying amount of the investment. A series of operating losses of an investee or other factors may indicate that a decrease in value of the investment has occurred which is other than temporary, and which should be recognized even though the decrease in value is in excess of what would otherwise be recognized by application of the equity method.
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In accordance with ASC 323-10-35-20 through 35-22, the investor ordinarily shall discontinue applying the equity method if the investment (and net advances) is reduced to zero and shall not provide for additional losses unless the investor has guaranteed obligations of the investee or is otherwise committed to provide further financial support for the investee. An investor shall, however, provide for additional losses if the imminent return to profitable operations by an investee appears to be assured. For example, a material, nonrecurring loss of an isolated nature may reduce an investment below zero even though the underlying profitable operating pattern of an investee is unimpaired. If the investee subsequently reports net income, the investor shall resume applying the equity method only after its share of that net income equals the share of net losses not recognized during the period the equity method was suspended.
Equity and cost method investments are classified as investments. The Company periodically evaluates its equity and cost method investments for impairment due to declines considered to be other than temporary. If the Company determines that a decline in fair value is other than temporary, then a charge to earnings is recorded as an impairment loss in the accompanying consolidated statements of operations.
Fair Value of Financial Instruments
ASC 825, “Disclosures about Fair Value of Financial Instruments,” requires disclosure of fair value information about financial instruments. ASC 820, “Fair Value Measurements” defines fair value, establishes a framework for measuring fair value in U.S. GAAP, and expands disclosures about fair value measurements. Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of December 31, 2021 and 2020.
The carrying amounts of the Company’s financial assets and liabilities, such as cash, prepaid expenses, accounts payable and accrued liabilities, payables with related parties, approximate their fair values because of the short maturity of these instruments.
Revenue Recognition
Revenue recognition is accounted for under ASC Topic 606, “Revenue from Contracts with Customers” (“ASC 606”) and all the related amendments.
The core principle of ASC 606 requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASC 606 defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under U.S. GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation.
The Company’s contracts with customers are generally on a contract and work order basis and represent obligations that are satisfied at a point in time, as defined in the new guidance, generally upon delivery or has services are provided. Accordingly, revenue for each sale is recognized when the Company has completed its performance obligations. Any costs incurred before this point in time, are recorded as assets to be expensed during the period the related revenue is recognized.
Stock Based Compensation
Stock-based compensation is accounted for based on the requirements of ASC 718 – “Compensation –Stock Compensation,” which requires recognition in the financial statements of the cost of employee, non-employee and director services received in exchange for an award of equity instruments over the period the employee or director is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award. The Company has elected to recognize forfeitures as they occur, and the cumulative impact of this change did not have any effect on the Company’s consolidated financial statements and related disclosures.
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Research and Development
Costs and expenses that can be clearly identified as research and development are charged to expense as incurred. For the years ended December 31, 2022, and 2021, the Company recorded $13,097 and $17,698 of research and development expenses, respectively.
Income Taxes
The Company accounts for income taxes in accordance with ASC 740-10, Income Taxes. Deferred tax assets and liabilities are recognized to reflect the estimated future tax effects, calculated at the tax rate expected to be in effect at the time of realization. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion of the deferred tax asset will not be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and rates of the date of enactment.
ASC 740-10 prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements and provides guidance on recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues. Interest and penalties are classified as a component of interest and other expenses. To date, the Company has not been assessed, nor paid, any interest or penalties.
Uncertain tax positions are measured and recorded by establishing a threshold for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Only tax positions meeting the more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized.
Earnings (Loss) Per Share
The Company reports earnings (loss) per share in accordance with ASC 260, “Earnings per Share.” Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during each period. Diluted earnings per share is computed by dividing net loss by the weighted-average number of shares of common stock, common stock equivalents and other potentially dilutive securities outstanding during the period. As of December 31, 2022, and 2021, the Company’s dilutive securities are convertible into 3,397,281 and 17,027,281 shares of common stock, respectively. This amount is not included in the computation of dilutive loss per share because their impact is antidilutive. The following table represents the classes of dilutive securities as of December 31, 2022, and 2021:
| December 31, 2022 | December 31, 2021 | |||||||
| Common stock to be issued | 727,281 | 11,067,281 | ||||||
| Stock options | 2,670,000 | 1,900,000 | ||||||
| Warrants to purchase common stock | — | 4,060,060 | ||||||
| 3,397,281 | 17,027,281 | |||||||
The following is management’s discussion and analysis of certain significant factors that have affected our financial position and operating results during the periods included in the accompanying consolidated financial statements, as well as information relating to the plans of our current management. This report includes forward-looking statements. Generally, the words “believes,” “anticipates,” “may,” “will,” “should,” “expect,” “intend,” “estimate,” “continue,” and similar expressions or the negative thereof or comparable terminology are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including the matters set forth in this report or other reports or documents we file with the Securities and Exchange Commission from time to time, which could cause actual results or outcomes to differ materially from those projected. Undue reliance should not be placed on these forward-looking statements which speak only as of the date hereof. We undertake no obligation to update these forward-looking statements.
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Going Concern
The independent auditors’ reports on our consolidated financial statements for the years ended December 31, 2022 and 2021 includes a “going concern” explanatory paragraph that describes substantial doubt about our ability to continue as a going concern. Management’s plans in regard to the factors prompting the explanatory paragraph are discussed below and also in Note 2 to the consolidated financial statements filed herewith.
While our financial statements are presented on the basis that we are a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business over a reasonable length of time, our auditors have raised a substantial doubt about our ability to continue as a going concern.
Off Balance Sheet Arrangements
We have no off-balance sheet arrangements including arrangements that would affect our liquidity, capital resources, market risk support and credit risk support or other benefits.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required for smaller reporting companies.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Index to Financial Statements and Financial Statement Schedules appearing on pages F-1-F-20 of this annual report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
A review and evaluation was performed by the Company’s management, including the Company’s Chief Executive Officer (the “CEO”) and Chief Financial Officer (the “CFO”), as of the end of the period covered by this annual report on Form 10-K, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that review and evaluation, the CEO and CFO have concluded that, as of December 31, 2022, disclosure controls and procedures were not effective at ensuring that the material information required to be disclosed in our reports pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), reports is recorded, processed, summarized and reported as required in the application of SEC rules and forms.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a set of processes designed by, or under the supervision of, a company’s principal executive and principal financial officers, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP and includes those policies and procedures that:
| ● | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and disposition of our assets; | |
| ● | Provide reasonable assurance our transactions are recorded as necessary to permit preparation of our financial statements in accordance with U.S. GAAP, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and | |
| ● | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. |
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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. It should be noted that any system of internal control, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our CEO and CFO have evaluated the effectiveness of our internal control over financial reporting as described in Exchange Act Rules 13a-15(e) and 15d-15(e) as of the end of the period covered by this report based upon criteria established in “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). As a result of this evaluation, our management, including our CEO and CFO, concluded that our internal control over financial reporting was not effective as of December 31, 2022, as described below.
We assessed the effectiveness of the Company’s internal control over financial reporting as of evaluation date and identified the following material weaknesses:
Insufficient Resources: We have an inadequate number of personnel with requisite expertise in the key functional areas of finance and accounting.
Inadequate Segregation of Duties: We have an inadequate number of personnel to properly implement control procedures.
Lack of Audit Committee: We do not have a functioning audit committee, resulting in lack of independent oversight in the establishment and monitoring of required internal controls and procedures.
We are committed to improving the internal controls and will (1) consider using third party specialists to address shortfalls in staffing and to assist us with accounting and finance responsibilities, (2) increase the frequency of independent reconciliations of significant accounts which will mitigate the lack of segregation of duties until there are sufficient personnel and (3) may consider appointing additional outside directors and audit committee members in the future.
We have discussed the material weakness noted above with our independent registered public accounting firm. Due to the nature of these material weaknesses, there is a more than remote likelihood that misstatements which could be material to the annual or interim financial statements could occur that would not be prevented or detected.
This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to the rules of the SEC that permit us to provide only management’s report in this annual report.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal controls over financial reporting during the fourth quarter of our fiscal year ended December 31, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Identification of directors and executive officers.
Set forth below is the name, age, and positions held by our executive officers and directors:
| Name | Age | Position(s) and Office(s) Held | ||
| Federico Pier | 55 | Chief Executive Officer (Principal Executive Officer) and Executive Chairman of the Board of Directors | ||
| Jeffery Wright | 40 | Chief Financial Officer (Principal Financial and Accounting Officer) | ||
| Charles Farrahar | 61 | Director | ||
| Colleen Delaney | 55 | Director | ||
| Dorothy Jordan | 66 | Director | ||
| Richard Rosenblum | 63 | Director |
Our directors are appointed for a one-year term to hold office until the next annual general meeting of our shareholders or until removed from office in accordance with our bylaws. Our officers are appointed by our board of directors and hold office until removed by the board. All officers and directors listed above will remain in office until the next annual meeting of our stockholders, and until their successors have been duly elected and qualified.
Set forth below is a brief description of the background and business experience of our current executive officers and directors.
Federico Pier – Chief Executive Officer and Executive Chairman of the Board
Mr. Pier was appointed as the Executive Chairman of the Board in May 2019, and has served as the Company’s Chief Executive Officer since August 2020. He is the Managing Director of YPH, LLC, a multifamily office investing in life sciences, energy, and technology. Mr. Pier has more than 25 years of experience in reverse mergers, structured finance, convertible debt and straight equity. He previously served as a Senior Director at Oppenheimer & Co. and as Managing Director at Bear Stearns. He holds a Bachelors’ degree from the University of North Texas and an MBA from the Graduate School of Management at the University of Dallas.
Jeffery Wright - Chief Financial Officer
Mr. Wright is a Certified Public Accountant who joined the Company in June 2019 as Controller. On February 1, 2020, he was promoted to Chief Financial Officer. Prior to joining the Company, Mr. Wright served as the Controller and Chief Financial Officer for Medovex Corporation (MDVX), a publicly traded medical device company that was subsequently acquired by H-CYTE Inc. Prior to his career with Medovex Corporation, Mr. Wright worked as an auditor at Ernst & Young within the Assurance Services division, where he managed audits of large ($2 billion to $10 billion annual revenue) publicly-traded companies. Prior to his career in public accounting, Mr. Wright worked as a trading analyst in the retirement trust services department at Reliance Trust Company, managing the institutional trading desk to settle mutual fund transactions with the National Securities Clearing Corporation. Mr. Wright holds Master of Professional Accountancy and Bachelor of Business Administration degrees from the Georgia State University Robinson College of Business and is a member of the Georgia Society of Certified Public Accountants.
Dorothy Jordan – Director
Dr. Jordan graduated with a B.S. in Nursing from East Stroudsburg University, a Masters in Child Health from Emory University, a Post-Masters Certificate in Psychiatric Mental Health from Georgia State University, and a Doctor of Nursing Practice from the University of Tennessee Health Science Center. Dr. Jordan served for many years on the Juvenile Diabetes Research Foundation board and the Camp Kudzu board. She currently serves on the advisory board of the Emory University Winship Cancer Institute and the Emory University Child and Adolescent Mood Program.
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Charlie Farrahar- Director
Mr. Farrahar, age 61, is a certified public accountant with over 30 years of managerial finance, administration, human resource, investor relations and risk management experience in the public, private and non-profit sectors. Mr. Farrahar served as the Company’s original Chief Financial Officer from its inception in 2014 through its merger with SSGI, Inc. to become a public entity. He has served as Chief Financial Officer for several small biotech startups in various stages of development and has been involved with their exits or mergers. Currently, he serves as Chief Financial Officer for Rion LLC , a privately held biotech company headquartered in Rochester, MN that licenses a platform technology from Mayo Clinic. In the late 1990s, Mr. Farrahar was Chief Financial Officer of Credit Depot Corp (Nasdaq). He was Chief Financial Officer of Medovex Corp. when it initially went public on Nasdaq in 2014 and was Chief Financial Officer of Roadie, Inc., when it was purchased by UPS in 2021.
Dr. Colleen Delaney- Director
Dr. Delaney, age 55, is Scientific Founder and Chief Scientific Officer, Executive Vice President of Research and Development of Deverra Therapeutics, Inc., a cellular therapy company focused on development of universal donor, off-the-shelf cell therapies for patients with hematologic malignancies and other critical diseases. Additionally, Dr. Delaney is a stem cell transplant physician and an Affiliate and former Professor of the Fred Hutchinson Cancer Research Center, Clinical Research Division, where she was PI of an NIH/government funded laboratory and where she established and became the Director of the Program in Cord Blood Transplant and Cord Blood Research at the Fred Hutch/Seattle Cancer Care Alliance. Dr. Delaney’s research interests focus on the development of methods to expand the number of umbilical cord blood stem cells and to then direct these cells to further differentiate into mature blood and immune cells for clinical application. She has more than 20 years of experience in the development of cord blood derived allogeneic cell therapies from bench to bedside and is an inventor on numerous patents.
Dr. Delaney received her MSc from Oxford University and her MD from Harvard Medical School and is the recipient of numerous awards, including the prestigious Damon Runyon Foundation Clinical Investigator Award, the Dr. Ali Al-Johani Award in recognition of exemplary clinical medical care and compassion to patients and families, the Seattle Business Journal’s Leaders in Health Care Award for Outstanding Medical Research and the Seattle American Women in Science’s Award for the Scientific Advancement and Leadership in STEM.
Richard Rosenblum - Director
Mr. Rosenblum, age 63, has served as President, Chief Financial Officer and Director of Payment Solutions Inc. since July 22, 2021. Mr. Rosenblum has also been a member of the Board of Directors of H-Cyte since February 1 2022. Mr. Rosenblum has been, since its founding in 1994, Chief Executive Officer and Principal at Harborview Capital Advisors LLC, which provided strategic advisory services in the areas of capital formation, merchant banking and management consulting. Additionally, Mr. Rosenblum has been the owner of Harborview Property Management for over 25 years, where he invests and manages domestic and international commercial real-estate, and multi-family real-estate assets. From 2008 to 2014, Mr. Rosenblum was a Director, President and Executive Chairman of Alliqua Biomedical Inc. (NASDAQ: ALQA), which developed and marketed hydrogel manufacturing technology in the wound care sector. His philanthropic and community-centered activities include being a founding board member of the Dr. David Feit Memorial Foundation, which for over 15 years raised money for the benefit and support of youth activities. Since 2018, Mr. Rosenblum has served on the Board of Directors of the Chilton Hospital Foundation. Mr. Rosenblum graduated Summa Cum Laude from SUNY Buffalo with a B.A. in Finance and Accounting.
Family Relationships
None
Involvement in Certain Legal Proceedings
No director, executive officer, significant employee or control person of the Company has been involved in any legal proceeding listed in Item 401(f) of Regulation S-K in the past 10 years.
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Corporate Governance
Our Board has not established any committees, including an audit committee, a compensation committee or a nominating committee, or any committee performing a similar function. The functions of those committees are being undertaken by our Board. Because we do not have any independent directors, our Board believes that the establishment of committees of our Board would not provide any benefits to our Company and could be considered more form than substance.
Given our relative size and lack of directors’ and officers’ insurance coverage, we do not anticipate that any of our stockholders will submit director nominees in the near future. While there have been no nominations of additional directors proposed, in the event such a proposal is made, all current members of our Board will participate in the consideration of director nominees.
As with most small, early-stage companies, until such time as our Company further develops our business, achieves a revenue base and has sufficient working capital to purchase directors’ and officers’ insurance, we do not have any immediate prospects to attract independent directors. When we are able to expand our Board to include one or more independent directors, we intend to establish an audit committee of our Board of Directors. It is our intention that one or more of these independent directors will also qualify as an audit committee financial expert. Our securities are not quoted on an exchange that has requirements that a majority of our Board members be independent and we are not currently otherwise subject to any law, rule or regulation requiring that all or any portion of our Board of Directors include “independent” directors, nor are we required to establish or maintain an audit committee or other committee of our Board.
Code of Ethics
Due to our limited size, we have not yet adopted a written code of business conduct and ethics that applies to our directors, officers and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. We intend to adopt a written code of business conduct and ethics in the near future.
Director Independence
None of the members of our Board of Directors qualifies as an independent director in accordance with the published listing requirements of The NASDAQ Stock Market (“NASDAQ”). The NASDAQ independence definition includes a series of objective tests, such as that the director is not, and has not been for at least three years, one of our employees and that neither the director, nor any of his family members has engaged in various types of business dealings with us. In addition, our Board has not made a subjective determination as to each director that no relationships exist which, in the opinion of our Board, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director, though such subjective determination is required by the NASDAQ rules. Had our Board of Directors made these determinations, our Board would have reviewed and discussed information provided by the directors and us with regard to each director’s business and personal activities and relationships as they may relate to us and our management.
In performing the functions of the audit committee, our board oversees our accounting and financial reporting process. In this function, our board performs several functions. Our board, among other duties, evaluates and assesses the qualifications of the Company’s independent auditors; determines whether to retain or terminate the existing independent auditors; meets with the independent auditors and financial management of the Company to review the scope of the proposed audit and audit procedures on an annual basis; reviews and approves the retention of independent auditors for any non-audit services; reviews the independence of the independent auditors; reviews with the independent auditors and with the Company’s financial accounting personnel the adequacy and effectiveness of accounting and financial controls and considers recommendations for improvement of such controls; reviews the financial statements to be included in our annual and quarterly reports filed with the Securities and Exchange Commission; and discusses with the Company’s management and the independent auditors the results of the annual audit and the results of our quarterly financial statements.
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Our board as a whole will consider executive officer compensation, and our entire board participates in the consideration of director compensation. Our board as a whole oversees our compensation policies, plans and programs, reviews and approves corporate performance goals and objectives relevant to the compensation of our executive officers, if any, and administers our equity incentive and stock option plans, if any.
Each of our directors participates in the consideration of director nominees. In addition to nominees recommended by directors, our board will consider nominees recommended by shareholders if submitted in writing to our secretary. Our board believes that any candidate for director, whether recommended by shareholders or by the board, should be considered on the basis of all factors relevant to our needs and the credentials of the candidate at the time the candidate is proposed. Such factors include relevant business and industry experience and demonstrated character and judgment.
Limitation on Liability and Indemnification of Officers and Directors
Our Amended and Restated Bylaws provide that our officers and directors will be indemnified by us to the fullest extent authorized by Delaware law, as it now exists or may in the future be amended. Our bylaws also permit us to maintain insurance on behalf of any officer, director or employee for any liability arising out of his or her actions, regardless of whether Delaware law would permit such indemnification.
These provisions may discourage stockholders from bringing a lawsuit against our directors for breach of their fiduciary duty. These provisions also may have the effect of reducing the likelihood of derivative litigation against officers and directors, even though such an action, if successful, might otherwise benefit us and our stockholders. Furthermore, a stockholder’s investment may be adversely affected to the extent we pay the costs of settlement and damage awards against officers and directors pursuant to these indemnification provisions.
We believe that these provisions are necessary to attract and retain talented and experienced officers and directors.
Delinquent Section 16(a) Reports
Section 16(a) of the Exchange Act requires the Company’s directors and executive officers, persons who beneficially own more than 10% of a registered class of the Company’s equity securities, and certain other persons to file reports of ownership and changes in ownership on Forms 3, 4 and 5 with the SEC, and to furnish the Company with copies of the forms. Based solely on its review of the forms it received, or written representations from reporting persons, except as set forth herein, the Company believes that all of its directors, executive officers and greater than 10% beneficial owners complied with all such filing requirements during 2021. Messrs. Pier, Wright, Yurkowsky and Potts, and Ms. Jordan previously failed to file required Form 3s. In addition, Bonderman Family Limited Partnership, ADEC Private Equity Investments LLC, and Massachusetts General Hospital, each of whom is a 10% stockholder, previously failed to file required Form 3s.
ITEM 11. EXECUTIVE COMPENSATION
2022 Summary Compensation Table
The following table sets forth information regarding compensation earned in or with respect to our fiscal years 2022 and 2022 for the following persons (collectively, the “named executive officers”):
| (i) | our principal executive officer or other individual serving in a similar capacity during the fiscal year ended December 31, 2022; | |
| (ii) | our two most highly compensated executive officers other than our principal executive officers who were serving as executive officers at December 31, 2022 whose compensation exceed $100,000; and | |
| (iii) | up to two additional individuals for whom disclosure would have been required but for the fact that the individual was not serving as an executive officer at December 31, 2022. |
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| Name | Year | Salary ($) | Bonus ($) | All Other Compensation ($) | Total ($) | |||||||||||||||
| Federico Pier | 2022 | $ | 120,000 | $ | - | $ | - | $ | 120,000 | |||||||||||
| ( Chief Executive Officer) | 2021 | $ | 90,000 | $ | - | $ | - | $ | 90,000 | |||||||||||
| Jeffrey Wright | 2022 | $ | 90,000 | $ | - | $ | - | $ | 90,000 | |||||||||||
| Chief Financial Officer | 2021 | $ | 60,000 | $ | - | $ | - | $ | 60,000 | |||||||||||
Narrative Disclosure to Summary Compensation Table
Except as otherwise described below, there are no compensatory plans or arrangements, including payments to be received from the Company with respect to any named executive officer, that would result in payments to such person because of his or her resignation, retirement or other termination of employment with the Company, or our subsidiaries, any change in control, or a change in the person’s responsibilities following a change in control of the Company.
Outstanding Equity Awards At 2022 Fiscal Year-End
The following table presents information concerning unexercised options and unvested restricted stock awards for the named executive officer outstanding as of December 31, 2022.
| Option Awards | ||||||||||||||||||||
| Name | Grant Date(1) | Number of Securities Underlying Unexercised Options (#) Exercisable | Number of Securities Underlying Unexercised Options (#) Unexercisable | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) | Option Exercise Price ($) | Option Expiration Date | ||||||||||||||
| Federico Pier | 6/14/19 | 250,000 | - | - | $ | 0.25 | 6/14/29 | |||||||||||||
| Federico Pier | 8/10/22 | - | 250,000 | - | $ | 0.25 | 8/10/32 | |||||||||||||
| Jeff Wright | 8/10/22 | - | 150,000 | - | $ | 0.25 | 8/10/32 | |||||||||||||
Executive Officer Compensation - Employment Agreements
On January 1, 2023, Vicapsys Life Sciences, Inc. (the “Company”) entered into that certain Employment Agreement (the “Pier Agreement”), dated as of January 1, 2023, by and between the Company and Federico Pier, the Company’s Chief Executive Officer and Executive Chairman of the Board.
Pursuant to the terms of the Pier Agreement, the Company agreed to pay Mr. Pier an annual base salary of $250,000 for his services as Chief Executive Officer. Mr. Pier’s base salary is subject to review annually by the Company’s Board of Directors (the “Board”) and may be increased, but not decreased. Mr. Pier will not receive any compensation for his services as a member of the Board.
In addition, Mr. Pier is eligible to receive an annual cash bonus of up to 100% of his annual base salary upon achievement of performance objectives to be determined by the Board or its compensation committee in consultation with Mr. Pier.
Also, Mr. Pier will have earned and will be paid a one-time cash bonus in a gross amount equal to $100,000 if either of the following triggering events occurs during the Term (as hereinafter defined):
| ● | The Company’s common stock is listed on The Nasdaq Stock Market or the New York Stock Exchange; or | |
| ● | The Company secures and receives financing of at least $8 million. |
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Pursuant to the terms of the Pier Agreement, the Company also agreed to issue to Mr. Pier a restricted stock unit award containing the following terms: Mr. Pier will receive shares of common stock of the Company (i) representing 1% of the Company’s fully diluted equity as of the payment date (the “Initial Equity Payment”) if the Company achieves a market capitalization of at least $250 million for 60 consecutive days during the term of the Pier Agreement (the “Initial Market Capitalization Target”); and (ii) representing the difference between 2% of the Company’s fully diluted equity as of the payment date and the amount of Initial Equity Payment (the “Subsequent Equity Payment”) and, together with Initial Equity Payment, “Equity Payments”) if the Company achieves a market capitalization of at least $500 million for 60 consecutive days during the Term (the “Subsequent Market Capitalization Target” and, together with Initial Market Capitalization Target, “Market Capitalization Targets”), such that Mr. Pier has, in the aggregate, received shares of common stock of the Company representing 2% of the Company’s fully diluted equity as of the date of payment of Subsequent Equity Payment.
Mr. Pier is also eligible to receive additional equity-based compensation awards as the Company may grant from time to time.
The Pier Agreement has a five-year term and will be automatically renewed for successive one-year periods until either party delivers a written notice of non-renewal at least 30 days prior to the then-effective term (the “Term”); provided that the Term will terminate prior to any such date (i) immediately upon Mr. Pier’s death or Disability (as defined in the Pier Agreement), (ii) on a date of termination set forth in the Company’s written notice of termination for any reason (whether for Cause (as defined in the Pier Agreement) or without Cause), or (iii) on a date of termination set forth in a written notice of Mr. Pier’s resignation.
Director Compensation
Mr. Federico Pier was named Executive Chairman of the Board of Directors in May 2019. For the years ended December 31, 2022, and 2021, the Company recorded expenses of $120,000 and $90,000 for these services. As of December 31, 2022, and 2021, Mr. Pier is owed $144,000 and $60,000, respectively, of accrued and unpaid director fees, and such amount is included in accounts payable, related parties on the consolidated balance sheet.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial ownership of our common stock as of April 1, 2023 for:
| ● | each person, or group of affiliated persons, known to us to beneficially own more than 5% of our common stock; |
| ● | each of our directors; |
| ● | each of our named executive officers; and |
| ● | all of our directors and executive officers as a group. |
Beneficial ownership of our common stock is determined under the rules of the SEC and generally includes any shares over which a person exercises sole or shared voting or investment power, or of which a person has a right to acquire ownership at any time within 60 days of April 14, 2023. Except as indicated by footnote, and subject to applicable community property laws, we believe the persons identified in the table have sole voting and investment power with respect to all shares of common stock beneficially owned by them.
In the following table, percentage ownership is based on 31,915,742 shares of our common stock. In computing the number of shares of common stock beneficially owned by a person and the percentage ownership of that person, we deemed to be outstanding all shares of voting securities subject to options or other convertible securities held by that person or entity that are currently exercisable or releasable or that will become exercisable or releasable within 60 days of April 1, 2023. We did not deem these shares outstanding, however, for the purpose of computing the percentage ownership of any other person.
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Unless otherwise indicated, the address of each of the following persons is c/o Vicapsys Life Sciences, Inc., 7778 Mcginnis Ferry Rd. #270, Suwanee, GA 30024. Except as otherwise noted, the persons named in the table have sole voting and dispositive power with respect to all shares beneficially owned, subject to community property laws where applicable.
| Name and Title: | Class of Security | Amount
of beneficial ownership | Percent
of Class (1) | |||||||
| Executive Officers and Directors: | ||||||||||
| Jeffery Wright, Chief Financial Officer | Common Stock (4) | 150,000 | * | % | ||||||
| Federico Pier | Common Stock (3) | 1,105,785 | 3.5 | % | ||||||
| Chief Executive Officer and Executive Chairman of the Board of Directors | ||||||||||
| Charles Farrahar, Director | Common Stock | 450,000 | 1.4 | % | ||||||
| Richard Rosenblum, Director | Common Stock | 0 | 0 | % | ||||||
| Dorothy Jordan, Director | Common Stock (2) | 212,500 | * | % | ||||||
| Colleen Delaney | Common Stock | 0 | 0 | % | ||||||
| All
Executive Officers and Directors (6 persons) | Common Stock (2,3,4) | 1.918.285 | 19.9 | % | ||||||
| More than 5% Beneficial Owners: | ||||||||||
| Bonderman Family Limited Partnership (5) | Common Stock | 6,070,588 | 19.0 | % | ||||||
| ADEC Private Equity Investments LLC (6) | Common Stock | 3,135,294 | 9.8 | % | ||||||
| Massachusetts General Hospital (7) | Common Stock | 3,582,880 | 11.2 | % | ||||||
*Less than 1%.
| (1) | Based on 31,915,742 (includes common stock to be issued of 727,281) shares of common stock outstanding as of April 1, 2023. | |
| (2) | Includes 100,000 shares of common stock issuable upon the exercise of vested options. | |
| (3) | Includes 500,000 shares of common stock issuable upon the exercise of vested options. | |
| (4) | Includes 150,000 shares of common stock issuable upon the exercise of vested options. | |
| (5) | Leonard Potter has voting and dispositive control over the Bonderman Family Limited Partnership. The address of the Bonderman Family Limited Partnership is 301 Commerce Street, Suite 3300, Fort Worth, TX 76102. | |
| (6) | E. Burke Ross has voting and dispositive control over the ADEC Private Equity Investments, LLC. | |
| (7) | Emile Braun has voting control and dispositive control over Massachusetts General Hospital. |
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
SEC regulations define the related person transactions that require disclosure to include any transaction, arrangement or relationship in which the amount involved exceeds the lesser of $120,000 or 1% of the average of the Company’s total assets at year-end for the last two completed fiscal years in which we were or are to be a participant and in which a related person had or will have a direct or indirect material interest. A related person is: (i) an executive officer, director or director nominee of the company, (ii) a beneficial owner of more than 5% of our common stock, (iii) an immediate family member of an executive officer, director or director nominee or beneficial owner of more than 5% of our common stock, or (iv) any entity that is owned or controlled by any of the foregoing persons or in which any of the foregoing persons has a substantial ownership interest or control.
In addition to the executive officer and director compensation arrangements discussed in “Executive Compensation,” the following is a description of all related person transactions that occurred during the period from January 1, 2022, through December 31, 2022, and any currently proposed transaction (the “Reporting Period”).
Consulting Agreements
On November 5, 2021, the Company entered into a Consulting Agreement (the “Poznansky Agreement”) with Mark Poznansky, MD, a minority stockholder and former Director. The Company engaged Dr. Poznansky to render consulting services with respect to informing, guiding, and supervising the development of antagonists to immune repellents or anti-fugetaxins for the treatment of cancer. The initial term of the Poznansky Agreement was for six months (the “Initial Term”), which was extended indefinitely, and the Company agreed to pay the Consultant $2,000 per month commencing November 5, 2021, with consideration for an increase in the monthly fee following the completion for the Company’s successful up listing to the NASDAQ Stock Market. The Company incurred a total of $24,000 and $4,000 in expenses for the years ended December 31, 2022 and 2021, respectively, related to the Poznansky Agreement, which is included in professional fees on the consolidated statements of operations. As of December 31, 2022 and 2021, $26,000 and $9,000, respectively, is included in accounts payable, related parties, on the consolidated balance sheets, related to the Poznansky Agreement.
On January 1, 2022, the Company entered into a consulting agreement (the “Toneguzzo Agreement”) with Frances Toneguzzo, Ph.D., the Company’s former CEO. Pursuant to the one-year term of the Toneguzzo Agreement in exchange for services in leading the research and development teams and laboratory work, the consultant will receive $5,000 per month. The Company incurred a total of $60,000 in expenses for the year ended December 31, 2022 related to the Toneguzzo Agreement, which is included in professional fees on the consolidated statements of operations. The Company did not incur any expenses related to the Toneguzzo Agreement for the year ended December 31, 2021. As of December 31, 2022, $40,000 is included in accounts payable, related parties, on the consolidated balance sheet related to the Toneguzzo Agreement.
On January 12, 2022, the Company entered into a Consulting Agreement (the “Donohoe Agreement”) with Donohoe Advisory Associates, LLC. (the “Consultant”). The Company engaged the Consultant to provide assistance and advice to the Company in support of the Company’s efforts to obtain a listing on a national securities exchange. The Company agreed to pay the Consultant a retainer fee of $17,500, which is to be applied to the Company’s monthly invoices until such time as the retainer fee is exhausted or the engagement under the agreement ends. The Company incurred $10,680 in expenses for the year ended December 31, 2022, which are included in professional fees on the consolidated statements of operations, and none of which is included in accounts payable on the consolidated balance sheet. As of December 31, 2022, the remaining balance of the retainer paid to the Consultant was $6,820 and is included in prepaid expenses on the consolidated balance sheet. No expenses were paid to the Consultant during the year ended December 31, 2021. If the Company is successful in listing on an exchange, the Company will be obligated to pay a “success fee” to the Consultant of either $10,000 or that number of registered common shares equivalent to $10,000 divided by the closing price of the Company’s common stock on the last day of trading on the OTC Market. The form of the success fee will be determined by the Company.
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On March 7, 2022, the Company entered into a Consulting Agreement (the “Alpha Agreement”) with Alpha IR Group, LLC. (the “Consultant”). The Company engaged the Consultant to provide consulting, investor relations, and corporate and transaction communication related services. The initial term of the Consulting Agreement was for three months (the “Initial Term”) beginning March 1, 2022, and the Company agreed to pay compensation equal to the sum of $50,000 payable in cash or stock options for the three months of service. The Company incurred $50,000 in expenses for the year ended December 31, 2022, which are included in professional fees on the consolidated statements of operations. No expenses were paid to the Consultant for the year ended December 31, 2021. As of December 31, 2022, the balance owed to the Consultant was $50,000 which is included in accounts payable on the condensed balance sheet.
MGH License Agreement
On May 8, 2013, ViCapsys and The General Hospital Corporation, d/b/a Massachusetts General Hospital (“MGH”) entered into a License Agreement as amended. As partial consideration upon execution of the License Agreement with MGH, the Company issued 3,000,000 shares of common stock to MGH with an estimated value of $200 which was capitalized as an intangible asset. Due to MGH’s current beneficial ownership of 11.2% of the Company’s common stock, the License Agreement is deemed to be a related party transaction. The Company incurred expenses to MGH of $13,097 and $17,698 for the years ended December 31, 2022, and 2021, respectively. As of December 31, 2022, there have not been any sales of product or process under this License Agreement. See “Item 1. Business; MGH License Agreement.”
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 360, Property, Plant, and Equipment (“ASC 360”) requires that a company recognize an impairment loss if, and only if, the carrying amount of a long-lived asset is not recoverable from the sum of the undiscounted cash flows expected to result from the use and eventual disposal of the asset, and if the carrying amount exceeds the asset’s fair value. Per ASC 360, a long-lived asset should be tested for recoverability whenever events or changes in circumstances indicate that its’ carrying amount may not be recoverable. As such, due to the combination of not having met certain due diligence requirements per the License, and the Company not raising sufficient capital necessary to maintain regular research and development activities in 2022, the Company reviewed the MGH license agreement for possible impairment as of December 31, 2022 by evaluating whether the anticipated future benefit of the license agreement exceeded the carrying value of the intangible asset of approximately $348,000 as of that date.
The Company concluded an impairment of the license agreement existed as of December 31, 2022 due to there being no projected undiscounted future net cash flows derived from the asset. As such, the Company wrote-off the carrying value of the asset as of December 31, 2022.
Accounts Payable, related parties and Accrued Salaries, related party
The Company incurred director fees of $120,000 and $90,000 for the years ended December 31, 2022, and 2021, respectively, to Federico Pier, the Company’s Chief Executive Officer and Chairman of the Board, which are included in personnel costs on the consolidated statements of operations. As of December 31, 2022, and 2021, $144,000 and $60,000, respectively, of these director fees are included in accounts payable, related parties, on the consolidated balance sheets.
The Company incurred consulting fees of $90,000 and $60,000 for the years ended December 31, 2022, and 2021, respectively, to Jeff Wright, the Company’s external Chief Financial Officer, which are included in professional fees on the consolidated statements of operations. As of December 31, 2022, and 2021, $99,000 and $40,000, respectively, is included in accounts payable, related parties, on the consolidated balance sheets.
In August 2020, Frances Tonneguzzo, the Company’s then-Chief Executive Officer (the “former CEO”), tendered her resignation as CEO. For the years ended December 31, 2022, and 2021, the Company did not incur any expenses to the former CEO. As of December 31, 2022 and 2021, $115,312 of unpaid salary to the former CEO is included in accrued salaries, related party on the consolidated balance sheets.
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Sale of Equity Method Investment
In January 2021, the Company sold its equity investment in AEI back to AEI for $100,000, which is included in gain on sale of equity method investment on the consolidated statement of operations for the year ended December 31, 2021.
Item 14. Principal Accountant Fees and Services
The following table presents fees for professional services billed or to be billed by D. Brooks and Associates, CPAs, for the audit of the Company’s annual financial statements for the fiscal years ended December 31, 2022, and December 31, 2021, as well as fees billed for other services rendered by D. Brooks and Associates, CPAs during those periods.
| Year
Ended December 31, 2022 | Year
Ended December 31, 2021 | |||||||
| Audit Fees(1) | $ | 42,000 | $ | 40,000 | ||||
| Audit-Related Fees | — | — | ||||||
| Tax Fees | — | — | ||||||
| All Other Fees | — | — | ||||||
| Total Fees | $ | 42,000 | $ | 40,000 | ||||
| (1) | Audit Fees are fees paid for professional services rendered for the audit of the Company’s annual consolidated financial statements and reviews of the Company’s interim unaudited condensed consolidated financial statements. |
Pre-Approval Policies and Procedures
Our Board of Directors pre-approves all services provided by our independent auditors. All of the above services and fees were reviewed and approved by our Board of Directors before the respective services were rendered.
Our Board of Directors has considered the nature and amount of fees billed by our independent registered public accounting firm and believe that the provision of services for activities unrelated to the audit is compatible with maintaining their respective independence.
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PART IV
Item 15. Exhibits and Financial Statement Schedules
| (a) | 1. | Financial Statements |
| The financial statements and Report of Independent Registered Public Accounting Firm are listed in the “Index to Financial Statements and Schedules” on page F-1 and included on pages F-2 to F-21 of this annual report on Form 10-K | ||
| 2. | Financial Statement Schedules | |
| All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission (the “Commission”) are either not required under the related instructions, are not applicable (and therefore have been omitted), or the required disclosures are contained in the financial statements included herein. | ||
| 3. | Exhibits (including those incorporated by reference). |
| 101.INS** | XBRL Instance Document | |
| 101.SCH** | XBRL Taxonomy Extension Schema Document | |
| 101.CAL** | XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF** | XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB** | XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE** | XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104* | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
* Incorporated by reference to Form 10-12G filed on February 12, 2020.
** Filed herewith
*** Furnished herewith
ITEM 16. FORM 10-K SUMMARY
Not applicable.
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SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized.
| VICAPSYS LIFE SCIENCES, INC. | ||
| Date: April 14, 2023 | By: | /s/ Federico Pier |
Federico Pier Chief Executive Officer | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Date: April 14, 2023 | By: | /s/ Federico Pier |
Federico Pier Chief Executive Officer (principal executive officer) and Executive Chairman of the Board of Directors | ||
| Date: April 14, 2023 | By: | /s/ Jeffery Wright |
| Jeffery Wright | ||
Chief Financial Officer (principal financial officer and principal accounting officer) | ||
| Date: April 14, 2023 | By: | /s/ Charles Farrahar |
Charles Farrahar Director | ||
| Date: April 14, 2023 | By: | /s/ Richard Rosenblum |
Richard Rosenblum Director | ||
| Date: April 14, 2023 | By: | /s/ Dorothy Jordan |
Dorothy Jordan Director | ||
| Date: April 14, 2023 | By: | /s/ Colleen Delaney |
Colleen Delaney Director |
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VICAPSYS LIFE SCIENCES, INC.
FINANCIAL STATEMENTS
Table of Contents
| F-1 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Vicapsys Life Sciences, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Vicapsys Life Sciences, Inc. (the Company) as of December 31, 2022 and 2021, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the years ended December 31, 2022 and 2021, and the related notes to the consolidated financial statements (collectively referred to as the consolidated financial statements).
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the years ended December 31, 2022 and 2021, in conformity with accounting principles generally accepted in the United States of America.
Substantial Doubt Regarding Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has incurred operating losses, used cash in operations, has a working capital deficit, and has a significant accumulated deficit. These and other factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plan regarding these matters are also described in Note 2 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditors since 2019.
April 14, 2023
| F-2 |
VICAPSYS LIFE SCIENCES, INC.
CONSOLIDATED BALANCE SHEETS
| December 31, 2022 | December 31, 2021 | |||||||
| Assets | ||||||||
| Current Assets: | ||||||||
| Cash | $ | $ | ||||||
| Prepaid Expenses | ||||||||
| Deferred offering costs | ||||||||
| Total Current Assets | ||||||||
| Intangible
asset, net of accumulated amortization of $ | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities and Stockholders’ Deficit | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accounts payable, related parties | ||||||||
| Accrued salaries, related parties | ||||||||
| Total Current Liabilities | ||||||||
| Stockholders’ Deficit: | ||||||||
| Preferred Stock; par value $.001; 20,000,000 shares authorized Series A Convertible Preferred Stock; par value $; shares authorized; -- shares issued and outstanding | ||||||||
| Series B Convertible Preferred Stock; par value $; shares authorized; -- shares issued and outstanding | ||||||||
| Common stock, par value $; shares authorized; and shares issued and outstanding, respectively | ||||||||
| Common stock to be issued, par value $; and shares outstanding, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Stockholders’ Deficit | ( | ) | ( | ) | ||||
| Total Liabilities and Stockholders’ Deficit | $ | $ | ||||||
See accompanying notes to consolidated financial statements.
| F-3 |
VICAPSYS LIFE SCIENCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| For the year ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenues | $ | $ | ||||||
| Operating Expenses: | ||||||||
| Personnel costs | ||||||||
| Research and development expenses, related party | ||||||||
| Professional fees | ||||||||
| Impairment loss | ||||||||
| General and administrative expenses | ||||||||
| Total operating expenses | ||||||||
| Loss from operations | ( | ) | ( | ) | ||||
| Other income: | ||||||||
| Other income | ||||||||
| Total other income | ||||||||
| Loss before income taxes | ( | ) | ( | ) | ||||
| Income taxes | ||||||||
| Net loss available to common shareholders | $ | ( | ) | $ | ( | ) | ||
| Deemed dividend on warrant modification | ( | ) | ||||||
| Net loss available to common stockholders | $ | ( | ) | $ | ( | ) | ||
| Net loss per common share: | ||||||||
| Basic and diluted | $ | ( | ) | $ | ( | ) | ||
| Weighted average common shares outstanding: | ||||||||
| Basic and diluted | ||||||||
See accompanying notes to consolidated financial statements.
| F-4 |
VICAPSYS LIFE SCIENCES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
For the Years Ended December 31, 2022 and 2021
| Total | ||||||||||||||||||||||||||||||||||||||||||||
| Series A Preferred Stock | Series B Preferred Stock | Common Stock | Common Stock to be Issued | Additional | Accumulated | Stockholders’ | ||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Paid-in Capital | Deficit | Deficit | ||||||||||||||||||||||||||||||||||
| Balance January 1, 2021 | | $ | | | $ | | | $ | | $ | | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||
| Conversion of Series A Preferred Stock to common stock to be issued | ( | ) | ( | ) | – | – | ( | ) | ||||||||||||||||||||||||||||||||||||
| Conversion of Series B Preferred Stock to common stock | – | ( | ) | ( | ) | – | ||||||||||||||||||||||||||||||||||||||
| Common stock issued for common stock to be issued | – | – | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Sale of common stock for cash | – | – | – | |||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||
| Net loss | – | – | – | – | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Balance December 31, 2021 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Common stock issued fom common stock to be issued | – | – | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Deemed dividend on warrant modification | – | – | – | – | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Common stock issued from warrant exercise | – | – | – | |||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||
| Net loss | – | – | – | – | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Balance December 31, 2022 | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
| F-5 |
VICAPSYS LIFE SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the year ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Amortization | ||||||||
| Impairment loss | ||||||||
| Stock-based compensation | ||||||||
| Gain on sale of equity method investment | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Prepaid Expenses | ( | ) | ( | ) | ||||
| Accounts payable | ( | ) | ||||||
| Accounts payable, related parties | ( | ) | ||||||
| Net Cash Used in Operating Activities | ( | ) | ( | ) | ||||
| Cash Flows from Investing Activities: | ||||||||
| Proceeds from sale of equity method investment | ||||||||
| Net Cash Used in Investing Activities | ||||||||
| Cash Flows from Financing Activities: | ||||||||
| Proceeds from exercise of warrants | ||||||||
| Payment of deferred offering costs | ( | ) | ||||||
| Proceeds from sale of common stock | ||||||||
| Net Cash Provided By Financing Activities | ||||||||
| Net Increase (decrease) in Cash | ( | ) | ||||||
| Cash, Beginning of year | ||||||||
| Cash, End of year | $ | $ | ||||||
| Supplementary Cash Flow Information | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for taxes | $ | $ | ||||||
| Supplementary Non-Cash Flow Information | ||||||||
| Deferred offering costs in accounts payable | $ | $ | ||||||
See accompanying notes to consolidated financial statements.
| F-6 |
VICAPSYS LIFE SCIENCES, INC.
Notes to Consolidated Financial Statements
December 31, 2022 and 2021
NOTE 1 - ORGANIZATION
Business
Vicapsys
Life Sciences, Inc. (“VLS”) was incorporated in the State of Florida on July 8, 1997 under the name All Product Distribution
Corp. On August 19, 1998, the Company changed its name to Phage Therapeutics International, Inc. On November 13, 2007, the Company changed
its name to SSGI, Inc. On September 13, 2017, the Company changed its name to Vicapsys Life Sciences, Inc.,
The Company’s strategy is to develop and commercialize, on a worldwide basis, various intellectual property rights (patents, patent applications, know how, etc.) relating to a series of encapsulated products that incorporate proprietary derivatives of the chemokine CXCL12 for creating a zone of immunoprotection around cells, tissues, organs and devices for therapeutic purposes. The product name VICAPSYN™ is the Company’s proprietary product line that is applied to transplantation therapies and related stem-cell applications in the transplantation field.
NOTE 2 – GOING CONCERN AND MANAGEMENT’S PLANS
The
accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which assumes
the realization of assets and satisfaction of liabilities and commitments in the normal course of business. The Company experienced a
net loss of $
In
March 2020, the World Health Organization declared the novel COVID-19 virus as a global pandemic. The COVID-19 outbreak in the
United States has resulted in a significant impact to the Company’s ability to secure additional debt or equity funding to
support operations. The Company received proceeds of $
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). The consolidated financial statements of the Company include the consolidated accounts of VLS and VI, its wholly owned subsidiary. All intercompany accounts and transactions have been eliminated in consolidation.
| F-7 |
Emerging Growth Company
The Company qualifies as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, as amended, (the “JOBS Act”). Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, for complying with new or revised accounting standards. As an emerging growth company, the Company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reported period. Actual results could differ from those estimates. Significant estimates for the years ended December 31, 2022, and 2021, include impairment of intangible assets, valuation allowance for deferred tax asset, and non-cash equity transactions and stock-based compensation.
Cash
The
Company considers all highly liquid investments with an original term of three months or less to be cash equivalents. These investments
are carried at cost, which approximates fair value. The Company held
Intangible Assets
Costs for intangible assets are accounted for through the capitalization of those costs incurred in connection with developing or obtaining such assets. Capitalized costs are included in intangible assets in the consolidated balance sheets. The Company’s intangible assets consist of costs incurred in connection with securing an Exclusive Patent License Agreement with The General Hospital Corporation, d/b/a Massachusetts General Hospital (“MGH”), as amended (the “License Agreement”). These costs are being amortized over the term of the License Agreement which is based on the remaining life of the related patents being licensed.
As of December 31, 2022, due to the combination of not having met certain due diligence requirements per the License Agreement, and the Company not raising sufficient capital necessary to maintain regular research and development activities in 2022, the Company reviewed the MGH License Agreement for possible impairment. The Company concluded an impairment of the License Agreement existed due to there being no projected undiscounted future net cash flows derived from the asset (See Note 4).
Long-Lived Assets
The Company recognizes impairment losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying values. Management has reviewed the Company’s long-lived assets for the years ended December 31, 2022, and 2021, and concluded an impairment of the License Agreement held with MGH disclosed above existed as of December 31, 2022 (See Note 4).
Equity Method Investment
The
Company accounts for investments in which the Company owns more than
| F-8 |
The amount of the adjustment is included in the determination of net income by the investor, and such amount reflects adjustments similar to those made in preparing consolidated statements including adjustments to eliminate intercompany gains and losses, and to amortize, if appropriate, any difference between investor cost and underlying equity in net assets of the investee at the date of investment. The investment of an investor is also adjusted to reflect the investor’s share of changes in the investee’s capital. Dividends received from an investee reduce the carrying amount of the investment. A series of operating losses of an investee or other factors may indicate that a decrease in value of the investment has occurred which is other than temporary, and which should be recognized even though the decrease in value is in excess of what would otherwise be recognized by application of the equity method.
In accordance with ASC 323-10-35-20 through 35-22, the investor ordinarily shall discontinue applying the equity method if the investment (and net advances) is reduced to zero and shall not provide for additional losses unless the investor has guaranteed obligations of the investee or is otherwise committed to provide further financial support for the investee. An investor shall, however, provide for additional losses if the imminent return to profitable operations by an investee appears to be assured. For example, a material, nonrecurring loss of an isolated nature may reduce an investment below zero even though the underlying profitable operating pattern of an investee is unimpaired. If the investee subsequently reports net income, the investor shall resume applying the equity method only after its share of that net income equals the share of net losses not recognized during the period the equity method was suspended.
Equity and cost method investments are classified as investments. The Company periodically evaluates its equity and cost method investments for impairment due to declines considered to be other than temporary. If the Company determines that a decline in fair value is other than temporary, then a charge to earnings is recorded as an impairment loss in the accompanying consolidated statements of operations.
The
Company’s equity method investment consisted of equity owned in Athens Encapsulation Inc. (“AEI”), a Company controlled
by former directors of the Company which was given to the Company as part of an investment and restructuring agreement entered into in
May 2019. In January 2021, the Company sold its equity investment in AEI, back to AEI for $
Fair Value of Financial Instruments
ASC 825, “Disclosures about Fair Value of Financial Instruments,” requires disclosure of fair value information about financial instruments. ASC 820, “Fair Value Measurements” defines fair value, establishes a framework for measuring fair value in U.S. GAAP, and expands disclosures about fair value measurements. Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of December 31, 2022 and 2021.
The carrying amounts of the Company’s financial assets and liabilities, such as cash, prepaid expenses, deferred offering costs, accounts payable and accrued liabilities, payables with related parties, approximate their fair values because of the short maturity of these instruments.
Revenue Recognition
Revenue recognition is accounted for under ASC Topic 606, “Revenue from Contracts with Customers” (“ASC 606”) and all the related amendments.
The core principle of ASC 606 requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASC 606 defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under U.S. GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation.
| F-9 |
The Company’s contracts with customers are generally on a contract and work order basis and represent obligations that are satisfied at a point in time, as defined in the new guidance, generally upon delivery or has services are provided. Accordingly, revenue for each sale is recognized when the Company has completed its performance obligations. Any costs incurred before this point in time, are recorded as assets to be expensed during the period the related revenue is recognized. During the years ended December 31, 2022, and 2021, the Company did not have any revenue.
Stock-based Compensation
Stock-based compensation is accounted for based on the requirements of ASC 718 – “Compensation –Stock Compensation,” which requires recognition in the financial statements of the cost of employee, non-employee and director services received in exchange for an award of equity instruments over the period the employee or director is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award. The Company has elected to account for forfeitures as they occur, on their share-based payment awards.
Research and Development
Costs
and expenses that can be clearly identified as research and development are charged to expense as incurred. For the years ended December
31, 2022, and 2021, the Company recorded $
Income Taxes
The Company accounts for income taxes in accordance with ASC 740-10, Income Taxes. Deferred tax assets and liabilities are recognized to reflect the estimated future tax effects, calculated at the tax rate expected to be in effect at the time of realization. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion of the deferred tax asset will not be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and rates of the date of enactment.
ASC 740-10 prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements and provides guidance on recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues. Interest and penalties are classified as a component of interest and other expenses. To date, the Company has not been assessed, nor paid, any interest or penalties.
Uncertain tax positions are measured and recorded by establishing a threshold for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Only tax positions meeting the more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized.
The Company reports earnings (loss) per share in accordance with ASC 260, “Earnings per Share.” Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during each period. Diluted earnings per share is computed by dividing net loss by the weighted-average number of shares of common stock, common stock equivalents and other potentially dilutive securities outstanding during the period. As of December 31, 2022, and 2021, the Company’s dilutive securities are convertible into and shares of common stock, respectively. This amount is not included in the computation of dilutive loss per share because their impact is antidilutive. The following table represents the classes of dilutive securities as of December 31, 2022, and 2021:
| December 31, 2022 | December 31, 2021 | |||||||
| Common stock to be issued | ||||||||
| Stock options | ||||||||
| Warrants to purchase common stock | ||||||||
| F-10 |
Recent Accounting Pronouncements
Management does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements for the years ended December 31, 2022, and 2021.
NOTE 4 – INTANGIBLE ASSET
The
Company’s intangible asset as of December 31, 2021 consist of costs incurred in connection with the License Agreement with MGH,
as amended (See Note 7). The consideration paid for the rights included in the License Agreement was in the form of common stock shares.
The estimated value of the common stock was being amortized over the term of the License Agreement which is based on the remaining life
of the related patents being licensed which was approximately
Financial
Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 360, Property, Plant,
and Equipment (“ASC 360”) requires that a company recognize an impairment loss if, and only if, the carrying amount of a
long-lived asset is not recoverable based on the sum of the undiscounted cash flows expected to result from the use and eventual
disposal of the asset, and if the carrying amount exceeds the asset’s fair value. Per ASC 360, a long-lived asset should be
tested for recoverability whenever events or changes in circumstances indicate that its’ carrying amount may not be
recoverable. As of December 31, 2022, due to the
combination of not having met certain due diligence requirements per the License Agreement, and the Company not raising sufficient
capital necessary to maintain regular research and development activities in 2022, the
Company reviewed the MGH license agreement for possible impairment as of December 31, 2022 by evaluating whether the anticipated
future benefit and estimated undiscounted cashflows of the license agreement exceeded the carrying value of the intangible asset of
approximately $
The Company concluded an impairment of the license agreement existed as of December 31, 2022 due to there being no projected undiscounted future net cash flows derived from the asset. As such, the Company wrote off the carrying value of the asset as of December 31, 2022 and recognized an impairment loss as presented on the statement of operations in operating expenses.
The Company’s intangible assets consisted of the following at December 31, 2022, and 2021:
| December 31, 2022 | December 31, 2021 | |||||||
| Licensed patents | $ | $ | ||||||
| Accumulated Amortization | ( | ) | ||||||
| Balance | $ | $ | ||||||
The
Company recognized $
NOTE 5 – RELATED PARTY TRANSACTIONS
Consulting Agreements
On
November 5, 2021, the Company entered into a Consulting Agreement (the “Poznansky Agreement”) with Mark Poznansky, MD, a
minority stockholder and former Director. The Company engaged Dr. Poznansky to render consulting services with respect to informing,
guiding, and supervising the development of antagonists to immune repellents or anti-fugetaxins for the treatment of cancer. The initial
term of the Poznansky Agreement was for six months (the “Initial Term”), which was extended indefinitely, and the Company
agreed to pay the Consultant $
| F-11 |
Accounts Payable, Related Parties, and Accrued Salary, Related party
The
Company incurred director fees of $
The
Company incurred consulting fees of $
In
August 2020, Frances Tonneguzzo, the Company’s then-Chief Executive Officer (the “former CEO”), tendered her
resignation as CEO. For the years ended December 31, 2022, and 2021, the Company did not incur any payroll related expenses to the
former CEO as an employee. As of December 31, 2022 and 2021, $
Sale of Equity Method Investment
In
January 2021, the Company sold its equity investment in AEI back to AEI for $
MGH License Agreement
On May 8, 2013, VI and MGH, a principal stockholder (see Note 6), entered into the License Agreement, pursuant to which MGH granted to the Company, in the field of coating and transplanting cells, tissues and devices for therapeutic purposes, on a worldwide basis: (i) an exclusive, royalty-bearing license under its rights in Patent Rights (as defined in the License Agreement) to make, use, sell, lease, import and transfer Products and Processes (each as defined in the License Agreement); (ii) a non-exclusive, sub-licensable (solely in the License Field and License Territory (each as defined in the License Agreement)) royalty-bearing license to Materials (as defined in the License Agreement) and to make, have made, use, have used, Materials for only the purpose of creating Products, the transfer of Products and to use, have used and transfer processes; (iii) the right to grant sublicenses subject to and in accordance with the terms of the License Agreement, and (iv) the nonexclusive right to use technological information (as defined in the License Agreement) disclosed by MGH to the Company under the License Agreement, all subject to and in accordance with the License Agreement (the “License”).
As amended by the Eighth Amendment to the License Agreement on March 14, 2022 (“Effective Date”), which replaces the prior pre-sales due diligence requirements in their entirety, the License Agreement requires that the Company satisfy the following requirements prior to the first sale of Products (“MGH License Milestones”), by certain dates.
Pre-Sales Diligence Requirement:
| (x) | The Company shall provide a detailed business plan and development plan by June 1st, 2022. As of the date of this filing the Company has yet to submit the business and development plan and is negotiating the extension of this requirement with MGH. | |
| (xi) | The
Company shall raise $ | |
| (xii) | The
Company shall raise an additional $ | |
| (xiii) | The Company shall initiate research regarding the role of CXCL12 in beta cell function and differentiation by January 1st, 2023. | |
| (xiv) | The Company shall initiate diabetic non-human primate studies using cadaveric islets encapsulated in the CXCL12 technology by March 1st, 2023. | |
| (xv) | The Company shall initiate research regarding other applications of the CXCL12 platform by June 1st, 2023. | |
| (xvi) | The Company shall initiate a Phase I clinical trial of a Product or Process by March 1st, 2024. | |
| (xvii) | The Company shall initiate a Phase II clinical trial of a Product or Process within thirteen (13) years from Effective Date. | |
| (xviii) | The Company shall initiate Phase III clinical trial of a Product or Process within sixteen (16) years from Effective Date. |
| F-12 |
Additionally, as amended by the Eighth Amendment to the License Agreement on March 14, 2022, which replaces the prior post-sales due diligence requirements in their entirety, the License Agreement requires that the Company satisfy the following requirements post-sales of Products (“MGH License Milestones”), by certain dates.
Post-Sales Diligence Requirements:
| (i) | The Company shall itself or through an Affiliate or Sublicensee make a First Commercial Sale within the following countries and regions in the License Territory within eighteen (18) years after the Effective Date of this Agreement: US and Europe and China or Japan. | |
| (ii) | Following the First Commercial Sale in any country in the License Territory, Company shall itself or through its Affiliates and/or Sublicensees use commercially reasonable efforts to continue to make Sales in such country without any elapsed time period of one (1) year or more in which such Sales do not occur due to lack such efforts by Company. |
In consideration of the update to the diligence milestones, the Company shall pay the following Annual Minimum Royalty payments:
| (i) | Prior
to the First Commercial Sale, the Company shall pay to MGH a non-refundable annual license fee of ten thousand dollars ($ | |
| (ii) | Following
the First Commercial Sale, the Company shall pay MGH a non-refundable annual minimum royalty in the amount of one hundred thousand
dollars United States Dollars ($ |
The
License Agreement also requires VI to pay to MGH a
The License Agreement expires on the later of (i) the date on which all issued patents and filed patent applications within the Patent Rights have expired (November 2033) or have been abandoned, and (ii) one year after the last sale for which a royalty is due under the License Agreement.
The License Agreement also grants MGH the right to terminate the License Agreement if VI fails to make any payment due under the License Agreement or defaults in the performance of any of its other obligations under the License Agreement, subject to certain notice and rights to cure set forth therein. MGH may also terminate the License Agreement immediately upon written notice to VI if VI: (i) shall make an assignment for the benefit of creditors; or (ii) or shall have a petition in bankruptcy filed for or against it that is not dismissed within 60 days of filing. As of the date of this filing, this License Agreement remains active and the Company has not received any termination notice from MGH.
| F-13 |
VI may terminate the License Agreement prior to its expiration by giving 90 days’ advance written notice to MGH, and upon such termination shall, subject to the terms of the License Agreement, immediately cease all use and sales of Products and Processes.
The
Company incurred costs to MGH of $
During the years ended December 31, 2022, and 2021, there have not been any sales of Product or Process under this License Agreement.
NOTE 6– COMMITMENTS AND CONTINGENCIES
Legal Matters
The Company is not aware of any material, existing or pending legal proceedings against our Company, nor is the Company involved as a plaintiff in any material proceeding or pending litigation.
MGH License Agreement
As
discussed in Note 5,
The
License Agreement also requires VI to pay to MGH a
Consulting Agreements
On
January 1, 2022, the Company entered into a consulting agreement (the “Toneguzzo Agreement”) with Frances Toneguzzo, Ph.D.,
the Company’s former CEO. Pursuant to the one-year term of the Toneguzzo Agreement in exchange for services in leading the research
and development teams and laboratory work, the consultant will receive $
| F-14 |
On
January 12, 2022, the Company entered into a Consulting Agreement (the “Donohoe Agreement”) with Donohoe Advisory Associates,
LLC. (the “Consultant”). The Company engaged the Consultant to provide assistance and advice to the Company in support of
the Company’s efforts to obtain a listing on a national securities exchange. The Company agreed to pay the Consultant a retainer
fee of $
On
March 7, 2022, the Company entered into a Consulting Agreement (the “Alpha Agreement”) with Alpha IR Group, LLC. (the “Consultant”).
The Company engaged the Consultant to provide consulting, investor relations, and corporate and transaction communication related services.
The initial term of the Consulting Agreement was for three months (the “Initial Term”) beginning March 1, 2022, and the Company
agreed to pay compensation equal to the sum of $
NOTE 7 – STOCKHOLDERS’ EQUITY (DEFICIT)
Preferred Stock
The Company has authorized shares of $ preferred stock.
Series A Preferred Stock
On
December 19, 2017, the Company amended its articles of incorporation by filing a certificate of designation with the Secretary of State
of Florida therein designating a class of preferred stock as Series A Preferred Stock, $ par value per share, consisting of
shares.
Pursuant to the Articles of Incorporation, the shares of Series A Preferred Stock automatically converted into shares of common stock to be issued on February 12, 2021, (the one-year anniversary of the initial filing by the Company of the Form 10 filed with the Securities and Exchange Commission).
As of December 31, 2022, and 2021, there were -- shares of Series A Preferred Stock issued and outstanding.
| F-15 |
Series B Preferred Stock
On December 19, 2017, the Company amended the articles of incorporation by filing a certificate of designation with the Secretary of State of Florida therein designating a class of preferred stock as Series B Preferred Stock, $ par value per share, consisting of shares (the “Series B Preferred Stock Certificate of Designation”).
Pursuant to the Articles of Incorporation, the shares of Series B Preferred Stock automatically converted into shares of common stock to be issued on February 12, 2021, the one-year anniversary of the initial filing by the Company of the Form 10 filed by the Company with the Securities and Exchange Commission.
As of December 31, 2022, and 2021, there were - of Series B Preferred Stock issued and outstanding.
Common Stock
The Company has authorized shares of $ common stock. As of December 31, 2022, and 2021, there are and shares of common stock outstanding, respectively.
Common Stock Issuances
On February 11, 2021, the Company issued shares to an investor. The shares were previously included in common stock to be issued.
During
the year ended December 31, 2021, the Company sold shares of common stock pursuant to a Private Placement Memorandum (the “PPM”)
for $ per share and received $
On February 12, 2021, the Company issued shares of common stock to the holders of Series A Preferred Stock, pursuant to the automatic conversion feature of the Series A Certificate of Designation, whereby, the Series A shares are to automatically convert on the one-year anniversary of the Company filing its Registration Statement on Form 10. The Form 10 Registration Statement was filed with the SEC on February 12, 2020. The common stock shares for the conversion of the Series A Preferred Stock were issued on January 13, 2022.
On February 12, 2021, the Company issued shares of common stock to the holders of Series B Preferred Stock, pursuant to the automatic conversion feature of the Series B Certificate of Designation, whereby, the Series B shares are to automatically convert on the one-year anniversary of the Company filing its Registration Statement on Form 10. The Form 10 Registration Statement was filed with the SEC on February 12, 2020. The common stock shares for the conversion of the Series B Preferred Stock were issued on January 13, 2022.
During the year ended December 31, 2022, the Company determined that the former Series B Preferred Stockholders, subsequent to all Series B Preferred Stock having previously been converted to shares of common stock in 2021, were owed additional shares of common stock due to an adjustment to the conversion price that occurred as a result of a down round trigger event that occurred in 2019 when the Company sold shares of common stock in a private placement at a price of $, which was below the original conversion ratio of the Series B Preferred Stock.
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Management determined the total additional shares owed to the Preferred B Stockholders to be as a result of the down round trigger. The financial statement impact of this down round trigger was not significant. The shares owed to the Series B Preferred Stockholders due to the 2019 trigger event have been presented on the statement of stockholders’ equity retrospectively as common stock to be issued with no impact on total stockholders’ deficit. The Company issued the additional shares to the Series B Preferred Stockholders on March 24, 2022.
In
July 2022, the Company received proceeds totaling $
Common Stock to be Issued
As of December 31, 2022, and 2021, there were and , respectively, shares of common stock to be issued. The December 31, 2022, amount relates to shares to be issued pursuant to the SRI Agreement, shares of common stock to be issued to two initial shareholders of VI, and shares of common stock to be issued pursuant to the exercise of warrants in July 2022. The December 31, 2021 amount relates to shares of common stock be issued for the automatic conversion of the Series A Preferred Stock, shares of common stock to be issued for the automatic conversion of the Series B Preferred Stock, shares to be issued pursuant to a Stock Issuance and Release Agreement (“SRI Agreement”) executed by the Company in February 2019 to stockholders for no consideration who purchased shares in 2018 at $, and shares of common stock to be issued to two initial shareholders of VI.
Stock Option-Based Compensation Plan
On August 10, 2022, the Board of Directors of the Company approved and adopted the Vicapsys Life Sciences, Inc., 2022 Omnibus Equity Incentive Plan (the “Plan”). The material terms of the 2022 Plan are set forth below:
| ● | The Board or a committee established by the Board will administer the 2022 Plan. |
| ● | The total number of shares of common stock authorized for issuance under the 2022 Plan is shares of common stock plus, to the extent the Company issues new shares of common stock other than under the terms of the 2022 Plan or other than certain Inducement Awards, 3.1% of the shares of common stock issued by the Company in such issuance (or such lower amount as determined by the Board). As of August 16, 2022, shares of common stock represents approximately % of our common stock outstanding. |
| ● | Eligible recipients of awards include employees, directors or independent contractors of the Company who has been selected as an eligible participant by the Administrator, subject to certain limitations relating to Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”). |
| ● | No
non-employee director may be granted awards under the 2022 plan during any calendar year if such awards and cash fees paid for serving
as a non-employee director would exceed $ |
| ● | In
no event shall the exercise price of an option issued pursuant to the 2022 Plan be less than one hundred percent ( |
The purposes of the Plan are to (i) provide an additional incentive to selected employees, directors, and independent contractors of the Company or its Affiliates whose contributions are essential to the growth and success of the Company, (ii) strengthen the commitment of such individuals to the Company and its Affiliates, (iii) motivate those individuals to faithfully and diligently perform their responsibilities and (iv) attract and retain competent and dedicated individuals whose efforts will result in the long-term growth and profitability of the Company. To accomplish these purposes, the Plan provides that the Company may grant options, stock appreciation rights, restricted stock, restricted stock units, other stock-based awards or any combination of the foregoing.
Stock Options
On August 10, 2022, the Board of Directors authorized the Company to issue options to purchase an aggregate of shares of common stock to certain consultants, directors, and former directors. The stock options are exercisable at a price of $. The options granted are estimated to have fair market value per share of $. The stock options fully vest after six months from the grant date.
We utilized the Black-Scholes valuation method to determine the estimated future value of the option on the date of grant. The Company utilized the following assumptions when applying the model.
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The simplified method provided for in Securities and Exchange Commission release, Staff Accounting Bulletin No. 110, averages an award’s weighted average vesting period and contractual term for “plain vanilla” share options. The expected volatility was estimated by analyzing the historic volatility of similar public biotech companies in an early stage of development. No dividend payouts were assumed as we have not historically paid, and do not anticipate paying, dividends in the foreseeable future. The risk-free rate of return reflects the average interest rate offered for US treasury rates over the expected term of the options.
The option price was set at the estimated fair value of the common stock on the date of grant using an actual transactions approach. The actual transactions method considers actual sales of the Company’s common stock prior to the valuation date. The Company determined the price per share of the most recent private sale of equity to be a more reliable indicator of the Company’s fair value rather than the quoted OTC prices, which reflected very low trading volume that subjected the quote priced to unusual fluctuations in the stock prices.
| Grant date | August 10, 2022 | |||
| Underlying common stock | $ | |||
| Expected term (years) | ||||
| Risk-free interest rate | % | |||
| Volatility | % | |||
| Dividend yield | ||||
| Number of Options | Weighted- Average Exercise Price per Share | Weighted- Average Remaining Life (Years) | Aggregate
Intrinsic Value | |||||||||||||
| Outstanding at January 1, 2021 | $ | $ | ||||||||||||||
| Outstanding at December 31, 2021 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Outstanding at December 31, 2022 | $ | $ | ||||||||||||||
| Exercisable at December 31, 2022 | $ | $ | ||||||||||||||
The Company recorded stock compensation expense of $ and $ for the years ended December 31, 2022 and 2021, respectively. As of December 31, 2022, there were shares of time-based, non-vested stock options that fully vest in February 2023. As of December 31, 2022, there was $ of total unrecognized stock-based compensation related to these non-vested stock options to be recognized in February 2023, or years.
Warrants
On July 14, 2022, the Board authorized and approved to extend the end date of certain warrants issued with common stock purchases at various dates in 2019, by and among the Company and certain investors, pursuant to which the investors had the right to exercise the warrants until July 31, 2022.
Accounting Standards Codification (“ASC”) ASC 718-20 Compensation-Stock compensation, which provides for the guidance on the accounting for a modification of the terms or conditions of an equity award, and requires a modification to be treated as an exchange of the original issuance for a new issuance, and any incremental value between the original award and the modified award be recorded.
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We utilized a Black-Scholes valuation method to determine any incremental value due to the modification. The inputs used to value the warrant as of the modification date are as follows:
| ● | Underlying common stock value: $ | |
| ● | Exercise price of the warrant: $ | |
| ● | Life of the warrant: years | |
| ● | Risk free return rate: % | |
| ● | Annualized volatility rate of four comparative companies: % |
The
Company recognized $
The following table summarizes activities related to warrants of the Company for the years ended December 31, 2022, and 2021:
| Number of Warrants | Weighted Average Exercise Price Per Share | Weighted Average Remining Life (Years) | ||||||||||
| Outstanding and exercisable at January 1, 2021 | $ | |||||||||||
| Outstanding an exercisable at December 31, 2021 | $ | |||||||||||
| Expired | ( | ) | $ | — | ||||||||
| Exercised | ( | ) | $ | — | ||||||||
| Outstanding and exercisable at December 31, 2022 | $ | |||||||||||
The Company did not issue any warrants during the years ended December 31, 2022 and 2021.
NOTE 8 – INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
At
December 31, 2022, the Company had a net operating loss (“NOL”) carryforward of approximately $
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A reconciliation of the Company’s effective tax rate to statutory rates for the years ended December 31, 2022, and 2021, is as follows:
| Year Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Pre- tax loss | $ | ( | ) | $ | ( | ) | ||
| U.S. federal corporate income tax rate | % | % | ||||||
| Expected U.S. income tax credit | ( | ) | ( | ) | ||||
| Permanent changes | ||||||||
| Change in valuation | ||||||||
| Tax expense | $ | $ | ||||||
The Company had deferred tax assets as follows:
| Year Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Tax loss carryforward | $ | ) | $ | |||||
| Valuation allowance | ( | ) | ( | ) | ||||
| Net deferred tax assets | $ | $ | ||||||
The Company’s NOL carryforwards may be significantly limited under the Internal Revenue Code (“IRC”). NOL carryforwards are limited under Section 382 when there is a significant ownership change as defined in the IRC. During the year ended December 31, 2017, and previous years, the Company may have experienced such ownership changes, which could pose limitations.
NOTE 9 – SUBSEQUENT EVENTS
In
April 2023, the Company entered into Security Purchase Agreements (“SPA’s) with select accredited investors in connection
with a private offering by the Company to raise a maximum of $ through the sale of shares of common stock at $ per share.
The Company has raised an aggregate amount of $
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