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TNI BIOTECH, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION(Edgar Glimpses Via Acquire Media NewsEdge) This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. The Company's actual results could differ materially from those set forth on the forward-looking statements as a result of the risks set forth in the Company's filings with the Securities and Exchange Commission, general economic conditions, and changes in the assumptions used in making such forward-looking statements. General TNI BioTech, Inc. ("we" or the "Company") was initially incorporated in Florida on December 2, 1993 as Resort Clubs International, Inc. ("Resort Clubs") to manage and market golf course properties in resort markets throughout the United States. Galliano International Ltd. ("Galliano") was incorporated in Delaware on May 27, 1998 and began trading in November 1999 through the filing of a 15C-211. On November 10, 2004, Galliano merged with Resort Clubs. Resort Clubs was the surviving corporation. On August 23 2010, Resort Clubs changed its name to pH Environmental, Inc. ("pH Environmental"). On April 23, 2012, pH Environmental completed a name change to TNI BioTech, Inc., and on April 24, 2012 the Company executed a share exchange agreement for the acquisition of all of the outstanding shares of TNI BioTech, IP, Inc. The Company is a biopharmaceutical company focused on developing and commercializing therapeutics to treat cancer, HIV/AIDS and autoimmune diseases by combating these chronic and often life-threatening diseases through the activation and rebalancing of the body's immune system. The Company has been developing active and adoptive forms of immunotherapies through the acquisition of patents, Investigational New Drug applications and clinical data and all proprietary technical information, know-how, procedures, protocols, methods, prototypes, designs, data and reports, which are not readily available to others through public means, and which are owned, generated or developed through experiments or testing by Dr. Plotnikoff, Professor Shan, Dr. Bernard Bihari, Dr. Ian Zagon, Dr. Jill Smith, Dr. Patricia J. McLaughlin and Moshe Rogosnitzky. The Company currently has offices in Frederick, Maryland, White Plains, New York and Orlando, Florida. Business Strategy The Company's short-term business strategy focuses on several key areas described below, all of which are being undertaken simultaneously. ? Commencing by the end of the third quarter of 2014, the distribution of low-dose naltrexone ("IRT 103 LDN") to support the large scale treatment in emerging nations, initially in Africa and Central/South America as an immune-stimulating therapy for HIV/AIDS, cancer, autoimmune disease and immune disorders; ? Commencing by the end of the second quarter of 2014, the distribution of IRT-103 LDN marketed under the name Lodonal™ through various distribution agreements; ? Outsourcing of the manufacturing of IRT-103 LDN to Laboratorios Ramos in Managua, Nicaragua to provide IRT 103 LDN in capsule, tablet and/or cream form, throughout Africa and expanding to other developing nations (Laboratorios Ramos has already produced IRT 103 LDN, and the Company will commence shipments when all regulatory approvals have been received in Africa for the importation of IRT 103 LDN); and ? Continuing the cooperative venture with the Hubei Qianjiang Pharmaceutical Company ("Qianjiang Pharmaceutical"), to be in operation by the end of 2014, pursuant to which Qianjiang Pharmaceutical will provide the funding required for the clinical trials of the Company's products in China in exchange for the Company providing exclusive licensing rights in China (with the Company expecting to receive 6% of the gross revenue from sales of those products in China). To further the business strategy, the Company has entered into relationships with a number of groups to promote the sale of its products outside the U.S., focusing initially on countries in Africa and Central/South America. They include: the Brewer Group, Inc. (the "Brewer Group"); GB Oncology & Imaging Group, LLC ("GBOIG"); American Hospitals and Resorts Limited ("AHAR"), an advanced surgical and medical facility, as well as a number of U.S. doctors that own and operate clinics in the U.S. and Nigeria. 19 -------------------------------------------------------------------------------- The Brewer Group is an international business advisory firm engaged in the business of identifying and capitalizing on opportunities with international governments, non-government organizations and professional athletes. The CEO of The Brewer Group is also the founder and Executive Director of The Jack Brewer Foundation. The Jack Brewer Foundation seeks to provide the Company with medical equipment where it is needed. Under the Engagement Agreement for Corporate Advisory Services dated effective February 5, 2013 (the "Engagement Agreement"), the Brewer Group agreed to evaluate the Company's options for expansion and growth into certain international markets, including Africa and, upon request, markets in Haiti, the Dominican Republic and/or Panama. Pursuant to the Engagement Agreement, the Brewer Group agreed to endorse the Company publicly and assist the Company in securing strategic partnership deals to enhance brand and market awareness. The initial term of the Engagement Agreement was 12 months, with an option for either party to terminate upon 30 calendar days with written notice to the other party. The agreement has been extended through February 2015. The Company issued the Brewer Group 500,000 shares of its common stock in accordance with the Engagement Agreement. GBOIG, a subsidiary of GB Energie LLC, is a Washington D.C. based business managed by Dr. Gloria B. Herndon, a director of the Company. Dr. Herndon is committed to sourcing sustainable solutions in the field of health care in Africa, and has been involved since the 1990s on health-care related issues in Africa. The Company and GBOIG are working with the ministries of health in African countries to provide better access to and public awareness of the prevention, diagnosis and treatment of cancer and chronic infectious diseases. The Company plans to work with onsite clinics to complete patient assessments at little or no cost and prescribe treatments used to stimulate the immune system of the patients with various chronic diseases, especially HIV/AIDS and/or cancer. In September 2012, the Company announced an agreement to open an outpatient's clinic at Queen Elizabeth Central Hospital in Malawi for the treatment of cancer and infectious diseases with GBOIG. Once the facility is operational, AHAR has agreed to assist in the operation of the clinic in Malawi and the implementation of the Company's therapies. The contract with the Republic of Malawi calls for delivery of 25,000 pills a day, increasing to 500,000 pills a day within 24 months. On April 16, 2014, The Malawi Pharmacy, Medicines and Poisons Board, the drug regulator authority of the government of Malawi, approved the marketing and sale of the Company's LDN product in Malawi. The Company expects to commence sales and operations in Malawi before the end of 2014. In October 2013, the Company announced the signing of an exclusive distribution agreement with AHAR Pharma, a Nigerian company, to market Lodonal™, in Nigeria for the treatment of autoimmune diseases and cancer. Dr. Richard Afonja formed AHAR Pharma in 2013 for the sole purpose of marketing the Company's therapies. Dr. Afonja is a Hematologist/Oncologist and the Founder and CEO of a number of medical operations in both the United States and Nigeria for the treatment of cancer and blood disorders. AHAR Pharma intends to distribute Lodonal™ through a local distributor network, an Internet client base and directly to hospitals, pharmacists and doctors in Nigeria. The Company expects to implement the agreement in 2014, and expects to treat up to 500,000 patients per day within a year of implementation. On October 18, 2012, the Company and Qianjiang Pharmaceutical signed a Venture Cooperation New Drug Methionine Enkephalin agreement pursuant to which Qianjiang Pharmaceutical acquired an exclusive license for the production of MENK in China. The agreement requires that Qianjiang Pharmaceutical conduct drug research and pilot testing for MENK, organize pre-clinical studies, and apply for clinical trials for MENK with the Chinese State Food and Drug Administration. Under the agreement, Qianjiang Pharmaceutical must open a co-administration account for the development of MENK in China. Qianjiang Pharmaceutical must pay the Company, upon the marketing of MENK products, a half-year amount equaling 6% of its gross sales from MENK of the preceding half year. The Company signed a Supplementary Agreement in March 2014, obligating the Company to provide to Qianjiang Pharmaceutical the Company's research materials, data and trial results to date so that Qianjiang Pharmaceutical can begin conducting basic studies and clinical trials in China. Under the agreements, Qianjiang Pharmaceutical will fund the subsequent studies in China. 20 -------------------------------------------------------------------------------- In February 2013, the Company entered into a Strategic Framework Agreement with Qianjiang Pharmaceutical. The agreement calls for the parties to co-develop new cancer drugs based on the Company's patents and licenses involving MENK, which when approved will be marketed in China under the brand name IRT-101 and IRT-102. On June 11, 2014, the Company's wholly-owned subsidiary, Airmed Biopharma Limited ("Airmed"), entered into a Distribution Agreement with PanAm Global Logistics, Inc. ("Distributor") pursuant to which Distributor will purchase from Airmed low-dose naltrexone under the name Lodonal™ for resale in Brazil, Colombia, Costa Rica, Dominican Republic, Ecuador, Guatemala, Panama, Venezuela, Republic of Malawi, and Egypt, and such other countries as may be added in accordance with the agreement. Pursuant to the agreement, Airmed agreed to supply Lodonal™ to Distributor for a price of $1.00 per pill ($30 per carton) at a twenty-five percent discount. The term of the agreement is five years and may be extended for an additional five-year period, subject to agreement between the parties on certain target sales requirements for the additional five-year term. Simultaneously with the execution of the agreement, Distributor purchased five thousand cartons of Lodonal™ for $150,000. The Company is focused on our lead therapies designed for the treatment of cancer, HIV/AIDS, Crohn's disease, fibromyalgia and multiple sclerosis. Management believes the pharmaceutical industry is eager to acquire advanced clinical-phase and approved products. However, despite the strong demand for advanced clinical-phase products, nearly 4,000 known compounds have had their development suspended in phase II or earlier. Many of these are promising therapeutic drug candidates, but their development was discontinued because of strategic or financial constraints rather than for clinical reasons. Therefore, management believes there are clear market opportunities with a significant amount of unmet needs and a robust potential for partnering activities. Distribution and Production The Company has entered into a contract for the supervision and inspection of manufacturing processes with ViPharma. The supervision and manufacturing agreement provides ViPharma with exclusive rights to supervise and inspect all manufacturing processes of IRT-103 LDN in Latin America. The initial term of the agreement is ten years commencing in September 2013, with automatic five-year renewal terms provided neither party is in breach. The agreement may be terminated by (i) mutual agreement, (ii) in the event of a breach after a 45 day cure period or (iii) by either party upon provision of written notice at least 90 days before the end of the agreement, provided however that if the Company terminates the agreement without cause it will be required to pay ViPharma a $10 million penalty. The Company executed a manufacturing agreement with Laboratorios Ramos, a facility meeting the U.S. Food and Drug Administration enforced Current Good Manufacturing Practice regulations ("cGMP"), for IRT-103 LDN effective August 16, 2013. Under the agreement, Laboratorios Ramos will produce IRT 103 LDN tablets, capsules and/or cream in accordance with the technical specifications provided by the Company, cGMPs and the practices of Nicaragua and of any other regulatory body of the countries where the products will be exported. Laboratorios Ramos has obtained all permits and licenses necessary to carry out the manufacturing of IRT 103 LDN. The manufacturing agreement has a five-year term, renewable by a signed agreement by the parties at least 60 days before the expiration of the agreement. The agreement may be terminated earlier through mutual agreement or upon expiration of a 30-day cure period following notice from the non-breaching party to the breaching party of a material failure of the obligations under the agreement. Additionally, the Company may terminate the agreement upon at least 30 days written notice if Laboratorios Ramos does not act in strict accordance with the technical specifications provided by the Company and with cGMPs or those of any regulatory body of the importing countries. The Company will pay Laboratorios Ramos a low single digit cent amount per tablet or capsule and a low double-digit cent amount per each cream produced. In October 2013, the Company announced the signing of a distribution agreement with AHAR Pharma, a Nigerian company, to market Lodonal™, in Nigeria for the treatment of autoimmune diseases and cancer. The agreement gives AHAR Pharma exclusive rights to sell to customers in the private sector, and non-exclusive rights to sell to customers in the public sector, AHAR Pharma intends to distribute Lodonal™ through a local distributor network, an Internet client base and directly to hospitals, pharmacists and doctors in Nigeria. Under the agreement, the Company is obligated to provide delivery of an initial supply of between 0.5 million and 1.0 million doses of Lodonal™ product per day to cover AHAR Pharma's purchase commitments in 2015. 21 -------------------------------------------------------------------------------- Subsidiaries The Company formed its United Kingdom subsidiary, TNI BioTech, LTD (the "Subsidiary") in August, 2013. The Subsidiary received approval to be considered an enterprise micro, small or medium-sized enterprise ("SME") with the European Medicines Agency ("EMA") on August 21, 2013. The designation provides the Subsidiary with significant discounts when holding meetings or submitting filings to the EMA. On September 19, 2013, the Subsidiary submitted a pre-submission package to the EMA regarding Crohn's Disease. The EMA granted the Subsidiary a meeting that took place on September 27, 2013. The Subsidiary is eligible to benefit from the provisions for administrative and financial assistance for SMEs set out in Regulation (EC) No 2049/2005. In October 2012, the Company formed TNI BioTech International, Ltd., a BVI company in Tortola, British Virgin Islands, which was set up to allow the Company to market and sell low dose naltrexone ("LDN") in those countries we have been able to obtain approval. In December 2013, the Company formed a new subsidiary, Cytocom Inc. ("Cytocom"), to focus on conducting LDN and Methionine [Met5]-enkephalin ("MENK") clinical trials in the United States. The Company expects that the manufacturing of our therapies and their subsequent distribution into emerging nations will continue to be operated directly through the Company. The Company initially entered into consulting arrangements with Dr. Graham Burton, M.D., Ph.D., and Mr. Gary G. Gemignani, to focus on the clinical advancement of LDN and MENK through Cytocom. Effective April 1, 2014, Dr. Burton was appointed President and Chief Executive Officer of Cytocom. On the same date, Mr. Gemignani was appointed Chief Operating Officer, Chief Financial Officer and Executive Vice President of Cytocom. Dr. Burton will be responsible for leading Cytocom's global development, clinical research and medical initiatives. Mr. Gemignani will be responsible for operational and business development activities and financial management of Cytocom. In March 2014, the Company incorporated Airmed, which was set up to benefit from incentives granted by the Irish government for the establishment of pharmaceutical companies (8 out of 10 of the world's leading pharmaceutical companies have located in Ireland), and because Ireland is a member of the European Union and the European Economic Area (the "Euro Zone"). An Irish limited liability company enjoys a low corporate income tax rate of 12.5%, one of the lowest in the world. The Irish-domiciled company hopes to qualify for tax incentives for Irish holding/headquartered companies and to benefit from the network of double tax treaties that reduce withholding taxes. TNI BioTech International, Ltd. will manage our international distribution, using product that is manufactured in Ireland and elsewhere. Research and Development The Company's research and development ("R&D") activities commenced in the third quarter of 2012, the Company having only completed the initial acquisition of MENK-related patents required for research in the second quarter of that year. In 2013 we continued to build R&D organization and capabilities focusing primarily on new uses for opioid-related immuno-therapies, such as LDN and MENK. Those activities continued in the first quarter of 2014. Our R&D priorities include development of IRT-101 or MENK, a small synthetic peptide that is naturally occurring in the body, and IRT-103 LDN, an opioid receptor antagonist. Our pipeline provides two therapies with a wide range of indications that can be pursued. We believe that both molecules have the ability to stimulate the immune system in order to treat a variety of autoimmune diseases including multiple sclerosis, immune disorders such as Crohn's disease, cancer, and viral infections such as HIV/AIDS. Our R&D is overseen and managed internally, working with individuals, universities, and contract research organizations in order to utilize patents that we have licensed or acquired since our inception. We continue to seek to expand our pipeline of patents by reviewing other compounds, technologies or capabilities. We also seek out promising compounds and innovative technologies developed by third parties to incorporate into our discovery and development processes or projects. Drug discovery and development is time-consuming, expensive and unpredictable. According to PhRMA, out of 5,000-10,000 screened compounds, only 250 enter preclinical testing, five enter human clinical trials and one is approved by the FDA. The process from early discovery or design to development to regulatory approval can take more than 10 years. Drug candidates can fail at any stage of the process, and candidates may not receive regulatory approval even after many years of research. As of June 30, 2014, we had two compounds (IRT-101 and IRT-103) in research and development. We currently have two active development programs in oncology and Crohn's disease; both of which are expected to move into Phase 3 clinical trials in the first half of 2014. 22 -------------------------------------------------------------------------------- Results of Operations - Three Months Ended June 30, 2014 Revenue The Company reported no revenues in the three months ended June 30, 2014 and 2013. The Company expects to derive revenues in 2014 from the sale of its products in Malawi, Nigeria, Equatorial Guinea, Burkina Faso and Niger under distribution and partnership agreements announced in 2012 and 2013. Direct Expenses and Gross Margin The Company incurred no direct expenses in the three months ended June 30, 2014 and 2013. In the future, direct expenses will include the cost of finished products to be purchased from the Company's contract manufacturers, sales incentives, associated travel, and inventory return charges. Gross margin, which is gross profit as a percent of revenue, will be affected by a number of factors, including the type of product sold and the geographic region in which the sale is made. Research and Development The Company makes significant investments in R&D in support of ongoing proprietary product development programs to support our pipeline of new drug candidates. R&D expenses consist of salaries and benefits paid to employees directly engaged in research, payments made in cash or in kind to contractors for services directly related to research and product development, product development costs, payments made for patents and licenses to which the Company has acquired rights to use, and travel, telecommunications, facilities and external legal costs incurred in relation to research activities. We do not collect costs on a product basis or for any category of product involved in carrying out research projects. While we do perform cost calculations to facilitate our internal evaluation of individual products, these calculations include significant estimations and allocations that are not relevant to, or included in, our external financial reporting mechanisms. As a consequence, we do not report research and development costs at the product level. Operating Expenses Selling, general and administrative expenses primarily include salary and benefit costs for employees and contractors included in our sales, marketing, finance, legal and administrative organizations, professional services, insurance, unallocated travel expenses, telecommunications, and office expenses. Professional services consist principally of recruiting costs, external legal, audit, tax and other consulting services. Other Expenses, Net Other expenses, net consists primarily of interest income on cash balances, interest expense on borrowings. Interest expense will vary periodically depending on prevailing short-term interest rates. 23 -------------------------------------------------------------------------------- Loss on settlement of debt Loss on settlement of debt comprises the cost of issuance of common stock for the retirement of principal and accrued interest on promissory notes. Critical Accounting Policies The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles ("GAAP") and the Company's discussion and analysis of its financial condition and operating results require the Company's management to make judgments, assumptions, and estimates that affect the amounts reported in its consolidated financial statements and accompanying notes. Note 1, "Summary of Significant Accounting Policies" of the Notes to Consolidated Financial Statements in this Form 10-Q describes the significant accounting policies and methods used in the preparation of the Company's consolidated financial statements. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. We have identified the policies below as critical to our business operations and the understanding of its results of operations. The Company's senior management has reviewed these critical accounting policies and related disclosures with the Company's Board of Directors. The impact and any associated risks related to these policies on our business operations are discussed throughout this section where such policies affect our reported and expected financial results. Our preparation of financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenues and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates and such differences may be material. Cash and Cash Equivalents We consider all highly liquid debt instruments and other short-term investments with a maturity of three months or less to be cash equivalents. Net Loss Per Share of Common Stock The basic net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding. Diluted net loss per share gives effect to all dilutive potential common shares outstanding during the period using the "as if converted" basis. Uncertainty in Income Taxes Management considers the likelihood of changes by taxing authorities in its filed income tax returns, and recognizes a liability for or discloses potential changes that management believes are more likely than not to occur upon examination by tax authorities. Management has not identified any uncertain tax positions in filed income tax returns that require recognition or disclosure. The Company's income tax returns for the past three years are subject to examination by tax authorities, and may change upon examination. We follow Accounting Standards Codification ("ASC") 740-10, Accounting for Uncertainty in Income Taxes ("ASC 740-10"). This interpretation requires recognition and measurement of uncertain income tax positions using a "more-likely-than-not" approach. ASC 740-10 is effective for fiscal years beginning after December 15, 2006. The Company has adopted ASC 740-10 and evaluates its tax positions on an annual basis. Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013 Revenues We had no revenues from operations for the three months ended June 30, 2014 and 2013. We anticipate having revenues in the second half of 2014. 24 -------------------------------------------------------------------------------- Operating Expenses Selling, general and administrative Selling, general and administrative expenses and related percentages for the three months ended June 30, 2014 and 2013 were as follows (dollar amounts in thousands): 2014 2013 Selling, general and administrative $ 3,721 $ 13,154 Increase/(decrease) from prior year $ (9,433) $ 12,877 Percent increase/(decrease) from prior year (72) % 4,649 % For the three months ended June 30, 2014 and 2013, selling, general and administrative expenses were made up as follows (dollar amounts in thousands): 2014 2013 Prepaid consulting services $ 2,208 $ 6,100 Stock listing and investor relations expenses (121) 5,894 Consulting and contractors 484 379 Payroll 303 239 Professional fees 566 334 Travel 40 120 Insurance 21 - Other expenses 220 88 Charitable donations - - $ 3,721 $ 13,154 The decrease year over year in selling, general and administrative expense was attributable primarily to reductions in prepaid consulting services and stock listing expenses. These reductions reflect the reduced reliance on consultants to raise new capital and reduced activity related to offshore sales and marketing activities . Prepaid consulting services in the three months ended June 30, 2014 consisted of the following: Amortization of cost of stock issued prior to 2014 under consulting contracts $ 1,093 Amortization of cost incurred for new stock issued in the three months ended June 30, 2014 under consulting contracts entered into in 2013 740 Amortization of cost incurred for new stock issued in the three months ended June 30, 2014 under consulting contracts entered into in 2014 375 The cost of the new stock issued in the three months ended June 30, 2014 arose from the issuance of 1,650,000 shares in the period, at a total cost of $957,000. The balance of the total cost ($693,000) will be amortized over the remaining lives of the contracts. In the three months ended June 30, 2014, total cash and cash accruals for selling, general and administrative expense was $1,634 compared to $1,160 for the corresponding period in 2013, an increase of $474 or 41%. Significant cash items included: ? consulting and contactor services obtained to assist the Company in raising capital, manage investor relations, and develop business in new markets, in the amount of $484 in 2014, an increase of $105 or 27% over the $379 spent in 2013; ? professional fees for legal, tax and accounting services in the amount of $556 in 2014, an increase of $222 or 66% over the $334 spent in 2013; ? payroll in the amount of $303 in 2014, an increase of $64 or 27% over the $239 spent in 2013; and ? travel in the amount of $40 in 2014, a decrease of $80 or 67% over the $120 spent in 2013. 25-------------------------------------------------------------------------------- Research and development R&D expenses and related percentages for the three months ended June 30, 2014 and 2013 were as follows (dollar amounts in thousands): 2014 2013 Research and development $ 2,026 $ 6,112 Increase/ (decrease) from prior year $ (4,086) $ 6,112 Percent increase / (decrease) from prior year (67% ) 100% Expenses for research and development in the three months ended June 30, 2014 decreased by 67% compared to expenses in the same period in 2013. The decrease occurred mainly as a result a reduction in the cost of stock payments for licenses, purchases of materials for R&D, and legal fees paid to maintain patents and licenses. In the three months ended June 30, 2014, total cash spent on R&D was $559, an increase of $16 or 3% over the $543 spent in the same period in 2013. Significant cash items included: ? payments for contracted technical services, $176 in 2014, a decrease of $96 or 35% over the $272 spent in 2013, reflecting the decreased use of contractors to perform some of our research activities; ? Payments for professional fees $61 in 2014, an increase of $44 or 258% over the $17 spent in 2013 ? payroll 93 in 2014, a decrease of $54 or 37% over the $147 spent in 2013, reflecting loss of our chief research officer in 2013. Approximately 75% of the R&D spending in both 2014 and 2013 was on the development of LDN; the balance was spent on MENK. Depreciation and amortization The Company amortizes the costs incurred to acquire patents and licenses over the period of the related agreements. The increase year over year in depreciation and amortization expense reflects the fact that most of the Company's patents and licenses were acquired after October 1, 2012. Depreciation and amortization expenses for the three months ended June 30, 2014 and 2013 were as follows (dollar amounts in thousands): 2014 2013 Depreciation expense $ 1 $ 0 Amortization expense $ 718 $ 718 Increase from prior year $ 1 $ 718 Percentage increase from prior year 0% 100% Interest Expense Interest expense for the three months ended June 30, 2014 and 2013 were as follows (dollar amounts in thousands): 2014 2013 Interest expense $ 121 $ 654 Increase/(decrease) from prior year $ (533) $ 654 Percentage decrease from prior year (81)% 100% Interest expenses are comprised of loan origination fees and interest owed by the Company. In 2013, interest expense included origination fees of $90. There were no origination fees paid in 2014. 26 -------------------------------------------------------------------------------- Loss on settlement of debt In three months ended June 30, 2013, certain lenders to the Company exercised their rights to convert all or a portion of their notes payable to equity. The Company recorded an expense of $4,040, reflecting the fair value of the shares of common stock issued in exchange for the notes. There was no corresponding expense in three months ended June 30, 2014. Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013 Revenues We had no revenues from operations for the six months ended June 30, 2014 and 2013. We anticipate having revenues in the second half of 2014. Operating Expenses Selling, general and administrative Selling, general and administrative expenses and related percentages for the six months ended June 30, 2014 and 2013 were as follows (dollar amounts in thousands): 2014 2013 Selling, general and administrative $ 16,334 $ 20,858 Increase/(decrease) from prior year $ (4,524 ) $ 20,858 Percent increase/(decrease) from prior year (22 )% 100 % For the six months ended June 30, 2014 and 2013, selling, general and administrative expenses were made up as follows (dollar amounts in thousands): 2014 2013 Prepaid consulting services $ 11,985 $ 11,063 Stock listing and investor relations expenses 2,322 6,981 Consulting and contractors 975 664 Payroll 611 479 Professional fees 711 529 Travel 168 233 Insurance 63 - Other expenses 249 212 Charitable donations (750 ) 750 $ 16,334 $ 20,911 The decrease year over year in selling, general and administrative expense was attributable primarily to decreased stock listing expenses. These reductions reflect the reduced reliance on consultants to raise new capital. Prepaid consulting services in the six months ended June 30, 2014 consisted of the following: Amortization of cost of stock issued prior to 2014 under consulting contracts $ 6,909 Amortization of cost incurred for new stock issued in the six months ended June 30, 2014 under consulting contracts entered into in 2013 3,322 Amortization of cost incurred for new stock issued in the six months ended June 30, 2014 under consulting contracts entered into in 2014 1,754, 27 -------------------------------------------------------------------------------- The cost of the new stock issued in the six months ended June 30, 2014 arose from the issuance of 7,140,000 shares in the period, at a total cost of $8,922,500. The balance of the total cost ($3,090,417) will be amortized over the remaining lives of the contracts. In the six months ended June 30, 2014, total cash and cash accruals for selling, general and administrative expense was $2,777 compared to $2,117 for the corresponding period in 2013, an increase of $660 or 31%. Significant cash items included: ? consulting and contractor services obtained to assist the Company in raising capital, manage investor relations, and develop business in new markets, in the amount of $975 in 2014, an increase of $311 or 47% over the $664 spent in 2013; ? professional fees for legal, tax and accounting services in the amount of $711 in 2014, an increase of $182 or 34% over the $529 spent in 2013; ? payroll in the amount of $611 in 2014, an increase of $132 or 28% over the $479 spent in 2013; and ? travel in the amount of $168 in 2014, a decrease of $65 or 28% over the $233 spent in 2013. Research and development R&D expenses and related percentages for the six months ended June 30, 2014 and 2013 were as follows (dollar amounts in thousands): 2014 2013 Research and development $ 6,197 $ 9,092 Increase/ (decrease) from prior year $ (2,895) $ 9,092 (32) % 100% Expenses for research and development in the six months ended June 30, 2014 decreased by 32% compared to expenses in the same period in 2013. The decrease occurred mainly as a result decreases in the cost of stock payments for licenses, purchases of materials for R&D, and legal fees paid to maintain patents and licenses. In the six months ended June 30, 2014, total cash spent on R&D was $1,071, an increase of $210 or 24% over the $861 spent in the same period in 2013. Significant cash items included: ? payments for contracted technical services, 319 in 2014, a decrease of $117 or 27% over the $436 spent in 2013, reflecting the decreased use of contractors to perform some of our research activities; ? purchases of supplies and materials used in research activities, $181 in 2014, an increase of $181 or 100% over the $0 spent in 2013; and ? payroll, $186 in 2014, a decrease of $67 or 26% over the $253 spent in 2013, reflecting loss of our chief research officer in 2013. Approximately 75% of the R&D spending in both 2014 and 2013 was on the development of LDN; the balance was spent on MENK. Depreciation and amortization The Company amortizes the costs incurred to acquire patents and licenses over the period of the related agreements. The increase year over year in depreciation and amortization expense reflects the fact that most of the Company's patents and licenses were acquired after October 1, 2012. Depreciation and amortization expenses for the six months ended June 30, 2014 and 2013 were as follows (dollar amounts in thousands): 2014 2013 Depreciation expense $ 1 $ 0 Amortization expense $ 1,439 $ 1,415 Increase from prior year $ 24 $ 1,415 Percentage increase from prior year 2 % 100 % 28 -------------------------------------------------------------------------------- Interest Expense Interest expense for the six months ended June 30, 2014 and 2013 were as follows (dollar amounts in thousands): 2014 2013 Interest expense $ 282 $ 893 Increase/(decrease) from prior year $ (611) $ 893 Percentage decrease from prior year (68) % 100 % Interest expenses are comprised of loan origination fees and interest owed by the Company. In 2013, interest expense included origination fees of $223. There were no origination fees paid in 2014. Loss on settlement of debt In six months ended June 30, 2013, certain lenders to the Company exercised their rights to convert all or a portion of their notes payable to equity. The Company recorded an expense of $7,108, reflecting the fair value of the shares of common stock issued in exchange for the notes. There was no corresponding expense in six months ended June 30, 2014. Liquidity Liquidity is measured by our ability to secure enough cash to meet our contractual and operating needs as they arise. We do not anticipate generating sufficient net positive cash flows from our operations to fund the next twelve months. We had cash of $58,739 at June 30, 2014, compared to $231,474 at June 30, 2013. We do not expect that our cash reserves will be sufficient to meet our operational needs and we will need to raise additional capital to pay for our operational expenses and provide for capital expenditures. In addition to the Company's operational expenses, which are estimated at $450,000 per month, we estimate that we need approximately $7-15 million in the next twelve months to fully develop our products and for Phase III clinical trials for Crohn's disease. If we are not able to raise additional working capital, we may have to cease operations altogether. For the six months ended June 30, 2014 and 2013, net cash used in operating activities from operations was $2,560,616 and $2,727,979, respectively. For the six months ended June 30, 2014 and 2013, net cash used in investing activities from operations was $42,503 and $163,414, respectively. In the six months ended June 30, 2013, the Company spent $160,539 in payments for licenses from Penn State University During the six months ended June 30, 2014 proceeds from the sale of stock and exercise of stock warrants totaled $1,655,262 compared to $2,482,438 for the corresponding period in 2013. We also received $750,000 from the issuance of notes payable in six months ended June 30, 2014, compared to $449,000 in 2013. Our ability to continue as a going concern is dependent entirely on raising funds through the sale of equity or debt. We anticipate that we will continue our attempt to raise capital through private equity and debt transactions, develop a credit facility with a lender, or the exercise of options and warrants; however, such additional capital may not be available to us at acceptable terms or available at all. In the event that we are unable to obtain additional capital, we would be forced to cease operations altogether. Off-Balance Sheet Arrangements During the six months ended June 30, 2014 and 2013, we did not engage in any off balance sheet arrangements as defined in item 303(a)(4) of the SEC's Regulation S-K. 29 -------------------------------------------------------------------------------- |