ITEM 1. Business.
Throughout this Annual Report on Form 10-K, the terms "we," "us," "our," "registrant," and "Company" refer to Mount Tam Biotechnologies, Inc., a Nevada corporation and, where applicable, its wholly-owned subsidiary Mount Tam Biotechnologies, Inc., a Delaware corporation ("Mount Tam").
Overview
The Company was established in November 2011 under the name TabacaleraYsidron. On August 13, 2015, the registrant entered into a Share Exchange and Conversion Agreement (the "Exchange Agreement") by and among the registrant and a holder of a majority of the issued and outstanding capital stock of the registrant (the "Majority Shareholder"), on the one hand, and Mount Tam, the stockholders of Mount Tam ("Mount Tam Stockholders"), and the holders of certain convertible promissory notes of Mount Tam ("Mount Tam Noteholders"). Pursuant to the Exchange Agreement, the Company acquired all of the issued and outstanding equity securities of Mount Tam and the Mount Tam Stockholders and the Mount Tam Noteholders become the controlling stockholders of the registrant. The transactions contemplated by the Exchange Agreement are hereinafter referred to as the "Share Exchange." Prior to the Share Exchange, the registrant was a "shell company" (as such term is defined in Rule 12b-2 under the Exchange Act), however, after the Share Exchange the registrant is no longer a shell company.
Effective on August 31, 2015, the registrant changed its name from TabacaleraYsidron, Inc. to Mount TAM Biotechnologies, Inc. The name change was effected through a parent/subsidiary short-form merger of Mount TAM Biotechnologies, Inc., our wholly-owned Nevada subsidiary which we formed solely for the purpose of the name change, with and into the Company, with the Company as the surviving corporation. With the exception of the name change, there were no changes to the Company's Articles of Incorporation or Bylaws. There will be no mandatory exchange of stock certificates.
We are an emerging biopharmaceutical company established to optimize, develop and bring to market a portfolio of products focused on improving the health and wellbeing of individuals afflicted with serious diseases, with a lead product targeting systemic lupus erythematosus ("SLE") and a strategy to bring to market novel therapeutics across a range of serious disease areas.
On August 17, 2014, Mount Tam entered into a Research Collaboration and License Agreement (the "Buck Institute License Agreement") with The Buck Institute for Research on Aging, an independent non-profit research organization devoted to aging and the diseases of aging based in Northern California ("Buck Institute"), pursuant to which Mount Tam secured a worldwide exclusive license to certain compounds and technology to develop, manufacture and commercialize these compounds in the field of autoimmune diseases. Our most advanced product candidate is TAM-01, a preclinical stage compound, which represents what we believe to be a promising therapeutic candidate for the treatment of SLE. In July 2016 an amendment was signed which broadened the license to include any and all conditions, human and veterinary. In February 2017 we announced that we were advancing into Discovery TAM-03, a novel rapamycin analog ("rapalog") which we consider to be a potential candidate for addressing an unmet need in several important cancer types. In July 2017 we announced that we had entered into a collaboration with a prominent academic laboratory in the field of neurodegeneration to explore the potential of our compounds in Parkinson’s Disease.
All company operations are based in the United States. As of the date of this report, we had no products that have obtained marketing approval in any jurisdiction. Additionally, we have not generated revenues since inception and do not expect to do so in the foreseeable future due to the early stage nature of our current product candidate.
Background on the Potential SLE Market
As of the date of this Report, we were focusing the development of our lead product candidate in the field of SLE, an autoimmune disorder where current treatments are often not adequate to fully control disease and a condition where a serious unmet need remains.
According to the Lupus Foundation of America, 1.5 million Americans have some form of lupus and more than 16,000 new cases are reported annually in the United States alone, although some other estimates are more conservative. The exact etiology of lupus is unknown. As an autoimmune disease, the immune system is unable to properly differentiate between healthy tissues and foreign invaders, leading the immune system to attack healthy tissues. This may cause inflammation of the joints, heart, lungs, kidneys, brain and blood vessels. Lupus is a disease that goes through stages of remission and flares.
SLE is the most serious form of lupus. It is a chronic, inflammatory disorder that can damage many parts of the body, including the skin, joints and internal organs. Lupus nephritis ("LN") is a common and very serious complication for people with SLE, causing inflammation of the kidneys that may lead to significant illness and even death.
There is currently no known cure for SLE and no treatment that fully stabilizes the disease. Patients diagnosed with lupus are treated with a range of therapies including anti-malarials, corticosteroids, immunosuppressants, and newer biologic agents that primarily address the symptoms of the disease. Despite the range of available therapies, the burden of disease for SLE patients remains high, with significant morbidity and mortality seen in this population even with best currently available care. SLE also brings a strong economic impact to patients and to society at large, both in direct and indirect economic impacts due to increased medical costs, lost wages for patients and for caregivers.
Our Product Candidates:
TAM-01
Our lead product candidate, TAM-01, is a novel rapalog which exerts its action through direct binding and inhibition of the mammalian Target of Rapamycin ("mTOR"). mTOR is a key regulatory pathway which is altered in individuals suffering from a range of disorders including autoimmune diseases such as lupus. Based on extensive research over the last several decades we now understand that mTOR inhibitors, particularly rapamycin, may reduce disease activity and normalize T cell activation-induced calcium fluxing in SLE patients, and may also normalize immune function through suppression of autoreactive B cells.
The only rapalogs currently approved by FDA are rapamycin (sirolimus) and its first generation analogs (temsirolimus, everolimus), but none of these are approved for use in SLE patients. Unfortunately their potential utility as therapeutic agents for the treatment of many chronic diseases such as SLE is limited due to their significant side effects, including impaired glucose tolerance, insulin resistance, and lipid dysregulation. Our lead product candidate, TAM-01 is a novel and proprietary rapalog, which has been shown in extensive preclinical pharmacology studies to deliver the high therapeutic efficacy of rapamycin while significantly reducing or abolishing some of its side effects.
Discovery, lead optimization and pre-development activities (including preliminary scale up) have been largely completed for TAM-01 and it is ready for initiation of cGMP manufacturing to be followed by IND-enabling safety studies (“GLP Tox studies”). A number of pharmacological studies in validated disease models (such as the NZBW/F1J SLE mouse model) have demonstrated that TAM-01 exhibits dose-dependent efficacy similar to rapamycin or temsirolimus. At 14-week dosage, TAM-01 is shown to reduce disease progression as measured by proteinuria, renal IgG and IgM deposition, anti-dsDNA antibody titers and ANA antibody titers. Examination of the kidney pathology of the NZBW/F1J mice showed that TAM-01 ameliorated kidney disease and reduced renal IgG and IgM deposits similarly to temsirolimus. Additionally, other studies have shown that, in contrast to both rapamycin and temsirolimus, TAM-01 has minimal impact on glucose levels, glucose tolerance, did not induce hyperlipidemia (cholesterol and triglyceride elevations), and had minimal impact on reticulocyte counts.
Although rapamycin and other rapalogs are thought to act primarily through the inhibition of the protein complex mTOR Complex 1 ("TORC1"), it is now well established that these drugs also have inhibitory effects on mTOR Complex 2 ("TORC2"). Our studies have shown TAM-01 to be a more selective TORC1 inhibitor vs. rapamycin and its analogs (having greater TORC1 inhibitory activity relative to TORC2 inhibitory activity) and we believe that this greater selectivity is the reason TAM-01 has shown a superior adverse event profile in mice vs. other rapalogs while still maintaining a strong efficacy profile. This theory, however, has not been proven in
clinical trials and the superior adverse event profile seen in mice may not be demonstrated in clinical trials in humans.
TAM-01 exhibits superior oral bioavailability vs. rapamycin, which is expected to result in reduced variability of absorption and superior pharmacokinetics, making it suitable for administration via a flexible dosing regimen.
TAM-01 has completed preliminary non-GLP 14-day toxicology, safety, PK, ADME, preliminary scale up manufacturing studies, and analytic and purification methods have been established. We are ready to initiate cGMP manufacturing and GLP studies in order to prepare and submit an Investigational New Drug ("IND") to FDA. We intend to advance TAM-01 to phase 1 clinical development in the United States within 18-24 months from the time we have completed our fundraising targets and recruitment of all required personnel. There can be no assurance, however, that the Company will be able to begin phase 1 clinical development in this time frame, if at all.
Rapalogs have been used in cancer therapy for some time to treat a range of cancers. Novartis' Affinitor/Votubia (everolimus), the leading rapalog for treating cancer, was first approved in 2009 to treat advanced kidney cancer and is now approved to treat a range of other cancers including certain breast and pancreatic cancers as well as tuberous sclerosis complex. Novartis reported sales of Afinitor/Votubia in 2017 were approx. $1.5 billion.
Real unmet need remains in these cancers however, with median progression free survival (PFS) in clinical trials with Afinitor reported to be less than 1 year in several important cancer types. An improved therapy that could meaningfully increase PFS, or as/more importantly, overall survival (OS), that still provided acceptable tolerability would likely be welcome by both healthcare providers and patients and we believe that by altering the mTORC1:2 inhibitory profile and other important pharmaceutical characteristics, e.g. potency and PK profiles we have the potential to accomplish this.
Given the unmet need and the unique characteristics of TAM-01, we are in the process of undertaking the first steps to characterize the cancer killing potential of TAM-01 through in vitro and in vivo experimentation.
However, preclinical and clinical development of cancer therapeutics is particularly challenging and we are at an early stage in the characterization of TAM-01 as a potential cancer therapeutic with many challenges, both known and unknown, lying ahead and so probability of product approval and commercialization must be considered low until more data are generated to support TAM-01s potential as a clinical development candidate.
Parkinson’s Disease (PD) is a devastating disease affecting around one million individuals in the US, impacting quality of life for both patients and caregivers and costing the US economy approx. $20B annually. Dysfunction in the process of autophagy (the natural process for ‘cellular cleanup’ where protein debris is ‘recycled’) is a key component in the development of Parkinson's disease, with PD patients showing altered autophagy and increased mTOR activity.
As it is well known that mTORC1 inhibitors can increase the rate of autophagy, the potential for rapalogs to address unmet need in Parkinson’s Disease (PD) has been explored in multiple preclinical models and rapamycin has shown promise in this area. Given TAM-01’s pharmacologic profile and potential to deliver a unique combination of efficacy and tolerability vs. current rapalogs, Mount Tam has entered into preclinical studies to explore its compounds potential in this area, including TAM-01. These are early investigations into this historically challenging area for clinical development, with Mount Tam’s goal being to quickly determine the potential of our compounds in this area and to determine our future pathway in PD.
TAM-03
TAM-03 is a novel rapalog with a differentiated selectivity profile of TORC1 vs. TORC2 inhibition (as compared to rapamycin, to on-market rapalogs temsirolimus and everolimus, and to TAM-01), and also, favorable potency and bioavailability profiles. We believe that this overall profile makes it an appropriate candidate for further discovery work as a cancer therapy target, and potentially other indications. As with TAM-01, we are in the process of undertaking the first steps to characterize the cancer killing potential of TAM-03 through both in vitro and in vivo
experimentation.
We are also exploring TAM-03’s potential in Parkinson’s Disease through exploratory in vivo models as part of an ongoing collaboration with an academic laboratory with significant experience in studying neurodegenerative diseases.
Our Suppliers and Manufacturers
We do not own or operate, and as of the date of this Report had no plans to establish, any manufacturing facilities. We will rely on third-party contract manufacturers ("CMOs") for the manufacture of our product candidates for larger scale preclinical and clinical testing, as well as for commercial quantities of any product candidates that are approved.
We do not have any current contractual relationships for the manufacture of commercial supplies of our product candidates if they are approved, and we intend to enter into agreements with a third-party contract manufacturer and one or more back-up manufacturers for the commercial production of our product candidates as they near potential approval.
Any drug products to be used in clinical trials and any approved product that we may commercialize will need to be manufactured in facilities, and by processes, that comply with FDA's current good manufacturing practice ("cGMP") requirements and comparable requirements of the regulatory agencies of other jurisdictions in which we are seeking approval.
Competition
We are a development company with no products on the market as of the date of this Report. We face competition from other companies, academic institutions, governmental agencies and other public and private research organizations for collaborative arrangements with pharmaceutical and biotechnology companies, in recruiting and retaining highly qualified scientific and management personnel and for licenses to additional technologies. Many of our competitors will have substantially greater financial, technical and human resources than we have. Our success depends in part on our ability to build, obtain regulatory approval for and market acceptance of, and actively manage a portfolio of drugs that addresses serious unmet medical needs.
If approved, our lead compound TAM-01 would compete with currently marketed drugs and therapies used for treatment of SLE and potentially with drug candidates currently in preclinical or clinical development. Patients diagnosed with SLE are currently treated with a range of therapies with varied success. Our main competitor is a biologic product, Benlysta(R), the only FDA approved drug specifically for SLE patients. Benlysta targets and blocks B Lymphocyte Stimulator, which promotes autoimmunity by permitting autoimmune B cells to live longer. However, Benlysta has not been evaluated in patients with severe active lupus nephritis or severe active central nervous system lupus and is not recommended for these patients. TAM-01 intends to take advantage of these limitations and to provide an effective therapy for these patients. Clinical success, however, is uncertain and our failure to compete effectively could have a material adverse effect on our business.
Oncology clinical development is very competitive with one recently published study stating that there were more than 1,500 clinical trials underway in the oncology space during the study period, far more than any other therapeutic area. In this environment any newly approved oncology product must show significant benefit over standard of care at time of approval, a significant barrier to entry.
Neurodegenerative diseases bring tremendous economic impact to society and burden of disease to patients and their families. There is a very high level of unmet need in this area and with the importance of these diseases to societies many large pharmaceutical manufacturers and biotechs are actively developing therapeutics to target these diseases. This creates a competitive environment and for our compounds to be successful will require us to show benefit vs. current and future therapeutics and will require us to compete against companies with access to much greater resources and expertise.
Intellectual Properties and Licenses
We strive to protect and enhance the proprietary technologies that we believe are important to our business and seek to obtain and maintain patents for any patentable aspects of our products and any other inventions that are
important to the development of our business. Our success depends in part on our ability to obtain and maintain our patent portfolio and other proprietary protection for commercially important technology, inventions and know-how related to our business, to defend and enforce our patents, to maintain our licenses to use intellectual property owned by third parties, to preserve the confidentiality of our trade secrets and to operate without infringing the valid and enforceable patents and other proprietary rights of third parties. We also rely on continuing technological innovation and in-licensing opportunities to develop, strengthen, and maintain our proprietary position in our targeted therapeutic.
On August 17, 2014, Mount Tam entered into the Buck Institute License Agreement. This agreement establishes a joint research effort led by Buck Institute to identify and develop compounds from two specific chemical chemotypes identified therein. We provide certain funding for Buck Institute's research efforts performed under the Buck Institute License Agreement. Under the terms of the Buck Institute License Agreement, Buck Institute assigned exclusive, worldwide rights to develop, manufacture and commercialize pharmaceutical products that incorporate a compound from one of two chemical compounds, identified therein, and exclusive rights to practice the drug discovery platform technology as necessary to research, develop and commercialize such pharmaceutical products. Mount Tam retains rights to inventions made by its employees, and Buck Institute will assign to Mount Tam all inventions made under the Buck Institute License Agreement jointly by its employees and Buck Institute personnel, provided that Mount Tam has complied with its funding obligations set forth in the Buck Institute License Agreement. On March 19, 2015 Mount Tam entered into an amendment to the Buck Institute License Agreement to extend the deadline of funding milestones and its reimbursement obligations for expenses that Buck Institute accrued relating to the patents under the Buck Institute License Agreement. On April 1, 2015, Mount Tam satisfied this revised funding milestone deadline with Buck Institute.
During the second quarter of 2016 the Company entered into negotiations with the Buck Institute to resolve certain outstanding financial concerns, and to broaden the Research Collaboration and License Agreement beyond the area of autoimmune disease. On July 18, 2016, the Company entered into an amendment (the "Amendment") to the Research Collaboration and License Agreement (the "License Agreement") between the Company and The Buck Institute.
By way of background, and as previously disclosed in the Company's public filings, the Company previously entered into a Research Collaboration and License Agreement (the "Buck Institute License Agreement") with the Buck Institute, which establishes a joint research effort led by Buck Institute to identify and develop compounds from two specific chemical chemotypes identified therein. The Company agreed to provide certain funding for Buck Institute's research efforts performed under the Buck Institute License Agreement. Under the terms of the Buck Institute License Agreement, Buck Institute assigned exclusive, worldwide rights to develop, manufacture and commercialize pharmaceutical products that incorporate a compound from one of two chemical compounds, identified therein, and exclusive rights to practice the drug discovery platform technology as necessary to research, develop and commercialize such pharmaceutical products. (Additional information about the Buck Institute License Agreement, together with prior amendments thereto, may be found in the Company's public filings).
Pursuant to this Amendment, the Research Collaboration Term of the License Agreement is tolled until the Company can achieve a Qualified Financing (defined as any financing occurring after the date of the Amendment which results in gross proceeds to the Company of at least $2,000,000). Once a Qualified Financing has been achieved, the research collaboration efforts will resume, and will continue for a period of twenty-one months (the "Extended Research Collaboration Term"). The Company and The Buck Institute agreed to work together to determine a new research plan, specifying the research and development activities of both parties during the Extended Research Collaboration Term.
Additionally, pursuant to the Amendment, the parties agreed to settle past research funding amounts owed by the Company to The Buck Institute. The Company agreed to pay $40,000 within ten days of the execution of the Amendment, and The Buck Institute agreed that once this amount is paid, the Company will be deemed to be in full compliance with the terms of the License Agreement, including its payment obligations. On July 19, 2016, the Company made the $40,000 payment to The Buck Institute. In addition to the $40,000 payment, on June 13, 2016, the Company paid to The Buck Institute $11,706 in connection with costs incurred to further the Company's intellectual property position under the License Agreement. Pursuant to the above Amendment The Buck Institute waived $274,247 of payables by the Company.
Moreover, in the Amendment the parties agreed that the field of use covered by the License Agreement would be expanded, with the new definition being "the treatment, diagnosis or prevention of any and all conditions or diseases including, without limitation, systemic lupus erythematous and multiple sclerosis for human and/or veterinary use." (Under the original License Agreement, the Company's field of use had been restricted to autoimmune disorders.)
Within the licensed library is TAM-01. TAM-01's composition of matter is patented in the US, having an expiration date of December 2032. TAM-01's composition of matter patent has been recently allowed in Japan, expected to provide coverage through 2032 or beyond. Our TAM-01 composition of matter patent application in the EU was allowed in 2017 and granted in February 2018. We expect this patent to be validated in more than 15 EU nations in the second quarter of 2018. We continue, as part of our ongoing research and development efforts, to strive to defend and to strengthen the intellectual property position of our key assets.
As consideration for the assignments and licenses, we issued Buck Institute 1,200,000 (post-merger) (450,000 pre-merger) shares of our common stock and Mount Tam is obligated to pay to Buck Institute milestone payments on development of its proprietary products claimed by patents assigned or licensed to it by Buck Institute. Mount Tam also is obligated to pay low single digit royalties, including annual minimum royalties, on sales of such products. Should Mount Tam grant licenses or sublicenses to those patents to third parties, Mount Tam is obligated to share a percentage or resulting revenue with Buck Institute. Mount Tam's royalty payment obligations are reduced if currently pending patent applications become invalid or if Mount Tam has to pay third parties to obtain certain licenses for the company to manufacture, use, sell or import its products produced pursuant to the Buck Institute License Agreement. Payment obligations terminate on expiration or annulment of the last patent covered by the Buck Institute License Agreement.
The Buck Institute License Agreement will terminate upon the expiration of our payment obligations thereunder. Mount Tam can terminate the licenses to any or all licensed patents upon specified advance notice to Buck Institute. Buck Institute may terminate the license provisions of the agreement only for cause. Termination of the Buck Institute License Agreement does not terminate Mount Tam's rights in patents assigned to it.
Governmental Regulations
To date, we have conducted and will continue to conduct our preclinical research through contract research organizations ("CROs"), through our partnership with the Buck Institute and through other academic collaborations. We do not at this time have the ability to independently conduct clinical trials for our product candidates, and we expect to continue to rely on CROs, medical institutions and academic collaborators to perform this function for both preclinical and clinical activities. Our reliance on these third parties for pre-clinic and clinical development activities reduces our control over these activities. Although we have, in the ordinary course of business, entered into agreements with these third parties, we continue to be responsible for confirming that all of our preclinical and clinical trials are conducted in accordance with approved investigational plans and protocols. Moreover, FDA requires us to comply with regulations and standards, commonly referred to as good clinical practices or cGCPs, for conducting, recording and reporting the results of clinical trials to assure that data and reported results are credible and accurate and that the trial participants are adequately protected. Our reliance on third parties does not relieve us of these responsibilities and requirements. To date, we believe that our CROs, the Buck Institute and academic collaborators have performed well.
The process of complying with FDA guidelines and obtaining approvals from FDA of applications to market drugs and products is costly, time consuming and subject to unanticipated delays. There is no assurance that we will be able to obtain FDA approval for any of our products.
Discovery and Development Activities
To gain regulatory approval of our products, we must demonstrate, through experiments, preclinical studies and clinical trials that our drug product candidate meets the safety and efficacy standards established by FDA and other international regulatory authorities. In addition, we must demonstrate that all development-related laboratory, clinical and manufacturing practices comply with regulations of FDA, other international regulators and where applicable, local regulators.
Regulations establish standards for various actions including: drug substances and materials; drug manufacturing operations and facilities; and analytical laboratories and medical development laboratory processes and environments. In each instance, these standards are in connection with research, development, testing, manufacture, quality control, labeling, storage, record keeping, approval, advertising and promotion, and distribution of product candidates, on a product-by-product basis.
Preclinical Studies and Clinical Trials
Development testing generally begins with laboratory testing and experiments, as well as research studies using animal models to obtain preliminary information on a product's efficacy and to identify potential safety issues. The results of these studies are compiled along with other information in an IND application, which is filed with FDA. After resolving any questions raised by FDA, which may involve additional testing and animal studies, clinical trials may begin. Regulatory agencies in other countries generally require a Clinical Trial Application to be submitted and approved before each trial can commence in each country.
Clinical trials normally are conducted in three sequential phases and may take many years to complete. Phase 1 consists of testing the drug product in a small number of humans, often healthy volunteers, to determine preliminary safety and a tolerable dose range. Phase 2 usually involves studies in a limited patient population to evaluate the effectiveness of the drug product in humans having the disease or medical condition for which the product is indicated, determine dosage tolerance and optimal dosage and identify possible common adverse effects and safety risks. Phase 3 consists of additional controlled testing at multiple clinical sites to establish clinical safety and effectiveness in an expanded patient population of geographically dispersed test sites to evaluate the overall benefit-risk relationship for administering the product and to provide an adequate basis for product labeling. Phase 4 clinical trials may be conducted after approval to gain additional experience from the treatment of patients in the intended therapeutic indication.
The conduct of clinical trials is subject to stringent medical and regulatory requirements. The time and expense required to establish clinical sites, provide training and materials, establish communications channels and monitor a trial over a long period of time is substantial. The conduct of clinical trials at institutions located around the world is subject to foreign regulatory requirements governing human clinical trials, which vary widely from country to country. Delays or terminations of clinical trials could result from a number of factors, including stringent enrollment criteria, slow rate of enrollment, size of patient population, having to compete with other clinical trials for eligible patients, geographical considerations and others. Clinical trials are monitored by the regulatory agencies as well as medical advisory and standards boards, which could determine at any time to reevaluate, alter, suspend, or terminate a trial based upon accumulated data, including data concerning the occurrence of adverse health events during or related to the treatment of patients enrolled in the trial, and the regulator's or monitor's risk/benefit assessment with respect to patients enrolled in the trial. If they occur, such delays or suspensions could have a material impact on our development programs.
Regulatory Review
The results of preclinical and clinical trials are submitted to FDA in a New Drug Application ("NDA"), with comparable filings submitted to other international regulators. After the initial submission, FDA has a period of time in which it must determine if the NDA is complete. After an NDA is submitted, although the statutory period provided for FDA's review is less than one year, dealing with questions or concerns of the agency and, taking into account the statutory timelines governing such communications, may result in review periods that can take several years. If an NDA is accepted for filing, following FDA's review, FDA may grant marketing approval, request additional information, or deny the application if it determines that the application does not provide an adequate basis for approval. If FDA grants approval, the approval may be conditioned upon the conduct of post-marketing clinical trials or other studies to confirm the product's safety and efficacy for its intended use. Until FDA has issued its approval, no marketing activities can be conducted in the United States. Similar regulations apply in other countries. There can be no assurance that any of the Company's drug candidates will receive FDA approval or the approval of regulators in other countries.
Fast Track and Breakthrough Designations
FDA has various programs, including fast track and breakthrough therapy designations, which are intended
to expedite the process for reviewing drugs. Even if a drug qualifies for one or more of these programs, FDA may later decide that the drug no longer meets the conditions for qualification. Generally, drugs that are eligible for these programs are those for serious or life-threatening conditions, those with the potential to address unmet medical needs, and those that offer meaningful benefits over existing treatments.
Fast track designation is intended to facilitate the development and expedite the review of drugs to treat serious conditions and fill an unmet medical need. Designation may be granted on the basis of preclinical data. A sponsor of a drug that receives fast track designation will typically have more frequent interactions with FDA during drug development. In addition, products that have been designated as fast track can obtain rolling review.
Breakthrough therapy designation is intended to expedite the development and review of drugs for serious or life-threatening conditions. The criteria for breakthrough therapy designation require preliminary clinical evidence that demonstrates the drug may have substantial improvement on at least one clinically significant endpoint over available therapy. A breakthrough therapy designation conveys all of the fast track program features, more intensive FDA guidance on an efficient drug development program, an organizational commitment involving senior managers, and eligibility for rolling review and priority review.
A key difference between fast track designation and breakthrough designation is what needs to be demonstrated to qualify for the programs. A breakthrough therapy designation is for a drug that treats a serious or life-threatening condition and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement on a clinically significant endpoint(s) over available therapies. In contrast, a fast track designation is for a drug that treats a serious or life-threatening condition, and nonclinical or clinical data demonstrate the potential to address unmet medical needs for the serious condition.
Where appropriate, the Company intends to seek fast track designation for TAM-01 and TAM-03. There can be no assurance that FDA will grant fast track designation. Even if such designation is provided, it may not result in a faster development or review time. Moreover, fast track designations do not increase the odds of approval. A fast track designation may be rescinded at any time if the drug candidate does not continue to meet the qualifications for these programs.
Manufacturing Standards
FDA and other international regulators establish standards and routinely inspect facilities and equipment, analytical and quality laboratories and processes used in the manufacturing and monitoring of products. Prior to granting approval of a drug product, FDA will conduct a pre-approval inspection of the manufacturing facilities, and the facilities of suppliers, to determine that the drug product is manufactured in accordance with cGMP and product specifications. Following approval, FDA will conduct periodic inspections. If, in connection with a facility inspection, FDA determines that a manufacturer does not comply with cGMP regulations and product specifications, FDA will issue an inspection report citing the potential violations and may seek a range of remedies, from administrative sanctions, including the suspension of our manufacturing operations, to seeking civil or criminal penalties.
International Approvals
Even if we were to succeed in gaining regulatory approval to market our products in the United States, we will still need to apply for approval with other international regulators if we want to sell outside the United States. Regulatory requirements and approval processes are similar in approach to that of the United States. With certain exceptions, although the approval of FDA carries considerable weight, international regulators are not bound by the findings of FDA and there is a risk that foreign regulators will not accept a clinical trial design or may require additional data or other information not requested by FDA.
Post-approval Regulations
Following the grant of marketing approval, FDA regulates the marketing and promotion of drug products. Promotional claims are generally limited to the information provided in the product package insert for each drug product, which is negotiated with FDA during the NDA review process. In addition, FDA enforces regulations designed to guard against conflicts of interest, misleading advertising and improper compensation of prescribing
physicians. FDA will review, among other things, direct-to-consumer advertising, prescriber-directed advertising and promotional materials, sales representative communications to healthcare professionals, promotional programming and promotional activities on the Internet. FDA will also monitor scientific and educational activities. If FDA determines that a company has promoted a product for an unapproved use ("off-label"), or engaged in other violations, it may issue a regulatory letter and may require corrective advertising or other corrective communications to healthcare professionals. Enforcement actions may also potentially include product seizures, injunctions and civil or criminal penalties. The consequences of such an action and the related adverse publicity could have a material adverse effect on a developer's ability to market its drug and its business as a whole.
Following approval, FDA and other international regulators will continue to monitor data to assess the safety and efficacy of an approved drug. A post-approval discovery of previously unknown problems or failure to comply with the applicable regulatory requirements may result in restrictions on the marketing of a product or a recall or withdrawal of the product from the market, as well as possible civil or criminal sanctions. Similar oversight is provided by regulators in jurisdictions outside the US.
None of our products under development has been approved for marketing in the United States or elsewhere. We may not be able to obtain regulatory approval for any of our products under development. If we do not obtain the requisite governmental approvals or if we fail to obtain approvals of the scope we request, we or our licensees or strategic alliance or marketing partners may be delayed or precluded entirely from marketing our products, or the commercial use of our products may be limited. Such events would have a material adverse effect on our business, financial condition and results of operations.
Other Healthcare Laws and Regulations
If we obtain regulatory approval for any of our current or future product candidates, we may also be subject to healthcare regulation and enforcement by the federal government and the states and foreign governments in which we conduct our business. These laws may impact, among other things, our proposed sales, marketing and education programs. In addition, we may be subject to patient privacy regulation by both the federal government and the states in which we conduct our business. The laws that may affect our ability to operate include:
·the federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual for, or the purchase, order or recommendation of, any good or service for which payment may be made under federal healthcare programs such as the Medicare and Medicaid programs;
·federal false claims laws which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payers that are false or fraudulent;
·federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters;
·the federal Physician Payment Sunshine Act, which requires certain manufacturers of drugs, devices, biologics and medical supplies to report annually to the Centers for Medicare & Medicaid Services information related to payments and other transfers of
value to physicians, other healthcare providers, and teaching hospitals, and ownership and investment interests held by physicians and other healthcare providers and their immediate family members;
·Health Insurance Portability and Accountability Act of 1996, as amended by Health Information Technology for Economic and Clinical Health Act of 2009, which governs the conduct of certain electronic healthcare transactions and protects the security and privacy of protected health information; and
·state and foreign law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payer, including commercial insurers; state laws that require pharmaceutical companies to comply with the pharmaceutical industry's voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government, or otherwise restrict payments that may be made to healthcare providers and other potential referral sources; state laws that require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures; and state laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts.
If our operations are found to be in violation of any of the laws described above or any other governmental laws and regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, the curtailment or restructuring of our operations, the exclusion from participation in federal and state healthcare programs and imprisonment, any of which could adversely affect our ability to operate our business and impact our financial results.
Employees
As of the date of this Report, we had three employees. In addition, we use advisors and consultants for research and development, clinical, regulatory, legal and administrative activities. We plan to hire additional staff as we expand research, production, business development, and sales and marketing programs. None of our employees are represented by a labor union.
Research and Development
We estimate that we have spent $1,018,065 on research and development activities during the last two fiscal years.
Compliance with Environmental Laws
Our operations may require the use of hazardous materials (including biological materials) which subject us to a variety of federal, provincial and local environmental and safety laws and regulations. Some of the regulations under the current regulatory structure provide for strict liability, holding a party potentially liable without regard to fault or negligence. We could be held liable for damages and fines as a result of our, or others', business operations should contamination of the environment or individual exposure to hazardous substances occur. We cannot predict how changes in laws or development of new regulations will affect our business operations or the cost of compliance.
ITEM 1A.
ITEM 1A. Risk Factors.
Before deciding to purchase, hold or sell our common stock, you should carefully consider the risks described below in addition to the other information contained in this Annual Report and in our other filings with the SEC, including subsequent reports on Forms 10-Q and 8-K. The risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business. If any of these known or unknown risks or
uncertainties actually occurs with material adverse effects on the Company, our business, financial condition, results of operations and/or liquidity could be seriously harmed. In that event, the market price of our common stock will likely decline, and you may lose all or part of your investment.
Risks Related to Our Business
Our success depends heavily on the successful development, regulatory approval and commercialization of TAM-01, our lead product candidate, and of TAM-03, our follow-on compound (“Our Candidates”).
We do not have any products that have been granted regulatory approval. We cannot commercialize our compounds in the United States without first obtaining regulatory approval for these products from FDA, nor can we commercialize our candidates outside of the United States without obtaining regulatory approval from comparable foreign regulatory authorities. Clinical trials require many years to complete and the FDA review process that follows completion of clinical trials typically takes 10 months or more, and approval is never guaranteed. As a result, our near-term prospects, including our ability to finance our operations and generate revenue, are substantially dependent on our ability to successfully complete clinical trials and to subsequently obtain regulatory approval for, and if approved, to successfully commercialize our candidates in a timely manner.
Obtaining regulatory approval for marketing of any product candidate in one country does not ensure we will be able to obtain regulatory approval in other countries, while a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory process in other countries.
Even if we were to successfully obtain approval for any product candidate from FDA and comparable regulatory authorities outside the United States, any approval might contain significant limitations related to use restrictions or may be subject to burdensome and costly post-approval study or risk management requirements. If we are unable to obtain regulatory approval for our product candidate in one or more jurisdictions, or if any approval contains significant limitations, we may not be able to obtain sufficient funding or generate sufficient revenue to continue our operations. Also, any regulatory approval of our product candidates, once obtained, may be withdrawn by the regulatory authority. Furthermore, even if we obtain regulatory approval, commercial success will depend on how successfully we are able to address a number of challenges, including the following:
•development of our own commercial organization and/or establishment of commercial collaborations with partners;
•establishment of commercially viable pricing and obtaining approval for adequate reimbursement from third-party and government payors;
•the ability of our third-party manufacturers to manufacture quantities of our candidates using commercially viable processes at a scale sufficient to meet anticipated demand and that are compliant with applicable regulations;
•our success in educating physicians, other health care professionals and patients about the benefits, administration and use of our candidates;
•the availability, actual advantages, perceived advantages, relative cost, relative safety and relative efficacy of alternative and competing treatments; and
•the effectiveness of our own or our potential commercial collaborators' marketing, sales and distribution strategy and operations.
Many of these factors are beyond our control. If we or any commercialization partners are unable to successfully commercialize our candidates or any future product candidate, we may not be able to earn sufficient revenues to continue our business.
The regulatory approval processes of FDA and comparable authorities outside the United States are lengthy, time-consuming and inherently unpredictable, and if we are ultimately unable to obtain regulatory approval for one or more of our product candidates, our business will be substantially harmed.
The time required to complete clinical trials and to obtain approval by FDA and comparable authorities outside the United States is unpredictable and typically takes many years. In addition, approval policies, regulations, or the type and amount of clinical data necessary to gain approval may change during the course of a product candidate's development and may vary among jurisdictions. We have not obtained regulatory approval for our candidates, and it is possible that our existing candidates, or any product candidates we may seek to develop in the future, will never obtain regulatory approval.
Our product candidates could fail to receive regulatory approval for many reasons, including the following:
•FDA or comparable foreign regulatory authorities may disagree with the design, scope or implementation of any clinical trials that we propose to conduct or require us to conduct additional clinical trials;
•we may be unable to demonstrate to the satisfaction of FDA or comparable foreign regulatory authorities that our product candidate is both safe and effective for its proposed indication;
•we may be unable to demonstrate that our product candidate's clinical and other benefits outweigh its safety risks;
•FDA or comparable regulatory authorities outside the United States may disagree with our interpretation of data from preclinical studies or clinical trials;
•the data collected from clinical trials of our product candidates may not be sufficient to support the submission of an NDA or other submission or to obtain regulatory approval in the United States or elsewhere;
•FDA or comparable regulatory authorities outside the United States may fail to approve the manufacturing processes or facilities of third party manufacturers with which we contract for clinical and commercial supplies; and
•the approval policies or regulations of FDA or comparable regulatory authorities outside the United States may change significantly in a manner rendering our clinical data insufficient for approval.
Failing to obtain regulatory approval to market one or more of our product candidates would harm our business, results of operations and prospects significantly.
In addition, even if we were to obtain approval, such regulatory approval may be for more limited indications than we request, may impact the price we intend to charge for our products, may be contingent on the performance of costly post-marketing clinical trials, or may approve a product candidate with a label that does not include the labeling claims necessary or desirable for the successful commercialization of our product candidates. Any of the foregoing scenarios could harm the commercial prospects for our product candidates.
We have not previously submitted an NDA or any similar drug approval filing to FDA or any comparable authority outside the United States for our product candidates, and we cannot be certain that our product candidate will be successful in clinical trials or receive regulatory approval. Further, our product candidates may not receive regulatory approval even if they are successful in clinical trials. If we do not receive regulatory approvals for our product candidates, we may not be able to continue our operations. Even if we successfully obtain regulatory approvals to market our product candidates in one or more jurisdictions, our revenue will be dependent, to a significant extent, upon the size of the markets in the jurisdictions for which we gain regulatory approval.
Even if our candidates, and any future product candidates, receive regulatory approval, they may fail to achieve the degree of market acceptance by physicians, pharmacies, hospital administrators, patients, caregivers, healthcare payors and others in the medical community necessary for commercial success.
Existing therapies for SLE have well-established market positions and familiarity with physicians, payers and patients. If we are unable to achieve significant differentiation for TAM-01 from existing and widely accepted therapies for SLE, our opportunity for TAM-01 to be commercialized successfully, if approved, would be adversely affected. Additionally, the markets for novel cancer therapeutics are extremely competitive with both regulators and
payors requiring a clear demonstration of benefit vs. standard-of-care for approval and subsequent reimbursement. In this environment, even if one or more of our candidates receive regulatory approval they may not be commercially successful.
If TAM-01, TAM-03 or any of our future product candidates receive regulatory approval, they may nonetheless fail to gain sufficient market acceptance by physicians, pharmacies, hospital administrators, patients, caregivers, payers and others in the medical community. The degree of market acceptance of our product candidate, if approved for commercial sale, will depend on a number of factors, including the following:
•convenience and ease of administration of the product candidate compared to alternative treatments;
•the prevalence and severity of any side effects;
•their efficacy and potential advantages compared to alternative treatments;
•the willingness of physicians and other health care providers to change their current treatment practices;
•the willingness of the target patient population to try new therapies and of physicians to prescribe new therapies;
•the strength of marketing and distribution support; and
•the price we charge for our product candidate.
Neither TAM-01 nor TAM-03 have ever been manufactured on a commercial scale, and there are risks associated with scaling up manufacturing to commercial scale.
We have never manufactured our product candidates on a commercial scale, and there are risks associated with scaling up manufacturing to commercial scale including, among others, cost overruns, potential problems with process scale-up, process reproducibility, stability issues, lot consistency and timely availability of raw materials. Even if we could otherwise obtain regulatory approval for our candidates or other future product candidates there is no assurance that our manufacturer, that we have not yet engaged, will be able to manufacture the approved product to specifications acceptable to FDA or other regulatory authorities, to produce it in sufficient quantities to meet the requirements for the potential launch of the product or to meet potential future demand.
If our suppliers are unable to produce sufficient quantities of any approved product for commercialization, our commercialization efforts would be impaired, which would have an adverse effect on our business, financial condition, results of operations and growth prospects.
We may not be successful in our efforts to build a pipeline of drug candidates.
A key element of our strategy is to use and expand our proprietary drug discovery platform to build a pipeline of drug candidates to address different targets, and progress those drug candidates through clinical development for the treatment of a variety of different types of diseases. Although our research efforts to date have resulted in identification of a series of targets, we may not be able to develop drug candidates that are safe and effective inhibitors or promoters of all or any of these targets. Even if we are successful in building a product pipeline, the potential drug candidates that we identify may not be suitable for clinical development for a number of reasons, including causing harmful side effects or demonstrating other characteristics that indicate a low likelihood of receiving marketing approval or achieving market acceptance. If our methods of identifying potential drug candidates fail to produce a pipeline of potentially viable drug candidates, then our success as a business will be dependent on the success of fewer potential drug candidates, which introduces risks to our business model and potential limitations to any success we may achieve.
We face substantial competition, which may result in others discovering, developing or commercializing products before or more successfully than we do.
The development and commercialization of new specialty pharmaceutical products is highly competitive. We face competition with respect to TAM-01 and TAM-03, and will face competition with respect to any product candidates that we may seek to develop or commercialize in the future, from major pharmaceutical companies, specialty pharmaceutical companies and biotechnology companies worldwide. There are many large pharmaceutical and biotechnology companies that are developing or currently market and sell products to our target patient groups. Potential competitors also include academic institutions, government agencies and other public and private research organizations that conduct research, seek patent protection and establish collaborative arrangements for research, development, manufacturing and commercialization.
Many of our competitors, including a number of large pharmaceutical companies that compete directly with us, have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing approved products than we do. There may also be companies unknown to us that are engaged in the development of products that are potentially competitive with those that we are developing. Mergers and acquisitions in the pharmaceutical, biotechnology and diagnostic industries may result in even more resources being concentrated among a smaller number of our competitors. Smaller or early stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies.
We currently have no sales representatives or distribution personnel and no marketing capabilities. If we are unable to develop a sales and marketing and distribution capability, we will not be successful in commercializing current or future product candidates.
We have not yet built out an infrastructure to sell, market or distribute therapeutic products. If TAM-01, TAM-03 or other future product candidates are approved, we intend to commercialize them, whether on our own or as part of a strategic partnership, with our own specialty sales force in the United States and with commercial partners globally.
There are risks involved with both establishing our own sales and marketing and distribution capabilities and entering into arrangements with third parties to perform these services. For example, recruiting and training a sales force is expensive and time-consuming and could delay any product launch. If the commercial launch of a product candidate for which we recruit a sales force and establish marketing capabilities is delayed or does not occur for any reason, we would have prematurely or unnecessarily incurred these commercialization expenses. This may be costly, and our investment would be lost if we cannot retain or reposition our sales and marketing personnel.
We may be unable to identify appropriate commercial partners to distribute and market our products outside the United States or to negotiate terms with such commercial partners that are favorable or acceptable to us. Also, we may be unable to maintain those relationships. The inability to identify, successfully negotiate with, and maintain relationships with, commercial partners for distribution outside the United States could limit and/or delay our ability to commercialize our products outside the United States.
If we obtain approval to commercialize any of our product candidates outside the United States, we will be subject to additional risks.
If we obtain approval to commercialize any approved products outside of the United States, a variety of risks associated with international operations could materially adversely affect our business, including:
•different regulatory requirements for drug approvals in countries outside the United States;
•reduced protection for intellectual property rights;
•unexpected changes in tariffs, trade barriers and regulatory requirements;
•economic weakness, including inflation or political instability in particular foreign economies and markets;
•compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;
•non-United States taxes, including withholding of payroll taxes;
•foreign currency fluctuations, which could result in increased operating expenses and reduced revenue and other obligations incident to doing business in another country;
•workforce uncertainty in countries where labor unrest is more common than in the United States;
•production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and
•business interruptions resulting from geopolitical actions, including war and terrorism, or natural disasters including earthquakes, typhoons, floods and fires.
Even if we receive regulatory approval for TAM-01, TAM-03 or future product candidates, we will be subject to ongoing regulatory obligations and continued regulatory review, which may result in significant additional expense, and we may be subject to penalties if we fail to comply with regulatory requirements.
Any regulatory approvals that we may receive for our product candidates will contain approved indicated uses, and we will be required to market any approved products in accordance with the indicated uses and our approved labeling. In addition, any regulatory approvals may contain conditions for approval or requirements for potentially costly post-marketing testing and surveillance to monitor the safety and efficacy of the product candidate. In addition, if FDA or a comparable regulatory authority outside the United States approves our product candidate, the manufacturing processes, labeling, packaging, distribution, adverse event reporting, storage, advertising, promotion, import, export and recordkeeping for the product will be subject to extensive and ongoing regulatory requirements. These requirements include submissions of safety and other post-marketing information and reports, registration, as well as continued compliance with current good manufacturing practices, or cGMPs, Quality System Regulation, or QSR, requirements and current good clinical practices for any clinical trials that we conduct post-approval. Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or with our third-party manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may result in, among other things:
•restrictions on the marketing or manufacturing of the product, withdrawal of the product from the market, or voluntary or mandatory product recalls;
•fines, warning or untitled letters or holds on clinical trials;
•refusal by FDA to approve pending applications or supplements to approved applications filed, or suspension or revocation of product approvals;
•product seizure or detention, or refusal to permit the import or export of products; and
•injunctions, the imposition of civil penalties or criminal prosecution.
We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States or abroad. Any government investigation of alleged violations of law could require us to expend significant time and resources in response and could generate negative publicity. If we are not able to maintain regulatory compliance or if we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, regulatory sanctions may be applied or we may lose any marketing approval that we may have obtained, and we may not achieve or sustain profitability, which would adversely affect our business, prospects, financial condition and results of operations.
Our product candidates may cause serious adverse side effects or have other properties that could delay or prevent their regulatory approval, limit the commercial profile of an approved label or result in significant negative consequences following any marketing approval.
It is impossible to predict when or if our product candidate will prove safe enough to receive regulatory approval. Undesirable side effects could result in a more restrictive label or the delay or denial of regulatory
approval by FDA or other comparable regulatory authority outside the United States for the affected product candidate. Additionally, if our product candidate receives marketing approval, and we or others later identify undesirable side effects caused by such product, a number of potentially significant negative consequences could result, including:
•we may be forced to suspend the marketing of such product;
•regulatory authorities may withdraw their approvals of such product;
•regulatory authorities may require additional warnings on the label that could diminish the usage or otherwise limit the commercial success of such products;
•FDA or other regulatory bodies may issue safety alerts, "Dear Healthcare Provider" letters, press releases or other communications containing warnings about such product;
•FDA may require the establishment or modification of Risk Evaluation Mitigation Strategies, or REMS, or a comparable regulatory authority outside the United States may require the establishment or modification of a similar strategy that may, for instance, restrict distribution of our products and impose burdensome and costly implementation requirements on us;
•we may be required to change the way the product is administered or conduct additional clinical trials;
•we could be sued and held liable for harm caused to subjects or patients;
•we may be subject to litigation or product liability claims; and
•our reputation may suffer.
Any of these events could prevent us from achieving or maintaining market acceptance of our product candidate, if approved.
Product liability lawsuits against us could cause us to incur substantial liabilities and to limit commercialization of any products that we may develop.
We face an inherent risk of product liability exposure related to any of our future product candidates. If we cannot successfully defend ourselves against claims that our product candidates or products caused injuries, we will incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:
•decreased demand for any product candidates or products that we may develop;
•injury to our reputation and significant negative media attention;
•significant costs to defend the related litigation;
•substantial monetary awards to patients;
•loss of revenue; and
•the inability to commercialize any products that we may develop.
Insurance coverage is increasingly expensive. We currently do not have any product liability or any other insurance, and may not be able to obtain and maintain insurance coverage at a reasonable cost or in an amount adequate to satisfy any liability that may arise.
We rely on third parties to conduct our preclinical studies and clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may not be able to obtain regulatory approval for our drug candidates and our business could be substantially harmed.
We depend upon independent investigators and contractors, such as CROs, universities and other academic institutions, such as Buck Institute, to conduct our preclinical studies and clinical trials. We rely upon, and plan to continue to rely upon, such third-party entities to execute our preclinical studies and clinical trials and to monitor and manage data produced by and relating to those studies and trials. However, we may not be able to in the future establish arrangements with CROs when needed or on terms that are acceptable to us, or at all, which could negatively affect our development efforts with respect to our drug candidates and materially harm our business, operations and prospects. As a result of the use of third-party contractors, we will have only limited control over certain aspects of their activities. Nevertheless, we are responsible for ensuring that each of our studies, including each of our clinical trials, is conducted in accordance with the applicable protocol, legal and regulatory requirements as well as scientific standards, and our reliance on any third-party entity will not relieve us of our regulatory responsibilities.
Based on our present expectations, we and our third-party contractors will be required to comply with current cGCP for all of our drug candidates in clinical development. Regulatory authorities enforce cGCP through periodic inspections of trial sponsors, clinical investigators and trial sites. If we or any of our contractors fail to comply with applicable cGCP, the clinical data generated in the applicable trial may be deemed unreliable and FDA or comparable foreign regulatory authorities may require us to perform additional clinical trials before approving a drug candidate for marketing, which we may not have sufficient cash or other resources to support and which would delay our ability to generate revenue from any sales of such drug candidate. Any agreements governing our relationships with outside contractors such as CROs or other contractors we may engage in the future, may provide those outside contractors with certain rights to terminate a clinical trial under specified circumstances. If such an outside contractor terminates its relationship with us during the performance of a clinical trial, we would be forced to seek an engagement with a substitute contractor, which we may not be able to do on a timely basis or on commercially reasonable terms, if at all, and the applicable clinical trial would experience delays or may not be completed.
If our contractors do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced or if the quality or accuracy of the data they obtain is compromised due to a failure to adhere to our clinical protocols, legal and regulatory requirements or for other reasons, our clinical trials may be extended, delayed or terminated and we may not be able to obtain regulatory approval for, or successfully commercialize, the affected drug candidates. In addition, we will be unable to control whether or not they devote sufficient time and resources to our preclinical and clinical programs. These outside contractors may not assign as great a priority to our programs or pursue them as diligently as we would if we were undertaking such programs ourselves. As a result, our operations and the commercial prospects for the effected drug candidates would be harmed, our costs could increase and our ability to generate revenues could be delayed. These contractors may also have relationships with other commercial entities, some of whom may compete with us. If our contractors assist our competitors to our detriment, our competitive position would be harmed.
Clinical drug development involves a lengthy and expensive process with uncertain outcomes, is very difficult to design and implement, and any of our clinical trials could produce unsuccessful results or fail at any stage in the process.
We are still in the preclinical stages of our development of TAM-01 and TAM-03 and hope to begin clinical trials in 2019. Clinical trials conducted on humans are expensive and can take many years to complete, and outcomes are inherently uncertain. Failure can occur at any time during the clinical trial process. Additionally, any positive results of preclinical studies and early clinical trials of a drug candidate may not be predictive of the results of later-stage clinical trials, such that drug candidate may reach later stages of clinical trials and fail to show the desired safety and efficacy traits despite having shown indications of those traits in preclinical studies and initial clinical trials. A number of companies in the pharmaceutical industry have suffered significant setbacks in advanced clinical trials due to lack of efficacy or adverse safety profiles, notwithstanding promising results in earlier phases of the trials. Therefore, the results of any ongoing or future clinical trials we conduct may not be successful.
We may experience delays in pursuing our planned clinical trials, and any planned clinical trials may not begin on time, may require redesign, may not enroll sufficient healthy volunteers or patients in a timely manner, and may not be completed on schedule, if at all.
Clinical trials may be delayed for a variety of reasons, including delays related to:
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obtaining regulatory approval to commence a trial;
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reaching agreement on acceptable terms with prospective CROs, and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;
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obtaining institutional review board, or IRB, approval at each trial site;
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enrolling suitable volunteers or patients to participate in a trial;
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developing and validating companion diagnostics on a timely basis;
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changes in dosing or administration regimens;
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having patients complete a trial or return for post-treatment follow-up;
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inability to monitor patients adequately during or after treatment;
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clinical investigators deviating from trial protocols or dropping out of a trial;
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regulators instituting a clinical hold due to observed safety findings or other reasons;
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adding new or substituting clinical trial sites; and
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manufacturing sufficient quantities of drug candidate for use in clinical trials.
We plan to rely on CROs and clinical trial sites to ensure the proper and timely conduct of our clinical trials. Although we expect that we will have agreements in place with CROs governing their committed activities and conduct, we will have limited influence over their actual performance. As a result, we ultimately do not and will not have control over a CRO's compliance with the terms of any agreement it may have with us, its compliance with applicable regulatory requirements, or its adherence to agreed time schedules and deadlines, and a future CRO's failure to perform those obligations could subject any of our clinical trials to delays or failure.
Further, we may also encounter delays if a clinical trial is suspended or terminated by us, by any IRB or Ethics Committee at an institution in which such trials are being conducted, by the Data Safety Monitoring Board, or DSMB, for the trial, if applicable, or by FDA, or other regulatory authorities. Such authorities may impose such a suspension or termination due to a number of factors, including failure to conduct the clinical trial in accordance with regulatory requirements, inspection of the clinical trial operations or trial site by FDA or other regulatory authorities resulting in the imposition of a clinical hold, exposing participants to health risks caused by unforeseen safety issues or adverse side effects, development of previously unseen safety issues, failure to demonstrate a benefit from using a drug candidate, changes in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial. Therefore, we cannot predict with any certainty the schedule for commencement or completion of any currently ongoing, planned or future clinical trials.
If we experience delays in the commencement or completion of, or due to suspension or termination of, any clinical trial for our drug candidates, the commercial prospects of the drug candidate could be harmed, and our ability to generate product revenues from the drug candidate may be delayed or eliminated. In addition, any delays in completing our clinical trials will increase our costs, slow down our drug candidate development and approval process and jeopardize regulatory approval of our drug candidates and our ability to commence sales and generate revenues. The occurrence of any of these events could harm our business, financial condition, results of operations and prospects significantly.
We rely and expect to continue to rely completely on third parties to formulate and manufacture our preclinical, clinical trial and post-approval drug supplies. The development and commercialization of any of our drug candidates could be stopped, delayed or made less profitable if those third parties fail to provide us with sufficient
quantities of such drug supplies or fail to do so at acceptable quality levels, including in accordance with applicable regulatory requirements or contractual obligations and our operations could be harmed as a result.
We have no experience in drug formulation or manufacturing. We do not currently have, nor do we plan to acquire, the infrastructure or capability internally, such as our own manufacturing facilities, to manufacture our preclinical and clinical drug supplies for use in the conduct of our clinical trials or commercial quantities of any drug candidates that may obtain regulatory approval. Therefore, we lack the resources and expertise to formulate or manufacture our own drug candidates. We have entered into agreements with third-party CMOs for the clinical-stage manufacture of certain of our drug candidate. We plan to enter into agreements with one or more manufacturers to manufacture, supply, store and distribute drug supplies for our current and future clinical trials and/or commercial sales. We intend to establish or continue those relationships for the supply of our drug candidates, however, there can be no assurance that we will be able to retain those relationships on commercially reasonable terms, if at all. If we are unable to maintain those relationships, we could experience delays in our development efforts as we locate and qualify new CMOs. If our current drug candidate or any drug candidates we may develop or acquire in the future receive regulatory approval, we will rely on one or more CMOs to manufacture the commercial supply of such drugs.
Our reliance on a limited number of CMOs exposes us to the following risks:
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We may be unable to identify manufacturers on acceptable terms, or at all, because the number of potential manufacturers is limited and FDA must approve any replacement contractor. This approval would require new testing and compliance inspections. In addition, a new manufacturer would have to be educated in, or develop substantially equivalent processes for, production of our products after receipt of FDA approval, if any.
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Our third-party manufacturers might be unable to formulate and manufacture our drugs in the volume and of the quality required to meet our clinical needs and commercial needs, if any.
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Our future contract manufacturers may not perform as contractually agreed or may not remain in the contract manufacturing business for the time required to supply our clinical trials or to successfully produce, store and distribute our products.
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Drug manufacturers are subject to ongoing periodic unannounced inspection by FDA, the Drug Enforcement Administration, and corresponding state agencies to ensure strict compliance with current good manufacturing practices, or cGMP, regulations and other government regulations and corresponding foreign standards. We do not have control over third-party manufacturers' compliance with these regulations and standards.
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If any third-party manufacturer makes improvements in the manufacturing process for our products, we may not own, or may have to share, the intellectual property rights to the innovation.
Each of these risks could delay our clinical trials, the approval, if any, of our drug candidates by FDA or the commercialization of our drug candidates or result in higher costs or deprive us of potential product revenues.
We expect to have no control over the ability of our contract manufacturers to maintain adequate quality control, quality assurance and qualified personnel. If any of our contract manufacturers cannot successfully manufacture material that conforms to our specifications and the strict regulatory requirements of FDA or other comparable foreign authorities, we would be prevented from obtaining regulatory approval for our drug candidates unless and until we engage a substitute contract manufacturer that can comply with such requirements, which we may not be able to do. Any such failure by any of our contract manufacturers would significantly impact our ability to develop, obtain regulatory approval for or market our drug candidates, if approved.
Further, we plan to rely on our manufacturers to purchase from third-party suppliers the materials necessary to produce our drug candidates for our clinical trials. We do not have, nor do we expect to enter into, any agreements for the commercial production of these raw materials, and we do not expect to have any control over the process or timing of our contract manufacturers' acquisition of raw materials needed to produce our drug candidates. Any significant delay in the supply of a drug candidate or the raw material components thereof for an ongoing
clinical trial due to a manufacturer's need to replace a third-party supplier of raw materials could considerably delay completion of our clinical trials, product testing and potential regulatory approval of our drug candidates. Additionally, if our future manufacturers or we are unable to purchase these raw materials to commercially produce any of our drug candidates that gain regulatory approvals, the commercial launch of our drug candidates would be delayed or there would be a shortage in supply, which would impair our ability to generate revenues from the sale of our drug candidates.
Disagreements with respect to the commercial terms of our sales, licensing, purchase or manufacturing agreements may limit our commercial success.
The rights and obligations of the partners to which we may license our TAM-01 technology are governed by the Buck Institute License Agreement. In addition, our relationships with CROs and CMOs are governed by the service agreements between us and each manufacturer. Although we attempt to address the full range of possible events that may occur during the development or the manufacturing of TAM-01 drug candidate and products, unanticipated or extraordinary events may occur beyond those contemplated by said agreements. Furthermore, our business relationships with our product manufacturers and our collaborators may include assumptions, understandings or agreements that are not included in our agreements with them, or that are inaccurately or incompletely represented by their terms. In addition, key terms in such agreements may be misunderstood or contested, even when both we and the other party previously believed that we had a mutual understanding of our obligations.
Any differences in interpretation or misunderstandings between us and other parties may result in substantial costs and delays with respect to the development, manufacturing or sale of TAM-01 drug product, and may negatively impact our revenues and operating results. Product manufacturers may fail to produce the products and partners may fail to develop the drug candidate under the timeline or in the manner we anticipated, and results may differ from the terms upon which we had agreed. As a result, we may be unable to supply drugs of the quality or in the quantity demanded or required. We may suffer harm to our reputation in the market from missed development goals or deadlines, and may be unable to capitalize upon market opportunities as a result. Resolution of these problems may entail costly and lengthy litigation or dispute resolution procedures. In addition, there is no guarantee that we will prevail in any such dispute or, if we do prevail, that any remedy we receive, whether legal or otherwise, will adequately redress the harm we have suffered. The delays and costs associated with such disputes may themselves harm our business and reputation and limit our ability to successfully compete in the market going forward.
Our future success depends on our ability to retain our chief executive officer and chief financial officer and other key executives and to attract, retain and motivate qualified personnel.
We are highly dependent on our chief executive officer, chief financial officer and the other principal members of our management team that may be hired in the future. The loss of the services of any of these people could impede the achievement of our research, development and commercialization objectives.
Recruiting and retaining qualified and experienced scientific, clinical, manufacturing and sales and marketing personnel will also be critical to our success. We may not be able to attract and retain these personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for similar personnel. We also experience competition for the hiring of scientific and clinical personnel from universities and research institutions. In addition, we rely on consultants and advisors, including scientific and clinical advisors, to assist us in formulating our research and development and commercialization strategy. Our consultants and advisors may be employed by employers or engaged by entities other than us and may have commitments under employment, consulting or advisory contracts with other entities that may limit their availability to us.
Our ability to timely submit an Investigational New Drug to FDA will depend on our ability to recruit all necessary personnel and to raise sufficient funds for such recruitment.
Our ability to execute on our current plan for the completion of all activities and submission of an IND to FDA will depend on our ability to recruit the necessary personnel to support our development activities. Failure to complete all hires as planned will result in significant delays in the submission of the IND, if at all. Further, our ability to hire and retain such personnel will depend on our ability to raise sufficient funds for such recruitment. Any
delays in raising the necessary funds will result in recruiting delays, which in turn will delay the submission of the IND.
We expect to expand our development, regulatory and sales and marketing capabilities, and as a result, we may encounter difficulties in managing our growth, which could disrupt our operations.
We currently have three employees. We expect to experience significant growth in the number of our employees and the scope of our operations if we are able to successfully develop and commercialize TAM-01, particularly in the areas of regulatory affairs, sales and marketing. To manage our anticipated future growth, we must continue to implement and improve our managerial, operational and financial systems, expand our facilities and continue to recruit and train additional qualified personnel. Due to our limited financial resources, we may not be able to effectively manage the anticipated expansion of our operations or recruit and train additional qualified personnel. The physical expansion of our operations may lead to significant costs and may divert our management and business development resources. Future growth would impose significant added responsibilities on members of management, including:
•managing our clinical trials effectively, which we anticipate being conducted at numerous clinical sites;
•identifying, recruiting, maintaining, motivating and integrating additional employees with the expertise and experience we will require;
•managing our internal development efforts effectively while complying with our contractual obligations to licensors, licensees, contractors and other third parties;
•managing additional relationships with various strategic partners, suppliers and other third parties;
•improving our managerial, development, operational and finance reporting systems and procedures; and
•expanding our facilities.
Our failure to accomplish any of these tasks could prevent us from successfully growing our Company. Any inability to manage growth could delay the execution of our business plans or disrupt our operations.
We may expend our limited resources to pursue a particular product candidate or indication and fail to capitalize on our product candidate or indications that may be more profitable or for which there is a greater likelihood of success.
Because we have limited financial and management resources, we focus on a limited number of research programs and product candidates and are currently focused principally on TAM-01 as well as certain activities intended to advance TAM-03 as an oncology candidate, or in other disease areas where we deem TAM-03 to have the potential to address serious unmet need . As a result, we may forego or delay pursuit of opportunities with other product candidates or for other indications that later prove to have greater commercial potential. Our resource allocation decisions may cause us to fail to capitalize on viable commercial drugs or profitable market opportunities. Our spending on current and future research and development programs and product candidates for specific indications may not yield any commercially viable drugs. If we do not accurately evaluate the commercial potential or target market for a particular product candidate, we may relinquish valuable rights to that product candidate through future collaboration, licensing or other arrangements in cases in which it would have been more advantageous for us to retain sole development and commercialization rights.
Guidelines and recommendations published by various organizations can reduce the use of our product candidate.
Government agencies promulgate regulations and guidelines directly applicable to us and to our product candidate. In addition, professional societies, practice management groups, private health and science foundations and organizations involved in various diseases from time to time may also publish guidelines or recommendations to the healthcare and patient communities. Recommendations of government agencies or these other groups or organizations may relate to such matters as usage, dosage, route of administration and use of therapies.
Recommendations or guidelines suggesting the reduced use of our product candidate or the use of competitive or alternative products as the standard of care to be followed by patients and healthcare providers could result in decreased use of our product candidate.
We have incurred significant losses since our inception and anticipate that we will continue to incur significant losses for the foreseeable future.
We are a development stage company with limited operating history. To date, we have focused primarily on developing our lead product candidate, TAM-01 and follow-on compound TAM-03. Our product candidates will require substantial additional development time and resources before we would be able to apply for or receive regulatory approvals and begin generating revenue from product sales. We have incurred cumulative net loss from inception (August 13, 2014) to December 31, 2017 of $7,149,803.
We have devoted most of our financial resources to product and technology development. To date, we have financed our operations primarily through the sale of equity securities and convertible debt securities. The size of our future net losses will depend, in part, on the rate of future expenditures and our ability to generate revenue. To date, our product candidate has not been commercialized, and if our product candidate is not successfully developed or commercialized, or if revenue is insufficient following marketing approval, we will not achieve profitability and our business may fail. Even if we successfully obtain regulatory approval to market our product candidate in the United States, our revenue is also dependent upon the size of the markets outside of the United States, as well as our ability to obtain market approval and achieve commercial success inside and outside the United States.
We expect to continue to incur substantial and increased expenses as we expand our development activities. We also expect an increase in our expenses associated with creating additional infrastructure to support operations as a public company. As a result of the foregoing, we expect to continue to incur significant and increasing losses and negative cash flows for the foreseeable future.
We have never generated any revenue and may never be profitable.
Our ability to generate revenue and achieve profitability depends on our ability, with collaborators, to successfully complete the development of, obtain the necessary regulatory approvals for, and commercialize our product candidate. We do not anticipate generating revenue from sales of our product candidate for the foreseeable future, if ever. Our ability to generate future revenue from product sales depends heavily on our success in:
•completing development of TAM-01;
•obtaining regulatory approval for TAM-01;
•completing development of TAM-03;
•obtaining regulatory approval for TAM-03; and
•launching and commercializing our product candidates for which we receive regulatory approval, either by building our own targeted sales force or by collaborating with third parties.
Because of the numerous risks and uncertainties associated with pharmaceutical product development, we are unable to predict the timing or amount of increased expenses, when, or if, we will begin to generate revenue from product sales, or when, or if, we will be able to achieve or maintain profitability. In addition, our expenses could increase beyond expectations if we are required by FDA or other regulatory authority to perform studies in addition to those that we currently anticipate.
Even if our product candidate is approved for commercial sale, to the extent we do not engage a third party collaborator, we anticipate incurring significant costs associated with commercializing any approved product candidate. Even if we are able to generate revenue from the sale of any approved products, we may not become profitable and may need to obtain additional funding to continue operations.
If we fail to obtain additional financing, we would be forced to delay, reduce or eliminate our product development programs.
Developing pharmaceutical products is expensive. As of December 31, 2017, we had cash and cash equivalents of $46,082. As such, we will need additional financing in order to execute our plans. Attempting to secure financing will divert our management from day-to-day activities, which may adversely affect our ability to develop and commercialize our product candidates. In addition, we cannot guarantee that any financing will be available in sufficient amounts or on terms acceptable to us, if at all. If we are unable to raise additional capital when required or on acceptable terms, we may be required to:
•significantly delay, scale back or discontinue the development or commercialization of our product candidates;
•seek corporate partners for our product candidates at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available;
•relinquish or license on unfavorable terms, our rights to technologies or product candidates that we otherwise would seek to develop or commercialize ourselves; or
•significantly curtail, or cease, operations.
If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we will be prevented from pursuing development and commercialization efforts, which will have a material adverse effect on our business, operating results and prospects.
There could be an adverse change or increase in the laws and/or regulations governing our business.
We and our operating subsidiary are subject to various laws and regulations in different jurisdictions, and the interpretation and enforcement of laws and regulations are subject to change. We are also subject to different tax regulations in each of the jurisdictions where we conduct our business or where our management or the management of our operating subsidiary is located. We expect the scope and extent of regulation in the jurisdictions in which we conduct our business, or where our management or the management of our operating subsidiary is located, as well as regulatory oversight and supervision, to generally continue to increase. There can be no assurance that future regulatory, judicial and legislative changes in any jurisdiction will not have a material adverse effect on us or hinder us in the operation of its business.
Risks Related to Our Intellectual Property
If we are unable to obtain or protect intellectual property rights related to our product candidates, we may not be able to compete effectively in our market.
While we intend to continue to apply for patent protection with respect to our product candidates, the strength of patents in the life sciences field involves complex legal and scientific questions and can be uncertain. Patent applications may fail to result in issued patents with claims that cover the products in the United States or in other countries. If this were to occur, early generic competition could be expected against product candidates in development. There is also no assurance that all of the potentially relevant prior art relating to a patent application, which can invalidate a patent or prevent a patent from issuing based on a pending patent application, will be found.
Even if patents do successfully issue, third parties may challenge their validity, enforceability or scope, which may result in such patents being narrowed or invalidated, which could adversely affect our ability to establish market share or successfully execute our business strategy to increase sales of our products and would negatively impact our financial condition and results of operations, including causing a significant decrease in our revenues and cash flows.
Furthermore, patents and patent applications may not adequately protect our intellectual property, provide exclusivity for our product candidates or prevent others from designing around our patent claims. If a patent application fails to issue or if the breadth or strength of protection of a patent or patent application is threatened,
competitors could directly compete against our products and we would have no recourse. We cannot offer any assurances about which, if any, patents will issue or whether any issued patents will be found valid and enforceable or will be unthreatened by third parties or will offer adequate coverage of our products. Further, if we encounter delays in regulatory approvals, the period of time during which we could market a product candidate could be reduced. Since patent applications in the United States and most other countries are confidential for a period of time after filing, and some remain so until issued, we cannot be certain that we were the first to file or invent any patent application. Furthermore, if a third party has filed such patent application, an interference proceeding in the United States can be provoked by such third party or instituted by us to determine who was the first to invent any of the subject matter covered by the patent claims of our applications. In the United States, the natural expiration of a maintained patent is generally 20 years after it is filed. Various extensions may be available; however the life of a patent, and the protection it affords, is limited. Once the patent life has expired, we may be open to competition from competitors that will be able to freely use our technology described in our expired patent(s).
In addition to the protection afforded by patents, we rely on trade secret protection and confidentiality agreements to protect proprietary know-how that is not patentable or which we elect not to patent, processes for which patents are difficult to enforce and any other elements of our development processes that involve proprietary know-how, information or technology that is not covered by patents. Although we expect all of our employees to assign their inventions to us, and all of our employees, consultants, advisors and any third parties who have access to our proprietary know-how, information or technology to enter into confidentiality agreements, we cannot provide any assurances that all such agreements have been duly executed or that our trade secrets and other confidential proprietary information will not be disclosed or that competitors will not otherwise gain access to our trade secrets or independently develop substantially equivalent information and techniques. We also seek to preserve the integrity and confidentiality of our data and trade secrets by maintaining physical security of our premises and physical and electronic security of our information technology systems. While we have confidence in these individuals, organizations and systems, agreements or security measures may be breached, and we may not have adequate remedies for any breach. If the steps taken to maintain our trade secrets are deemed inadequate, we may have insufficient recourse against third parties for misappropriating the trade secret. In addition, our competitors may independently discover our trade secrets and proprietary information. For example, FDA, as part of its Transparency Initiative, is currently considering whether to make additional information publicly available on a routine basis, including information that we may consider to be trade secrets or other proprietary information, and it is not clear at the present time how FDA's disclosure policies may change in the future, if at all.
Changes in either the patent laws or interpretations of the patent laws in the United States and other countries may diminish the value of our intellectual property or narrow the scope of our patent protection. An inability to obtain, enforce and defend patents covering our proprietary technologies would materially and adversely affect our business prospects and financial condition.
We may not be able to protect our intellectual property rights throughout the world.
Filing, prosecuting and defending patents on product candidates in all countries throughout the world would be prohibitively expensive, and our intellectual property rights in some countries outside the United States may be less extensive than those in the United States. Further, the laws of some foreign countries do not tend to protect proprietary rights to the same extent or in the same manner as the laws of the United States. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the United States, or from selling or importing products made using our inventions in and into the United States or other jurisdictions. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and further, may export otherwise infringing products to territories where we have patent protection, but enforcement may not be as strong as that in the United States. These products may compete with our products and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing. As a result, we may encounter significant problems in protecting and defending our intellectual property both in the United States and abroad. For example, if the issuance to us, in a given country, of a patent covering an invention is not followed by the issuance, in other countries, of patents covering the same invention, or if any judicial interpretation of the validity, enforceability, or scope of the claims in, or the written description or enablement in, a patent issued in one country is not similar to the interpretation given to the corresponding patent issued in another country, our ability to protect our intellectual property in those countries may be limited. Changes in either patent laws or in interpretations of patent laws in the United States and other countries may materially diminish the value of our intellectual property or narrow the scope of our patent protection. We may be unable to
prevent material disclosure of the non-patented intellectual property related to our technologies to third parties, and there is no guarantee that we will have any such enforceable trade secret protection, and therefore we may not be able to establish or maintain a competitive advantage in our market, which could materially adversely affect our business, results of operations and financial condition.
Further, many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not tend to favor the enforcement of patents, trade secrets and other intellectual property protection, particularly those relating to biotechnology products, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.
If we breach any of the agreements under which we license from third parties the intellectual property rights or commercialization rights to our drug candidate, particularly our license agreement with Buck Institute, we could lose license rights that are important to our business and our operations could be materially harmed.
Under the Buck Institute License Agreement, Mount Tam licenses significant intellectual property related to TAM-01 and TAM-03 from the Buck Institute. Under the terms of the Buck Institute License Agreement, Buck Institute assigns to Mount Tam certain assets, materials and records resulting from the research. Mount Tam retains rights to inventions made by its employees, and Buck Institute assigns to Mount Tam all inventions made under the Buck Institute License Agreement jointly by Mount Tam's employees and Buck Institute personnel, provided that Mount Tam's employees have made a certain inventive contribution. With respect to all other inventions made in the course of the research, Buck Institute grants to Mount Tam worldwide exclusive license rights under patents and patent applications claiming such inventions. Buck Institute retains rights to practice these inventions for research and teaching purposes. Mount Tam bears the costs of filing, prosecution and maintenance of patents assigned or licensed to us under the Buck Institute License Agreement.
As consideration for the assignments and licenses, Mount Tam is obliged to pay to Buck Institute milestone payments on development of its proprietary products claimed by patents assigned or licensed to Mount Tam by Buck Institute. Mount Tam also is obliged to pay low single-digit royalties, including annual minimum royalties, on sales of such products. Should Mount Tam grant licenses or sublicenses to those patents to third parties, Mount Tam is obliged to pay to Buck Institute certain undisclosed variable fees as a function of out-licensing revenues, or the Out-License Fee, where such Out-License Fees are creditable against annual license payments to Buck Institute. Mount Tam's payment obligations are reduced by our proportionate contribution to a joint invention. Payment obligations terminate on expiration or annulment of the last patent covered by the agreement.
In addition to the Buck Institute License Agreement, we may seek to enter into additional agreements with other third parties in the future granting similar license rights with respect to other potential drug candidates. If we fail to comply with any of the conditions or obligations or otherwise breach the terms of the Buck Institute License Agreement, or any future license agreement we may enter on which our business or drug candidates are dependent, Buck Institute or other licensors may have the right to terminate the applicable agreement in whole or in part and thereby extinguish our rights to the licensed technology and intellectual property and/or any rights we have acquired to develop and commercialize certain drug candidates, including, with respect to the Buck Institute License Agreement, our TAM-01 and TAM-03 drug therapies. Under the Buck Institute License Agreement, Mount Tam can terminate the licenses to any or all licensed patents upon specified advance notice to Buck Institute. Buck Institute may terminate the license provisions of the agreement only for cause. Termination of the agreement does not terminate Mount Tam's rights in patents assigned to Mount Tam but would terminate Mount Tam's rights to patents licensed to it under the Buck Institute License Agreement. The loss of the rights licensed to Mount Tam under the Buck Institute License Agreement, or any future license agreement that we may enter granting us rights on which our business or drug candidates are dependent, would eliminate our ability to further develop the applicable drug candidates and would materially harm our business, prospects, financial condition and results of operations.
Claims that we infringe the intellectual property rights of others may prevent or delay our drug discovery and development efforts.
Our research, development and commercialization activities, as well as any drug candidates or products resulting from those activities, may infringe or be accused of infringing a patent or other form of intellectual property under which we do not hold a license or other rights. Third parties may assert that we are employing their proprietary technology without authorization.
There may be third-party patents of which we are currently unaware with claims that cover the use or manufacture of our drug candidates. Because patent applications can take many years to issue, there may be currently pending patent applications that may later result in issued patents that our drug candidates may infringe. In addition, third parties may obtain patents in the future and claim that use of our drug candidates infringes upon these patents. If our activities or drug candidates infringe the patents or other intellectual property rights of third parties, the holders of such intellectual property rights may be able to block our ability to commercialize such drug candidates unless we obtain a license under the intellectual property rights or until any applicable patents expire or are determined to be invalid or unenforceable.
Defense of any intellectual property infringement claims against us, regardless of their merit, would involve substantial litigation expense and would be a significant diversion of resources from our business. In the event of a successful claim of infringement against us, we may have to pay substantial damages, obtain one or more licenses from third parties, limit our business to avoid the infringing activities, pay royalties and/or redesign our infringing drug candidates or alter related formulations, processes, methods or other technologies, any or all of which may be impossible or require substantial time and monetary expenditure. Further, if we were to seek a license from the third party holder of any applicable intellectual property rights, we may not be able to obtain the applicable license rights when needed or on reasonable terms, or at all. Some of our competitors may be able to sustain the costs of complex patent litigation or proceeding more effectively than us because they have substantially greater resources. The occurrence of any of the above events could prevent us from continuing to develop and commercialize one or more of our drug candidates and our business could materially suffer.
We may desire to, or be forced to, seek additional licenses to use intellectual property owned by third parties, and such licenses may not be available on commercially reasonable terms or at all.
In addition to Buck Institute, other third parties may also hold intellectual property, including patent rights, that are important or necessary to the development of our drug candidate, in which case we would need to obtain a license from that third party or develop a different formulation of the product that does not infringe upon the applicable intellectual property, which may not be possible. Additionally, we may identify drug candidates that we believe are promising and whose development and other intellectual property rights are held by third parties. In such a case, we may desire to seek a license to pursue the development of those drug candidates. Any license that we may desire to obtain or that we may be forced to pursue may not be available when needed on commercially reasonable terms or at all. Any inability to secure a license that we need or desire could have a material adverse effect on our business, financial condition and prospects.
We may be involved in lawsuits to protect or enforce our patents or the patents of our licensors, which could be expensive, time-consuming and unsuccessful.
Competitors may infringe our patents or the patents of our current or potential licensors. To attempt to stop infringement or unauthorized use, we may need to file infringement claims, which can be expensive and time-consuming and distract management.
If we pursue any infringement proceeding, a court may decide that a patent of ours or our licensors is not valid or is unenforceable, or may refuse to stop the other party from using the relevant technology on the grounds that our patents do not cover the technology in question. Further, the legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents, which could reduce the likelihood of success of, or the amount of damages that could be awarded resulting from, any infringement proceeding we pursue in any such jurisdiction. An adverse result in any infringement litigation or defense proceedings could put one or more of our patents at risk of being invalidated, held unenforceable, or interpreted narrowly and could put our patent applications at risk of not issuing, which could limit the ability of our drug candidates to compete in those jurisdictions.
Interference proceedings provoked by third parties or brought by the USPTO or at its foreign counterparts to determine the priority of inventions with respect to our patents or patent applications or those of our licensors. An unfavorable outcome could require us to cease using the related technology or to attempt to license rights to use it from the prevailing party. Our business could be harmed if the prevailing party does not offer us a license on commercially reasonable terms, or at all.
Litigation or interference proceedings may fail and, even if successful, may result in substantial costs and distract our management and other employees.
Risks Related to an Investment in Our Securities
Our limited operating history makes evaluating our business and future prospects difficult, and may increase the risk of any investment in our common stock.
Our operations to date have been limited to developing TAM-01 and follow-on compound TAM-03. In addition, as an early stage company, we have limited experience and have not yet demonstrated an ability to successfully overcome many of the risks and uncertainties frequently encountered by companies in new and rapidly evolving fields, particularly in the pharmaceutical area. Nor have we demonstrated an ability to obtain regulatory approval for or to commercialize a product candidate. Consequently, any predictions about our future performance may not be as accurate as they could be if we had a history of successfully developing and commercializing a significant number of pharmaceutical products.
Our common stock has limited liquidity.
Our common stock is quoted on the OTC Markets (OTC Pink). OTC Pink securities are not listed or traded on the floor of an organized national or regional stock exchange. Instead, OTC Pink securities transactions are conducted through a telephone and computer network connecting dealers in stocks. OTC Pink issuers are traditionally smaller companies that do not meet the financial and other listing requirements of a regional or national stock exchange. As such, our securities are thinly traded compared to larger more widely known companies in the same industry. Thinly traded common stock can be more volatile than stock trading in an active public market. We cannot predict the extent to which an active public market for our common stock will develop or be sustained. In addition, there is no assurance that trading in the Company's common stock will continue on the OTC Pink Market or on any other securities exchange or quotation medium.
Our stock is categorized as a penny stock. Trading of our stock may be restricted by the SEC's penny stock regulations which may limit a shareholder's ability to buy and sell our stock.
Our stock is categorized as a penny stock. The SEC has adopted Rule 15g-9 which generally defines "penny stock" to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and accredited investors. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer's account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer's confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules; the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of our common stock.
FINRA sales practice requirements may also limit a shareholder's ability to buy and sell our stock.
In addition to the "penny stock" rules described above, FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer's financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. The FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.
To date, we have not paid any cash dividends and no cash dividends will be paid in the foreseeable future.
We do not anticipate paying cash dividends on our common stock in the foreseeable future and we may not have sufficient funds legally available to pay dividends. Even if the funds are legally available for distribution, we may nevertheless decide not to pay any dividends. We presently intend to retain all earnings for our operations.
Our common shares are not currently traded with any substantial volume, and you may be unable to sell at or near ask prices or at all if you need to sell or liquidate a substantial number of shares at one time.
We cannot predict the extent to which an active public market for our common stock will develop or be sustained.
Our common shares are currently quoted, but currently with little to no volume, based on quotations on the OTC Markets (OTC Pink), meaning that the number of persons interested in purchasing our common shares at or near bid prices at any given time may be relatively small or non-existent. This situation is attributable to a number of factors, including the fact that we are a small company which is still relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned and viable. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. We cannot give you any assurance that a broader or more active public trading market for our common stock will develop or be sustained, or that trading levels will be sustained.
Shareholders should be aware that, according to SEC Release No. 34-29093, the market for "penny stocks" has suffered in recent years from patterns of fraud and abuse. Such patterns include (1) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (2) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (3) boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (4) excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and (5) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses. Our management is aware of the abuses that have occurred historically in the penny stock market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive within the confines of practical limitations to prevent the described patterns from being established with respect to our securities. The occurrence of these patterns or practices could increase the future volatility of our share price.
Our corporate actions are substantially controlled by our principal shareholders and affiliated entities.
As of April 10, 2018, our principal shareholders, which includes our officers and directors, own approximately 47.8% of our outstanding shares of common stock. These shareholders, acting individually or as a group, could exert substantial influence over matters such as electing directors and approving mergers or other business combination transactions. In addition, because of the percentage of ownership and voting concentration in
these principal shareholders and their affiliated entities, elections of our Board will generally be within the control of these shareholders and their affiliated entities. While all of our shareholders are entitled to vote on matters submitted to our shareholders for approval, the concentration of shares and voting control presently lies with these principal shareholders and their affiliated entities. As such, it would be difficult for shareholders to propose and have approved proposals not supported by management. There can be no assurances that matters voted upon by our officers and directors in their capacity as shareholders will be viewed favorably by all of our shareholders.
The elimination of monetary liability against our directors, officers and employees under Nevada law and the existence of indemnification rights to our directors, officers and employees may result in substantial expenditures by our company and may discourage lawsuits against our directors, officers and employees.
Our Articles of Incorporation, as amended, contain a provision permitting us to eliminate the liability of our directors for monetary damages to our company and shareholders to the extent provided by Nevada law. We may also have contractual indemnification obligations under our employment agreements with our officers. The foregoing indemnification obligations could result in our company incurring substantial expenditures to cover the cost of settlement or damage awards against directors and officers, which we may be unable to recoup. These provisions and resultant costs may also discourage our company from bringing a lawsuit against directors and officers for breaches of their fiduciary duties, and may similarly discourage the filing of derivative litigation by our shareholders against our directors and officers even though such actions, if successful, might otherwise benefit our company and shareholders.
Legislative actions, higher insurance costs and potential new accounting pronouncements may impact our future financial position and results of operations.
There have been regulatory changes and there may potentially be new accounting pronouncements or additional regulatory rulings that will have an impact on our future financial position and results of operations. In addition, insurers are likely to increase premiums as a result of high claims rates over the past several years, which we expect will increase our premiums for insurance policies. Further, there could be changes in certain accounting rules. These and other potential changes could materially increase the expenses we report under generally accepted accounting principles, and adversely affect our operating results.
We may have material liabilities that were not discovered before, and have not been discovered since, the closing of the Exchange Agreement.
As a result of the Share Exchange, the former business plan and management of the registrant, previously known as "TabacaleraYsidron, Inc.", have been abandoned and replaced with the business and management team of Mount Tam. Prior to the Share Exchange, there were no relationships or other connections among the businesses or individuals associated with those two entities. As a result, we may have material liabilities based on activities before the Share Exchange that have not been discovered or asserted. We could experience losses as a result of any such undisclosed liabilities that are discovered in the future, which could materially harm our business and financial condition. Although the Exchange Agreements and the other agreements entered into in connection with the Share Exchange contains customary representations and warranties from Mount Tam and the registrant concerning their respective assets, liabilities, financial condition and affairs, there may be limited or no recourse against pre-Share Exchange shareholders or principals in the event those representations prove to be untrue. As a result, our current and future shareholders will bear some, or all, of the risks relating to any such unknown or undisclosed liabilities.
We may be exposed to additional risks as a result of "going public" by means of a reverse acquisition transaction.
We may be exposed to additional risks because the business of Mount Tam has become a public company through a "reverse acquisition" transaction. There has been increased focus by government agencies on transactions such as the Share Exchange in recent years, and we may be subject to increased scrutiny by the SEC and other government agencies and holders of our securities as a result of the completion of that transaction. Further, as a result of our existence as a "shell company" under applicable rules of the SEC prior to the closing of the Exchange Agreement on August 13, 2015, we are subject to certain restrictions and limitations for certain specified periods of time relating to potential future issuances of our securities and compliance with applicable SEC rules and regulations. Additionally, our "going public" by means of a reverse acquisition transaction may make it more
difficult for us to obtain coverage from securities analysts of major brokerage firms following the Share Exchange because there may be little incentive to those brokerage firms to recommend the purchase of our common stock. Further, investment banks may be less likely to agree to underwrite secondary offerings on our behalf than they might if we became a public reporting company by means of an initial public offering, because they may be less familiar with our company as a result of more limited coverage by analysts and the media, and because we became public at an early stage in our development. The failure to receive research coverage or support in the market for our shares will have an adverse effect on our ability to develop a liquid market for our common stock. The occurrence of any such event could cause our business or stock price to suffer.
If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent material misstatements.
The SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring every public company to include a management report on such company's internal controls over financial reporting in its annual report, which contains management's assessment of the effectiveness of our internal controls over financial reporting. Our management may conclude that our internal controls over our financial reporting are not effective. Moreover, even if our management concludes that our internal controls over financial reporting are effective, our independent registered public accounting firm may issue a report that is qualified if it is not satisfied with our controls or the level at which our controls are documented, designed, operated or reviewed. Our reporting obligations as a public company will place a significant strain on our management, operational and financial resources and systems for the foreseeable future. Effective internal controls, particularly those related to sales revenue recognition, are necessary for us to produce reliable financial reports and are important to help prevent material misstatements, or in certain extreme cases, fraud. As a result, our failure to achieve and maintain effective internal controls over financial reporting could result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the trading price of our stock. Furthermore, we anticipate that we will incur considerable costs and use significant management time and other resources in an effort to comply with Section 404 and other requirements of the Sarbanes-Oxley Act.
ITEM 1B.
ITEM 1B. Unresolved Staff Comments.
As a "smaller reporting company" as defined by Item 10 of Regulation S-K, the Company is not required to provide the information required by this Item.
ITEM 2.
ITEM 2. Properties.
Effective March 1, 2018 (and since March 1, 2017) Mount Tam rents office space at 7250 Redwood Blvd, Suite 300, Novato, CA 94945. The rental agreement expires August 31, 2018. The Company believes that its facilities are sufficient to meet its current needs and the Company will look for suitable additional space as and when needed.
Prior to March 1, 2017, Mount Tam rented office and laboratory spaces from The Buck Institute at Buck Institute 8001 Redwood Boulevard, Novato, California. Originally Mount Tam was under a lease that provided for an annual rental payment of $24,500 plus $2,000 per year for administrative services, however, the agreement was amended in September 2015 to reduce the annual rental payment to $9,500. In 2016, The Buck Institute billed the Company $9,875 for office space fees plus a $2,000 administration fee, for a total of $11,875 for office space and administration services. In 2017, The Buck Institute billed the Company $0 for office space fees, and $0 administration fee, for a total of $0 for office space and administration services. For the fiscal year ended December 31, 2016, the Company paid $13,199 to The Buck Institute for office space, which includes $2,125 of expense from 2015. For the fiscal year ended December 31, 2017, the Company paid $0 to The Buck Institute for office space, which includes $0 of expense from 2016.
ITEM 3.
ITEM 3. Legal Proceedings.
As of the date of this Report, the Company was not involved in any material legal proceedings, nor has it been involved in any such proceedings that have had or may have a significant effect on the Company. The Company is not aware of any other pending material legal proceedings.
ITEM 4.
ITEM 4. Mine Safety Disclosures.
Not Applicable
PART II
ITEM 5.
ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
The registrant's common stock is not listed on any stock exchange, and is quoted on the OTC Markets (OTC Pink) under the symbol "MNTM."
The following table reflects the high closing sales information for our common stock for each fiscal quarter during the fiscal years ended December 31, 2017 and 2016. This information was obtained from OTC Pink and reflects inter-dealer prices without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
Holders
As of April 2, 2018, there were approximately 98 shareholders of record of the Company's common stock based upon the records of the shareholders provided by the Company's transfer agent. The Company's transfer agent is VStock Transfer, LLC, whose address is 18 Lafayette Place, Woodmere, New York 100598, and whose telephone number is (212) 828-8436.
Dividends
The Company has never paid cash dividends on its common stock. The Company intends to keep future earnings, if any, to finance the expansion of its business. The Company does not anticipate that any cash dividends will be paid in the foreseeable future. The Company's future payment of dividends, if any, will depend on its earnings, capital requirements, expansion plans, financial condition and other relevant factors that the Company's board of directors may deem relevant. The Company's retained earnings deficit currently limits its ability to pay dividends.
Repurchases
During the fiscal year ended December 31, 2017, we did not repurchase any of our securities.
Options
The Company's Board of Directors approved the adoption of the Mount Tam 2016 Stock-Based Compensation Plan (the "2016 Plan") on May 12, 2016. A majority of the stockholders approved the 2016 Plan by written consent on June 27, 2016. A copy of the 2016 Plan is included as Exhibit A to the Company's Information Statement filed with the SEC on July 11, 2016.
On May 2, 2016, the Company granted options to purchase up to 6,330,000 shares of Common Stock under the Plan in the aggregate, with an exercise price of $0.59 per share. Options will vest as per below table
On October 2, 2016, the Company granted options to purchase up to 135,000 shares of Common Stock under the Plan in the aggregate, with an exercise price of $0.40 per share. Options will vest as per below table
Stock-based compensation expense related to vested options was $981,875 for the twelve months ended December 31, 2017. Stock-based compensation expense related to vested options was $648,188 for the twelve months ended December 31, 2016. The Company determined the value of share-based compensation using the Black-Scholes fair value option-pricing model using the following weighted average assumptions for options granted during the year ended December 31, 2016.
As summary of option activity under the 2016 Plan as of December 31, 2017, and changes during the period then ended is presented below:
As of December 31, 2017, there was $2,239,852 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of 2.2 years.
Warrants
On August 10, 2017, the Company entered into a Securities Purchase Agreement with two investors to purchase from the Company 4,038,462 shares of the Company's common stock for an aggregate purchase price of $525,000. (See Note 6 Capital Stock - Private Placement.) The investors received a warrant to purchase an additional 504,808 shares at an exercise price of $0.15 per share, and a warrant to purchase an additional 504,808 shares at an exercise price of $0.20 per share. Both warrants have a call provision when the Company's common stock trades for five consecutive days at a price equal or greater than 500% of the exercise price of each warrant agreement. Both warrant agreements expire August 10, 2022.
Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities
As part of the offering of our common stock which commenced in August 2016, the Company accepted the following additional subscriptions:
On December 10, 2016, the Company entered into a Securities Purchase Agreement with an investor for such investor to purchase from the Company 166,666 shares of the Company's common stock for an aggregate purchase price of $50,000. The Company incurred $3,750 as cash fee expenses towards the placement agent. The Company intends to use the proceeds from this investment for general corporate and working capital purposes.
On February 27, 2017, the Company entered into a Securities Purchase Agreement with an investor for such investor to purchase from the Company 833,334 shares of the Company's common stock for an aggregate purchase price of $250,000. The Company intends to use the proceeds from this investment for general corporate and working capital purposes.
On February 28, 2017, the Company entered into a Securities Purchase Agreement with an investor for such investor to purchase from the Company 83,333 shares of the Company's common stock for an aggregate purchase price of $25,000. The Company intends to use the proceeds from this investment for general corporate and working capital purposes.
On March 3, 2017, the Company entered into a Securities Purchase Agreement with an investor for such investor to purchase from the Company 83,333 shares of the Company's common stock for an aggregate purchase price of $25,000. The Company intends to use the proceeds from these investments for research and development activities, general corporate and working capital purposes.
On August 10, 2017, the Company entered into a Securities Purchase Agreement with an investor for such investor to purchase from the Company 3,846,154 shares of the Company's common stock for an aggregate purchase price of $500,000, of which $200,000 has been received, and a promissory note for $300,000 was received from the investor, requiring three $100,000 payments to the Company during a 90 day period which ended on November 12, 2017. The Company incurred $14,451 as cash fee expenses towards the placement agent. The Company used the proceeds from this investment for general corporate and working capital purposes. The investor received a warrant to purchase an additional 480,769 shares at an exercise price of $0.15 per share, and a warrant to purchase an additional 480,769 shares at an exercise price of $0.20 per share. Both warrants have a call provision when the Company's common stock trades for five consecutive days at a price equal or greater than 500% of the exercise price of each warrant agreement. Both warrant agreements expire August 10, 2022. As of December 31, 2017, the Company had received the $300,000 from the investor as payment on the promissory note. The balance remaining is $0.
On August 10, 2017, the Company entered into a Securities Purchase Agreement with an investor for such investor to purchase from the Company 192,308 shares of the Company's common stock for an aggregate purchase price of $25,000, which was received on August 11, 2017. The Company incurred $625 as cash fee expenses towards the placement agent. The Company used the proceeds from this investment for general corporate and working capital purposes. The investor received a warrant to purchase an additional 24,038 shares at an exercise price of $0.15 per share, and a warrant to purchase an additional 24,038 shares at an exercise price of $0.20 per share. Both warrants have a call provision when the Company's common stock trades for five consecutive days at a price equal or greater than 500% of the exercise price of each warrant agreement. Both warrant agreements expire August 10, 2022.
The aforementioned securities were sold in reliance upon an exemption from registration under Section 4(a)(2) of the Securities Act of 1933, as amended, and Regulation D promulgated thereunder.
Secured Convertible Promissory Note Financing
On April 6, 2018, the Company, and Fromar Investments, LP (the “Lender”) entered into an arrangement whereby Lender would lend the Company $500,000 pursuant to the terms of a convertible promissory note (the “Note”). The Note bears interest at a rate of 8.0% per annum and has a maturity date of September 30, 2108. By agreement of the parties, the effective date of the Note is March 5, 2018, and funds are disbursed under the Note pursuant to a schedule thereto.
The Company and Lender also entered into a Security Agreement (the “Security Agreement”) pursuant to which the Company and the Lender agreed that all amounts, liabilities and obligations owed by the Company to the Lender (including, but not limited to, all amounts owed under the Note) are secured by a second priority security interest in all assets of the Company on the terms and conditions set forth in the Security Agreement. The security interest granted to the Lender is subordinate to the interest granted to 0851229 BC, Ltd. pursuant to an amended and restated security agreement dated as of June 14, 2016 (included as Exhibit 99.2 to the Company’s Current Report on Form 8-K filed on June 15, 2016).
Pursuant to the terms of the Note, if the Company issues capital stock or any security convertible into or exercisable for its capital stock in a transaction, the primary purpose of which is to raise capital (a “Financing”), the Lender may convert all or any portion of the outstanding principal amount and accrued and unpaid interest into the same securities issued by the Company in the Financing (the “Financing Securities”) at a conversion price equal to
eighty percent (80%) of the price per Financing Securities paid by the other investors in the Financing. If the Company consummates a Qualified Financing (as hereinafter defined) then the outstanding principal amount and all accrued and unpaid interest shall automatically convert into the same securities issued to investors in the Qualified Financing (the “Qualified Financing Securities”) at a conversion price equal to eighty percent (80%) of the price per Qualified Financing Securities paid by the other investors in the Qualified Financing. A “Qualified Financing” means a Financing which results in gross proceeds to the Company, in one or a series of related transactions, of at least $2,000,000 (including the aggregate amount of indebtedness converted into equity securities in such Financing), in which either (i) the investor leading negotiations with the Company is a bona fide institutional investor or (ii) the investor leading negotiations with the Company is not a bona fide institutional investor but the Financing includes commercially reasonable customary terms and conditions for an equity financing of an early-stage biopharmaceutical company.
Effective upon a complete funding of the entire principal amount of $500,000, the Company agreed to issue to the Lender 1,000,000 shares of its common stock. The Company agreed to issue to the Lender an additional 1,000,000 shares of its common stock in the event that the Company has not either (i) closed a Financing resulting in funding of at least $1,000,000 to the Company after the date of the Note, but on or before July 1, 2018, or (ii) received a binding term sheet or other similar binding agreement pertaining to a licensing transaction with a company that operates in the pharmaceutical and/or biotech industries that will provide for at least $500,000 in upfront payments to the Company on or before July 1, 2018, as well as milestones and royalties for TAM-01, TAM-3, or for any follow-on compounds of the Company (a “Licensing Transaction”) on or before July 1, 2018. The Company agreed to issue to the Lender an additional 3,000,000 shares of its common stock in the event that the Company has not either (i) closed a Financing resulting in funding of at least $1,000,000 to the Company after the date of the Note, but on or before September 30, 2018, or (ii) received a binding term sheet or other similar binding agreement for a Licensing Transaction on or before September 30, 2018.
In addition to the foregoing, the Company entered into amendment (the “Amendment”) to that certain Amended and Restated Promissory Note with 0851229 BC, Ltd. dated June 13, 2016 (the “June 2016 Note”) whereby the maturity date of the June 2016 Note was extended to September 30, 2018.
The foregoing descriptions of the Note, the Security Agreement, and the Amendment do not purport to be complete and are qualified in their entirety by the terms and conditions of the agreements themselves. Copies of the Note, the Security Agreement, and the Amendment are attached as Exhibits 10.1, 10.2 and 10.3, respectively, to a Current Report on Form 8-K, filed with the Commission on April 12. 2018.
The Note and the securities of the Company into which the Note is convertible were offered and sold without registration under the Securities Act of 1933, as amended (the “Securities Act”), in reliance on the exemptions provided by Section 4(a)(2) of the Securities Act and/or Regulation D promulgated thereunder, and in reliance on similar exemptions under applicable state laws. The Lender has represented to the Company that it is an accredited investor. No person received any underwriting discount or commission in connection with the issuance of the securities described herein.
Our reliance on Regulation D under the Securities Act of 1933 was based in part upon written representations made by the investor that: (a) such party is acquiring the securities for his, her or its own account for investment and not for the account of any other person and not with a view to or for distribution, assignment or resale in connection with any distribution within the meaning of the Securities Act of 1933, (b) the party agrees not to sell or otherwise transfer the securities unless they are registered under the Securities Act of 1933 and any applicable state securities laws, or an exemption from such registration is available, (c) the party has knowledge and experience in financial and business matters such that he, she or it is capable of evaluating the merits and risks of an investment in the Company, (d) the party had access to all of our documents, records, and books pertaining to the investment and was provided the opportunity to ask questions and receive answers regarding the terms and conditions of the offering or issuance and to obtain any additional information which we possessed or were able to acquire without unreasonable effort and expense, and (e) the party has no need for liquidity in its investment and could afford the complete loss of such investment. In any instant in which we relied upon Rule 506 of Regulation D promulgated under the Securities Act of 1933, management made the determination, based upon written representations, that the investor was an "accredited investor" as defined in Rule 501 of Regulation D. In addition, there was no general solicitation or advertising for securities issued in reliance upon Regulation D.
Our reliance upon Section 4(a)(2) of the Securities Act of 1933 was based in part upon the following factors: (a) the issuance of the securities was in connection with an isolated private transaction which did not involve any public offering; (b) there were a limited number of offerees; (c) there were no subsequent or contemporaneous public offerings of the securities by us; (d) the securities were not broken down into smaller denominations; and (e) the negotiations for the sale of the securities took place directly between the offeree and the placement agent or the Company, as applicable.
ITEM 6.
ITEM 6. Selected Financial Data.
As a "smaller reporting company" as defined by Item 10 of Regulation S-K, the Company is not required to provide the information required by this Item.
ITEM 7.
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our audited financial statements and the related notes that appear elsewhere in this annual report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward looking statements. Factors that could cause or contribute to such differences include those discussed below and elsewhere in this annual report. Words such as "anticipate," "estimate," "plan," "project," "continuing," "ongoing," "expect," "believe," "intend," "may," "will," "should," "could," and similar expressions are used to identify forward-looking statements.
We believe that our assumptions are based upon reasonable data derived from and known about our business and operations and the business and operations of the Company. No assurances are made that actual results of operations or the results of our future activities will not differ materially from its assumptions. Factors that could cause differences include, but are not limited to, expected market demand for the Company's products and services and competition.
The Share Exchange was treated as a reverse acquisition for financial accounting and reporting purposes. As such, Mount Tam is treated as the acquirer for accounting and financial reporting purposes while the Company was treated as the acquired entity for accounting and financial reporting purposes. Further, as a result, the historical financial statements that will be reflected in the Company's future financial statements filed with the SEC will be those of Mount Tam, and the Company's assets, liabilities and results of operations will be consolidated with the assets, liabilities and results of operations of Mount Tam. Accordingly, for clarity and continuity, we are presenting the historical financial statements for Mount Tam for the periods presented.
Overview
We are an early stage company primarily engaged in the development of bio-pharmaceuticals to treat a range of disease areas with high unmet need. Our lead program is focused on SLE, and we intend to optimize and bring to market a portfolio of leading products focused on improving the health and well-being of millions of people who have been affected by a range of serious disease conditions. To that end, we have formed a strategic partnership with the Buck Institute, an independent research facility focused on understanding the connection between aging and chronic disease. As part of the partnership, we have signed the License Agreement that includes many of the Buck Institute's intangible research and development assets. The initial focus of our research and development efforts will be a preclinical stage compounds for the treatment of SLE, a serious form of lupus with potential in treating cancers and neurodegenerative disorders as well.
Plan of Operations
As shown in the accompanying consolidated financial statements, the Company incurred net losses of $2,616,098 for the year ended December 31, 2017 and has an accumulated deficit of $7,149,803 as of December 31, 2017.
Liquidity and Capital Resources
Our principal sources of cash have been proceeds from private placements of common stock and incurrence
of debt. As of December 31, 2017, the Company had working capital deficit of $1,571,584 with cash balance of $42,082. Our cash decreased by $329,416 during the year ended December 31, 2017.
During the second quarter of 2016 the Company entered into negotiations with the Buck Institute to resolve certain outstanding financial concerns, and to broaden the Research Collaboration and License Agreement beyond the area of autoimmune disease. On July 18, 2016, Mount Tam Biotechnologies, Inc. (the "Company"), entered into an amendment (the "Amendment") to the Research Collaboration and License Agreement (the "License Agreement") between the Company and The Buck Institute for Research on Aging ("The Buck Institute").
Pursuant to this Amendment, the Research Collaboration Term of the License Agreement is tolled until the Company can achieve a Qualified Financing (defined as any financing occurring after the date of the Amendment which results in gross proceeds to the Company of at least $2,000,000). Once a Qualified Financing has been achieved, the research collaboration efforts will resume, and will continue for a period of twenty-one months (the "Extended Research Collaboration Term"). The Company and The Buck Institute agreed to work together to determine a new research plan, specifying the research and development activities of both parties during the Extended Research Collaboration Term.
Additionally, pursuant to the Amendment, the parties agreed to settle past research funding amounts owed by the Company to The Buck Institute. The Company agreed to pay $40,000 within ten days of the execution of the Amendment, and The Buck Institute agreed that once this amount is paid, the Company will be deemed to be in full compliance with the terms of the License Agreement, including its payment obligations. On July 19, 2016, the Company made the $40,000 payment to The Buck Institute. In addition to the $40,000 payment, on June 13, 2016, the Company paid to The Buck Institute $11,706 in connection with costs incurred to further the Company's intellectual property position under the License Agreement. Pursuant to the above amendment The Buck Institute waived $274,247 of payable by the Company. In addition, the Company issued to Buck Institute 1,009,016 shares of common stock, which was the number of shares required to equal to 5% of the Company's total outstanding shares. Pursuant to the original License Agreement, and the Amendment, The Buck Institute's equity interest in the Company will not be reduced below 5% of the total aggregate shares of common stock until such time that the Company has raised and received a total of $5,000,000 of investment in equity, debt, grants, contributions, or donations. As of December 31, 2017, the Company has issued 2,644,272 shares of the Company's common stock to The Buck Institute.
Moreover, the parties agreed that the field of use covered by the License Agreement would be expanded, with the new definition being "the treatment, diagnosis or prevention of any and all conditions or diseases including, without limitation, systemic lupus erythematous and multiple sclerosis for human and/or veterinary use." (Under the original License Agreement, the Company's field of use had been restricted to autoimmune disorders). The foregoing is qualified in its entirety to the terms of the Amendment, a copy of which was filed as Exhibit 99.1 to our Form 8-K filed on July 21, 2016.
Negative Operating Cash Flow
We reported negative cash flow from operations for the year ended December 31, 2017 and 2016. It is anticipated that we will continue to report negative operating cash flow in future periods, likely until one or more of our products are placed into production and released to our customers.
Our cash balance of $46,082 may not be sufficient to fund our operations for at least the next 12 months. Additionally, if we are unable to generate sufficient revenues to pay our expenses, we will need to raise additional funds to continue our operations. We have historically financed our operations through private equity and debt financings. Recent economic turmoil and lack of liquidity in the debt capital markets together with high volatility in prices in the equity capital markets have severely and adversely affected capital raising opportunities. We do not have any commitments for financing at this time, and financing may not be available to us on favorable terms, if at all. If we are unable to obtain debt or equity financing in amounts sufficient to fund our operations, if necessary, we will be forced to suspend or curtail our operations. In that event, current stockholders would likely experience a loss of most or all of their investment. Additional funding that we do obtain may be dilutive to the interests of existing stockholders.
Results of Operations
For the Year ended December 31, 2017 compared with the Year ended December 31, 2016
Revenue
We had no revenues for the year ended December 31, 2017 and 2016. We are in the research and development stage.
Operating Expenses
We incurred operating expenses of $2,530,790 and $2,078,762 during the year ended December 31, 2017 and 2016, respectively. Our operating expenses included research and development expenses in the amount of $688,668 and $329,397, and general and administrative expenses in the amount of $1,842,122 and $1,749,364 for year ended December 31, 2017 and 2016 respectively. The increase in general and administrative expenses was mainly due to an increase in stock option expense of $174,887, partially offset by a decrease in legal of $14,657, and a decrease in consulting expenses of $150,102.
Other Expense
Other expense totaled $85,307 and $101,810 during the year ended December 31, 2017 and 2016, respectively. The decrease is due to the decrease in the amortization of debt discount. Other expenses included interest expense in the amount of $19,321 and $14,331, and amortization of debt discount in the amount of $66,520 and $87,479 for the year ended December 31, 2017 and 2016, respectively
Net Loss
As a result of the foregoing, during the year ended December 31, 2017 and 2016, we recorded a net loss of $2,616,098 and $2,180,571, respectively.
Liquidity and Capital Resources
We had cash and equivalents of $46,082 at December 31, 2017.
Operating Activities
During the year ended December 31, 2017, we used $1,189,264 of cash in operating activities, compared to $1,174,448 for the year ended December 31, 2016. Non-cash adjustments included $1,024,587 and $706,083 for fair value of stock options and stock based compensation, $66,520 and $87,479 related to amortization of beneficial conversion feature, $21,818 and $20,854 in amortization of prepaid expenses and net change in accounts payable and accrued liabilities of $324,555 and $216,732 during the year ended December 31, 2017 and 2016, respectively.
Financing Activities
Financing activities provided $859,847 to us during the year ended December 31, 2017 compared to $1,544,500 for the year ended December 31, 2016. We received $75,000 in net proceeds from loans for the year ended December 31, 2017, compared to $477,000 for the year ended December 31, 2016. In addition, we received 802,422 in net proceeds from issuance of common stock during the year ended December 31, 2017, compared to $1,067,500 in net proceeds from issuance of common stock during the year ended December 31, 2016.
Sources of Liquidity and Capital
During the year ended December 31, 2017, we received net proceeds from the sale of common stock of $802,422 and issuance of debt in the amount of $75,000. During the year ended December 31, 2016, we received net
proceeds from the sale of common stock of $1,067,500 and issuance of debt in the amount of $477,000. The capital raised has been used primarily for continuation of the Company's research and development efforts and to support its operations. As of December 31, 2017, the Company had remaining cash of $46,082 with net working capital deficit of $1,571,584. As of December 31, 2016, the Company had remaining cash of $375,499 with net working capital deficit of $240,560. As a result of the Company's significant operating expenditures and the lack of any significant product sales revenue, we expect to incur losses from operations for the near future.
We reported negative cash flow from operations year ended December 31, 2017 and 2016. It is anticipated that we will continue to report negative operating cash flow in future periods, likely until one or more of our products are placed into production and released to our customers.
Our cash balance of $46,082 may not be sufficient to fund our operations for at least the next 12 months. Additionally, if we are unable to generate sufficient revenues to pay our expenses, we will need to raise additional funds to continue our operations. We have historically financed our operations through private equity and debt financings. Recent economic turmoil and lack of liquidity in the debt capital markets together with volatility in the equity capital markets have severely and adversely affected capital raising opportunities. We do not have any commitments for financing at this time, and financing may not be available to us on favorable terms, if at all. If we are unable to obtain debt or equity financing in amounts sufficient to fund our operations, if necessary, we will be forced to suspend or curtail our operations. In that event, current stockholders would likely experience a loss of most or all of their investment. Additional funding that we do obtain may be dilutive to the interests of existing stockholders.
To the extent we raise additional capital by issuing equity securities or obtaining borrowings convertible into equity, ownership dilution to existing stockholders will result and future investors may be granted rights superior to those of existing stockholders. The incurrence of indebtedness or debt financing would result in increased fixed obligations and could also result in covenants that would restrict our operations. Our ability to obtain additional capital may depend on prevailing economic conditions and financial, business and other factors beyond our control. Economic crisis and disruptions in the U.S. and global financial markets may adversely impact the availability and cost of credit, as well as our ability to raise money in the capital markets. Instability in these market conditions may limit our ability to access the capital necessary to fund and grow our business. The Company cannot provide any assurances that it will be able to raise the additional capital needed to fund its operations, or if the Company is able to raise such additional capital, that any such financing will be on terms which are beneficial to the existing shareholders.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations is based upon the Company's financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires it to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, the Company evaluates its critical accounting policies and estimates. The Company bases its estimates on historical experience and on various other assumptions that 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 that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company's critical accounting policies and estimates are discussed on the footnote Note 2.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.
ITEM 7A.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.
As a "smaller reporting company" as defined by Item 10 of Regulation S-K, the Company is not required to provide the information required by this Item.
ITEM 8.
ITEM 8. Financial Statements and Supplementary Data.
Page
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2017 and 2016
Consolidated Statements of Operations for the year ended December 31, 2017 and 2016.
Consolidated Statements of Stockholders' Deficit for the year ended December 31, 2017 and 2016.
Consolidated Statements of Cash Flows for the year ended December 31, 2017 and 2016.
Notes to Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
Mount Tam Biotechnologies, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Mount Tam Biotechnologies, Inc. (the “Company”), as of December 31, 2017 and 2016, and the related consolidated statements of operations, stockholders’ deficit and cash flows for each of the two years in the period ended December 31, 2017 and the related notes (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, 2017 and 2016, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
The Company's Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the accompanying consolidated financial statements, the Company has suffered recurring losses from operations, generated negative cash flows from operating activities, has an accumulated deficit and has stated that substantial doubt exists about Company’s ability to continue as a going concern. Management's evaluation of the events and conditions and management’s plans in regarding these matters are also described in Note 2. 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 these 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 the Company’s 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 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 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 financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2014
New York, New York
April 16, 2018
/s/ RBSM LLP
Larkspur, California
April 16, 2018
The accompanying notes are integral to these consolidated financial statements.
The accompanying notes are integral to these consolidated financial statements.
The accompanying notes are integral to these consolidated financial statements.
The accompanying notes are integral to these consolidated financial statements.
Mount TAM Biotechnologies, Inc.
Consolidated Financial Statements
For the year ended December 31, 2017
Note 1 - Nature of the Business
The terms "we," "us," "our," "registrant," and the "Company" refer to Mount Tam Biotechnologies, Inc., a Nevada corporation, and, where applicable, Mount Tam Biotechnologies, Inc., a Delaware corporation and our wholly-owned subsidiary ("Mount Tam"). The Company is an early-stage life sciences and technology company pursuing the development of bio-pharmaceuticals to treat autoimmune diseases. The Company intends to optimize and bring to market a portfolio of products focused on improving the health and wellbeing of individuals afflicted with autoimmune diseases. The Company is headquartered in the San Francisco Bay Area, and may go to market both vertically and horizontally by product/technology specialties and provide our customers with treatment options.
On August 13, 2015, Mount Tam entered into a Share Exchange and Conversion Agreement (the "Exchange Agreement") with the Company and certain other persons party thereto. Immediately following the effective time of the Exchange Agreement, Mount Tam's stockholders (as of immediately prior to the transactions contemplated by the Exchange Agreement (such transactions, the "Share Exchange")) owned approximately 57.14% of the Company's outstanding common stock and the Company's stockholders (as of immediately prior to the Share Exchange) owned approximately 42.86% of the Company's outstanding common stock. Additionally, following the Share Exchange, the business conducted by Mount Tam became the primary the business conducted by the Company.
As a result of the Share Exchange, Mount Tam became a wholly-owned subsidiary of the Company. However, the former stockholders of Mount Tam acquired a majority of the outstanding shares of the Company's common stock. In connection with the Share Exchange, a former shareholder of the Company agreed to surrender all of his shares of the Company's common stock in exchange for $30,000, and all of the issued and outstanding shares of Epicurean Cigars, Inc., which at the time was a wholly-owned subsidiary of the Company which had a nominal remaining net liability. The shares were returned to the Company, and the $30,000 due to the shareholder has been accrued as of December 31, 2015.
Effective on August 31, 2015, the Company changed its name from TabacaleraYsidron, Inc. to Mount TAM Biotechnologies, Inc. The name change was effected through a parent/subsidiary short-form merger of Mount TAM Biotechnologies, Inc., our wholly-owned Nevada subsidiary which we formed solely for the purpose of the name change, with and into the Company, with the Company as the surviving corporation. With the exception of the name change, there were no changes to the Company's Articles of Incorporation or Bylaws. There will be no mandatory exchange of stock certificates. The Company's trading symbol on the OTC Markets (OTC Pink) marketplace was changed to "MNTM" from "TQBY".
Mount Tam Biotechnologies, Inc., the Company's wholly-owned legal subsidiary, was the "accounting acquirer," and for accounting purposes, the TYI was deemed as having been "acquired" in the Merger. The board of directors and officers that managed and operated Mount Tam immediately prior to the effective time of the Merger became the Company's board of directors and officers.
To meet its business objectives, Mount Tam formed a strategic partnership with the Buck Institute for Research on Aging ("Buck Institute"), an independent research facility focused on understanding the connection between aging and chronic disease. As part of the partnership, Mount Tam signed an exclusive worldwide licensing and collaboration agreement with the Buck Institute that includes many of the Buck Institute's intangible research and development assets in the area of autoimmune disorders. The initial focus of Mount Tam's research and development efforts will be a pre-clinical stage compound for the treatment and diagnosis of systemic lupus erythematosus, a common form of lupus. Mount Tam has not produced any revenues from the intangible research and development assets it acquired from Buck Institute and it has not commenced its planned principal operations.
The production and marketing of the Company's products and its ongoing research and development activities will be subject to extensive regulation by numerous governmental authorities in the United States. Prior to marketing in the United States, any drug developed by the Company must undergo rigorous preclinical (animal) and clinical (human) testing and an extensive regulatory approval process implemented by the Food and Drug
Administration under the Food, Drug and Cosmetic Act. In addition, the Company's success will depend in part on its ability to obtain and maintain patents, exploit its product license rights, maintain trade secrets, and operate without infringing on the proprietary rights of others, both in the United States and other countries.
The following reflects the Company's current, post-merger corporate structure (State of Incorporation):
Mount Tam Biotechnologies, Inc., formerly TabacaleraYsidron, Inc. (Nevada)
Mount Tam Biotechnologies, Inc. (Delaware)
The Company is a publicly-traded biotechnology company dedicated to speeding the delivery of new treatment options to patients affected by autoimmune diseases through the development and application of highly specialized drug targeting platforms and formulation expertise. The Company focuses on underserved patient populations where it can have the greatest potential impact. Mount Tam's clinical division advances clinical-stage product candidates towards marketing approval and commercialization.
The Company is subject to a number of risks, including: the need to raise capital through equity and/or debt financings; the uncertainty whether the Company's research and development efforts will result in successful commercial products; competition from larger organizations; reliance on licensing proprietary technology of others; dependence on key personnel; uncertain patent protection; and dependence on corporate partners and collaborators. See the section titled "Risk Factors" included elsewhere in this Annual Report on Form 10-K.
History
The Company was established in November 2011 under the name TabacaleraYsidron. Mount Tam was incorporated on August 13, 2014 (date of inception). On August 13, 2014, Mount Tam issued 9,000,000 shares of common stock, $0.0001 par value, for $900.
On August 13, 2015, Mount Tam and the Company entered into the Exchange Agreement as described above.
The Share Exchange was treated as a reverse acquisition of the Company, a public shell company at the time, by Mount Tam for financial accounting and reporting purposes. As such, Mount Tam was treated as the acquirer for accounting and financial reporting purposes while the Company is treated as the acquired entity for accounting and financial reporting purposes. As a result of the Share Exchange, $50,048 account payable and $17,500 note payable of the Company was brought forward at their book values and no goodwill has been recognized. Prior to the Share Exchange, the Company was a non-operating public shell company with nominal operations and nominal assets.
Note 2 - Summary of Significant Accounting Policies
The significant accounting policies applied in the annual consolidated financial statements of the Company as of December 31, 2017 are applied consistently in these consolidated financial statements.
Basis of Presentation
The Financial Statements have been prepared using the accrual basis of accounting in accordance with Generally Accepted Accounting Principles ("GAAP") of the United States. All intercompany accounts have been eliminated.
The Company's consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. Through December 31, 2017, the Company had accumulated losses of approximately $7,149,803 and a working capital deficit of $1,571,584. Management expects to incur further losses for the foreseeable future. The Company plans to continue to review strategic partnerships, collaborations and potential equity sales as a potential means to fund its preclinical and clinical programs in the future. Until the Company can generate sufficient levels of
cash from its operations, the Company expects to continue to finance future cash needs primarily through proceeds from equity or debt financings, loans and collaborative agreements with corporate partners or through a business combination with a company that has such financing in order to be able to sustain its operations until the Company can achieve profitability and positive cash flows, if ever.
On August 13, 2015, upon the closing of the Share Exchange (as discussed further in Note 1, Business, and Note 6, Issuance of Common Stock), Mount Tam's stockholders exchanged each share of Mount Tam's common stock into 2.67 shares of the Company's common stock. Therefore, all shares of common stock are reported in these consolidated financial statements on a post-Share Exchange basis.
Management plans to seek additional debt and/or equity financing for the Company through private or public offerings or through a business combination or strategic partnership, but it cannot assure that such financing or transaction will be available on acceptable terms, or at all. The uncertainty of this situation raises substantial doubt about the Company's ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might result from the failure to continue as a going concern.
Use of Estimates
The preparation of the 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 disclosure of contingent liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates.
Management makes estimates that affect certain accounts including deferred income tax assets, accrued expenses, fair value of equity instruments and reserves for any other commitments or contingencies. Any adjustments applied to estimates are recognized in the period in which such adjustments are determined.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The carrying value of those investments approximates their fair market value due to their short maturity and liquidity. Cash and cash equivalents include cash on hand and amount on deposit with financial institutions, which amounts may at times exceed federally insured limits. The Company has not experienced any losses on such accounts and it does not believe it is exposed to any significant credit risk. As of December 31, 2017 and 2016 the Company had cash and cash equivalents of $46,082 and $375,499, respectively.
Fair Value of Financial Instruments
The carrying amounts of certain of the Company's financial instruments including cash and cash equivalents, prepaid expenses, accounts payable, accrued liabilities and note payable approximate fair value due either to length of maturity or interest rates that approximate prevailing market rates unless otherwise disclosed in these consolidated financial statements.
Income Taxes
The Company utilizes FASB ASC 740, "Income Taxes," which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the tax basis of assets and liabilities and their financial reporting amounts based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. A valuation allowance is recorded when it is "more likely-than-not" that a deferred tax asset will not be realized.
The Company generated a deferred tax asset through net operating loss carry-forward. However, a valuation allowance of 100% has been established due to the uncertainty of the Company's realization of the net operating loss carry forward prior to its expiration.
We utilize the liability method of accounting for income taxes as set forth in ASC 740. Under the liability method, deferred taxes are determined based on the temporary differences between the financial statements and tax basis of assets and liabilities using tax rates expected to be in effect during the years in which the basis differences reverse. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized. In determining the need for valuation allowances we consider projected future taxable income and the availability of tax planning strategies. If in the future we determine that we would not be able to realize our recorded deferred tax assets, an increase in the valuation allowance would be recorded, decreasing earnings in the period in which such determination is made.
We assess our income tax positions and record tax benefits for all years subject to examination based upon our evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where there is greater than 50% likelihood that a tax benefit will be sustained, we have recorded the largest amount of tax benefit that may potentially be realized upon ultimate settlement with a taxing authority that bas full knowledge of all relevant information. For those income tax positions where there is less than 50% likelihood that a tax benefit will be sustained no tax benefit bas been recognized in the consolidated financia1 statements.
Research and Development costs
The Company follows Accounting Standards Codification Subtopic ("ASC") 730-10, "Research and Development," in which research and development costs are charged to the statement of operations as incurred. During the year ended December 31, 2017 and 2016 the Company incurred $688,668 and $329,397, respectively of expenses related to research and development costs.
Net Earnings (Loss) Per Common Share
The Company computes earnings per share under ASC 260-10, "Earnings Per Share". Basic earnings (loss) per share is computed by dividing the net income (loss) attributable to the common stockholders (the numerator) by the weighted average number of shares of common stock outstanding (the denominator) during the reporting periods. Diluted loss per share is computed by increasing the denominator by the weighted average number of additional shares that could have been outstanding from securities convertible into common stock (using the "treasury stock" method), unless their effect on net loss per share is anti-dilutive. There were no potentially dilutive shares for the year ended December 31, 2017.
The potential shares, which are excluded from the determination of basic and diluted net loss per share as their effect is anti-dilutive, are as follows:
Accounts Payable
Accounts payable and accrued expenses include the following as of December 31, 2017 and 2016:
Fair Value Measurements
The Company measures and discloses the fair value of assets and liabilities required to be carried at fair value in accordance with ASC 820, "Fair Value Measurements and Disclosures" ("ASC 820"). ASC 820 defines fair value, establishes a framework for measuring fair value, and enhances fair value measurement disclosure.
ASC 825 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. ASC 825 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 825 establishes three levels of inputs that may be used to measure fair value:
Level 1 - Quoted prices for identical assets or liabilities in active markets to which we have access at the measurement date.
Level 2 - Inputs other than quoted prices within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3 - Unobservable inputs for the asset or liability.
The determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
For the year ended December 31, 2017, the Company has determined that there we no assets or liabilities measured at fair value on a recurring basis.
The Company believes the carrying amounts of Cash and cash equivalents, other current assets, accounts payable, accrued expenses salaries, wages and payroll taxes, and other accrued expenses are a reasonable approximation of the fair value of those financial instruments because of the nature of the underlying transactions and the short-term maturities involved.
Going Concern
The Company's financial statements are prepared using U.S. GAAP applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has no significant operating history and had a cumulative net loss from inception (August 13, 2014) to December 31, 2017 of $7,149,803. The Company has a working capital deficit (current liabilities minus current assets) of 1,571,584 as of December 31, 2017. Since inception, the Company has been funded through debt and equity financings. The Company has not yet established an ongoing source of revenue sufficient to cover its operating costs and to allow it to continue as a going concern. The accompanying financial statements for the period ended December 31, 2017, have been prepared assuming the Company will continue as a going concern. The Company believes its cash resources are insufficient to meet its anticipated needs during the next twelve months. The Company will require additional financing to fund its future planned operations, including research and development and clinical trials and commercialization of its product candidates. In addition, the Company will require additional financing in order to seek to license or acquire new assets, research and develop any potential patents and the related compounds, and obtain any further intellectual property that the Company may seek to acquire.
The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it establishes a revenue stream and becomes profitable. Management's plans to continue as a going concern include raising additional capital through borrowing and sales of common stock. However, management cannot provide any assurances that the Company will be successful in accomplishing any of its plans. If the Company is not able to obtain the necessary additional financing on a timely basis, the Company will be forced to delay or scale down some or all of its development activities or perhaps even cease the
operation of its business. Since its inception, the Company has funded its operations primarily through debt financings and it expects that it will continue to fund its operations through a mix of equity and debt financings. If the Company secures additional financing by issuing equity securities, its existing stockholders' ownership will be diluted. The Company also expects to pursue non-dilutive financing sources. However, obtaining such financing would require significant efforts by the Company's management team, and such financing may not be available, and if available, could take a long period of time to obtain. The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and eventually secure other sources of financing and attain profitable operations. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Comprehensive Loss
Comprehensive loss is defined as the change in equity of a company during a period from transactions and other events and circumstances excluding transactions resulting from investment owners and distributions to owners. For the periods presented, comprehensive loss did not differ from net loss.
Collaborative Arrangements
The Company and its collaborative partners are active participants in the collaborative arrangements and both parties are exposed to significant risks and rewards depending on the commercial success of the activity. The Company records all expenses related to collaborative arrangements as research and development expense in the consolidated statements of operations as incurred.
Recent Accounting Pronouncements
In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Going Concern ("ASU 2014-15"). ASU 2014-15 provides GAAP guidance on management's responsibility in evaluating whether there is substantial doubt about a company's ability to continue as a going concern and about related footnote disclosures. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a company's ability to continue as a going concern within one year from the date the financial statements are issued. The standard will be effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Early application is permitted for annual or interim reporting periods for which the financial statements have not previously been issued. The adoption of this standard did not have a material impact on the Company's financial statements.
In April 2015, the FASB issued Accounting Standards Update No. 2015-03, Interest - Imputation of Interest: Simplifying the presentation of Debt Issuance Costs ("ASU 2015-03"). The standard requires entities to present debt issuance costs on the balance sheet as a direct deduction from the related debt liability rather than as an asset, and the amortization is reported as interest expense. The result of application of this guidance would be to reduce the deferred financing costs balance, with a corresponding reduction to the long term liabilities to which the debt issuance costs relate in the balance sheets. The standard does not affect recognition and measurement of debt issuance costs. The Company adopted ASU 2015-03 on January 1, 2016. The adoption of this standard did not have a material impact on the Company's financial statements.
Recent Accounting Pronouncements Issued and Adopted as of December 31, 2017
In January 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (ASU) 2016-01, which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Changes to the current guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the ASU clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new standard is effective for fiscal years and interim periods beginning after December 15, 2017, and upon adoption, an entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effective. Early adoption is not permitted except for the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. The Company is currently evaluating the impact of adopting this guidance.
In April 2015, the FASB issued ASU 2015-05, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement," which provides guidance about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. This ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015, and early adoption is permitted. The adoption of this standard did not have a material impact on the Company's financial statements.
In August 2014, the FASB issued ASU 2014-15, "Presentation of Financial Statements - Going Concern (Subtopic 205-40), effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. This standard provides guidance about management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. The guidance is effective for annual reporting periods ending after December 15, 2016, and early adoption is permitted. The Company adopted this guidance on January 1, 2017. The adoption of this standard did not have a material impact on the Company's financial statements.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)," on revenue recognition. This guidance provides that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance also requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The original effective date of this guidance was for interim and annual reporting periods beginning after December 15, 2016, early adoption is not permitted, and the guidance must be applied retrospectively or modified retrospectively. In July 2015, the FASB approved an optional one-year deferral of the effective date. As a result, we expect to adopt this guidance on January 1, 2018. The Company has not yet determined its approach to adoption or the impact the adoption of this guidance will have on its financial position, results of operations or cash flows, if any.
In the second quarter of 2014, the FASB issued guidance applicable to revenue recognition that will be effective for the Company for the year ending December 31, 2018. The new guidance must be adopted using either a full retrospective approach for all periods presented or a modified retrospective approach. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The new guidance applies a more principles-based approach to recognizing revenue. The Company expects to adopt this new guidance in the first quarter of 2018 using the modified retrospective method. The adoption may have a material effect on the Company's financial statements. The Company's revenues are derived primarily from license and collaboration agreements. The consideration the Company is eligible to receive under these agreements includes upfront payments, research and development funding, milestone payments, and royalties. Each collaboration agreement is unique and will need to be assessed
separately under the five-step process under the new standard. The new guidance differs from the current accounting standard in many respects, such as in the accounting for variable consideration, including milestone payments. Under the current accounting policy, the Company recognizes milestone revenue using the milestone method specified in ASC 605-28, which generally results in the recognition of the milestone payment as revenue in the period that the milestone is achieved. However, under the new accounting standard, it is possible to start to recognize milestone revenue before the milestone is achieved, subject to management's assessment of whether it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.
In November 2015, the FASB issued Accounting Standards Update No. 2015-17, Balance Sheet Classification of Deferred Taxes ("ASU 2015-17"). ASU 2015-17 requires companies to classify all deferred tax assets and liabilities as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrent amounts. The guidance is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. The guidance may be adopted on either a prospective or retrospective basis. The adoption of this standard did not have a material impact on the Company's financial statements.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) ("ASU 2016-02"). ASU 2016-02 addresses the financial reporting of leasing transactions. Under current guidance for lessees, leases are only included on the balance sheet if certain criteria, classifying the agreement as a capital lease, are met. This update will require the recognition of a right-of-use asset and a corresponding lease liability, discounted to the present value, for all leases that extend beyond 12 months. For operating leases, the asset and liability will be expensed over the lease term on a straight-line basis, with all cash flows included in the operating section of the statement of cash flows. For finance leases, interest on the lease liability will be recognized separately from the amortization of the right-of-use asset in the statement of operations and the repayment of the principal portion of the lease liability will be classified as a financing activity while the interest component will be included in the operating section of the statement of cash flows. This guidance is effective for annual and interim reporting periods beginning after December 15, 2018. Early adoption is permitted. The Company has not yet completed the analysis of how adopting this guidance will affect its consolidated financial statements.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"). ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Some of the areas of simplification apply only to nonpublic entities. For public business entities, the amendments in ASU 2016-09 are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The adoption of this standard did not have a material impact on the Company's financial statements.
In August, 2016, the FASB issued Accounting Standards Update No. 2016-15, Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force) ("ASU 2016-15"). The amendments in ASU 2016-15 address eight specific cash flow issues and apply to all entities that are required to present a statement of cash flows under ASC Topic 230, Statement of Cash Flows. The amendments in ASU 2016-15 are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption during an interim period. The adoption of this standard did not have a material impact on the Company's financial statements.
In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). ASU 2017-04 simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. ASU 2017-04 is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and should be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this standard did not have a material impact on the Company's financial statements.
In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation: Scope of Modification Accounting. The guidance clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. Entities will apply the modification accounting guidance if the value, vesting conditions or classification of the award changes. This guidance is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.
The FASB issued ASU 2017-05, “Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic: 610-20): Clarifying the Scope of Asset Derecognition Guidance and the Accounting for Partial Sales of Nonfinancial Assets,” which helps filers determine the guidance applicable for gain/loss recognition subsequent to the adoption of ASU 2014-09, Revenue from Contracts with Customers. The amendments also clarify that the derecognition of all businesses except those related to conveyances of oil and gas rights or contracts with customers should be accounted for in accordance with the derecognition and deconsolidation guidance in Topic 810, Consolidation. The Company adopted the ASU on January 1, 2018, using the modified retrospective transition method. Under this transition method the Company may elect to apply this guidance retrospectively either to all contracts at the date of initial application or only to contracts that are not completed contracts at the date of initial application. The Company elected to evaluate only contracts that are not completed contracts. As there were no contracts at January 1, 2018, there was no impact to the Company’s consolidated financial statements and related disclosures upon adoption.
In July 2017, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): Part 1 - Accounting for Certain Financial Instruments with Down Round Features and Part 2 - Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with Scope Exception (“ASU No. 2017-11”). Part 1 of ASU No. 2017-11 addresses the complexity of accounting for certain financial instruments with down round features. Down round features are provisions in certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of ASU No. 2017-11 addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification®. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. For public business entities, the amendments in Part I of this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. We early adopted the proposed guidance under ASU 2017-11 for the year end December 31, 2017, and recognized warrants issued in the fourth quarter of 2017 with a down round feature as equity. Adjustments were required for the retrospective application of this standard.
In September 2017, the FASB issued ASU 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842). The effective date for ASU 2017-13 is for fiscal years beginning after December 15, 2018. The adoption of this ASU will not have a material impact to our consolidated financial statements.
There were various other updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company's financial position, results of operations or cash flows.
Note 3 - Income Taxes
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“the Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a United States corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017. The impact due to the change in the federal tax rate on the Company’s deferred tax assets was approximately $922,000, which was fully offset by a reduction in the valuation allowance.
The provision for income taxes on the statements of operations consists of $800, $800 and $800 for the years ended December 31, 2017, 2016 and 2015, respectively.
Deferred tax assets (liabilities) are comprised of the following at December 31:
Deferred taxes arise from temporary differences in the recognition of certain expenses for tax and financial reporting purposes. At December 31, 2017 and 2016, management determined that realization of these benefits is not assured and has provided a valuation allowance for the entire amount of such benefits. At December 31, 2017, net operating loss carryforwards were approximately $5.4 million for federal and state tax purposes that expire at various dates from 2035.
Utilization of net operating loss carryforwards may be subject to substantial annual limitations due to the “change in ownership” provisions of the Internal Revenue Code Sections 382 and 383. The annual limitation may result in the expiration of substantial net operating loss carryforwards before utilization. The Company has not calculated its IRC Section 382 and 383 change of ownership to date, but there seems to have been a change of ownership within the meaning of Internal Revenue Code Section 382 and 383, which would limited the use of net operating losses or render such worthless.
Management believes that it appears more likely than not that the Company will not realize these tax benefits due to the Company’s continuing losses for United States income taxes purposes and therefore has provided 100% valuation allowance on the deferred tax assets. Management intends to review this valuation allowance periodically and make adjustments as necessary. The provision for income taxes differs from the amount computed by applying the U.S. federal statutory tax rate (34% in 2017 and 2016) to income taxes as follows:
ASC 740 clarifies the accounting for uncertainty in income taxes and prescribes a recognition threshold, measurement attribute for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. Under ASC 740, we are required to recognize in the financial statements the impact of a
tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure. Our policy is to record interest and penalties related to unrecognized tax benefits in income tax expense. There were no unrecognized tax benefits recorded as of December 31, 2017 and 2016. Furthermore, substantially all of the Company’s tax years, from 2015, remain open to federal and state tax examinations.
Note 4 - Loans
In 2014, the Company executed an agreement with a third-party investor whereby the Company issued $53,209 in a convertible promissory note. This convertible note bears an interest rate of 8% per year and was set to mature on November 26, 2015. The Company subsequently received an advance of $50,000 from the same party. The proceeds from these loans were used for working capital purposes. During the year ended December 31, 2015, both of these loans were consolidated into a new convertible note (see Note 5).
As a result of the Share Exchange, the Company assumed an obligation to a former note holder in the amount of $17,500. The unsecured promissory note in the amount of $15,000 is to an unrelated party. Pursuant to the terms of the note, the note is interest bearing at 3.5% and is due on demand. As of December 31, 2017, the Company has accrued interest of $2,256. Another unsecured promissory note is of $2,500 to an unrelated party. Pursuant to the terms of the note, the note is non-interest bearing and is due on demand. The Company is currently assessing how to revise the terms of this note.
Note 5 - Convertible Notes
On January 2, 2015, the Company issued a convertible promissory note in the principal amount of $400,000 to a third party investor, which included $53,209 in principal amount for a previously issued note (see Note 4) at a conversion price of $0.50. Such note bears an interest rate of 1% per year and matures on September 2, 2015. On August 13, 2015, this note was fully converted into 800,000 shares of common stock.
On March 19, 2015, the Company issued a convertible promissory note in the principal amount of $600,000 at a conversion price of $0.50. This note bears an interest rate of 1% per year and matures on December 31, 2015. On August 13, 2015, this note was fully converted into 1,200,000 shares of common stock.
In connection with the above convertible note, the Company accrued $60,000 for finance fees to be amortized over the life of the note. As of December 31, 2015, $60,000 of the finance fees was expensed.
On November 9, 2015, the Company borrowed $66,004 from 0851229 BC Ltd. (the "Lender") through a convertible note bearing 3% interest with a maturity date of March 18, 2017. The Lender is deemed a related party as a result of owning more than 10% of the Company's common stock. As of December 31, 2015, the Company had principal outstanding in the promissory note of $66,004 and accrued interest of $282. Terms of the convertible note include the right to convert the note at the next financing with gross proceeds to the Company of at least $2,000,000 at a conversion price equal to 80% of the price per share in the financing. The fair value of the beneficial conversion feature of the note was determined to be $16,501. The value of beneficial conversion feature was amortized over the life of the note. For the year ended December 31, 2015, the Company amortized the debt discount of $1,733.
On November 15, 2015, the Company borrowed $25,000 from the Lender through a convertible note bearing 3% interest with a maturity date of March 18, 2017. The Lender is deemed a related party as a result of owning more than 10% of the Company's common stock. As of December 31, 2015, the Company had principal outstanding in the promissory note of $25,000 and accrued interest of $86. Terms of the convertible note include the right to convert the note at the next financing with gross proceeds to the Company of at least $2,000,000 at a conversion price equal to 80% of the price per share in the financing. The fair value of the beneficial conversion feature of the note was determined to be $6,250. The value of beneficial conversion feature was amortized over the life of the note. For the year ended December 31, 2015, the Company amortized the debt discount of $541.
On December 17, 2015, the Company borrowed $50,000 from the Lender through a convertible note bearing 3% interest with a maturity date of March 18, 2017. The Lender is deemed a related party as a result of owning more than 10% of the Company's common stock. As of December 31, 2015, the Company had principal outstanding in the promissory note of $50,000 and accrued interest of $57. Terms of the convertible note include the right to convert the note at the next financing with gross proceeds to the Company of at least $2,000,000 at a conversion price equal to 80% of the price per share in the financing. The fair value of the beneficial conversion feature of the note was determined to be $12,500. The value of beneficial conversion feature was amortized over the life of the note. For the year ended December 31, 2015, the Company amortized the debt discount of $383.
During the year ended December 31, 2017 and 2016, the Company borrowed $75,000 and $477,000, respectively, from 0851229 BC Ltd. (the "Lender") through a convertible note bearing 3% interest with a maturity date of March 18, 2017. The Lender is deemed a related party as a result of owning more than 10% of the Company's common stock.
The initial fair value of the beneficial conversion feature of the note on the date of issuance was determined to be $18,750 and $119,250 for the year ended December 31, 2017 and 2016. The value of beneficial conversion feature is being amortized over the life of the loan. For the twelve months ended December 31, 2017 and 2016, the Company amortized the debt discount of $66,520 and $87,478, respectively. The unamortized debt discount as of December 31, 2017 and 2016 is $16,595 and $64,365 respectively.
On March 23, 2016, all of the previous loans provided by the Lender were consolidated into the Secured Note (defined below) which amends, restates and modifies the terms of the previous loans to the terms set forth in the Secured Note and contains other terms and conditions as described in the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on March 31, 2016.
On June 13, 2016, the Company and the Lender entered into an amended agreement regarding the aggregate principal amount of indebtedness and maturity date, which may be outstanding pursuant to that certain Secured Convertible Promissory Note issued by the Lender to the Company effective as of November 9, 2015 (the "Secured Note"). On June 13, 2016 the Secured Note was amended, as described in the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on June 15, 2016.
The Lender is deemed a related party as a result of owning more than 10% of the Company's common stock. The Lender and the Company agreed that the aggregate principal amount of all outstanding loans made under the Secured Note shall not exceed $5,000,000 at any time, and the maturity was extended to March 18, 2018. Terms of the Secured Note include the obligation to convert the loan at a financing with gross proceeds to the Company (if such financing is led by an institutional investor or contains commercially reasonable terms and conditions for an early stage biopharmaceutical company) of at least $2,000,000 at a conversion price equal to 80% of the price per share in the financing.
As of December 31, 2016, the Company had principal outstanding on this Secured Note of $618,004 and accrued interest of $13,723. Total interest expenses for the twelve months ended December 31, 2016 was $14,331.
As of December 31, 2017, the Company had principal outstanding on this Secured Note of $693,004 and accrued interest of $36,402. Total interest expenses for the twelve months ended December 31, 2017 was $18,246.
Note 6 - Capital Stock
Share Exchange
Pursuant to the Exchange Agreement, upon consummation of the Share Exchange, each share of Mount Tam's capital stock issued and outstanding immediately prior to the Share Exchange was exchanged for 2.67 shares of the Company's common stock, par value $0.0001 per share. As a condition to the closing of the Share Exchange, the former shareholder described in Note 1 agreed to cancel 28,533,125 certain shares of common stock of the Company and the then-current Company stockholders retained an aggregate of 16,000,625 shares of common stock. As a result of the Share Exchange, the Company issued a total of 26,000,000 shares of common stock to the shareholders and existing note holders of Mount Tam.
Common Stock
The Company has authority to issue up to 100,000,000 shares, par value $0.0001 per share. As of December 31, 2017, there were 53,320,702 shares of the Company's common stock issued and outstanding.
Mount Tam has an agreement with The Buck Institute as further detailed in Note 7 to maintain a certain common stock equity interest in the Company. As of December 31, 2017 and 2016 the Company owed to the Buck Institute 0 and 192,983 shares respectively, as a result of the Share Exchange and subsequent issuances of common stock. In 2016, the 192,983 shares were treated as issued for services and valued at $57,895. Out of the 1009,016 shares to be issued in 2015, 957,928 shares were treated as a component of the recapitalization of the Company, while the balance of 51,088 shares were treated as issued for service and valued at $42,403.
During the year ended December 31, 2016, the Company issued 1,009,016 shares of common stock to The Buck Institute for stock to be issued which were accounted in prior period.
During the year ended December 31, 2016, the Company reached a settlement agreement with The Buck Institute to waive of $274,247 of balance payable by the Company, which was credited to additional paid in capital.
During the year ended December 31, 2017, the Company issued 435,256 shares of common stock to The Buck Institute out of which 192,983 shares were related to prior year stock to be issued and the balance shares was treated as issued for services for the year ended December 31, 2017 and was valued at $42,712.
On August 3, 2016 the Company entered into a Placement Agent Agreement with Colorado Financial Services Corporation ("CFSC") for a best efforts private placement of its common stock to investors (the "Offering"). The term of the engagement is 12 months. Either party may terminate the engagement earlier upon 10 days prior written notice. In connection with this engagement, the Company shall pay CFSC a cash fee of ten percent (7.5%) of gross proceeds from sales of Securities placed by CFSC in the Offering and two and half percent (2.5%) of gross proceeds of investors introduced by Company. As additional compensation for services, the Company will, upon consummation of the Offering (ie $5,000,000), issue to CFSC warrants to purchase a number of shares of common stock of the Company equal to 500,000 shares at an exercise price of $0.50 per share. The warrants will have a term of 3 years from the date of issuance and have such other terms and conditions as shall be mutually agreed upon, including a cashless exercise feature.
On August 5, 2016, the Company entered into a Securities Purchase Agreement with an investor for such investor to purchase from the Company 2,000,000 shares of the Company's common stock for an aggregate purchase price of $1,000,000. The Company incurred $25,000 as cash fee expenses towards the placement agent. In November 2016 the Company lowered the offering price of the common shares being offered in a private placement to $0.30 per share to attract additional investors. The Company has agreed to issue 1,333,333 additional shares to the investor who invested $1,000,000 on August 5, 2016, which adjust its purchase price to $0.30 per share. The Company intends to use the proceeds from this investment for general corporate and working capital purposes.
In connection with the above sales of shares the Company paid a cash fees of 2.5% ie $25,000 since it was not directly introduced by the placement agent. Also the offering of $5,000,000 was not completed hence the Company is not liable to issue any warrants.
On November 2, 2016, the Company entered into a Securities Purchase Agreement with an investor for such investor to purchase from the Company 166,666 shares of the Company's common stock for an aggregate purchase price of $50,000. The Company incurred $3,750 as cash fee expenses towards the placement agent. The Company intends to use the proceeds from this investment for general corporate and working capital purposes.
On December 10, 2016, the Company entered into a Securities Purchase Agreement with an investor for such investor to purchase from the Company 166,666 shares of the Company's common stock for an aggregate purchase price of $50,000. The Company incurred $3,750 as cash fee expenses towards the placement agent. The Company intends to use the proceeds from this investment for general corporate and working capital purposes.
In connection with the above sales of shares the Company paid a cash fees of 7.5% ie $7,500 since the offering of $5,000,000 was not completed hence the Company is not liable to issue any warrants.
On February 27, 2017, the Company entered into a Securities Purchase Agreement with an investor for such investor to purchase from the Company 833,334 shares of the Company's common stock for an aggregate purchase price of $250,000. On February 28, 2017, the Company entered into a Securities Purchase Agreement with an investor for such investor to purchase from the Company 83,333 shares of the Company's common stock for an aggregate purchase price of $25,000. On March 3, 2017, the Company entered into a Securities Purchase Agreement with an investor for such investor to purchase from the Company 83,333 shares of the Company's common stock for an aggregate purchase price of $25,000.
Pursuant to an agreement with the placement agent (see above), in connection with the above sales of shares the Company paid a cash fees of 2.5% i.e. $7,500 since it was not directly introduced by the placement agent. Also, the offering of $5,000,000 was not completed hence the Company is not liable to issue any warrants to the placement agent.
On August 10, 2017, the Company entered into a Securities Purchase Agreement with an investor for such investor to purchase from the Company 3,846,154 shares of the Company's common stock for an aggregate purchase price of $500,000, of which $200,000 has been received, and a promissory note for $300,000 was received from the investor, requiring three $100,000 payments to the Company during a 90 day period which ended on November 12, 2017. The Company incurred $14,451 as cash fee expenses towards the placement agent. The Company used the proceeds from this investment for general corporate and working capital purposes. The investor received a warrant to purchase an additional 480,769 shares at an exercise price of $0.15 per share, and a warrant to purchase an additional 480,769 shares at an exercise price of $0.20 per share. Both warrants have a call provision when the Company's common stock trades for five consecutive days at a price equal or greater than 500% of the exercise price of each warrant agreement. Both warrant agreements expire August 10, 2022. As of December 31, 2017, the Company had received the $300,000 from the investor as payment on the promissory note.
On August 10, 2017, the Company entered into a Securities Purchase Agreement with an investor for such investor to purchase from the Company 192,308 shares of the Company's common stock for an aggregate purchase price of $25,000, which was received on August 11, 2017. The Company incurred $625 as cash fee expenses towards the placement agent. The Company used the proceeds from this investment for general corporate and working capital purposes. The investor received a warrant to purchase an additional 24,038 shares at an exercise price of $0.15 per share, and a warrant to purchase an additional 24,038 shares at an exercise price of $0.20 per share. Both warrants have a call provision when the Company's common stock trades for five consecutive days at a price equal or greater than 500% of the exercise price of each warrant agreement. Both warrant agreements expire August 10, 2022.
Stock Options
The Company's Board of Directors approved the adoption of the Mount Tam 2016 Stock-Based Compensation Plan (the "2016 Plan") on May 12, 2016. A majority of the stockholders approved the 2016 Plan by written consent on June 27, 2016. A copy of the 2016 Plan is included as Exhibit A to the Company's Information Statement filed with the SEC on July 11, 2016.
On May 2, 2016, the Company granted options to purchase up to 6,330,000 shares of Common Stock under the Plan in the aggregate, with an exercise price of $0.59 per share. Options will vest as per below table
On October 2, 2016, the Company granted options to purchase up to 135,000 shares of Common Stock under the Plan in the aggregate, with an exercise price of $0.40 per share. Options will vest as per below table
Stock-based compensation expense related to vested options was $981,875 and $648,188 for the twelve months ended December 31, 2017 and 2016, respectively. The Company determined the value of share-based compensation using the Black-Scholes fair value option-pricing model using the following weighted average assumptions for options granted.
As summary of option activity under the 2016 Plan as of December 31, 2017, and changes during the period then ended is presented below:
As of December 31, 2017, there was $2,239,852 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of 2.2 years.
Warrants
On August 10, 2017, the Company entered into a Securities Purchase Agreement with two investors to purchase from the Company 4,038,462 shares of the Company's common stock for an aggregate purchase price of $525,000. (See Note 6 Capital Stock - Private Placement.) The investors received a warrant to purchase an additional 504,808 shares at an exercise price of $0.15 per share, and a warrant to purchase an additional 504,808 shares at an exercise price of $0.20 per share. Both warrants have a call provision when the Company's common stock trades for five consecutive days at a price equal or greater than 500% of the exercise price of each warrant agreement. Both warrant agreements expire August 10, 2022.
Note 7 - Commitments & Contingencies
From time to time Mount Tam may become a party to litigation in the normal course of business. Management believes that there are no current legal matters that would have a material effect on the Company's financial position or results of operations.
On August 17, 2014, the Company entered into an agreement with Buck Institute for licenses of certain patents held by Buck Institute (the "License Agreement"). In connection with this agreement, Mount Tam agreed to pay Buck Institute for research and development activities. Mount Tam will pay Buck Institute in eight equal installments of $75,000 each for conducting research and development. In March 2015, the payment terms were revised so that Mount Tam still pays the Research Funding amount in eight (8) equal installments of seventy-five thousand dollars ($75,000) each and the installments shall be payable as follows: the first, second and third installments (together $225,000) shall all be payable by April 1, 2015, and each subsequent installment shall be payable three (3) months after the date on which the prior installments was payable, with the fourth installment payable July 1, 2015, three (3) months after the first three payments were made, and the final installments payable fifteen (15) months after the first through third installments were made.
In addition, the Company issued to Buck Institute that number of shares equal to 5% of the Company's total outstanding shares. Buck Institute's equity interest in the Company will not be reduced below 5% of the total aggregate shares of Common Stock until such time that the Company has raised and received a total of $5,000,000
of investment in equity, debt, grants, contributions, or donations. As of December 31, 2017 and 2016, the Company has issued 2,644,272 and 2,209,016 shares of the Company's Common Stock to Buck Institute and committed to issue 0 and 192,983 shares of the Company Common stock as additional shares, respectively. Additionally, the Company agreed to pay one-time milestone payments upon the first occurrence of the corresponding milestone events as set forth in the table below.
As of December 31, 2017 none of the milestone events had yet been achieved.
Mount Tam also agreed to pay Buck Institute non-refundable and non-creditable royalties in the amount of 2% of the annual aggregate net sales. For each licensed product for which Mount Tam grants worldwide sublicense rights to a third party, Mount Tam agreed to pay Buck Institute 20% of all sub-license revenues. Please see discussion in Item 1, Business, Intellectual Property and Licenses, for further discussion of recent communication with the Buck Institute regarding our agreement with them.
Within 30 days after the date on which the Company raises and receives a total of $1,000,000 of investment in equity, debt, grants, contributions, or donations, the Company shall reimburse Buck Institute for 100% of the patent expenses for the Product Patents and 50% of the patent expenses for the Program Patents, incurred by Buck Institute as defined in the Licensing Agreement. Per amended agreement dated March 2015, the Company shall reimburse Buck Institute for 100% of the patent expenses for the Product Patents and 50% of the Patent Expenses for the Program Patents, incurred by Buck Institute incurred on or before April 1, 2015.
During the second quarter of 2016 the Company entered into negotiations with the Buck Institute to resolve certain outstanding financial concerns, and to broaden the Research Collaboration and License Agreement beyond the area of autoimmune disease. On July 18, 2016, the Company entered into an amendment (the "Amendment") to the Research Collaboration and License Agreement (the "License Agreement") between the Company and The Buck Institute.
By way of background, and as previously disclosed in the Company's public filings, the Company previously entered into a Research Collaboration and License Agreement (the "Buck Institute License Agreement") with the Buck Institute, which establishes a joint research effort led by Buck Institute to identify and develop compounds from two specific chemical chemotypes identified therein. The Company agreed to provide certain funding for Buck Institute's research efforts performed under the Buck Institute License Agreement. Under the terms of the Buck Institute License Agreement, Buck Institute assigned exclusive, worldwide rights to develop, manufacture and commercialize pharmaceutical products that incorporate a compound from one of two chemical compounds, identified therein, and exclusive rights to practice the drug discovery platform technology as necessary to research, develop and commercialize such pharmaceutical products. (Additional information about the Buck Institute License Agreement, together with prior amendments thereto, may be found in the Company's public filings, including the Company's Annual Report on Form 10-K for the year ended December 31, 2015.)
Pursuant to this Amendment, the Research Collaboration Term of the License Agreement is tolled until the Company can achieve a Qualified Financing (defined as any financing occurring after the date of the Amendment which results in gross proceeds to the Company of at least $2,000,000). Once a Qualified Financing has been achieved, the research collaboration efforts will resume, and will continue for a period of twenty-one months (the "Extended Research Collaboration Term"). The Company and The Buck Institute agreed to work together to determine a new research plan, specifying the research and development activities of both parties during the Extended Research Collaboration Term.
Additionally, pursuant to the Amendment, the parties agreed to settle past research funding amounts owed by the Company to The Buck Institute. The Company agreed to pay $40,000 within ten days of the execution of the Amendment, and The Buck Institute agreed that once this amount is paid, the Company will be deemed to be in full
compliance with the terms of the License Agreement, including its payment obligations. On July 19, 2016, the Company made the $40,000 payment to The Buck Institute. In addition to the $40,000 payment, on June 13, 2016, the Company paid to The Buck Institute $11,706 in connection with costs incurred to further the Company's intellectual property position under the License Agreement. Pursuant to the above amendment The Buck Institute waived $274,247 of payable by the Company.
Moreover, the parties agreed that the field of use covered by the License Agreement would be expanded, with the new definition being "the treatment, diagnosis or prevention of any and all conditions or diseases including, without limitation, systemic lupus erythematous and multiple sclerosis for human and/or veterinary use." (Under the original License Agreement, the Company's field of use had been restricted to autoimmune disorders.)
On January 2, 2015, the Company entered into an employment agreement with its former Vice President, Research and Development. The employment agreement requires annual base salary payments of $150,000 per year. In addition, the Company has agreed to grant this executive stock options to purchase up to 360,000 shares of common stock. On August 10, 2015, this employee's employment agreement was amended as a result of his appointment to become the Company's Chief Executive Officer, and to change the number of expected to be granted options to 1,160,000 shares of the Company's Common Stock. As of December 31, 2016 these options were issued.
On January 2, 2015, the Company entered into a license and service agreement with Buck Institute. In connection with the agreement, the Company agreed to pay Buck Institute an annual fee of $24,500 to procure access to certain office space in the facility in order to conduct research and facilitate its research and development program. The agreement was amended in September 2015 to reduce an annual fee to $9,500. This agreement was terminated in February 2017. In 2016 The Buck billed the Company $9,875 for office space fees plus a $2,000 administration fee, for a total of $11,875 for office space and administration services. For the fiscal year ended December 31, 2016, the Company paid $13,199 to the Buck for office space, which includes $2,125 of expense from 2015. The Company no longer leases office space from the Buck Institute. For the fiscal year ended December 31, 2017, the Company paid $54,526 for reimbursement of patent and patent related expenses.
On August 13, 2015, the Company has assumed the employment agreement that Dr. Powers, the previous CEO, had with Mount Tam. Effective February 8, 2016 Dr. Timothy Powers resigned as Chief Executive Officer of Mount Tam Biotechnologies, Inc. (the "Company"). There were no disagreements between Dr. Powers and the Company on any matter relating to the Company's operations, policies or practices that resulted in his resignation. Dr. Powers will remain a member of the Company's Board of Directors.
In May 2016 Mr. Powers became the Company's Chief Scientific Officer.
On March 29, 2016, the Company and Dr. Richard Marshak entered into an Amended and Restated Employment Agreement (the "Marshak Employment Agreement"), which amends and restates the terms of the Employment Agreement dated as of March 22, 2016 by and between the Company and Dr. Marshak, and pursuant to which Dr. Marshak (i) continued his position as the Chief Executive Officer of the Company and (ii) is entitled to be appointed to the Company's Board of Directors promptly thereafter. The initial term of Dr. Marshak's employment expires on March 22, 2019 and thereafter, the Marshak Employment Agreement may be renewed for additional one year terms upon the mutual agreement of the parties, subject in each case to the termination provisions described therein.
The Company will pay Dr. Marshak an aggregate base annual salary of $300,000, payable on a bi-weekly or semi-monthly basis. In addition, Dr. Marshak shall (i) be entitled to three (3) weeks of paid time off, (ii) have the right to participate in the Company's general employee benefit plan(s), (iii) have the right to participate in an executive bonus plan and receive other bonus payments as determined by the Company's Board of Directors and (iv) be entitled to be reimbursed for reasonable business expenses. Subject to the approval of the Board of Directors and the approval of certain other actions, Dr. Marshak received an option to purchase 4,200,000 shares of Common Stock which shall vest and be governed by the terms of the Plan and an award agreement to be entered into by and between the Company and Dr. Marshak. Upon the occurrence of a change of control transaction or the termination of Dr. Marshak's employment by the Company without cause or by Dr. Marshak for good reason, all unvested options or shares of restricted Common Stock shall immediately vest and either be exercisable or no longer subject to any restrictions, as applicable. In addition to other standard and customary payments receivable in connection with the termination of Dr. Marshak's employment, he shall be entitled to receive a severance payment equal to his
base salary per month for the lesser of the number of months remaining in the current term of his employment or 18 months.
The Marshak Employment Agreement also prohibits Dr. Marshak from competing with the Company during the term of the Marshak Employment Agreement (with certain limited exceptions) and from soliciting or making known employees of the Company for a period of two (2) years following termination of the Marshak Employment Agreement. The foregoing is qualified in its entirety by reference to the terms of the Marshak Employment Agreement, which is filed as Exhibit 10.4 to our Form 8-K filed with the SEC on March 31, 2016.
On May 2, 2016, the Company entered into an employment agreement with its current Chief Financial Officer, James Stapleton (the "Stapleton Employment Agreement"). The Stapleton Employment Agreement requires annual base salary payments of $175,000 per year. Further, Mr. Stapleton is entitled to a one-time bonus of $40,000 payable upon the Company's achievement of certain financial targets. In addition, the Company granted Mr. Stapleton an option to purchase up to 750,000 shares of Common Stock. The foregoing is qualified in its entirety by reference to the terms of the Stapleton Employment Agreement, which is filed as Exhibit 10.1 to our Form 8-K filed with the SEC on April 26, 2016.
On August 3, 2016 the Company entered into a Placement Agent Agreement with Colorado Financial Services Corporation ("CFSC") for a best efforts private placement of it's common stock to investors. The term of the engagement is 12 months. Either party may terminate the engagement earlier upon 10 days prior written notice. In connection with this engagement, the Company shall pay CFSC a cash fee of ten percent (7.5%) of gross proceeds from sales of Securities placed by CFSC in the Offering and two and half percent (2.5%) of gross proceeds of investors introduced by Company. As additional compensation for services, the Company will, upon consummation of the Offering (ie $5,000,000), issue to CFSC warrants to purchase a number of shares of common stock of the Company equal to 500,000 shares at an exercise price of $0.50 per share. The warrants will have a term of 3 years from the date of issuance and have such other terms and conditions as shall be mutually agreed upon, including a cashless exercise feature. On May 8, 2017 the Company terminated the Placement Agent Agreement.
The Company has engaged Young America Capital, LLC as the Placement Agent for a current private placement transaction and is entitled to a fee of between 2.0% and 8.0% of the offering price of the common shares sold to investors they source. In addition, the Placement Agent will be issued a warrant granting the Placement Agent the right to purchase shares of common stock equal to 8.0% of the number of shares of common stock issued by the Company in the aforementioned offering, which is still ongoing as of the date of this report.
Effective March 1, 2018 (and since March 1, 2017) Mount Tam rents office space at 7250 Redwood Blvd, Suite 300, Novato, CA 94945. The rental agreement expires August 31, 2018, with a monthly lease payment of $1,055. The Company believes that its facilities are sufficient to meet its current needs and the Company will look for suitable additional space as and when needed.
Note 8 - Related Party Transactions
In November 2014, we entered into a consulting agreement with a services firm, Wells Compliance Group, that is owned by our former interim Chief Financial Officer. As compensation for its services, Wells Compliance Group is to be paid $3,500 per month. As of December 31, 2017 and 2016 our accounts payable to the Wells Compliance Group was $0. During the year ended December 31, 2017 and 2016, the Company expensed $0 and $21,500, respectively, for the services provided by Wells Compliance Group. As of May, 2, 2016, Wells Compliance and the Company terminated the consulting agreement.
Pursuant to our agreements with the Buck Institute and with our Chairman of the Board Brian Kennedy (Professor and Principal Investigator at the Buck Institute), the Buck Institute is deemed a related party. Please see Note 7, Commitments and Contingencies, for discussion of our liabilities and obligations with the Buck Institute. As December 31, 2017 and 2016, the Company expensed $63,444 and $103,524, respectively, for the services provided by Buck Institute, respectively. As of December 31, 2017 and 2016 the Company owed to the Buck Institute 0 and 192,983 shares, respectively, as a result of the Share Exchange transaction and subsequent issuances of common stock. The 192,983 shares to be issued were treated as issued for service and valued at $57,895. In December 2017, the Company issued 435,256 shares of common stock to the Buck Institute, out of which 192,983 shares were
related to prior year stock to be issued and the balance shares was treated as issued for service for the year ended December 31, 2017 and was valued at $42,712. As of December 31, 2017 and 2016 our accounts payable balance to Buck Institute was $18,235 and $9,308, respectively.
In the year 2016, Buck Institute billed the Company for office space and administration services (Note 7). The Company no longer rents office space from Buck Institute. In the year 2017, Buck Institute billed the Company for office space and administration of $0.
See Notes 5 for a description of the loans the Company received from 0851229 BC Ltd deemed a related party as a result of owning more than 10% of the Company's common stock.
In December 2015, we entered into an agreement with Lemon Fair Consulting, which is owned by our Chief Executive Officer, Dr. Richard Marshak. The agreement terminated when Dr. Marshak became our CEO on March 29, 2016. During the twelve months ended December 31, 2016, the Company paid $34,390 for the services provided by Lemon Fair Consulting during the first quarter of 2016. As December 31, 2016 our accounts payable to the Lemon Fair Consulting was $0.
Note 9 - Subsequent Events
On April 6, 2018, the Company, and Fromar Investments, LP (the “Lender”) entered into an arrangement whereby Lender would lend the Company $500,000 pursuant to the terms of a convertible promissory note (the “Note”). The Note bears interest at a rate of 8.0% per annum and has a maturity date of September 30, 2108. By agreement of the parties, the effective date of the Note is March 5, 2018, and funds are disbursed under the Note pursuant to a schedule thereto.
The Company and Lender also entered into a Security Agreement (the “Security Agreement”) pursuant to which the Company and the Lender agreed that all amounts, liabilities and obligations owed by the Company to the Lender (including, but not limited to, all amounts owed under the Note) are secured by a second priority security interest in all assets of the Company on the terms and conditions set forth in the Security Agreement. The security interest granted to the Lender is subordinate to the interest granted to 0851229 BC, Ltd. pursuant to an amended and restated security agreement dated as of June 14, 2016 (included as Exhibit 99.2 to the Company’s Current Report on Form 8-K filed on June 15, 2016).
Pursuant to the terms of the Note, if the Company issues capital stock or any security convertible into or exercisable for its capital stock in a transaction, the primary purpose of which is to raise capital (a “Financing”), the Lender may convert all or any portion of the outstanding principal amount and accrued and unpaid interest into the same securities issued by the Company in the Financing (the “Financing Securities”) at a conversion price equal to eighty percent (80%) of the price per Financing Securities paid by the other investors in the Financing. If the Company consummates a Qualified Financing (as hereinafter defined) then the outstanding principal amount and all accrued and unpaid interest shall automatically convert into the same securities issued to investors in the Qualified Financing (the “Qualified Financing Securities”) at a conversion price equal to eighty percent (80%) of the price per Qualified Financing Securities paid by the other investors in the Qualified Financing. A “Qualified Financing” means a Financing which results in gross proceeds to the Company, in one or a series of related transactions, of at least $2,000,000 (including the aggregate amount of indebtedness converted into equity securities in such Financing), in which either (i) the investor leading negotiations with the Company is a bona fide institutional investor or (ii) the investor leading negotiations with the Company is not a bona fide institutional investor but the Financing includes commercially reasonable customary terms and conditions for an equity financing of an early-stage biopharmaceutical company.
Effective upon a complete funding of the entire principal amount of $500,000, the Company agreed to issue to the Lender 1,000,000 shares of its common stock. The Company agreed to issue to the Lender an additional 1,000,000 shares of its common stock in the event that the Company has not either (i) closed a Financing resulting in funding of at least $1,000,000 to the Company after the date of the Note, but on or before July 1, 2018, or (ii) received a binding term sheet or other similar binding agreement pertaining to a licensing transaction with a company that operates in the pharmaceutical and/or biotech industries that will provide for at least $500,000 in upfront payments to the Company on or before July 1, 2018, as well as milestones and royalties for TAM-01, TAM-
3, or for any follow-on compounds of the Company (a “Licensing Transaction”) on or before July 1, 2018. The Company agreed to issue to the Lender an additional 3,000,000 shares of its common stock in the event that the Company has not either (i) closed a Financing resulting in funding of at least $1,000,000 to the Company after the date of the Note, but on or before September 30, 2018, or (ii) received a binding term sheet or other similar binding agreement for a Licensing Transaction on or before September 30, 2018.
In addition to the foregoing, the Company entered into amendment (the “Amendment”) to that certain Amended and Restated Promissory Note with 0851229 BC, Ltd. dated June 13, 2016 (the “June 2016 Note”) whereby the maturity date of the June 2016 Note was extended to September 30, 2018.
The foregoing descriptions of the Note, the Security Agreement, and the Amendment do not purport to be complete and are qualified in their entirety by the terms and conditions of the agreements themselves. Copies of the Note, the Security Agreement, and the Amendment are attached as Exhibits 10.12, 10.13, and 10.14, respectively, to a Current Report on Form 8-K,, filed with the Commission on April 12, 2018.
The Note and the securities of the Company into which the Note is convertible were offered and sold without registration under the Securities Act of 1933, as amended (the “Securities Act”), in reliance on the exemptions provided by Section 4(a)(2) of the Securities Act and/or Regulation D promulgated thereunder, and in reliance on similar exemptions under applicable state laws. The Lender has represented to the Company that it is an accredited investor. No person received any underwriting discount or commission in connection with the issuance of the securities described herein.
ITEM 9.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
ITEM 9A.
ITEM 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures.
We are required to maintain "disclosure controls and procedures" as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. Based on their evaluation as of the end of the period covered by this Annual Report on Form 10-K, our Chief Executive Officer and our Chief Financial Officer, have concluded that our disclosure controls and procedures were not effective to ensure that the information relating to our company, required to be disclosed in our Securities and Exchange Commission reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive Officer, to allow timely decisions regarding required disclosure as a result of material weaknesses in our internal control over financial reporting.
Management's Report on Internal Control over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
●pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
●provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our 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.
Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. 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 management assessed the effectiveness of our internal control over financial reporting as of December 31, 2017. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework. Management's assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of these controls. Based on this assessment, our management has concluded that as of December 31, 2017, our internal control over financial reporting was not effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles as a result of material weaknesses.
We have identified the following factors that have led management to determine that material weaknesses exist in our internal control over financial reporting as of December 31, 2017:
1.We do not have written documentation of our internal control policies and procedures. Written documentation of key internal controls over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act. Management evaluated the impact of our failure to have written documentation of our internal controls and procedures on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.
2.We do not have sufficient segregation of duties within accounting functions, which is a basic internal control. Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals. Management evaluated the impact of our failure to have segregation of duties on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.
These factors represent material weaknesses in our internal controls over financial reporting. Although we believe the possibility of errors in our financial statements is remote, and expect to continue to use a third party accountant to address shortfalls in staffing and to assist us with accounting and financial reporting responsibilities in an effort to mitigate the lack of segregation of duties, until such time as we expand our staff with qualified personnel, we expect to continue to report material weaknesses in our internal control over financial reporting.
Changes in Internal Control over Financial Reporting.
There have been no changes in our internal control over financial reporting during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. Other Information.
Entry into Definitive Material Agreement; Sales of Unregistered Securities; Creation of a Direct Financial Obligation
As noted above under the heading “Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities,” on April 6, 2018, the Company entered into an agreement with Fromar Investments, LP (the “Lender”) pursuant to which the Lender agreed to lend $500,000 to the Company, in return for which the Company issued a convertible promissory note (the “Note”). The Company and the Lender also entered into a Security Agreement to secure the Company’s obligations under the Note. Finally, the Company agreed with 0851229 BC LTD, an entity to which the Company had previously issued a promissory note (the “Prior Note”), to extend the maturity date of the Prior Note. Additional details relating to the Note, the Security Agreement, and the Prior Note are included above.
Part III
ITEM 10.
ITEM 10. Directors, Executive Officers and Corporate Governance.
Directors and Executive Officers
The following table sets forth the names and ages of the current directors and executive officers:
Biographical Information
The following is a brief account of the education and business experience of the incoming directors and executive officers during at least the past five years, indicating the person's principal occupation during the period, and the name and principal business of the organization by which he or she was employed.
Dr. Brian Kennedy is the chairman of the board of the Company. Dr. Kennedy is internationally recognized for his research in the basic biology of aging and as a visionary committed to translating research discoveries into new ways of delaying, detecting, preventing and treating human aging and associated diseases. He is the Director of the Centre for Healthy Ageing at the Yong Loo Lin School of Medicine at National University Singapore. He also serves as a Distinguished Professor in Biochemistry and Physiology. The Centre seeks to demonstrate that ageing interventions can be successfully employed in humans to extend healthspan, the disease-free and highly functional period of life.
From 2010 to 2016 he was the President and CEO of the Buck Institute for Research on Aging. Currently he remains as a Professor at the Institute, where his lab addresses the biology of aging. Dr. Kennedy has adjunct appointments at the Leonard Davis School of Gerontology at USC and the Department of Biochemistry at the University of Washington, where he was a faculty member from 2001 to 2010. In addition, Dr. Kennedy is also actively involved with a number of Biotechnology companies, serving in consulting and Board capacities, and is Scientific Director of Affirmativ Health. In addition, Dr. Kennedy serves as a Co-Editor-In-Chief at Aging Cell. Finally, Dr. Kennedy has a track record of interaction in China, where he was a Visiting Professor at the Aging Research Institute at Guangdong Medical College from 2009 to 2014.
Dr. Richard Marshak is the Company's chief executive officer and director. In December 2015, the Company engaged Dr. Marshak as a consultant, the terms of which are set forth in a consulting agreement with the Company. Dr. Marshak's consulting agreement with the Company has expired by its terms and is no longer in effect. From 2013 to 2015, Dr. Marshak served as the Founding Principal and President of LF Consulting, a business consulting firm that provides consulting services to a range of development-stage life science companies, with a focus on guiding prioritization of development pathways and optimizing commercialization planning as well as overall strategic planning. From 1999 to 2013, Dr. Marshak occupied roles of increasing responsibility at Abbott Laboratories' Pharmaceutical Products Group and at AbbVie, spanning product marketing across a broad range of therapeutic areas, business development, General Manager - Pain Care, General Manager - Alliance Management and Senior Director - Strategic Pricing. From early to middle 2011, Dr. Marshak occupied the position of General Manager - Alliance Management at Abbott Laboratories, and from mid-2011 to 2013, Dr. Marshak occupied the position of Senior Director - Strategic Pricing at Abbott Laboratories/AbbVie. On January 1, 2013, Abbott Laboratories separated its research-based pharmaceuticals business, which became AbbVie, a new independent biopharmaceutical company. Abbott Laboratories specializes in diversified products including medical devices, diagnostic equipment and nutrition products and AbbVie is a research-based pharmaceutical manufacturer. The Company is not affiliated with LF Consulting, AbbVie or Abbott Laboratories.
Dr. Timothy Powers is a director of the Company. He has been engaged in all aspects of drug discovery and development for more than 20 years at both small and large biotechnology and pharmaceutical companies. Dr. Powers held the position of Scientific Director of Medicinal Chemistry at Amgen where he provided scientific and executive leadership to the teams that were responsible for the discovery and development of Amgen's first b-secretase small molecule clinical candidate for Alzheimer's disease. Prior to joining Amgen, he was Director of Medicinal Chemistry at Atlantos Pharmaceuticals, overseeing all aspects of the company's discovery research activities which led to the clinical development of the company's two flagship programs in the areas of type-II diabetes and osteoarthritis. Dr. Powers has authored over 50 publications and scientific presentations and is an inventor on over 40 issued United States patents and patent applications in the areas of drug discovery and process manufacturing spanning therapeutic disease areas of inflammation, neuroscience, oncology and metabolic diseases. He holds a B.S. degree in chemistry from the University of California, Davis, and received his Ph.D. in organic chemistry from the University of Chicago.
Effective February 8, 2016 Dr. Timothy Powers resigned as Chief Executive Officer of the Company. There were no disagreements between Dr. Powers and the Company on any matter relating to the Company's operations, policies or practices that resulted in his resignation. Dr. Powers will remain a member of the Company's Board of Directors. Effective May 1, 2016, Dr. Powers was appointed the Chief Scientific Officer.
Chester Aldridge is Mount Tam's Co-Founder and a director of the Company. Mr. Aldridge is also the Chairman and CEO of US Equity Holdings. Through US Equity Holdings, Mr. Aldridge incubates, finances and manages numerous ventures in the fields of entertainment, internet, clean energy (solar and biofuels) and biotechnology (life science pharmaceuticals). Mr. Aldridge also co-founded and is Chairman of Equity Solar since September 2009, which has secured the exclusive license to patented solar photovoltaic technology. Equity Solar's technology is used within the solar cell manufacturing line. The technology was co-developed by NASA and the United States Department of Defense. Mr. Aldridge is a Life Member of the Stanford Business School Alumni Association and serves as an Ambassador of the Buck Advisory Council, a committee led by a diverse group of individuals from around the world in the areas of government, business, pharmaceuticals, and law, among other fields.
James P. Stapleton is the Company's chief financial officer. Mr. Stapleton joined Mount Tam Biotechnologies in May 2016. Mr. Stapleton brings over 25 years of financial and operating experience, achieving his first CFO position at a public company in 1987. Currently, Mr. Stapleton is a director, and Audit Committee chair for Summer Energy Holdings (OTCQB SUME). From August 2012 to May 2014 Mr. Stapleton was the CFO of Ozone International, LLC, which provides ozone equipment and solutions to food processors. From February 2012 to June 2012, Mr. Stapleton was the CFO for Jones Soda (OTC BB JSDA). From 2007 to 2011, Mr. Stapleton was a consultant and advisor to a variety of companies. From May 2005 through July 2007, Mr. Stapleton was the Chief Financial Officer of Bionovo (OTC BB BNVI). From January 2003 through April 2005, Mr. Stapleton was the Chief Financial Officer of Auxilio (NYSE AUXO). . Mr. Stapleton graduated from the University of California at Irvine (UCI) with a MBA in 1995, and from the University of Washington with a BA in Economics in 1985.
Family Relationships
There are no family relationships between or among any of the current directors or executive officers.
Involvement in Certain Legal Proceedings
To the best of our knowledge, during the past ten years, none of the following occurred with respect to a present or former director or executive officer of the Company: (1) any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; (2) any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); (3) being subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of any competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; and (4) being found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodities Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated.
Board of Directors
Our Board of Directors (the "Board") is comprised of four members. All directors serve in this capacity until their terms expire or until their successors are duly elected and qualified. The registrant's bylaws provide that the authorized number of directors shall be one or more, as fixed from time to time by resolution of the Board; provided, however, that the number of directors shall not be reduced so as to shorten the tenure of any director at the time in office.
Board Committees; Director Independence; Insider Participation
Our Board has not established a separate standing audit committee within the meaning of Section 3(a)(58)(A) of the Exchange Act or separate standing nominating or compensation committees, or committees performing similar functions, nor has it adopted charters for any such committee. Due to the present and prior size of our Board, our Board believes that it is not necessary to have separate standing audit, nominating or compensation committees at this time because the functions of each such committee are adequately performed by our full Board. However, it is anticipated that our Board will form separate standing audit, nominating and compensation committees, with the audit committee including an audit committee financial expert and the audit and compensation committees consisting solely of independent directors, if and when our Board determines that the establishment of such committees is advisable as we seek to further develop our business and operations and potentially expand the size of our Board.
We have not adopted a code of ethics that apply to any of our principal executive officers. We have not adopted a code of ethics due to our size and rely upon our Board to determine whether any actions or omissions constitute unethical behavior.
As of the date of this Report, our Board was comprised of Brian Kennedy, Richard Marshak, Chester Aldridge and Timothy Powers, none of whom is an independent director. We look to our directors to guide us through our next phase as a public company and to continue and manage our growth. Our directors bring leadership experience from a variety of corporate, technology and professional backgrounds which we require to continue to grow and to add shareholder value.
No interlocking relationship exists between the Board and the board of directors or compensation committee of any other company, nor has any interlocking relationship existed in the past.
Section 16 Compliance
The Company does not have a class of equity securities registered pursuant to Section 12 of the Exchange Act; therefore, this item is not applicable.
ITEM 11.
ITEM 11. Executive Compensation.
The following table sets forth all compensation paid in respect of our principal executive officer and principal financial officer for the years ended December 31, 2017 and 2016. No other officer of the Company or Mount Tam received compensation in excess of $100,000 for the last two completed fiscal years.
EXECUTIVE COMPENSATION
(1)Appointed CEO on August 13, 2015, resigned on February 8, 2016. Currently Chief Scientific Officer. 2017 includes accrued payroll paid for prior years.
(2)Mr. Powers is reimbursed for his medical insurance expenses.
(3)Appointed on March 29, 2016.
(4)Appointed on May 2, 2016.
The dollar amounts of the option awards for the name executive officers above are the vested grant date fair value of the option awards. Please refer to Note 6 to our audited financial statements, included in this Report, for further information about our calculation of those amounts, which we based on the reported closing market price of our common stock on the date we granted the options. Mr. Marshak's and Mr. Stapleton's options vest 25% twelve months after the grant date, 25% twenty-four months after the grant date, 25% thirty-six months after the grant date, and the remainder forty-eight months after the grant date. Mr. Powers options vest 33% twelve months after the grant date, 33% twenty-four months after the grant date, and 34% thirty-six months after the grant date.
Employment Agreements
On August 13, 2015, the Company has assumed the employment agreement that Dr. Powers, the previous CEO, had with Mount Tam. Effective February 8, 2016 Dr. Timothy Powers resigned as Chief Executive Officer of the Company. There were no disagreements between Dr. Powers and the Company on any matter relating to the Company's operations, policies or practices that resulted in his resignation. Dr. Powers remains a member of the Company's Board of Directors.
In May 2016 Mr. Powers became the Company's Chief Scientific Officer.
On March 29, 2016, the Company and Dr. Richard Marshak entered into an Amended and Restated Employment Agreement (the "Marshak Employment Agreement"), which amends and restates the terms of the Employment Agreement dated as of March 22, 2016 by and between the Company and Dr. Marshak, and pursuant to which Dr. Marshak (i) continued his position as the Chief Executive Officer of the Company and (ii) is entitled to be appointed to the Company's Board of Directors promptly thereafter. The initial term of Dr. Marshak's employment expires on March 22, 2019 and thereafter, the Marshak Employment Agreement may be renewed for additional one year terms upon the mutual agreement of the parties, subject in each case to the termination provisions described therein.
The Company will pay Dr. Marshak an aggregate base annual salary of $300,000, payable on a bi-weekly or semi-monthly basis. In addition, Dr. Marshak shall (i) be entitled to three (3) weeks of paid time off, (ii) have the right to participate in the Company's general employee benefit plan(s), (iii) have the right to participate in an executive bonus plan and receive other bonus payments as determined by the Company's Board of Directors and (iv) be entitled to be reimbursed for reasonable business expenses. Subject to the approval of the Board of Directors and the approval of certain other actions, Dr. Marshak is expected to receive an option to purchase 4,200,000 shares of Common Stock which shall vest and be governed by the terms of the Plan and an award agreement to be entered into by and between the Company and Dr. Marshak. Upon the occurrence of a change of control transaction or the termination of Dr. Marshak's employment by the Company without cause or by Dr. Marshak for good reason, all unvested options or shares of restricted Common Stock shall immediately vest and either be exercisable or no longer subject to any restrictions, as applicable. In addition to other standard and customary payments receivable in connection with the termination of Dr. Marshak's employment, he shall be entitled to receive a severance payment equal to his base salary per month for the lesser of the number of months remaining in the current term of his employment or 18 months.
The Marshak Employment Agreement also prohibits Dr. Marshak from competing with the Company during the term of the Marshak Employment Agreement (with certain limited exceptions) and from soliciting or making known employees of the Company for a period of two (2) years following termination of the Marshak Employment Agreement. The foregoing is qualified in its entirety by reference to the terms of the Marshak Employment Agreement, which is filed as Exhibit 10.4 to our Form 8-K filed with the SEC on March 31, 2016.
On April 21, 2016, the Company and James Stapleton entered into an Employment Agreement (the "Stapleton Employment Agreement"), pursuant to which Mr. Stapleton is employed as the Chief Financial Officer of the Company, effective on May 2, 2016. The Stapleton Employment Agreement requires annual base salary payments of $175,000 per year. Further, Mr. Stapleton is entitled to a one-time bonus of $40,000 payable upon the Company's achievement of certain financial targets. In addition, the Company granted Mr. Stapleton an option to purchase up to 750,000 shares of Common Stock. The foregoing is qualified in its entirety by reference to the terms of the Stapleton Employment Agreement, which is filed as Exhibit 10.1 to our Form 8-K filed with the SEC on April 26, 2016.
Potential Payments Upon Termination or Change-in-Control
Other than any employment agreements described in this Annual Report on Form 10-K, as of the date of this Report we had no contract, agreement, plan or arrangement, whether written or unwritten, that provides for payments to a named executive officer at, following, or in connection with any termination, including without limitation resignation, severance, retirement or a constructive termination of a named executive officer, or a change in control of the Company or a change in the named executive officer's responsibilities, with respect to each named executive officer.
Director Compensation
We do not have any agreements or formal plan for compensating our directors for their service in their capacity as directors, although our board of directors may, in the future, award stock options to purchase shares of common stock to our directors.
ITEM 12.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth certain information, as of April 10, 2018, with respect to the beneficial ownership of any outstanding common stock by (i) any holder of more than 5%, (ii) each of our named executive officers and directors, and (iii) our directors and officers as a group. Unless otherwise indicated, the business address of each person listed is in care of the Company, 7250 Redwood Boulevard, Suite 300, Novato, California 94945. The percentages in the table has been calculated on the basis of treating all shares of common stock outstanding for a particular person, all shares of common stock outstanding on that date and all shares of our common stock issuable to that holder in the event of exercise of outstanding options which are exercisable within 60 days of that date.
(1)Based on 53,320,702 shares of common stock outstanding on April 10, 2018.
(2)Mr. Aldridge is deemed the beneficial owner of shares of common stock and has sole or shared power to vote or to direct the vote and to dispose or direct disposition of these shares, which includes: (i) 2,808,333 shares of common stock held by Mr. Aldridge, (ii) 200,000 shares of common stock held by Bobby Aldridge, and (iii) 100,000 shares of common stock held by Joe Aldridge.
(3)Mr. Froese is deemed the beneficial owner of shares of common stock and has sole or shared power to vote or to direct the vote and to dispose or direct disposition of these shares, which includes: (i) 1,500,000 shares of common stock held by Mr. Froese, (ii) 2,900,000 shares of common stock held by 0851229 BC LTD, (iii) 1,750,000 shares of common stock held by 0797288 BC LTD, (iv) 1,750,000 shares of common stock held by Fromac Developments LTD, (v) 1,700,000 shares of common stock held by Compass Point Ventures LTD, (vi) 1,600,000 shares of common stock held by 0767182 BC LTD, (vii) 1,210,000 shares of common stock held by 0742949 BC LTD, (viii) 1,000,000 shares of common stock held by IC Projects LP, and (ix) 650,000 shares of common stock held by Larry Wiebe.
(4)CC3I is deemed the beneficial owner of shares of common stock and has sole or shared power to vote or to direct the vote and to dispose or direct disposition of these shares, which includes: (i) 166,667 shares of common stock held by Jake Farrell, and (ii) 166,667 shares of common stock held by Patrick Rawlings.
ITEM 13.
ITEM 13. Certain Relationships and Related Transactions, and Director Independence.
Certain Relationships and Related Transactions
Review, Approval or Ratification of Transactions with Related Persons
As we have not adopted a code of ethics, we rely on our board to review related party transactions on an ongoing basis to prevent conflicts of interest. Our board reviews a transaction in light of the affiliations of the director, officer or employee and the affiliations of such person's immediate family. Transactions are presented to our board for approval before they are entered into or, if this is not possible, for ratification after the transaction has occurred. If our board finds that a conflict of interest exists, then it will determine the appropriate remedial action, if any. Our board approves or ratifies a transaction if it determines that the transaction is consistent with our best interests. During the fiscal year ended December 31, 2017, the Company entered into the following related party transactions:
The Company entered into the loans described in this Annual Report on Form 10-K with 0851229 BC Ltd. (the "Lender"). The Lender is deemed a related party as a result of owning more than 10% of the Company's common stock. Such loans were consolidated into a Secured Note which amends, restates and modifies the terms of the such prior loans to the terms set forth in the Secured Note and contains other terms and conditions as described in the Company's Current Report on Form 8-K filed on March 31, 2016.
Dr. Brian Kennedy, the Chairman of the Company's Board of Directors, was affiliated with The Buck Institute. Dr. Kennedy was CEO of The Buck Institute from July 2010 until December 2016, when he resigned as CEO. Currently, Dr. Kennedy is the Director of the Centre for Healthy Ageing at the Yong Loo Lin School of Medicine at National University Singapore.
The transactions between Mount Tam and The Buck Institute as more fully described in this Annual Report on Form 10-K may be considered related party transactions.
Director Independence
We do not currently have any independent directors. We evaluate independence by the standards for director independence established by Marketplace Rule 5605(a)(2) of the NASDAQ Stock Market, Inc.
Subject to some exceptions, this standard generally provides that a director will not be independent if (a) the director is, or in the past three years has been, an employee of ours; (b) a member of the director's immediate family is, or in the past three years has been, an executive officer of ours; (c) the director or a member of the director's immediate family has received more than $120,000 per year in direct compensation from us other than for service as a director (or for a family member, as a non-executive employee); (d) the director or a member of the director's immediate family is, or in the past three years has been, employed in a professional capacity by our independent public accountants, or has worked for such firm in any capacity on our audit; (e) the director or a member of the director's immediate family is, or in the past three years has been, employed as an executive officer of a company where one of our executive officers serves on the compensation committee; or (f) the director or a member of the director's immediate family is an executive officer of a company that makes payments to, or receives payments from, us in an amount which, in any twelve-month period during the past three years, exceeds the greater of $1,000,000 or two percent of that other company's consolidated gross revenues.
ITEM 14.
ITEM 14. Principal Accounting Fees and Services.
Audit Fees
The aggregate fees billed for the two most recently completed fiscal periods ended December 31, 2017, and December 31, 2016, for professional services rendered by RBSM LLP, for the audit of our annual consolidated financial statements, quarterly reviews of our interim consolidated financial statements and services normally provided by the independent accountant in connection with statutory and regulatory filings or engagements for these fiscal periods were as follows:
In the above table, "audit fees" are fees billed by our company's external auditor for services provided in auditing our company's annual financial statements and review of financial statements included in our Form 10-Qs for the subject year. "Audit-related fees" are fees not included in audit fees that are billed by the auditor for assurance and related services that are reasonably related to the performance of the audit or review of our company's financial statements. "Tax fees" are fees billed by the auditor for professional services rendered for tax compliance, tax advice and tax planning. "All other fees" are fees billed by the auditor for products and services not included in the foregoing categories.
Our Board has adopted a procedure for pre-approval of all fees charged by our independent registered accounting firm. Under the procedure, the Board approves the engagement letter with respect of audit, tax and review services. Other fees are subject to pre-approval by the Board, or, in the period between meetings, by a designated member of the Board. Any such approval by the designated member is disclosed to the entire Board at the next meeting.
Part IV
ITEM 15.
ITEM 15. Exhibits, Financial Statement Schedules.
Exhibit No.
Description
2.1
Share Exchange and Conversion Agreement dated August 13, 2015, by and among the Company and the majority stockholder of the Company on the one hand; and Mount Tam Biotechnologies, Inc., a Delaware corporation (Mount Tam) and the stockholders of Mount Tam and the noteholders of Mount Tam on the other hand, incorporated by reference to Exhibit 2.1 to the Company's Form 8-K filed August 19, 2015.
2.2
Agreement and Plan of Merger by and between the Company and Mount TAM Biotechnologies, Inc., a Nevada corporation dated August 19, 2015, incorporated by reference to Exhibit 2.1 to the Company's Form 8-K filed September 1, 2015.
3.1
Articles of Incorporation incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 filed November 1, 2013.
3.2
Bylaws of the Company incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1 filed November 1, 2013.
3.3
Amendment to the Bylaws of the Company incorporated by reference to Exhibit 3.3 to the Company's Form 8-K filed August 19, 2015.
3.4
Articles of Merger dated August 19, 2015, incorporated by reference to Exhibit 3.1 to the Company's Form 8-K filed September 1, 2015.
4.1
Mount Tam Biotechnologies, Inc. 2016 Stock-Based Compensation Plan, incorporated by reference to Exhibit A to our Information Statement filed on July 11, 2016.
10.1
Research Collaboration and License Agreement by and between Buck Institute for Research on Aging, a California non-profit public benefit corporation and Mount Tam Biotechnologies, Inc., a corporation organized under the laws of Delaware dated as of August 17, 2014, incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed August 19, 2015.
10.2
Employment Agreement by and between Mount Tam Biotechnologies, Inc., a Delaware corporation and Timothy Powers effective as of January 2, 2015, incorporated by reference to Exhibit 10.2 to the Company's Form 8-K filed August 19, 2015.
10.3
Amendment to Employment Agreement by and between Mount Tam Biotechnologies, Inc., a Delaware corporation, Timothy Powers dated August 12, 2015, incorporated by reference to Exhibit 10.3 to the Company's Form 8-K filed August 19, 2015.
10.4
License and Services Agreement between the Buck Institute for Research on Aging, a California non-profit public benefit corporation and Mount Tam Biotechnologies, Inc., effective January 2, 2015, incorporated by reference to Exhibit 10.4 to the Company's Form 8-K filed August 19, 2015.
10.5
Cancellation and Transfer Agreement dated August 13, 2015 by and among the Company and Ramon Tejeda, incorporated by reference to Exhibit 10.6 to the Company's Form 8-K filed August 19, 2015.
10.6
Amended and Restated Employment Agreement of Richard Marshak, incorporated by reference to Exhibit 10.4 to our Form 8-K filed with the SEC on March 31, 2016.
Exhibit No.
Description
10.7
Employment Agreement of James Stapleton, incorporated by reference to Exhibit 10.1 to our Form 8-K filed with the SEC on April 26, 2016.
10.8
Amended and Restated Secured Convertible Promissory Note, incorporated by reference to Exhibit 99.1 to our Form 8-K filed with the SEC on June 15, 2016.
10.9
Amended and Restated Security Agreement, incorporated by reference to Exhibit 99.2 to our Form 8-K filed with the SEC on June 15, 2016.
10.10
Amended Letter Agreement, incorporated by reference to Exhibit 99.3 to our Form 8-K filed with the SEC on June 15, 2016.
10.11
Amendment No. 3 to Research and Collaboration and License Agreement with Buck Institute, incorporated by reference to Exhibit 99.1 to our Form 8-K filed with the SEC on July 22, 2016.
10.12
Convertible Promissory Note, dated April 6, 2018, incorporated by reference to 10.1 to our Form 8-K filed with the SEC on April 12, 2018.
10.13
Security Agreement, dated April 6, 2018, incorporated by reference to 10.2 to our Form 8-K filed with the SEC on April 12, 2018.
10.14
Amendment to Amended and Restated Promissory Note, dated April 6, 2018, incorporated by reference to 10.3 to our Form 8-K filed with the SEC on April 12, 2018.
21.1
Subsidiaries of the Company
31.1*
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*
Certification of Chief Executive Officer pursuant to Section 906 Certifications under Sarbanes-Oxley Act of 2002
32.2*
Certification of Chief Financial Officer pursuant to Section 906 Certifications under Sarbanes-Oxley Act of 2002
101.INS*
XBRL Instance Document
101.SCH*
XBRL Taxonomy Extension Schema
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase
101.DEF*
XBRL Taxonomy Extension Definition Linkbase
101.LAB*
XBRL Taxonomy Extension Label Linkbase
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase
* Filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MOUNT TAM BIOTECHNOLOGIES, INC.
Dated: April 10, 2018
By:
/s/ Richard Marshak
Name:
Richard Marshak
Title:
Chief Executive Officer (Principal Executive Officer)
Dated: April 10, 2018
By:
/s/ James P. Stapleton
Name:
James P. Stapleton
Title:
Chief Financial Officer (Principal Financial and Accounting 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.
Signature
Title(s)
Date
/s/ Richard Marshak
Chief Executive Officer and Director
April 10, 2018
Richard Marshak
(Principal Executive Officer)
/s/ James P. Stapleton
Chief Financial Officer
April 10, 2018
James P. Stapleton
(Principal Financial Officer)
/s/ Brian Kennedy
Chairman of the Board of Directors
April 10, 2018
Brian Kennedy
/s/ Timothy Powers
Director
April 10, 2018
Timothy Powers
/s/ Chester Aldridge
Director
April 10, 2018
Chester Aldridge