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GNSZ > SEC Filings for GNSZ > Form 10-Q on 8-Nov-2013All Recent SEC Filings

Show all filings for GENSPERA INC

Form 10-Q for GENSPERA INC


8-Nov-2013

Quarterly Report


NOTE 2 - MANAGEMENT'S PLANS

Basis of Presentation

We have prepared our financial statements on the basis that we will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. We have incurred losses since inception and have a deficit accumulated during the development stage of $30.3 million as of September 30, 2013. We anticipate incurring additional losses for the foreseeable future and until such time, if ever, that we can generate significant sales of our therapeutic product candidates currently in development or enter into cash flow positive business development transactions.

Development Stage Risks

We are a development stage entity. To date, we have generated no sales revenues, have incurred losses and expect to incur significant additional losses as we advance G-202 through clinical studies. Consequently, our operations are subject to all the risks inherent in the establishment of a pre-revenue business enterprise as well as those risks associated with a company engaged in research and development of pharmaceutical compounds.

Our cash and cash equivalents balance at September 30, 2013 was $4.9 million, representing 94% of total assets. Based upon our current expected level of operating expenditures, we expect to able to fund operations for the next twelve to fifteen months. We require additional cash to fund and continue operations beyond that point. This period could be shortened if there are any unanticipated significant increases in planned spending on development programs or other unforeseen events. We need to raise additional funds through collaborative arrangements, public or private sales of debt or equity securities, or some combination thereof. There is no assurance that financing will be available when needed to allow us to continue our operations or if available, on terms acceptable to us.

In the event financing is not obtained, the Company could pursue cost cutting measures as well as explore the sale of selected assets to generate additional funds. If we are required to significantly reduce operating expenses and delay, reduce the scope of, or eliminate development programs, these events could have a material adverse effect on our business, results of operations and financial condition. These factors raise significant doubt about our ability to continue as a going concern. The financial statements do not include any adjustments relating to recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue in existence.

NOTE 3 - SUMMARY OF CRITICAL ACCOUNTING POLICIES

Use of estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying disclosures. Actual results may differ from those estimates.

Research and Development

Research and development costs are charged to expense as incurred. Our research and development expenses consist primarily of expenditures for manufacturing, clinical trials, compensation and consulting costs.

GenSpera incurred research and development expenses of approximately $0.6 million for the three months ended September 30, 2013 and 2012, respectively. GenSpera incurred research and development expenses of approximately $1.9 million, $2.1 million and $15.9 million for the nine months ended September 30, 2013 and 2012, and from November 21, 2003 (inception) through September 30, 2013, respectively.

Loss Per Share

Basic loss per share is calculated by dividing net loss and net loss attributable to common shareholders by the weighted average number of common shares outstanding for the period. Basic and diluted loss per share are the same, in that any potential common stock equivalents would have the effect of being anti-dilutive in the computation of net loss per share.The following potentially dilutive securities have been excluded from the computations of weighted average shares outstanding as of September 30, 2013 and 2012, as they would be anti-dilutive:

                                                   Nine months ended September 30,
                                                       2013               2012
Shares underlying options outstanding                   6,011,023          4,674,628
Shares underlying warrants outstanding                 10,266,597          8,357,620
Shares underlying convertible notes outstanding           259,296            250,476
                                                       16,536,916         13,282,724

Fair Value of Financial Instruments

Our short-term financial instruments, including cash, accounts payable and other liabilities, consist primarily of instruments without extended maturities. We believe that the fair values of our current assets and current liabilities approximate their reported carrying amounts.

Warrant derivative liability consists of certain of our warrants with anti-dilution provisions. The Company uses the Black-Scholes option-pricing model to value its warrant derivative liability which incorporate the Company's stock price, volatility, U.S. risk-free interest rate, dividend rate, and estimated life.

Fair Value Measurements

Valuation Hierarchy - GAAP establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows:

Level 1:Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2:Quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.
Level 3:Unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value.

A financial asset or liability's classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The Company previously had recorded a warrant derivative liability for warrants with anti-dilution provisions, which all the respective warrants were either exercised or expired as of September 30, 2013. The reconciliation of the warrant derivative liability measured at fair value on a recurring basis using unobservable inputs (Level 3) is as follows (in thousands):

                                                                  2013
         Balance at beginning of year                           $   1,176
         Gain on change in fair value of warrant liability        (1,096)
         Reclassification to equity upon exercise of warrants        (80)
         Balance at end of period                               $       -

Stock-Based Compensation

The Company measures the cost of employee services received in exchange for equity awards based on the grant-date fair value of the award. All grants under our stock-based compensation programs are accounted for at fair value and that cost is recognized over the period during which an employee is required to provide service in exchange for the award (the vesting period).

Compensation expense for options granted to non-employees is determined in accordance with the standard as the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measured. Compensation expense for awards granted to non-employees is re-measured each period.

Determining the appropriate fair value of the stock-based compensation requires the input of subjective assumptions, including the expected life of the stock-based payment and stock price volatility. The Company uses the Black-Scholes option-pricing model to value its stock option awards which incorporate the Company's stock price, volatility, U.S. risk-free interest rate, dividend rate, and estimated life.

Recent Accounting Pronouncements

Recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC, did not, or are not believed by management, to have a material impact on the Company's present or future financial statements.

NOTE 4 - SUPPLEMENTAL CASH FLOW INFORMATION

The following table contains additional information for the periods reported (in
thousands):

                                                      Nine months ended September 30,
                                                         2013                  2012
Non-cash financial activities:

Common stock options issued as payment of
accrued compensation                               $            999      $            674
Derivative liability reclassified to equity upon
exercise of warrants                                             80                   427

There was no cash paid for interest and income taxes for the three or nine months ended September 30, 2013 and 2012.

NOTE 5 - ACCRUED EXPENSES

Accrued expenses consist of the following (in thousands):

                                              September 30,    December 31,
                                                  2013             2012
         Accrued compensation and benefits   $           780   $         958
         Accrued research and development                 56             100
         Accrued other                                   205             234
         Total accrued expenses              $         1,041   $       1,292

NOTE 6 - CONVERTIBLE NOTES PAYABLE

We have executed convertible notes with our chief executive officer pursuant to which we have borrowed an aggregate of $0.2 million, with $0.1 million principal balance outstanding at September 30, 2013. The notes bear an interest rate of 4.2% and matured at various dates through December 6, 2011. Accrued interest at September 30, 2013 and December 31, 2012 was approximately $25,000 and $21,000, respectively. As of September 30, 2013, our chief executive officer has not demanded payment of the outstanding principal and accrued interest. Accordingly, we consider these amounts payable on demand. The notes and accrued interest are convertible, at the option of the holder, into shares of our common stock at a conversion price of $0.50 per share.

NOTE 7 - COMMITMENTS AND CONTINGENCIES

Legal Matters

On March 12, 2012, GenSpera instituted a declaratory judgment action against Annastasiah Mhaka ("Mhaka") in the United States District Court for the District of Maryland: GenSpera, Inc. v. Mhaka, Civil Action No. MJG-12-772 (D. Md.). In that complaint, GenSpera, as the licensee of the inventions described and claimed in the U.S. Patent No. 7,468,354 ("the '354 patent") and U.S. Patent No. 7,767,648 ("the '648 patent"), sought a declaratory judgment that Mhaka (a former doctoral student at Johns Hopkins University) should not be added to either the '354 patent or the '648 patent as an inventor. On April 2, 2012, Mhaka filed and served her answer and counterclaim, in which she sought to be added as an inventor to the '354 patent and the '648 patent. Between April 26, 2012 and October 1, 2012, the parties conducted fact discovery. Between October 1, 2012 and December 1, 2012, the parties conducted limited expert discovery. On November 1, 2012, Mhaka filed a separate complaint in the State Circuit Court for Baltimore County, Maryland, naming GenSpera as a defendant along with Dr. Samuel Denmeade and Dr. John Isaacs (the named inventors on the '354 patent and the '648 patent). In the complaint, Mhaka alleged that the defendants are liable under various state law tort theories for omitting her from inventorship on the '354 patent and '648 patent. In her prayer for relief, Mhaka sought unspecified damages from the defendants but did not seek to alter the inventorship or ownership of the '354 patent or '648 patent. On November 8, 2012, the defendants removed this second action to the United States District Court for the District of Maryland, and on November 16, 2012, the defendants moved to dismiss all claims in the complaint, asserting (among other things) that the claims were preempted by federal patent law. On January 24, 2013, the Court heard GenSpera's motion for summary judgment in the original case and the defendants' motion to dismiss in the second case. On May 1, 2013, the Court granted GenSpera's motion for summary judgment in the original case. In its order, the Court stated that it would proceed to issue a declaratory judgment establishing that Mhaka should not be added to the two patents at issue as an additional inventor pursuant to 35 U.S.C. 256." Reserving any ruling on the issue of whether Mhaka's state law tort claims are preempted by federal patent law, the Court denied defendants' motion to dismiss Mhaka's complaint and directed Mhaka to re-file her claims as counterclaims in the original action. On May 14, 2013, Mhaka filed an amended answer and counterclaims in the consolidated action, re-pleading her tort claims as counterclaims. On June 3, 2013, GenSpera (along with Drs. Denmeade and Isaacs) filed a reply to the counterclaims, denying their allegations and raising a number of affirmative defenses. On July 16, 2013, the Court issued a scheduling order governing Mhaka's counterclaims. Under the Court's schedule, fact discovery is to be completed by December 13, 2013. Expert discovery is to be completed by February 28, 2014.

NOTE 8 - CAPITAL STOCK AND STOCKHOLDER'S EQUITY

Common Stock

During the nine months ended September 30, 2013, 325,670 warrants were exercised into an equivalent number of common shares for which we received proceeds of approximately $404,000, and one million warrants were exercised on a cashless basis into 537,722 common shares. During the nine months ended September 30, 2012, 375,670 options and warrants were exercised into an equivalent number of common shares for which we received proceeds of approximately $494,000, and 78,333 warrants were exercised on a cashless basis into 37,301 common shares.

Equity Financing

August 2013 Offering

In August of 2013, we sold an aggregate of $5,000,032, or 3,333,356 units, to accredited and institutional investors. The price per unit was $1.50, with each unit consisting of (i) one share of the Company's common stock and (ii) one common stock purchase warrant. The warrants have a term of five years and entitle the investors to purchase the Company's common stock at a price per share of $1.75. In the event that the shares underlying the warrants are not subject to a registration statement at the time of exercise, the warrants may be exercised on a cashless basis after 6 months from the issuance date. The warrants also contain provisions providing for an adjustment in the underlying number of shares and exercise price in the event of stock splits or dividends and fundamental transactions. Additionally, the warrants contain limitations on the holder's ability to exercise the warrants in the event such exercise causes the holder to beneficially own in excess of 4.99% of the Company's issued and outstanding common stock, subject to a discretionary increase in such limitation by the holder to 9.99% upon 61 days' prior notice to the Company.

In connection with the offering, we also paid commissions equal to 8% of gross proceeds, for an aggregate commission of $400,003, and a non-accountable expense allowance equal to 2% of the gross proceeds, or $100,001 to the placement agent. The placement agent also received common stock purchase warrants to purchase such number of shares equal to 8% of the shares sold in the offering to investors, or 266,668 placement agent warrants with substantially the same terms as the warrants. Additionally, the placement agent was also reimbursed for its legal and due diligence costs in an amount not greater than $35,000. The placement agent also received (i) a cash fee of 4% of gross proceeds received from the exercise of the warrants, and (ii) additional transaction fees equal to 8% of gross proceeds and 8% warrant coverage for any future investment by one of the investors in the Company for a period of 12 months following the closing of the offering.

In connection with the offering, investors received certain registration rights. Pursuant to the registration rights, the Company agreed to file a registration statement with the SEC within 45 days from the closing to register the resale of the common shares and common shares underlying the warrants. The Company also agreed to have the registration statement declared effective within 120 days from the filing date. The Company agreed to keep the registration statement continuously effective until the earlier to occur of (i) the date after which all of the securities to be registered thereunder have been sold, or (ii) the date on which all the securities to be registered thereunder may be sold without volume or manner-of-sale restrictions and without current public information pursuant to Rule 144 under the Securities Act of 1933, as amended. We are also obligated to pay the investors, as partial liquidated damages, a fee of 1.5% of each investor's subscription amount per month in cash or shares of the Company's common stock, at the discretion of the Company, upon the occurrence of certain events, including our failure to file and / or failure to have the registration statement declared effective within the time provided.

December 2012 Offering

In December of 2012 we commenced a unit offering of our securities. Each unit consists of: (i) one share of common stock, and (ii) one common stock purchase warrant. The warrants have a term of five years and entitle the holders to purchase common stock at a price per share of $3.00. In the event the shares underlying the warrants are not subject to a registration statement, the warrants may be exercised on a cashless basis after 12 months from the issuance date. The warrants also contain provisions providing for an adjustment in the underlying number of shares and exercise price in the event of stock splits or dividends and fundamental transactions, as defined. The warrants do not contain any price protection provisions. Additionally, the warrants contain limitations on the holder's ability to exercise the warrants in the event such exercise causes the holder to beneficially own in excess of 4.99% of the Company's issued and outstanding common stock, subject to a discretionary increase in such limitation by the holder to 9.99% upon 61 days' prior notice to the Company.

In January 2013, we offered and sold an aggregate of 104,095 units in an additional closing resulting in gross proceeds of $0.2 million. The price per unit was $2.20. In connection with the December 2012 and January 2013 closings, we issued 96,443 additional units in March 2013 in order to adjust the price per unit from $2.20 to $1.773 to be consistent with the price per unit of our March 2013 closing as discussed below.

In March 2013, we offered and sold an additional 557,256 units in connection with an additional closing, resulting in gross proceeds of $1.0 million, at a price per unit of $1.773. In connection with this closing, we incurred placement agent fees and expenses in the amount of $37,000 in cash and issued warrants to purchase 18,410 shares at an exercise price per share of $3.00.

In connection with the offering, we agreed to enter into registration rights agreements with our investors. Pursuant to the registration rights agreements, we agreed to file a "resale" registration statement with the SEC covering the shares of common stock included in the units as well as the shares underlying the warrants, within 45 days of the final closing date of the sale of units and to maintain the effectiveness of the registration statement until all securities have been sold or are otherwise able to be sold pursuant to Rule 144. We also agreed to use our best efforts to have the registration statement declared effective within 90 days of the final closing. We are also obligated to pay to investors, as partial liquidated damages, a fee of 0.50% per month in cash up to a maximum of 6%, upon the occurrence of certain events, including but not limited to failure to file and/or have the registration statement declared effective within the time provided. Subsequent to the offering, we received a waiver and amendment to the registration rights agreement by holders of a majority of the registrable securities. The effect of the waiver and amendment was to waive all penalties under the registration rights agreement with regard to filing deadlines and effectiveness requirements.

NOTE 9 - STOCK OPTIONS

In March 2013, we amended the terms of our 2009 Executive Compensation Plan ("2009 Plan") to allow for the issuance of up to 6,000,000 shares of common stock. The terms of our 2007 Equity Compensation Plan ("2007 Plan") allows for the issuance of up to 6,000,000 shares of common stock. Collectively, the 2009 Plan and 2007 Plan are referred to as "the Plans."

Total stock-based compensation expense recognized for stock options and warrants issued using the straight-line method in the statement of operations are as follows:

                                 Three Months Ended September 30,         Nine Months Ended September 30,
                                    2013                 2012                2013                 2012
General and administrative     $           33      $              92   $            729     $            579
Research and development                   13                     34                463                  452
Total stock-based compensation $           46      $             126   $          1,192     $          1,031

As of September 30, 2013, there was $57,000 of total unrecognized compensation cost related to non-vested stock options which vest over time. That cost is expected to be recognized over a weighted-average period of approximately six months. As of September 30, 2013, there was no unrecognized compensation expense related to performance-based, non-vested employee stock options. The following table summarizes weighted-average assumptions using the Black-Scholes option-pricing model used on the date of the grants issued for the nine months ended September 30, 2013 and 2012:

                                                 September 30,
                                                2013        2012
                     Volatility                   58.7 %     71.6 %
                     Expected term (years)         3.9        3.2
                     Risk-free interest rate       0.7 %      0.5 %
                     Dividend yield                  0 %        0 %

During the nine months ended September 30, 2013, the Company issued options to purchase 1,221,972 and 114,000 shares of common stock to employees and non-employee directors, respectively, under the Plans. Additionally, the Company issued options to purchase 140,423 shares of common stock to consultants. During the nine month period ended September 30, 2013, no options were exercised. During the nine months ended September 30, 2012, 70,000 options were exercised into an equivalent number of common shares for which we received $35,000 in proceeds. The following is a summary of our stock option activity:

                                             Weighted-     Weighted-average      Aggregate
                               Number of      average          remaining         intrinsic
                                common       exercise      contractual term      value (in
                                 shares        price           (in years)        thousands)
Outstanding at December
31, 2012                        4,674,628   $       1.79
Granted                         1,476,395   $       2.04
Forfeited                       (140,000)   $       2.80
Outstanding at September
30, 2013                        6,011,023   $       1.83                  4.2   $      462.0
Exercisable at September
30, 2013                        5,882,935   $       1.83                  4.2   $      462.0

Effective June 30, 2013, upon the resignation of the Company's Vice President of Finance, the Company extended the exercise period for her vested awards from ninety days to the contractual life of the options. As a result of the modification, the Company recognized incremental compensation cost of approximately $72,000 in the second quarter of 2013.

NOTE 10 - WARRANTS AND DERIVATIVE WARRANT LIABILITY

We account for common stock warrants as either equity instruments or derivative liabilities depending on the specific terms of the warrant agreement. Stock warrants are accounted for as derivative liabilities if the warrants allow for cash settlement or provide for modification of the warrant exercise price in the event subsequent sales of common stock by the Company are at a lower price per share than the then-current warrant exercise price. We classify derivative warrant liabilities on the balance sheet at fair value, and changes in fair value during the periods presented in the statement of operations, which is revalued at each balance sheet date subsequent to the initial issuance of the stock warrant.

During the nine months ended September 30, 2013, 325,670 warrants were exercised into an equivalent number of common shares for which we received approximately $404,000 in proceeds, and 1,000,000 warrants were exercised on a cashless basis into 537,722 common shares. During the nine months ended September 30, 2012, 305,670 warrants were exercised into an equivalent number of common shares for which we received $459,000 in proceeds, and 78,333 warrants were exercised on a cashless basis into 37,301 common shares. The following is a summary of our equity-classified and liability-classified warrant activity:

                                               Weighted-    Weighted-average     Aggregate
                                                average         remaining        intrinsic
                               Number of        exercise    contractual term     value (in
                                shares           price         (in years)        thousands)
Outstanding at December
31, 2012                         8,513,984   $       2.47
Granted                          4,376,228   $       1.97
Exercised                      (1,325,670)   $       1.06
Forfeited                      (1,297,945)   $       1.50
Outstanding at September
30, 2013                        10,266,597   $       2.56                 3.1   $       84.1
Exercisable at September
30, 2013                        10,266,597   $       2.56                 3.1   $       84.1

The following table summarizes outstanding warrants to purchase common stock as of September 30, 2013:

                                       Weighted-
                        Number of       average
                          common        exercise
                          shares         price                Expiration
Issued to                                            October 2013 through January
consultants               1,178,759   $       2.27   2018

Issued pursuant to                                   February 2014 through
2009 financings           1,455,516   $       3.00   September 2014

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