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GNSZ > SEC Filings for GNSZ > Form 10-K on 3-Mar-2014All Recent SEC Filings

Show all filings for GENSPERA INC

Form 10-K for GENSPERA INC


3-Mar-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is provided in addition to the accompanying financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. MD&A is organized as follows:

Company Overview - Discussion of our business plan and strategy in order to provide context for the remainder of MD&A.

Critical Accounting Policies - Accounting policies that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results and forecasts.

Results of Operations - Analysis of our financial results comparing the year ended December 31, 2013 to 2012. Liquidity and Capital Resources - Analysis of changes in our cash flows, and discussion of our financial condition and potential sources of liquidity.

The various sections of this MD&A contain a number of forward-looking statements. Such statements are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this filing and particularly in the Risk Factors section of this Annual Report. Our actual results may differ materially.

Company Overview

Business

We are a development stage pharmaceutical company focused on the development of prodrug cancer therapeutics for the treatment of solid tumors including prostate, liver, brain and other cancers. A prodrug is an inactive precursor of a drug that is converted into its active form only at the site of the tumor. Our technology platform combines a powerful, plant-derived cytotoxin with a prodrug delivery system that targets release of the drug within the tumor. We believe that if successfully developed, our cancer prodrug therapies have the potential to provide a targeted therapeutic approach to a broad range of solid tumors with fewer side effects than those related to current chemotherapy treatments.

Plan of Operation

We are currently focused on the clinical development of our lead drug candidate, G-202.

Our major focus over the next twelve months will be the conduct of the ongoing Phase II clinical trial in liver cancer patients. Assuming a positive signal from the liver cancer trial, we will develop a subsequent randomized study in liver cancer patients as part of an aggressive path to ultimate registration and marketing approval by the FDA.

In the first quarter of 2014, we entered into a collaborative arrangement and plan to initiate a Phase II clinical trial in patients with glioblastoma (a form of brain cancer). This trial is being conducted at a single site in the U.S. and is expected to enroll up to 34 patients. As financial resources allow, we also intend to develop clinical programs in prostate and renal cancer. We also anticipate expanding our manufacturing budget in support of our clinical programs.

Financial

To date, we have devoted a substantial portion of our efforts and financial resources to the development of G-202. G-202 is the only product candidate for which we have conducted clinical trials, and we have not marketed, distributed or sold any products. As a result, since our inception in 2003, we have generated no revenue from product sales and have funded our operations principally through private sales of our equity securities. We have never been profitable and, as of December 31, 2013, we had an accumulated deficit of $32.4 million. We expect to continue to incur significant operating losses for the foreseeable future as we continue the development of our product candidates and advance them through clinical trials.

Our cash and cash equivalents balance at December 31, 2013 was $3.6 million, representing 92% of total assets. Based on our current expected level of operating expenditures, we expect to be able to fund our operations for the next nine to twelve months from our year end. This period could be shortened if there are any significant increases in spending that were not anticipated or other unforeseen events. We need to raise additional cash through the private or public sales of equity or debt securities, collaborative arrangements, or a combination thereof, to continue to fund operations and the development of our product candidates. There is no assurance that such financing will be available to us when needed to allow us to continue our operations or if available, on terms acceptable to us. If we do not raise sufficient funds in a timely manner, we may be forced to curtail operations, delay or stop our ongoing clinical trials, or cease operations altogether, or file for bankruptcy. We currently do not have commitments for future funding of cash from any source.

To preserve cash, we delayed the start of our planned Phase II prostate cancer clinical trial and certain other product development activities. In the event financing is not obtained, we may pursue further 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 additional 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.

Product Development of G-202

Our ability to execute our product development plan is wholly dependent on the amount and timing of cash, if any, that we are able to raise. Should we not raise sufficient funds to execute our product development plan, our priority is the continuation and completion of our Phase II clinical study in liver cancer. We believe we have sufficient working capital to fund the Phase II clinical trial in liver cancer to the point where we can determine if such trial will have a positive or negative outcome. Notwithstanding, depending on the rate of enrollment, and the duration of the trial, we may not have sufficient capital to fund the trial through completion.

Our current product development plan of G-202 contemplates the following major initiatives:

Conducting a Phase II clinical study in patients with liver cancer.

In the first quarter of 2014, we entered into a collaborative arrangement and plan to initiate our Phase II clinical trial in patients with glioblastoma (a form of brain cancer). This trial is being conducted at a single site in the U.S. and is expected to enroll up to 34 patients.

Conducting a Phase II clinical study in patients with prostate cancer. We have deferred commencement of this study until additional capital is raised or we enter into a collaborative arrangement to conduct this study.

Phase I Clinical Development of G-202

During 2011 and 2012 we conducted a Phase Ia/b clinical trial of G-202 to evaluate safety, understand the pharmacokinetics (the process by which a compound is absorbed, distributed, metabolized, and eliminated by the body) of G-202 in humans, and to determine an appropriate dosing regimen for subsequent clinical studies. This clinical trial is closed to new patient enrollment. We treated a total of 44 patients (includes Phase Ia and Ib). Although our Phase I study was not designed to determine the anti-tumor effects of G-202, encouraging signs were observed, including prolonged disease stabilization in a few liver cancer patients. As a result, we initiated our Phase II clinical trial in liver cancer.

Phase II Clinical Development of G-202

In 2012, we obtained clearance from the FDA to initiate our Phase II clinical trial entitled, "A Phase II, Multicenter, Single-Arm Study of G-202 as Second-Line Therapy Following Sorafenib for Adult Patients with Progressive Advanced Hepatocellular Carcinoma." This trial is being conducted at multiple sites in the U.S. and requires seventeen evaluable patients for anticipated statistical analyses. As of February 24, 2014, sixteen patients were treated in the study, of which the majority of the patients treated are considered to be evaluable.

In the first quarter of 2014, we entered into a collaborative arrangement and plan to initiate our Phase II clinical trial in patients with glioblastoma (a form of brain cancer). This trial will initially be conducted at a single site in the U.S. and is expected to enroll up to 34 patients.

Significant Accounting Policies

We have prepared our financial statements in conformity with accounting principles generally accepted in the United States, which requires management to make significant judgments and estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. We base these significant judgments and estimates on historical experience and other applicable assumptions we believe to be reasonable based upon information presently available. These estimates may change as new events occur, as additional information is obtained and as our operating environment changes. These changes have historically been minor and have been included in the financial statements as soon as they became known. Actual results could materially differ from our estimates under different assumptions, judgments or conditions.

All of our significant accounting policies are discussed in Note 2, Summary of Critical Accounting Policies, to our financial statements, included elsewhere in this Annual Report. We have identified the following as our critical accounting policies and estimates, which are defined as those that are reflective of significant judgments and uncertainties, are the most pervasive and important to the presentation of our financial condition and results of operations and could potentially result in materially different results under different assumptions, judgments or conditions.

We believe the following critical accounting policies reflect our more significant estimates and assumptions used in the preparation of our financial statements:

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.

Cash and Equivalents - Cash equivalents are comprised of certain highly liquid investments with maturity of three months or less when purchased. We maintain our cash in bank deposit accounts which, at times, may exceed federally insured limits. We have not experienced any losses in such accounts.

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

Stock-based Compensation - The Company measures the cost of employee services received in exchange for an equity award 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 option model to value its stock option awards which incorporate the Company's stock price, volatility, U.S. risk-free rate, dividend rate, and estimated life.

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, and are valued using option pricing models which incorporate the Company's stock price, volatility, U.S. risk-free 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.

Result of Operations

Year Ended December 31, 2013 Compared to the Year Ended December 31, 2012

Our results of operations have varied significantly from year to year and quarter to quarter and may vary significantly in the future. We did not have revenue during the years ending December 31, 2013 and 2012. We do not anticipate generating any revenues during 2014. Net loss for 2013 and 2012 were $5.3 million and $6.9 million, respectively, resulting from the operational activities described below.

Operating Expenses

Operating expense totaled $6.4 million and $6.9 million during 2013 and 2012,
respectively. The increase in operating expenses is the result of the following
factors.

                                      Year Ended              Change in 2013
                                     December 31,              Versus 2012
                                 2013            2012           $          %
                                (amount in thousands)
Operating Expenses
General and administrative   $      3,662    $      3,953   $    (291)     (7) %
Research and development            2,733           2,922        (189)     (6) %
Total operating expense      $      6,395    $      6,875   $    (480)     (7) %

General and Administrative

General and administrative expenses totaled $3.7 million and $4.0 million during 2013 and 2012, respectively. The decrease of $291,000 or 7% for 2013 compared to 2012 was primarily attributable to decreases in stock-based compensation expense and professional expenses related to patents, patent litigation and financing of approximately $518,000, that was partially offset by increases of approximately $226,000 due primarily to personnel-related costs and consulting costs.

Our general and administrative expenses consist primarily of expenditures related to compensation, legal, accounting and tax and other professional, and general operating.

Research and Development

Research and development expenses totaled $2.7 million and $2.9 million during 2013 and 2012, respectively. The decrease of $189,000 or 6% for 2013 compared to 2012 was attributable to decreases related to stock compensation expense, toxicology and manufacturing of approximately $616,000, which were partially offset by an increase of $427,000 in costs related personnel-related costs, as well as increases in clinical trial expense due to our Phase II clinical trial in liver cancer.

Our research and development expenses consist primarily of expenditures related to toxicology and other studies, manufacturing, clinical trials, compensation and consulting costs.

Other Income (Expense)

Other income (expense) totaled approximately $1.1 million and ($45,000) for 2013
and 2012, respectively.

                                                  Year Ended                Change in 2013
                                                 December 31,                 Versus 2012
                                              2013           2012           $            %
                                             (amount in thousands)
(Loss) gain on change in fair value of
warrant derivative liability              $      1,096    $      (50)   $    1,146        2,292   %
Interest income                                    (3)              5          (8)        (160)   %
Total other income (expense)              $      1,093    $      (45)   $  (1,138)        2,529   %

(Loss) gain on change in fair value of warrant derivative liability

The (loss) gain on change in fair value of the warrant derivative liability totaled approximately $1.1 million gain during 2012 compared to a $50,000 loss during 2012, respectively. The change in the fair value of the warrant derivative liability resulted primarily from the expiration of the related warrants and the changes in our stock price and volatility of our common stock during the reported periods. Refer to Note 11 of our Notes to Financial Statements for further discussion on our warrant liability.

Interest income (expense)

We had net interest expense of approximately $3,000 and net interest income of approximately $5,000 for the year ended December 31, 2013 and 2012, respectively. The decrease of $8,000 was attributable to a decrease in interest earned on average outstanding cash balances.

Liquidity and Capital Resources

We have incurred losses since our inception in 2003 as a result of significant expenditures for operations and research and development and the lack of any approved products to generate revenue. We have a deficit accumulated of $32.4 million as of December 31, 2013 and anticipate that we will continue to incur additional losses for the foreseeable future. To date, we have funded our operations through the private sale of our equity securities and exercise of warrants, resulting in total proceeds of $24.3 million. Cash and cash equivalents at December 31, 2013 were $3.6 million.

Based on our current level of expected operating expenditures, we expect to be able to fund our operations for the next nine to twelve months from our year end. This assumes that we spend minimally on general operations and only continue conducting our ongoing Phase II clinical trials, and that we do not encounter any unexpected events or other circumstances that could shorten this time period.

We are actively seeking sources of financing to fund our continued operations and research and development programs. To raise additional capital, we may sell shares of equity or debt securities, or enter into collaborative, strategic and/or licensing transactions. There can be no assurance that we will be able to complete any financing transaction in a timely manner or on acceptable terms or otherwise. If we are not able to raise additional cash, we may be forced to further delay, curtail, or cease development of our product candidates, or cease operations altogether.

From January through March 2013, we offered and sold an aggregate of 686,420 units in a private placement, in multiple closings, resulting in gross proceeds of approximately $1.2 million. In August 2013, we offered and sold approximately 3.3 million units in a private placement that upon closing resulted in gross proceeds of approximately $5.0 million. For a further description of the offerings, see the section of this Annual Report entitled "Recent Sales of

Unregistered Securities"

                                                    Year Ended
                                                Ended December 31,
                                                2013           2012
                                              (amounts in thousands)
Cash at beginning of period                 $       2,345    $   5,530
Net cash used in operating activities             (4,707)      (4,521)
Net cash used in investing activities                 (8)          (7)
Net cash provided by financing activities           5,957        1,343
Cash at end of period                       $       3,587    $   2,345

Net Cash Used in Operating Activities

Net cash used in operating activities was $4.7 million and $4.5 million during 2013 and 2012, respectively. The increase of $0.2 million in cash used during 2013 compared to 2011 was primarily attributable to a decrease in net loss of approximately $1.6 million, offset by a decrease of $2.5 million in our derivative liability and accounts payable and accrued expenses, partially offset by an increase of $0.7 million in stock-based compensation.

Net Cash Used in Investing Activities

Cash used in investing activities was $8,000 and $7,000 for 2013 and 2012, respectively. The increase was due to purchases of office equipment in 2013 and 2012.

Net Cash Provided by Financing Activities

During 2013, we received net proceeds of $6.0 million from the sales of our securities in private placements and the exercise of warrants compared to $0.7 million during 2012. We are actively seeking sources of financing to fund our continued operations and research and development programs.

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