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FPMI > SEC Filings for FPMI > Form 10-K on 25-Mar-2014All Recent SEC Filings

Show all filings for FLUOROPHARMA MEDICAL, INC.

Form 10-K for FLUOROPHARMA MEDICAL, INC.


25-Mar-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

This report contains forward-looking statements. These forward-looking statements include, without limitation, statements containing the words "believes," "anticipates," "expects," "intends," "projects," "will," and other words of similar import or the negative of those terms or expressions. Forward-looking statements in this report include, but are not limited to, expectations of future levels of research and development spending, general and administrative spending, levels of capital expenditures and operating results, sufficiency of our capital resources, our intention to pursue and consummate strategic opportunities available to us, including sales of certain of our assets. Forward-looking statements subject to certain known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These risks and uncertainties include, but are not limited to those described in "Risk Factors" of the reports filed with the SEC.

The following discussion should be read in conjunction with our consolidated financial statements and notes thereto included elsewhere herein.

Overview

We are a biopharmaceutical company specializing in discovering, developing and commercializing molecular imaging pharmaceuticals with initial applications in the area of cardiology. Molecular imaging pharmaceuticals are radiopharmaceuticals that enable early detection of disease through the visualization of subtle changes in biochemical and biological processes. We currently have two clinical-stage molecular imaging pharmaceutical product candidates: CardioPET and BFPET. Additionally we have identified potential candidates that may be useful in the detection and/or treatment of vulnerable plaque.

Recent Accounting Pronouncements

Management does not expect any recently issued, but not yet effective, accounting standards to have a material effect on its results of operations or financial condition.

Critical Accounting Policies

This summary of significant accounting policies is presented to assist in understanding our consolidated financial statements. The consolidated financial statements and notes are representations of our management, which is responsible for their integrity and objectivity. These accounting policies conform to U.S. GAAP and have been consistently applied in the preparation of the financial statements.

Accounting for Share-Based Payments

We follow the provisions of ASC Topic 718, which establishes the accounting for transactions in which an entity exchanges equity securities for services and requires companies to expense the estimated fair value of these awards over the requisite service period. We use the Black-Scholes option pricing model in determining fair value. Accordingly, compensation is recognized using the fair value method and expected term accrual requirements as prescribed.

We account for share-based payments granted to non-employees in accordance with ASC Topic 505, "Equity Based Payments to Non-Employees." The Company determines the fair value of the stock-based payment as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. If the fair value of the equity instruments issued is used, it is measured using the stock price and other measurement assumptions as of the earlier of either (1) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the counterparty's performance is complete.

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The fair value of each share based payment is estimated on the measurement date using the Black-Scholes model with the following assumptions, which are determined at the beginning of each year and utilized in all calculations for that year:

Risk-Free Interest Rate. We utilized the U.S. Treasury yield curve in effect at the time of grant with a term consistent with the expected term of our awards.

Expected Volatility. We calculate the expected volatility based on a volatility index of peer companies as we did not have sufficient historical market information to estimate the volatility of our own stock.

Dividend Yield. We have not declared a dividend on its common stock since its inception and have no intentions of declaring a dividend in the foreseeable future and therefore used a dividend yield of zero.

Expected Term. The expected term of options granted represents the period of time that options are expected to be outstanding. We estimated the expected term of stock options by using the simplified method. For warrants, the expected term represents the actual term of the warrant.

Forfeitures. Estimates of option forfeitures are based on our experience. We will adjust our estimate of forfeitures over the requisite service period based on the extent to which actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of compensation expense to be recognized in future periods.

Derivative Financial Instrument.

We evaluate all financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of operations. For stock-based derivative financial instruments, we use a binomial pricing model to value the derivative instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.

At December 31, 2013, we had a derivative warrant liability relating to certain warrants issued in 2013 that contain anti-dilution provisions.

Investments

Investments that are purchased and held principally for the purpose of selling them in the near term are classified as "trading securities" and reflected on the balance sheet at fair value, with unrealized gains and losses included in earnings. Investments as of December 31, 2013 is comprised of a single investment in a publicly traded stock and is considered "trading securities". Gains and losses on the sale of these securities are recorded on the trade date and are determined using the specific identification method.

Impairments

We assess the impairment of long-lived assets, including other intangible assets, whenever events or changes in circumstances indicate that their carrying value may not be recoverable in accordance with ASC Topic 360-10-35, "Impairment or Disposal of Long-Lived Assets." The determination of related estimated useful lives and whether or not these assets are impaired involves significant judgments, related primarily to the future profitability and/or future value of the assets. We hold investments in companies having operations or technologies in areas that are within or adjacent to our strategic focus when acquired, all of which are privately held and whose values are difficult to determine. We record an investment impairment charge if it believes an investment has experienced a decline in value that is other than temporary.

As of December 31, 2013, management has recorded an impairment on equipment of $128,245, which is included in general and administrative expense in the consolidated statements of operations. The circumstances leading to the impairment included reconsideration of the equipment's utilization in future operations of the Company as well as the current condition of the equipment. Fair value was estimated using quantitative and qualitative considerations including the expected use and disposition of the equipment. Management has determined that no impairments were required as of December 31, 2012.

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Intangible Assets

Our intangible assets consist of technology licenses and are carried at the legal cost to obtain them. Intangible assets are amortized using the straight-line method over the estimated useful life. Useful lives are as follows: technology licenses 5 to 15 years.

Research and Development Costs

Research and development costs are expensed as incurred. The cost of intellectual property purchased from others that is immediately marketable or that has an alternative future use is capitalized and amortized as intangible assets. Capitalized costs are amortized using the straight-line method over the estimated economic life of the related asset.

Use of Estimates

The accompanying consolidated financial statements are prepared in conformity with GAAP in the United States of America, and include certain estimates and assumptions which affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Accordingly, actual results may differ from those estimates.

RESULTS OF OPERATIONS

General

To date, we have not generated any revenues from operations and at December 31, 2013, we had an accumulated deficit of approximately $24.2 million primarily as a result of research and development, or R&D, expenses and general and administrative, or G&A, expenses. While we may in the future generate revenue from a variety of sources, including license fees, research and development payments in connection with strategic partnerships and/or government grants, our product candidates are at an early stage of development and may never be successfully developed or commercialized. Accordingly, we expect to continue to incur substantial losses from operations for the foreseeable future and there can be no assurance that we will ever generate significant revenues.

R&D Expenses

Conducting R&D is central to our business. For the period from inception through December 31, 2013, R&D expenses aggregated approximately $7.4 million. R&D expenses consist primarily of:

? employee-related expenses, which include salaries and benefits, and rent expense;

? license fees and annual payments related to in-licensed products and intellectual property;

? expenses incurred under agreements with CROs, investigative sites and consultants that conduct or provide other services relating to our clinical trials and a substantial portion of our preclinical activities;

? the cost of acquiring clinical trial materials from third party manufacturers; and

? costs associated with non-clinical activities, patent filings and regulatory filings.

From inception through December 31, 2013, direct, external development costs incurred for our CardioPET, BFPET and VasoPET product development programs were $1.6 million, $0.4 million and $0.2 million, respectively.

We expect to continue to incur substantial expenses related to our R&D activities for the foreseeable future as we continue product development. Since product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later stage clinical trials, we expect that our R&D expenses will increase in the future. In addition, if our product development efforts are successful, we expect to incur substantial costs to prepare for potential commercialization of any late-stage product candidates and, in the event one or more of these product candidates receive regulatory approval, to fund the launch of the product.

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G&A Expenses

G&A expenses consist principally of personnel-related costs, professional fees for legal, consulting and audit services, rent and other general operating expenses not otherwise included in R&D. For the period from inception through December 31, 2013, G&A expenses aggregated approximately $13.9 million. We anticipate G&A expenses will increase in future periods, reflecting continued and increasing costs associated with:

? support of our expanded R&D activities;

? an expanding infrastructure and increased professional fees and other costs associated with the compliance with the Exchange Act, the Sarbanes-Oxley Act and stock exchange regulatory requirements and compliance; and

? business development and financing activities.

Comparison of Years Ended December 31, 2013 and 2012

G&A expenses were $3,049,591 and $2,726,224 for the years ended December 31, 2013 and 2012, respectively. The 11.9% increase was due primarily to increases in investor relations activities, personnel costs, as well as a general increase in operating expenses, in addition to the impairment of equipment of approximately $130,000. We expect G&A expenses to increase going forward as we proceed to advance our product candidates through the development and regulatory process.

R&D expenses were $1,312,507 and $1,423,286 for the years ended December 31, 2013 and 2012, respectively. The 7.8% decrease was due primarily to decreased consulting expenses. In addition, during the year ended December 31, 2012, we incurred approximately $160,000 in R&D grants related to our clinical trials. We expect R&D expenses to increase in future periods as our product candidates continue through clinical trials and we seek strategic collaborations.

Other (expense) income, net was $(1,245,230) and $132,764 for the years ended December 31, 2013 and 2012, respectively. The 1038% decrease was due to approximately $818,000 in losses on the sale of trading securities, approximately $236,000 in unrealized losses on trading securities, a $217,000 loss on revaluation and modification of derivative warrant liability and $51,000 of interest expense which primarily related to the exchange of the notes payable for Series B Preferred Stock. In addition, during the year ended December 31, 2013, we recognized other income of approximately $70,000 from the sale of an insurance company of which we were a policyholder. For the year ended December 31, 2012, we recorded a gain on settlements of accounts payable of approximately $133,000.

Liquidity and Capital Resources

We have experienced net losses and negative cash flows from operations since our inception. We have sustained cumulative losses attributable to common stockholders of approximately $24.2 million as of December 31, 2013. We have historically financed our operations through issuances of equity and the proceeds of debt instruments. In the past, we have also provided for our cash needs by issuing common stock, options and warrants for certain operating costs, including consulting and professional fees.

During the year ended December 31, 2013, we raised $1,370,190 in cash and freely tradable securities valued at $3,495,384 (based upon the closing price of such securities on the day prior to closing), net of offering costs, through the private placement of our Series B Preferred Stock that closed in 2013 and the private placement of our common stock that closed in 2013. As of December 31, 2013, we received gross proceeds of $1.8 million from the sale of a portion of such freely tradable securities received as consideration in the private placement of our Series B Preferred Stock.

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At December 31, 2013, we had cash, cash equivalents and trading securities of approximately $1.8 million, which we believe is sufficient, together with proceeds of the private placement of our common stock that closed in 2014, to fund our planned operations through August 2014 based on our current business plan. We continue to actively pursue various funding options, including equity offerings, to obtain additional funds to continue our product development activities beyond such date. We will seek funds through equity or debt financings, collaborative or other arrangements with corporate sources, or through other sources. Adequate additional funding may not be available to us on acceptable terms or at all. If adequate funds are not available to us, we will be required to delay, curtail or eliminate one or more of our research and development programs.

Cash Flows for the Year Ended December 31, 2013 and 2012

Net cash used in operating activities for the year ended December 31, 2013 was $3,331,797, which primarily reflected our net loss of $5,607,328 offset by non-cash expenses of $2,122,802 and an increase in working capital of $152,730. Net cash used in operating activities for the year ended December 31, 2012 was $3,280,696 which primarily reflected our net loss of $4,016,746, offset by non-cash expense of $893,805, an increase in working capital of $24,613 and non-cash gain on the settlement of accounts payable of $133,142.

Net cash provided by investing activities was $1,800,694 for the year ended December 31, 2013, which primarily reflected the proceeds from the sale of trading securities offset by the purchase of office equipment. For the year ended December 31, 2012, net cash used by investing activities was $40,929, which primarily reflected the purchase of office furniture and leasehold improvements.

For the year ended December 31, 2013, net cash provided by financing activities was $1,370,190, which reflects net cash received from the sale of Series B Preferred Stock, the issuance of promissory notes in the aggregate principal amount of $330,000 and the sale of common stock. For the year ended December 31, 2012, net cash provided by financing activities was $1,360,572, which reflects net cash received from the issuance of common stock.

Off-Balance Sheet Arrangements

We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our stockholders.

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