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Article by DailyStocks_admin    (11-11-13 11:30 PM)

Description

LION BIOTECHNOLOGIES, INC. President & CEO, 10% Owner Singh Manish bought 125,000 shares on 11-05-2013 at $ 2.

BUSINESS OVERVIEW

Overview

We are an emerging biotechnology company focused on developing and commercializing adoptive cell therapy using autologous tumor infiltrating lymphocytes for the treatment of Stage IV metastatic melanoma and other cancers. Our lead product c andidate, Cōntego™, is an adoptive cell therapy using autologous tumor infiltrating lymphocytes for the treatment of certain cancers.

Cancer cells possess multiple means of evading detection and destruction by the immune system. Such evasion occurs despite the fact that there are tumor associated antigens expressed on the surface of the cancer cells which are not expressed on the surface of normal cells. A variety of immunosuppressive influences can exist in the cancer patient including the presence of lymphocytes or myeloid cells with immunosuppressive activity.

Adoptive cell therapy (ACT) is a passive immunotherapy which attempts to optimize each patient’s unique immune response so that immune system operatives called anti-tumor T cells will circulate throughout the patient’s body, recognize the markers on the surface of cancer cells, and attack and kill those cancer cells. Our lead product candidate that we have named Cōntego ™ is being developed as a ready-to-infuse ACT product comprised of a specific kind of anti-tumor T cell called autologous tumor-infiltrating lymphocytes (TILs). TILs migrate from the bloodstream and invade the tumor in an attempt to kill the tumor cells. We are developing Cōntego ™ to treat patients suffering from metastatic melanoma, and ovarian, breast and colorectal cancers.

Cōntego™ is based on the adoptive cell therapy regimen using tumor infiltrating lymphocytes invented by Dr. Steven A. Rosenberg, Chief, Surgery Branch, Center for Cancer Research, National Cancer Institute for t he treatment of metastatic melanoma. Dr. Rosenberg’s adoptive cell therapy is presently available as a physician-sponsored investigational therapy for the treatment of Stage IV metastatic melanoma at the National Cancer Institute, MD Anderson Cancer Center, and the H. Lee Moffitt Cancer & Research Institute. The current method of treatment is very labor intensive, which has limited its widespread application. We believe that a significant market opportunity exists if we can make the existing adoptive cell therapy more widely available to a larger number of cancer patients. In addition, we believe that there are opportunities to improve the manufacturing process for TILs, including the use of more automation (robotics and optics), that will reduce the number of cellular manipulations, reduce costs and improve logistics. There is no guarantee that Cōntego , if it receives regulatory approval, will prove to be a commercially successful therapy product.

We have licensed the rights to the adoptive cell therapy from the National Institute of Health. We are also in discussions with the National Cancer Institute to license additional rights to next generation T-cells that we believe will have higher potency, persist over a longer period of time, require fewer cells, and have a lower manufacturing cost. No assurance can be given that we will be able to license these additional rights.

In order to execute our business plan, we have to date (i) acquired a worldwide, non-exclusive license for various adoptive cell therapy technologies from the National Institute of Health, and (ii) entered into a Cooperative Research and Development Agreement with the National Cancer Institute (NCI), pursuant to which we intend to support the in vitro development of improved methods for the generation and selection of autologous TILs, develop approaches for large-scale production of autologous TILs that are in accord with cGMP procedures, and conduct clinical trials using these improved methods of generating TILs for the treatment of metastatic melanoma. We have also entered into a Manufacturing Services Agreement with Lonza Walkersville, Inc. pursuant to which Lonza has agreed to manufacture, package, ship and handle quality assurance and quality control of our Cōntego™ autologous cell therapy products. Lonza has commenced developing a commercial-scale manufacturing process for Cōntego™ as a prospective therapy for the treatment of Stage IV metastatic melanoma. Our goal is to develop and establish a third party manufacturing process for the large-scale production of TILs that is in accord with current Good Manufacturing Practices (“cGMP”).

Company History--Corporate Restructuring

We were incorporated in the State of Nevada on September 17, 2007. Until March 2010, we were an inactive company known as Freight Management Corp. On March 15, 2010, we acquired the rights, title and interest to certain assets, including certain patents, patent applications, materials, and know-how, related to the development and commercialization of biotechnology drugs, and then commenced developing anti-cancer drugs based primarily on anti-CD55+ antibody (the “Anti-CD55+ Antibody Program”). However, test results from the studies performed for us as part of the Anti-CD55+ Antibody Program failed to meet the pre-clinical development endpoints, and in October 2011, our Board of Directors abandoned the Anti-CD55+ Antibody Program.

In 2011 we identified an opportunity to develop and commercialize adoptive cell therapy using autologous tumor infiltrating lymphocytes for the treatment of Stage IV metastatic melanoma and other cancers based on technologies that we could license from the National Institutes of Health, an agency of the United States Public Health Service within the Department of Health and Human Services (“NIH”). Accordingly, in October 2011, we entered into a Patent License Agreement (the “License Agreement”) with the NIH for a non-exclusive worldwide right and license to develop and manufacture certain proprietary adoptive cell therapy using autologous tumor infiltrating lymphocytes for the treatment of certain cancers. The intellectual property subject to the License Agreement is covered by 43 patents and patent applications. Our goal was to raise at least $25 million in a public offering of our common stock (the “Common Stock”), to develop our new products and establish our new business. In order to fund our operating costs while we attempted to complete the public offering, during the year ended December 31, 2012, we raised a total of $1,481,250 from the issuance of senior secured notes and other debt instruments, and a total of $250,000 from the sale of our common stock and warrants. However, we were unable to complete the public offering in 2012.

In 2013 we determined that, in order to attract new investors it was necessary to restructure our prior debt and equity issuances and to hire new management. Accordingly, on May 22, 2013 we completed a restructuring of our unregistered debt and equity securities (the “Restructuring”) and raised approximately $1.25 million. We also replaced most of our officers and directors. To effect the Restructuring, we entered into an exchange agreement (the “Exchange Agreement”) and other agreements pursuant to which (i) most of the outstanding promissory notes and other debt instruments that we issued to investors were converted into shares of Common Stock; (ii) substantially all of outstanding warrants to purchase shares of capital stock were exchanged for shares of Common Stock; (iii) certain investors who invested in our prior private equity offerings (the “Prior PIPE Transactions”) purchased additional shares of Common Stock; and (iv) certain investors who purchased shares of Common Stock in the Restructuring received additional shares of Common Stock, for no additional consideration.

Under the Exchange Agreement, creditors holding (i) an aggregate of approximately $7.2 million (including accrued interest and penalties) of the senior secured notes that we issued on July 27, 2011 (the “Senior Secured Notes”), (ii) an aggregate of approximately $1.7 million (including accrued interest and penalties) of bridge notes issued May 7, 2012 and September 12, 2012 (the “12% Secured Notes”), and (iii) an aggregate of approximately $0.3 million in other outstanding debt (the Senior Secured Notes, 12% Secured Notes and other debt is herein collectively referred to as the “Debt”) converted the Debt into shares of Common Stock at a conversion price of $0.01 per share. In addition, certain creditors and other warrant holders, together holding warrants to purchase 4,080,000 shares of our Common Stock, exchanged their warrants for shares of Common Stock. Under the Exchange Agreement, we also sold 25,000,000 shares of Common Stock for $250,000 (i.e. at a purchase price of $0.01 per share). Collectively, we issued a total of 955,844,092 shares of Common Stock under the Exchange Agreement.

In order to raise additional working capital, in connection with the Restructuring, we also sold additional shares of our Common Stock, at a price of $0.01 per share, to certain investors who had previously purchased Common Stock and warrants from us in the prior PIPE Transactions. In order to induce those investors to purchase a certain amount of shares, for no additional consideration we issued to each investor the number of shares of Common Stock that the investor would have received in the prior PIPE Transactions had the price per share of Common Stock in the prior PIPE Transactions been $0.01 per share. A total of 335,506,865 shares of Common Stock were issued in these transactions, and an aggregate of $1,099,990 of cash was received by us from these sales. Finally, security holders holding warrants to purchase 8,193,418 shares of Common Stock cancelled their warrants and received one share of Common Stock for each share of Common Stock underlying the warrants.

The effect of the Exchange Agreement transactions and the sale of shares to the investors in the prior PIPE Transactions was to (i) extinguish all outstanding secured and unsecured promissory notes (representing liabilities of approximately $8,510,000 in the aggregate), (ii) raise a total of $1,250,000 of cash from the sale of the securities, and (iii) extinguish substantially warrants for all but 100,000 shares, including the anti-dilution provisions contained therein. The shares of Common Stock that we issued in the foregoing transactions do, however, provide for new limited anti-dilution protection, whereby those shares receive anti-dilution protection for any sale of our capital stock if such stock is sold for less than $0.01 per share. The foregoing anti-dilution provision will expire once we have received $6 million of additional debt or equity financing. We also received a release of all claims against us related to prior financing transactions from the investors in the prior PIPE Transactions and from the holders of the Debt and warrants.

On May 20, 2013, Martin Schroeder resigned from the Board of Directors. In connection with the Restructuring, on May 22, 2013, Anthony Cataldo, Michael Handelman and William Andrews resigned from our Board of Directors. Finally, on May 24, 2013, our stockholders removed Dr. L. Stephen Coles from the Board and elected Paul Kessler to serve as an additional director on the Board. Mr. Kessler is a director of Bristol Investment Fund, Ltd. and a manager of Bristol Capital, LLC who, collectively, hold approximately 27.5% of our currently outstanding shares of Common Stock.

After the completion of the foregoing transactions, our Board continued its search for a new, experienced Chief Executive Officer and for new directors. In particular, we continued our negotiations with Dr. Manish Singh, the principal executive officer and stockholder of Lion Biotechnologies, Inc. On July 24, 2013, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Lion Biotechnologies, Inc., a Delaware corporation, and Genesis Biopharma Sub, Inc., our newly formed Delaware subsidiary (“Merger Sub”), and thereby acquired Lion Biotechnologies (the “Merger”). In the Merger, Lion Biotechnologies’ stockholders received, in exchange for all of their issued and outstanding shares of common stock, an aggregate of 134,000,000 shares of our Common Stock, as well as the ability to receive an additional 135,000,000 shares of Common Stock upon the achievement of certain milestones related to the Company’s financial performance and position. As part of the Merger, Dr. Manish Singh entered into an employment agreement with us whereby we appointed him as our Chief Executive Officer and Chairman of the Board of the Company. We also agreed to reconstitute our Board of Directors by appointing Jay Venkatesan and Sanford J. Hillsberg to replace David Voyticky and Paul Kessler as directors on our Board. Those appointments and resignations became effective on September 3, 2013, and Mr. Hillsberg and Dr. Venkatesan are now directors on our Board.

Recent Corporate Action--Reverse Stock Split, Change of Corporate Name, Increase in Authorized Common Stock, Creation of Blank Check Preferred Stock, and Amendment to Equity Incentive Plan.

In August 2013, stockholders holding approximately 72.7% of our common stock, and our Board of Directors approved (i) a reverse stock split (pro-rata reduction of outstanding shares) of our common stock at a reverse split ratio in the range of between 1-for-50 and 1-for-100, which specific ratio will be determined by the Chairman of our Board, (ii) increasing (after the reverse stock split) the number of our authorized number of shares of common stock to 150,000,000 shares, (iii) the amendment of our Articles of Incorporation to authorize the issuance of 50,000,000 shares of “blank check” preferred stock, $0.001 par value per share, (iv) the change in the name of this company to “Lion Biotechnologies, Inc.”, (v) an amendment to our Articles of Incorporation to add indemnification and limit the personal liability of officers and members of our Board, and (vi) an amendment to our 2011 stock option plan to (a) increase the number of shares of common stock authorized for issuance under the Genesis Biopharma, Inc. 2011 Equity Incentive Plan from 18,000,000 shares of common stock to 170,000,000 shares of common stock (prior to giving effect to the reverse stock split), and (b) increase the maximum number of shares eligible for issuance under the Equity Incentive Plan in any twelve-month period from 5,000,000 shares of common stock to 30,000,000 shares (prior to giving effect to the reverse stock split). The foregoing actions will become effective by the end of September 2013.

Technology and Proposed Products; Regulatory Strategy

Cōntego ™ is being developed as a ready-to-infuse adoptive cell therapy product candidate comprised of a specific kind of anti-tumor T cell called autologous tumor-infiltrating lymphocytes (TILs) for the treatment of certain solid tumor cancers.

Currently our focus is on the development and commercialization of Cōntego ™, our adoptive cell therapy (ACT) therapy using TILs for the treatment of Stage IV metastatic melanoma. Our goal is to also develop our technology so that it can eventually be used to treat certain other solid tumor cancers such as triple negative breast/inflammatory breast duct, ovarian, and colorectal cancers. We will also seek to license additional rights from the NIH for the next generation of T-cells for use in the treatment of these cancers.

After the patient’s metastatic melanoma tumor has been surgically resected at the patient’s hospital, the tumor will then be sent to our manufacturing partner, Lonza Walkersville, Inc., at its facilities in Walkersville, Maryland, where autologous TILs that have a high reactivity against the patient’s tumor-specific cell surface markers will then be isolated from the patient’s metastatic melanoma tumor. This population of autologous TILs is then multiplied ex vivo to greater than 10-50 billion TILs under conditions that overcome the immunosuppressive influences that exist in the cancer patient due to the presence of their cancer. Six to eight days prior to infusion of the TILs, the patient returns to the hospital and is administered a nonmyeloablative chemotherapeutic regimen to remove any lymphoid and myeloid suppressor cells present in the patient’s immune system. Once the TILs have been multiplied to a sufficient number ex vivo, and after the patient has completed the nonmyeloablative chemotherapeutic regimen, the TILs are infused into the patient along with a high dose of interleukin-2 (IL-2), a protein that stimulates the immune system.

Typically, the patient remains in the hospital for 8-10 days after the TILs infusion while his immune system rebuilds itself. Based on published results by the NCI, the MD Anderson Cancer Center and at the Moffit Cancer Center, and if planned confirmatory clinical trials reproduce those results seen so far, we expect that for patients with metastatic melanoma who are refractory to all other treatments, about 50% of such patients according to RECIST criteria (“Response Evaluation Criteria in Solid Tumors” for clinical trials where diagnostic imaging such as a CAT scan is used to determine tumor presence, absence, shrinkage or growth) could experience an objective response showing significant tumor shrinkage following the ACT using autologous TILs. In addition, based on results from the same institutions, we also anticipate that a small percentage of patients could experience a complete response. Responses could also be durable lasting several years, and could be seen in all organ sites where metastasis is present, including in the brain.

Our development strategy is to collaborate with some of the leading medical centers to study our TILs technology in combination with other melanoma products that have been recently approved or are in late stages of development. Our strategy includes optimizing our clinical strategy based on upcoming clinical data from principal investigator (PI) initiated clinical trials for both first-line combination trials (such as with immunotherapy ipilimumab (Yervoy) and with BRAF inhibitor vemurafenib Zelboraf) and second line trials. We believe metastatic melanoma treatment is going to change over the next few years, and having clinical data from such combination trials will be useful prior to any registration study. Our goal is to generate such clinical data in 2014 and 2015 from our collaborative studies. During 2013 and 2014, we intend to work with both our manufacturing partner, Lonza Walkersville, and certain research institutions with expertise in T-cell manufacturing to develop a more robust manufacturing process for TILs including automation of certain processes. Our goal is to significantly reduce the cost of manufacturing and also to simplify manufacturing processes.

We also plan to invest igate Cōntego ™ as a prospective therapy for the treatment of persons with triple negative breast / inflammatory breast duct cancers, ovarian cancer, and colorectal cancer. We intend to undertake exploratory pilot clinical trials for these indications under sponsored research agreements with various medical and research institutions, including the institutions that are affiliated with members who have served on our scientific and medical advisory board (see, Item 10 “Scientific & Medical Advisory Board” below). To date, we have not, however, entered into any such sponsored research agreements, and no assurance can be given if, or when such investigative clinical trials will begin.

Market Opportunity

We are initially positioning Cōntego™ for the treatment of Stage IV metastatic melanoma. However, our technology is a broad technology platform that could be applicable for all solid tumors such as ovarian, breast and colorectal cancers.

According to the National Cancer Institute, in 2011 (the most recent year numbers are available) 70,230 people in the United States were diagnosed with melanomas of the skin, and 8,790 people in the U.S. died from melanomas of the skin. The American Cancer Society estimates for melanoma in the United States for 2013 that about 76,690 new melanomas will be diagnosed (about 45,060 in men and 31,630 in women) and that about 9,480 people are expected to die of melanoma (about 6,280 men and 3,200 women). The rates of melanoma have been rising for at least 30 years. Based on our own internal estimates and the number of annual deaths for people with metastatic melanoma, we currently estimate approximately 6,000 –7,000 Stage IV metastatic melanoma patients could be candidates for Cōntego™ annually in the U.S. We also estimate that the number of Stage IV metastatic melanoma patients suitable for treatment using Cōntego™ outside the U.S. is approximately twice the size as in the U.S. We cannot, however, estimate how many of the patients that would be suitable for therapy using Cōntego ™, if and when Cōntego™ becomes available, will actually use Cōntego™ nor whether their disease status will change in meaningful way.

MANAGEMENT DISCUSSION FROM LATEST 10K

Background on the Company and Recent Change in Strategic Focus

On March 15, 2010, we entered the biopharmaceutical business when we acquired the rights, title and interest to certain assets, including certain patents, patent applications, materials, and know-how, related to the development and commercialization of biotechnology drugs, and then commenced developing anti-cancer drugs based primarily on anti-CD55+ antibodies (the “Anti-CD55+ Antibody Program”). We engaged the University of Nottingham to conduct our research and development. Although we initially believed that the proposed anti-CD55+ therapies that we were attempting to develop had significant commercial potential, test results received in mid-2011 from the studies performed for us by the University of Nottingham failed to meet the pre-clinical development endpoints. Accordingly, in 2011 we decided to (i) end our development efforts for the anti-CD55+ technology, and (ii) pursue the development of a new ready-to-infuse adoptive cell therapy product candidate we refer to as Cōntego ™.

On October 5, 2011 we licensed the rights to the adoptive cell therapy from the National Institute of Health and to a manufacturing process for Cōntego™ (initially for Stage IV metastatic melanoma) that we intend to develop to enable us to make the adoptive cell therapy available to a larger number of patients. The license agreement required us to pay the NIH approximately $723,000 of upfront licensing fees and expense reimbursements in 2011. In addition, we will have to pay royalties of six percent (6%) of net sales (subject to certain annual minimum royalty payments of $20,000 per year), a percentage of revenues from sublicensing arrangements, and lump sum benchmark royalty payments on the achievement of certain clinical and regulatory milestones for each of the various indications. We also have to make certain benchmark payments to the NIH based on the development and commercial release of licensed products using the technology underlying the License Agreement. If we achieve all benchmarks for metastatic melanoma, up to and including the product’s first commercial sale in the United States, the total amount of such benchmark payments will be $6,050,000 for the melanoma indication. The benchmark payments for the other three indications, if all benchmarks are achieved, will be $6,050,000 for ovarian cancer, $12,100,000 for breast cancer, and $12,100,000 for colorectal cancer. Accordingly, if we achieve all benchmarks for all four licensed indications, the aggregate amount of benchmark royalty payments that we will have to make to NIH will be $36,300,000.

In order to develop the adoptive cell immunotherapies we licensed from the NIH, effective August 5, 2011, we signed a Cooperative Research and Development Agreement (“CRADA”) with the NIH and the National Cancer Institute (“NCI”). Under the terms of the CRADA, we are required to provide $1,000,000 per year (in quarterly installments of $250,000) to support research activities thereunder and to pay for supplies and travel expenses.

In December 2011, we entered into a five-year Manufacturing Services Agreement with Lonza Walkersville, Inc. under which Lonza agreed to manufacture, package, ship and handle quality assurance and quality control of our Cōntego™ autologous cell therapy products. All of Lonza Walkersville’s services will be provided under separate statements of work that we have agreed to enter into, from time to time, with Lonza Walkersville, Inc. In 2011, we paid Lonza a total of $500,000, but we did not request any additional services from Lonza during the year ended December 31, 2012.

Results of Operations

Revenues

As a development stage company that is currently engaged in the development of therapeutics to fight cancer, we have not yet generated any revenues from our biopharmaceutical business or otherwise since our formation. We currently do not anticipate that we will generate any revenues during 2013 from the sale or licensing of any products.

Costs and expenses

Operating Expenses . Operating expenses include compensation-related costs for our employees dedicated to general and administrative activities, legal fees, audit and tax fees, consultants and professional services, and general corporate expenses. Our operating expenses were $6,477,000 and $19,303,000 for the fiscal years ended December 31, 2012 (“fiscal 2012”) and 2011 (“fiscal 2011”), respectively.

Our operating expenses in fiscal 2012 decreased by $12,826,000 compared to fiscal 2011 primarily as a result of the reduction in non-cash compensation we incurred in fiscal 2012. In fiscal 2011, we started our new Cōntego™ line of business and entered into the Licensing Agreement. In connection with the change in our business focus, we hired two full-time executives and retained a consulting firm to assist us with the acquisition and development of our intellectual properties. In addition, we expanded the size of our Board of Directors and established a scientific advisory board. Most of the compensation paid to our officers, directors, consultants and advisors was paid in equity securities rather than in cash. The total amount of such non-cash compensation we paid in fiscal 2012 was $4,203,000. However, in fiscal 2011, the total amount of such non-cash compensation we paid to officers and consultants was $14,608,000. In addition, in fiscal 2012 our legal, accounting and other professional fees decreased substantially as we reduced our operating activities and expenses pending the completion of our proposed fundraising efforts.

Research and Development . Research and development costs were $1,656,000 for the year ended December 31, 2012, as compared to $1,756,000 in fiscal 2011. Research and development expenses in fiscal 2012 included $1,000,000 paid and accrued under the CRADA with the National Institutes of Health and $656,000 pursuant to agreements with the National Institute of Health. Research and development expenses in fiscal 2011 include $500,000 that we paid under the CRADA with the National Institutes of Health, $723,000 we paid to the NIH under the License Agreement, and $500,000 we paid on the process development and scale-up consulting agreement with Lonza Walkersvill e relating to Cōntego ™. We intend to engage in substantial research and development activities in the future. However, the amount of our future research and development activities, and the amount of our future expenses, will depend upon the amount of funds that we have available.

Impairment of intangible asset. In 2011 we terminated the Anti-CD55+ Antibody Program and the related license agreement. In connection with the termination of the Anti-CD55+ Antibody Program and related license agreement, we agreed to return to all rights to the anti-CD55+ related patents and patent applications that were licensed and transferred to us. The $160,000 impairment expense in fiscal 2011 represents that value we wrote off related to the return of these intangible assets to the licensee.

Other income (expense)

Change in fair value of derivative liability. During the years ended December 31, 2012 and December 31, 2011 we recorded a gain as a result of a decrease in the fair market value of outstanding debt and equity securities accounted for as derivative liabilities of $8,635,000 and $1,596,000, respectively.

Interest expense. Interest expense represents the amount of interest that accrued on the various promissory notes we issued to fund our operations, including the $5,000,000 of 7% Tranche A Senior Unsecured Convertible Notes and Tranche B Senior Unsecured Convertible Notes we issued in 2011 (collectively, the “Senior Secured Notes”) and the $1,231,000 of 12% secured promissory notes we issued in 2012 (the “12% Secured Notes”). Interest expense was $1,922,000 and $152,000 for the years ended December 31, 2012 and 2011, respectively. The increase is due to the increased outstanding principal balances of our indebtedness and penalty interest accrued due to default or our 7% Senior Secured Convertible Promissory Notes.

Amortization of discount on convertible notes. During the year ended December 31, 2012, we recorded a valuation discount of $497,888 upon issuance of (i) the 12% secured promissory notes and (ii) a $250,000 interim loan we issued in September 2012. During the year ended December 31, 2011, we recorded a valuation discount of $5,000,000 upon issuance of our $5,000,000 Senior Secured Notes and the associated warrants to purchase 4,000,000 shares of our Common Stock. The total discount applied to the Senior Secured Notes was amortized over the term of the Senior Secured Notes (from July 26, 2011 through the original maturity date of November 30, 2011) and recorded as an expense.

Private placement costs. During fiscal 2012, we incurred total private placement costs of $1,390,000, which represented the fair value of 1.8 million shares of common stock and 5 year warrants to purchase 943,000 shares of common stock at $0.53/share with an aggregate total of $1.4 million. During the fiscal 2011, we incurred total private placement costs of $920,000, which included $535,000 of non-cash costs relating to a derivative liability upon issuance of our convertible notes and warrants, and closing costs of $385,000.

Net Loss

We had a net loss of $3,308,000 and $25,694,000 in fiscal 2012 and fiscal 2011, respectively. Our net loss for fiscal 2012 decreased compared to fiscal 2011 primarily as a result of the decrease in non-cash operating expenses and the gain on change in fair value of derivative instruments. These decreases were partially offset by the increases in interest expense and private placement costs. Our net loss for fiscal 2011 included noncash compensation charges of $12,044,393 related to the issuance of equity instruments to our executives and others, amortization of debt discount on our convertible notes of $5,000,000, and the recording of a derivative liability of $2,563,647 upon the issuance of our warrants.

As development stage company and do not expect to generate any revenues during 2013, and we expect to continue to incur net losses.

Liquidity and Capital Resources

As of December 31, 2012, we had no cash or cash equivalents on hand, and had a working capital deficiency of $11,341,614. In addition, as of December 31, 2012, we had outstanding promissory notes in the aggregate amount of $8,510,000 (consisting primarily of the 7% Senior Secured Convertible Promissory Notes, 12% Secured Promissory Notes, September 2012 Secured Promissory Notes and the unpaid interest and penalties thereon). As of May 24, 2013, all of our outstanding promissory notes were in default and, as a result, bore interest at default rates of interest. Since most of these notes were secured by a lien on our assets, the lenders could have foreclosed on our assets.

On May 24, 2013, we effected the Restructuring, under which all of the Senior Secured Notes and the 12% Secured Notes, and some other debt obligations, were converted into shares of Common Stock. This transaction extinguished approximately $9,268,000 of liabilities, ended our future interest payment obligations, and removed all liens from our assets. In addition, in connection with the Restructuring, we also raised $1,350,000 from the sale of shares of Common Stock. Accordingly, following the Restructuring we had substantially reduced our outstanding liabilities and had received some cash to fund our short-term operating needs.

All of our capital resources during fiscal 2012 were derived through the sale of convertible debt and equity securities. Although we extinguished a substantial amount of liabilities in the Restructuring, we still have substantial other liabilities and obligations, including $1.2 million that we still owe the NIH and the CRADA, and no source of on-going revenues. Accordingly, we will have to raise additional proceeds in the near future to fund our working capital needs, our obligations to the NCI under the CRADA, to pay the NIH obligation, and to repay the other outstanding accrued expenses. No assurance can be given that we will have access to the capital markets in future, or that financing will be available to us on acceptable terms or otherwise. Our inability to access the capital markets or obtain acceptable financing could have a material adverse effect on our future operations and financial condition, and could severely threaten our ability to continue as a going concern.

As shown in the accompanying financial statements, we incurred a net loss of $3,308,000 for the year ended December 31, 2012, and our current liabilities exceeded current assets by $11,341,614. These factors, our inability to meet our obligations from current operations, and the need to raise additional capital to accomplish our objectives, create a substantial doubt about our ability to continue as a going concern.

Despite the Restructuring, we currently do not have sufficient capital on hand to fund our anticipated on-going operating expenses, and we do not have any bank credit lines or other sources of capital. Accordingly, we will have to obtain additional debt or equity funding in the near future in order to continue our operations. We have not yet identified, and cannot be sure that we will be able to obtain any additional funding from either of these sources, or that the terms under which we may be able to obtain such funding will be beneficial to us or our stockholders.

Since our inception, we have funded our operations primarily through private sales of equity securities and convertible loans. These sales of equity and debt securities consisted of the following:


In 2010, we raised a total of $1,945,000 from the sale of 14,578,309 shares of Common Stock (including warrants). In 2011, we raised a total of $895,000 from the sale of 850,000 shares of Common Stock and five-year Class “C” Warrants to purchase 850,000 shares that exercisable at $1.25 per share. In February 2012 we raised $250,000 from the sale of Common Stock (including warrants).


On July 27, 2011, we raised gross proceeds of $5,000,000 from the sale of the Senior Secured Notes and five year warrants (the “Note Warrants”) to purchase 4,000,000 shares of our common stock. The Senior Secured Notes were initially convertible at $1.25 per share, and the Warrants are initially exercisable at $1.25 per share, subject in both cases to anti-dilution adjustments that reduced the exercise price then in effect. The Senior Secured Notes initially were to mature November 30, 2011 but were amended and extended a number of times. The Senior Secured Notes and Note Warrants were extinguished in the Restructuring.


In April 2012, we issued two short-term promissory notes in the aggregate amount of $250,000. These promissory notes were exchanged for new 12% Secured Notes issued in May 2012.


In May 2012, we issued 12% Secured Notes in the aggregate amount of $1,231,000. These promissory notes were secured by our assets and had a maturity date of December 31, 2012. In addition, we also agreed to issue to the holders of these promissory notes, for no additional consideration, one-half the number of shares of Common Stock for every dollar funded under the 2012 Secured Notes (or 615,625 shares of Common Stock).


In September 2012, we received $250,000 loan, which loan was evidenced by promissory note that is due on demand. In addition, we also issued, for no additional consideration, a five year, fully vested warrant to purchase 943,398 shares of common stock at $1.25 per share.

All of the foregoing promissory notes and warrants were converted or extinguished in the Restructuring.

Currently, we have no sources of liquidity. Accordingly, our goal is to attempt to raise the additional funds that we need through the sale of additional debt or equity securities. The sale of additional equity or convertible debt securities will result in additional dilution to our stockholders and could subject us to covenants that may have the effect of restricting our operations. We may also in the future seek to obtain funding through strategic alliances with larger pharmaceutical or biomedical companies. However, we currently have no agreements in place with any funding sources or with any strategic partners that could provide us with some or all of the funding that we need. Accordingly, we can provide no assurance that additional financing will be available to us in an amount or on terms acceptable to us, if at all. Even if we are able to obtain additional funding from either financings or alliances, no assurance can be given that the terms of such funding will be beneficial to us or our stockholders. If we are unsuccessful or only partly successful in our efforts to secure additional financing, we may find it necessary to suspend or terminate some or all of our product development and other activities.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Background on the Company and Recent Change in Strategic Focus

On March 15, 2010, we entered the biopharmaceutical business when we acquired the rights, title and interest to certain assets, including certain patents, patent applications, materials, and know-how, related to the development and commercialization of biotechnology drugs, and then commenced developing anti-cancer drugs based primarily on anti-CD55+ antibodies (the “Anti-CD55+ Antibody Program”). We engaged the University of Nottingham to conduct our research and development. Although we initially believed that the proposed anti-CD55+ therapies that we were attempting to develop had significant commercial potential, test results received in mid-2011 from the studies performed for us by the University of Nottingham failed to meet the pre-clinical development endpoints. Accordingly, in 2011 we decided to (i) end our development efforts for the anti-CD55+ technology, and (ii) pursue the development of a new ready-to-infuse adoptive cell therapy product candidate we refer to as Cōntego™.

On October 5, 2011 we licensed the rights to th e adoptive cell therapy from the National Institute of Health (“NIH”) and to a manufacturing process for Cōntego™ (initially for Stage IV metastatic melanoma) that we intend to develop to enable us to make the adoptive cell therapy available to a larger nu mber of patients. The license agreement required us to pay the NIH approximately $723,000 of upfront licensing fees and expense reimbursements in 2011. In addition, we will have to pay royalties of six percent (6%) of net sales (subject to certain annual minimum royalty payments of $20,000 per year), a percentage of revenues from sublicensing arrangements, and lump sum benchmark royalty payments on the achievement of certain clinical and regulatory milestones for each of the various indications. We also have to make certain benchmark payments to the NIH based on the development and commercial release of licensed products using the technology underlying the License Agreement. If we achieve all benchmarks for metastatic melanoma, up to and including the product’s first commercial sale in the United States, the total amount of such benchmark payments will be $6,050,000 for the melanoma indication. The benchmark payments for the other three indications, if all benchmarks are achieved, will be $6,050,000 for ovarian cancer, $12,100,000 for breast cancer, and $12,100,000 for colorectal cancer. Accordingly, if we achieve all benchmarks for all four licensed indications, the aggregate amount of benchmark royalty payments that we will have to make to NIH will be $36,300,000.

In order to develop the adoptive cell immunotherapies we licensed from the NIH, effective August 5, 2011, we signed a Cooperative Research and Development Agreement (“CRADA”) with the NIH and the National Cancer Institute (“NCI”). Under the terms of the CRADA, we are required to provide $1,000,000 per year (in quarterly installments of $250,000) to support research activities thereunder and to pay for supplies and travel expenses.

In December 2011, we entered into a five-year Manufacturing Serv ices Agreement with Lonza Walkersville, Inc. under which Lonza agreed to manufacture, package, ship and handle quality assurance and quality control of our Cōntego™ autologous cell therapy products. All of Lonza Walkersville’s services will be provided und er separate statements of work that we have agreed to enter into, from time to time, with Lonza Walkersville, Inc. In 2011, we paid Lonza a total of $500,000, but we did not request any additional services from Lonza during the year ended December 31, 2012.

During the three months ended June 30, 2013, there were no net sales that would have required us to make royalty payments, nor were there any benchmarks or milestones achieved that would have required us to make lump sum benchmark royalty payments under the NIH license agreement. During the three months ended June 30, 2013, the Company accrued no direct expense reimbursements, such as legal costs associated with patents, incurred by the NIH in performing on the licensing agreement. Such costs are reimbursable from the Company to the NIH pursuant to the terms of the licensing agreement. The entire amount is past due and there is no assurance that we will be able to make the required payment in the future and that the NIH will not exercise its right to terminate the agreement. The costs are included in Accrued expenses – National Institutes of Health on the accompanying condensed balance sheet and in research and development in the accompanying condensed statement of operations. Other than the royalties and benchmark expenses as described above and the aforementioned direct expense reimbursements there are no additional future obligations associated with the license.

In 2011 we acquired a worldwide, non-exclusive license for various adoptive cell therapy technologies from the National Institute of Health (NIH), and have entered into a Cooperative Research and Development Agreement with the National Cancer Institute (NCI), pursuant to which we intend to support the in vitro development of improved methods for the generation and selection of autologous tumor-infiltrating lymphocytes (TILs). Recently, we have been in discussions with the NIH to obtain additional licenses to next generation TIL technologies. These licensed rights would consist of cells enriched for higher potency that have a lower cost of goods and a shorter manufacturing process. If we do obtain these license rights, our future license fees and other related costs will increase. In addition, should be obtain the additional licenses, a Phase I clinical trial is planned at NCI, which will also increase our future operating expenses. No assurance can be given that we will be able to obtain a license to the next generation technologies, or that we will conduct the planned Phase I clinical trial.

Results of Operations

Revenues

As a development stage company that is currently engaged in the development of therapeutics to fight cancer, we have not yet generated any revenues from our biopharmaceutical business or otherwise since our formation. We currently do not anticipate that we will generate any revenues during 2013 from the sale or licensing of any products.

Operating Expenses

Operating expenses include compensation-related costs for our employees dedicated to general and administrative activities, legal fees, audit and tax fees, consultants and professional services, and general corporate expenses. Operating expenses were $779,260 and $1,376,425 for the three months ended June 30, 2013 and 2012, respectively. Operating expenses were $1,214,173 and $3,626,558 for the six months ended June 30, 2013 and 2012, respectively.

Our operating expenses during the three months ended June 30, 2013 decreased by $597,165 compared to the three months ended June 30, 2012, primarily as a result of the decrease in non-cash compensation we incurred for the three months ended June 30, 2013 The total amount of such non-cash compensation we incurred during the three months ended June 30, 2013 was $87,386 compared to $469,486 for the three months ended June 30, 2012.

Our operating expenses during the six months ended June 30, 2013 decreased by $2,412,385 compared to the six months ended June 30, 2012, primarily as a result of the decrease in non-cash compensation we incurred for the six months ended June 30, 2013. The total amount of such non-cash compensation we incurred during the six months ended June 30, 2013 was $133,032 compared to $1,696,712 for the six months ended June 30, 2012.

Research and Development .

Research and development expenses are primarily comprised of amounts payable to (i) the National Institutes of Health under terms of our license agreement, and (ii) NCI under the CRADA. Research and development costs were $250,000 and $270,000 for the three months ended June 30, 2013 and 2012, respectively. Research and development costs were $520,000 and $1,156,000 for the six months ended June 30, 2013 and 2012, respectively. Research and development expenses in the 2013 fiscal quarter included the $250,000 quarterly payment we made under the CRADA. In the quarter ended June 30, 2013, we made the $20,000 annual minimum payments to the NIH under the licensing agreement. In the 2012 fiscal quarter, we made payments of $250,000 under payable under the CRADA and accrued $616,000 of unpaid past prosecution expenses as well as the minimum license royalty payment of $20,000. Our goal is to substantially increase our research and development activities in the near future in order to accelerate the development of our technologies. However, the amount of our future research and development activities, and the amount of our future expenses, will depend upon the amount of funds that we have available.

Change in fair value of derivative liabilities.

We record the change in fair value of derivatives as other income or expenses. Derivatives included in these calculations primarily consist of the outstanding options and warrants that we issued as part of various financing activities and common shares underlying our convertible notes payable. There was no change in fair value of derivative liabilities for the three months ended June 30, 2013 compared to a gain of $1,927,839 for the three months ended June 30, 2012. Similarly, there was no change in fair value of derivative liabilities for the six months ended June 30, 2013, compared to loss of ($620,235) for the six months ended June 30, 2012. The significant loss for the six months ended June 30, 2012 was the result of the volatility of the trading price of our common stock in 2012. The Company used the assistance of a valuation specialist due to the complexity in determining the fair value of its derivative liability at December 31, 2012. As a result of the Company’s inability to pay its debt obligations, the default status of its convertible promissory notes and lack of available working capital at December 31, 2012, for valuation purposes, the Company, with the assistance of the independent valuation expert determined that the effect of the default and insolvent financial condition, as such, the outstanding conversion features and warrants accounted for as derivative upon its issuance had no more value at December 31, 2012. The significant gain was primarily the result of the decrease in the market price of our stock, $0.02 compared to $1.15, used in the calculation of the fair value at June 30, 2013 compared to June 30, 2012, respectively which offset the increase in the quantity of derivative instruments recorded as of June 30, 2013 compared to June 30, 2012.

Interest expense.

Interest expense represents the amount of interest that accrued on the outstanding interest bearing securities issued by the Company, including the various secured convertible promissory notes.

Interest expense was $104,127 and $110,810 for the three months ended June 30, 2013 and 2012, respectively. Interest expense was $445,743 and $199,282 for the six months ended June 30, 2013 and 2012, respectively. The increase is due to increase in the amount of interest bearing promissory notes that were outstanding in 2013 compared to the amount of such notes accruing interest in 2012. In addition, the interest rate on the outstanding promissory notes increased in 2013 because the notes were in default and, therefore, those promissory notes accrued interest at the higher default rates of interest.

Net Loss

We had a net loss of $3,429,255 and $327,284 for the three months ended June 30, 2013 and 2012, respectively. Our net loss for the three months ended June 30, 2013 increased compared to the three months ended June 30, 2012 due to non-cash private placement costs of $2,295,868 and net of decreases in operating expenses, research and development costs and interest expense as described above.

We had a net loss of $4,475,784 and $6,099,963 for the six months ended June 30, 2013 and 2012, respectively. Our net loss for six months ended June 30, 2013 decreased compared to the six months ended June 30, 2012 primarily as a result of the aforementioned the decreases in operating expenses, research and development costs, which was offset the reduction of loss on a change in the fair value of derivative liabilities as well as an increase in non-cash private placement costs of $2,295,868 related to the restructuring effected in May 2013. We anticipate that we will continue to incur losses in the foreseeable future because we will be primarily engaged in research and development activities and we do not anticipate receiving any revenues from our operations.

Liquidity and Capital Resources

As of June 30, 2013, we had $569,581 in cash or cash equivalents on hand, and had a working capital deficiency of $2,790,355. As of May 24, 2013, all of our outstanding promissory notes were in default and, as a result, bore interest at default rates of interest. Since most of these notes were secured by a lien on our assets, the lenders could have foreclosed on our assets. These factors, together with our inability to meet our obligations from current operations and the need to raise additional capital to accomplish our objectives, create a substantial doubt about our ability to continue as a going concern.

On May 24, 2013, we completed a restructuring of our unregistered debt and equity securities (the “Restructuring”) under which all of the Senior Secured Notes and the 12% Secured Notes, and some other debt obligations, were converted into shares of Common Stock. This transaction extinguished approximately $9,268,000 of liabilities, ended our future interest payment obligations, and removed all liens from our assets. In addition, in connection with the Restructuring, we also raised $1,350,000 from the sale of shares of Common Stock. Accordingly, following the Restructuring we had substantially reduced our outstanding liabilities and had received some cash to fund our short-term operating needs.

All of our capital resources since our formation have been derived through the sale of convertible debt and equity securities. Although we extinguished a substantial amount of liabilities in the Restructuring, we still have substantial other liabilities and obligations, including $632,292 that we still owe the NIH, and no source of on-going revenues. Accordingly, we will have to raise additional proceeds in the near future to fund our working capital needs, our obligations to the NCI under the CRADA, to pay the NIH obligation, and to repay the other outstanding accrued expenses. No assurance can be given that we will have access to the capital markets in future, or that financing will be available to us on acceptable terms or otherwise. Our inability to access the capital markets or obtain acceptable financing could have a material adverse effect on our future operations and financial condition, and could severely threaten our ability to continue as a going concern.

Despite the Restructuring, we currently do not have sufficient capital on hand to fund our anticipated on-going operating expenses, and we do not have any bank credit lines or other sources of capital. Accordingly, we will have to obtain additional debt or equity funding in the near future in order to continue our operations. We have not yet identified, and cannot be sure that we will be able to obtain any additional funding from either of these sources, or that the terms under which we may be able to obtain such funding will be beneficial to us or our stockholders.

Since our inception, we have funded our operations primarily through private sales of equity securities and convertible loans. These sales of equity and debt securities consisted of the following:



In 2010, we raised a total of $1,945,000 from the sale of 145,783 shares of Common Stock (including warrants). In 2011, we raised a total of $895,000 from the sale of 8,500 shares of Common and five-year Class “C” Warrants to purchase 8,500 shares that exercisable at $125.00 per share. In February 2012 we raised $250,000 from the sale of Common Stock (including warrants).



On July 27, 2011, we raised gross proceeds of $5,000,000 from the sale of the Senior Secured Notes and five year warrants (the “Note Warrants”) to purchase 40,000 shares of our common stock. The Senior Secured Notes were initially convertible at $125.00 per share, and the Warrants are initially exercisable at $125.00 per share, subject in both cases to anti-dilution adjustments that reduced the exercise price then in effect. The Senior Secured Notes initially were to mature November 30, 2011 but were amended and extended a number of times. The Senior Secured Notes and Note Warrants were extinguished in the Restructuring.



In April 2012, we issued two short-term promissory notes in the aggregate amount of $250,000. These promissory notes were exchanged for new 12% Secured Notes issued in May 2012.



In May 2012, we issued 12% Secured Notes in the aggregate amount of $1,231,000. These promissory notes were secured by our assets and had a maturity date of December 31, 2012. In addition, we also agreed to issue to the holders of these promissory notes, for no additional consideration, one-half the number of shares of Common Stock for every dollar funded under the 2012 Secured Notes (or 6,156 shares of Common Stock).



In September 2012, we received $250,000 loan, which loan was evidenced by promissory note that is due on demand. In addition, we also issued, for no additional consideration, a five year, fully vested warrant to purchase 9,434 shares of common stock at $125.00 per share.



In January and May 2013, we issued five 18% convertible promissory notes in the aggregate amount of $311,500 that were due upon demand and convertible into shares of our Common Stock at a conversion price of $125.00 per share.

All of the foregoing promissory notes and warrants were converted or extinguished in the Restructuring.

Currently, we have no sources of liquidity. Accordingly, our goal is to attempt to raise the additional funds that we need through the sale of additional debt or equity securities. The sale of additional equity or convertible debt securities will result in additional dilution to our stockholders and could subject us to covenants that may have the effect of restricting our operations. We may also in the future seek to obtain funding through strategic alliances with larger pharmaceutical or biomedical companies. However, we currently have no agreements in place with any funding sources or with any strategic partners that could provide us with some or all of the funding that we need. Accordingly, we can provide no assurance that additional financing will be available to us in an amount or on terms acceptable to us, if at all. Even if we are able to obtain additional funding from either financings or alliances, no assurance can be given that the terms of such funding will be beneficial to us or our stockholders. If we are unsuccessful or only partly successful in our efforts to secure additional financing, we may find it necessary to suspend or terminate some or all of our product development and other activities.

Recent Accounting Pronouncements

In January 2013, the FASB issued ASU 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. This ASU clarifies which instruments and transactions are subject to the offsetting disclosure requirements established by ASU 2011-11. This guidance is effective for annual and interim reporting periods beginning January 1, 2013. We do not believe the adoption of this update will have a material effect on our financial position and results of operations.

n March 4, 2013, the FASB issued ASU 2013-05, “Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity” (“ASU 2013-05”). ASU 2013-05 updates accounting guidance related to the application of consolidation guidance and foreign currency matters. This guidance resolves the diversity in practice about what guidance applies to the release of the cumulative translation adjustment into net income. This guidance is effective for interim and annual periods beginning after December 15, 2013. We do not believe the adoption of this update will have a material effect on our financial position and results of operations.

In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Loss, or a Tax Credit Carryforward Exists. Topic 740, Income Taxes, does not include explicit guidance on the financial statement presented of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. There is diversity in practice in the presentation of unrecognized tax benefits in those instances and the amendments in this update are intended to eliminate that diversity in practice. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Early adoption is permitted. We do not believe the adoption of this update will have a material effect on our financial position and results of operations.

Other accounting pronouncements did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements and accompanying notes, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. When making these estimates and assumptions, we consider our historical experience, our knowledge of economic and market factors and various other factors that we believe to be reasonable under the circumstances. Actual results may differ under different estimates and assumptions.

The accounting estimates and assumptions discussed in this section are those that we consider to be the most critical to an understanding of our financial statements because they inherently involve significant judgments and uncertainties.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from these estimates.

Intangible Assets

We record intangible assets in accordance with guidance of the FASB. Intangible assets consist mostly of intellectual property rights that were acquired from an affiliated entity and recorded at their historical cost and are being amortized over a three years life. We review intangible assets subject to amortization at least annually to determine if any adverse conditions exist or a change in circumstances has occurred that would indicate impairment or a change in the remaining useful life. If the carrying value of the assets is determined not to be recoverable, we record an impairment loss equal to the excess of the carrying value over the fair value of the assets. Our estimate of fair value is based on the best information available. If the estimate of an intangible asset’s remaining useful life is changed, we amortize the remaining carrying value of the intangible asset prospectively over the revised remaining useful life.

Stock-Based Compensation

We periodically issue stock options and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. We adopted FASB guidance effective January 1, 2006, and are using the modified prospective method in which compensation cost is recognized beginning with the effective date (a) for all share-based payments granted after the effective date and (b) for all awards granted to employees prior to the effective date that remain unvested on the effective date. We account for stock option and warrant grants issued and vesting to non-employees in accordance with accounting guidance whereby the fair value of the stock compensation is based on the measurement date as determined at either (a) the date at which a performance commitment is reached, or (b) the date at which the necessary performance to earn the equity instrument is complete.

We estimate the fair value of stock options using the Black-Scholes option-pricing model, which was developed for use in estimating the fair value of options that have no vesting restrictions and are fully transferable. This model requires the input of subjective assumptions, including the expected price volatility of the underlying stock and the expected life of stock options. Projected data related to the expected volatility of stock options is based on the historical volatility of the trading prices of the Company’s common stock and the expected life of stock options is based upon the average term and vesting schedules of the options. Changes in these subjective assumptions can materially affect the fair value of the estimate, and therefore the existing valuation models do not provide a precise measure of the fair value of our employee stock options.

Derivative Financial Instruments

We evaluate all of our financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For stock-based derivative financial instruments, we use both a weighted average Black-Scholes-Merton and Binomial option pricing models 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.

Off-Balance Sheet Arrangements

At June 30, 2013, we had no obligations that would require disclosure as off-balance sheet arrangements.

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